Big lenders out of local regulators' reach

Penny Ochsenreiter got a nasty surprise last spring when she was on the phone with Bank of America about a mortgage modification on her Countrywide home loan.

Bank of America, which took over Countrywide in 2008, told her the mortgage modification approved by Countrywide was canceled and she owed more than $40,000, according to a complaint she filed in April with state Attorney General Rob McKenna.

"This is very frustrating and if it's going on with me, I wonder how many others it's going on with," wrote Ochsenreiter, 53, of Sammamish. "I have been in my home for 10 years and struggled the last two years."

What happened next was routine: McKenna's office passed the complaint to the state Department of Financial Institutions (DFI), which forwarded it to the federal Office of the Comptroller of the Currency (OCC), the primary regulator of national banks.

DFI has file drawers bulging with hundreds of forwarded complaints like Ochsenreiter's against national banks and their mortgage-lending subsidiaries.

Brad Williamson, director of banks, says the state's authority to investigate national banks has been limited by Bush-era federal regulators and Supreme Court decisions since 2002.

As things now stand, "We just don't get any response from Bank of America because they don't have to respond," said Deb Bortner, DFI's director of consumer services.

But a sweeping federal financial-overhaul law enacted last summer could change that. Under the new law, state attorneys general will have the power to enforce regulations of the new federal Consumer Protection Bureau, which is to begin operations next July.

"We'd like a lot more clarity in the law," said Jim Sugarman, assistant attorney general for Washington state. "Right now it's ridiculous how complicated it is to determine whether we have the authority in some circumstances over national banks and thrifts."

Under the changes, states can take national banks to court to enforce their own consumer-protection laws, instead of waiting for federal regulators to do so, said Arthur Wilmarth, a law professor at George Washington University.

And the new law makes it harder for federal regulators to pre-empt state officials' authority, Wilmarth said.

New flexibility

Consumer advocates say the new law gives states the flexibility to pass even higher standards than those that will be issued by the federal bureau.

"It gives states more space to address new abuses before they spread to become national problems," said Lauren Saunders, managing attorney for the Center for Responsible Lending, a nonprofit consumer advocacy based in Durham, N.C.

But the Mortgage Bankers Association, a national trade group that lobbies on behalf of the mortgage industry, cautions against too many states passing their own stricter laws.

"Uniformity is the best means of assuring that consumers throughout the nation are all well protected and that compliance costs are not unnecessarily increased by a patchwork of diverse laws," the association said in a statement. "Consumers ultimately pay these unnecessary costs."

During the mortgage boom, state regulators were flooded with complaints from Washington residents about national banks and thrifts.

In 2002, for instance, DFI sought to pursue now-defunct National City Mortgage, a subsidiary of National City Bank, for allegedly packing illegal fees into mortgages. The OCC, the federal bank regulator, told National City it wasn't subject to the state's regulation, and the bank included the feds' letter in responding to DFI, records show.

"The state banks didn't write the subprime loans that went belly-up and triggered this whole thing," said DFI Director Scott Jarvis in an interview this fall. For consumers with complaints against national banks, "it's a torturous path to get to the right folks," he said.

The state Attorney General's Office received 3,288 complaints against 11 national banks and bank-owned mortgage companies from 2005 through September of this year, a Seattle Times analysis of records shows.

Bank of America had the most at 1,259, while there were 636 against Wells Fargo and 595 against Washington Mutual. The three — all overseen by federal regulators — together accounted for three-quarters of all the complaints.

Billing issues, unkept promises, harsh collection practices, bad service, price gouging and credit-reporting errors are among the leading complaints, according to the analysis.

The AG's office was able to resolve a fraction of them, but the bulk were referred to the state Department of Financial Institutions — which had to pass most on to federal agencies such as the OCC.

In the first nine months of this year alone, DFI forwarded 573 complaints to federal banking regulators. Williamson said DFI rarely learns whether any action was taken.

About 70 percent of the complaints, state officials say, are about mortgage problems, such as modifications, foreclosures, misapplied loan payments and refinances.

OCC mum

A spokesman for the OCC declined to answer questions about its Bush-era role in pre-empting state laws. As for Ochsenreiter's complaint in April, spokesman Dean DeBuck couldn't say whether the agency had replied to her or opened an investigation.

"We are not able to comment on individual complaints," he said.

An employee of a local biotech company, Ochsenreiter had a good job but was carrying more of the financial burden since her husband's hours were cut back.

In addition to the attorney general, she wrote U.S. Sens. Patty Murray and Maria Cantwell, Gov. Chris Gregoire and President Obama.

She got calls from Treasury's Making Home Affordable mortgage-modification program and a senior Bank of America official, she said, and learned that her Countrywide modification paperwork wasn't the only one missing.

DFI officials say they were told by Countrywide that it destroyed files it should have maintained for at least two years. But officials say they weren't aware of the loss of any files on modified mortgages transferred to Bank of America.

The bank hasn't heard of the lost modifications that Ochsenreiter referred to, said spokesman Rick Simon. The bank declined to give her a modification in December 2008 due to incomplete documents, he said, and in February 2009 she was declined again for other reasons.

Ultimately, though, the bank approved her for a modification. Ochsenreiter said she now has a less expensive fixed-rate mortgage.

She said she didn't recall ever hearing back from the OCC.

State officials say they are cautiously optimistic about the new federal law, but the details of how it will be implemented still remain unsettled.

"Some 11 federal agencies, including the new Consumer Financial Protection Bureau, must adopt more than 240 new rules to implement the 2,300 pages of legislation," said DFI Director Jarvis. "There is a lot of work still to be completed before I am ready to conclude that consumers will be adequately protected under this legislation."

Sanjay Bhatt: 206-464-3103 or sbhatt@seattletimes.com