WSJ on Mortgage Lender Lobbying to Limit Regulation

Since I often take the Wall Street Journal to task on its reporting, I wanted to be sure to point out when they do a good job on topics of interest, per today’s page one story, “Lender Lobbying Blitz Abetted Mortgage Mess.”

The article describes the lobbying efforts of subprime lender Ameriquest and three industry associations of which it was a member. While it nails details of the efforts at the federal and particularly state level to neuter legislation that would have imposed higher standards on subprime operators, it doesn’t give any sense as to how large these contributions were relative to other financial services industry pet causes.

Similarly, the article suggests that these expenditures were effective. Yet the story also mentions,

At that point {October 2002}, opponents of the new {New Jersey} law got some help. Just as it had done in Georgia, Standard & Poor’s said it wouldn’t rate some securities containing loans from the state. In addition, federal banking regulators issued a series of regulatory orders banning states from applying state consumer-protection rules to federally chartered banks and thrifts, part of a turf battle between federal and state regulators. That put pressure on states to soften predatory-lending rules so federally chartered banks didn’t have an advantage over state-chartered ones.

“Put pressure”? It’s more accurate to say it made the state rules irrelevant. Federally chartered banks could offer subprime products to mortgage brokers and directly to customers. The fact that some state chartered banks would be constrained would have minimal impact on the availability of the product. And it would therefore be futile to keep the new laws in place, since their effect would simply be to restrict the activities, and likely profits, of state-chartered entities.

From the Wall Street Journal:

During the housing boom, the subprime industry succeeded at more than just writing mortgages. It also shot down efforts by some states to curtail risky lending to borrowers with spotty credit.

Ameriquest Mortgage Co., until recently one of the nation’s largest subprime lenders, was at the center of those battles. Working with a husband-and-wife team of Washington lobbyists, it handed out more than $20 million in political donations and played a big role in persuading legislators in New Jersey and Georgia to relax tough new laws. Those victories, in turn, helped blunt efforts by other states to crack down on reckless lending, critics of the industry contend.

Executives at Ameriquest, based in Orange, Calif., acknowledge that the company lobbied heavily against state lending restrictions, but say that other subprime lenders did so as well. In fact, a host of subprime lenders and banking trade groups, including Citigroup Inc., Wells Fargo & Co., Countrywide Financial Corp. and the Mortgage Bankers Association, spent heavily on lobbying and political giving.

Ameriquest, a unit of ACC Capital Holdings, has stopped making new subprime loans, and it has sold some operations and is winding down others. It is now a defendant in hundreds of lawsuits alleging mortgage fraud.

Data from federal and state campaign-finance records, Internal Revenue Service filings, and the National Institute on Money in State Politics show that from 2002 through 2006, Ameriquest, its executives and their spouses and business associates donated at least $20.5 million to state and federal political groups. In comparison, over the same time period, Countrywide Financial, another large subprime lender, gave about $2 million in campaign gifts, and spent an additional $6.7 million lobbying in Washington, records indicate.

Some of the giving by Ameriquest executives and associates was high-profile. President Bush received more than $200,000 for his 2004 re-election campaign, and Ameriquest founder Roland Arnall and his wife, Dawn, contributed more than $5 million to political organizations that backed the president. Last year, President Bush appointed Mr. Arnall ambassador to the Netherlands, and his wife took over as chairman of Ameriquest’s parent company. California Gov. Arnold Schwarzenegger’s campaigns received at least $1.4 million, along with stacks of tickets to a Rolling Stones concert that were used to lure big donors. A spokesman for Gov. Schwarzenegger said his decisions are not influenced by campaign contributions. Mr. Arnall declined to comment. The White House said Mr. Arnall was nominated because of his qualifications.

Much of Ameriquest’s efforts took place below the national radar, at the state level. State legislatures wanted to crack down on so-called predatory lending, which refers to the use of deceptive or unfair practices in the sale of high-interest loans, often to low-income borrowers who can’t afford them. In New Jersey, for example, lawmakers passed a strong predatory-lending law in 2003 that made it difficult for Ameriquest to continue doing business there.

Washington lobbyist Wright Andrews and his wife, Lisa, coordinated much of the industry’s lobbying. Mr. Andrews’s firm, Butera & Andrews, collected at least $4 million in fees from the subprime industry from 2002 through 2006, congressional lobbying reports indicate. Mr. Andrews didn’t represent Ameriquest directly. He ran three different subprime-industry trade groups: the National Home Equity Mortgage Association, of which Ameriquest was a member; the Coalition for Fair and Affordable Lending, which spent $6.3 million lobbying against state laws before it dissolved earlier this year, according to federal filings; and the Responsible Mortgage Lending Coalition.

In 2003, Lisa Andrews was appointed senior vice president for government affairs at Ameriquest. Her public-relations firm, Washington Communications Group Inc., claims credit on its Web site for coordinating the industry’s victory in New Jersey, as well as its overall strategy at the state level. Ms. Andrews left Ameriquest in 2005 and returned to her firm..

Ameriquest was founded by Mr. Arnall in 1979 as Long Beach Savings & Loan. He later shed all of the thrift’s operations except its retail-mortgage unit, which he renamed Ameriquest. During the refinancing boom of the 1990s, Ameriquest became a player in the business of lending to low-income homeowners. The company persuaded many homeowners to take cash out of their houses by refinancing them for larger amounts than their existing mortgages. Many of the new loans carried relatively high interest rates.

Settling Claims

Last year, ACC Capital, its parent company, agreed to pay $325 million to settle regulators’ claims that it charged excessively high mortgage rates and didn’t adequately disclose loan risks. Some of the state attorneys general who signed the settlement, including Greg Abbott of Texas, received campaign donations from the firm. Utah’s attorney general, Mark Shurtleff, received a $1,000 contribution and Rolling Stones tickets. A spokesman for Mr. Shurtleff says the attorney general was not directly involved in negotiating the settlement. A spokesman for Mr. Abbott notes that the settlement was also negotiated and approved by 48 other state attorneys general.

Ameriquest also handed out Rolling Stones tickets to state legislators in Georgia, Maryland, Nevada, Oregon, Utah, Washington and California, according to ethics records and local news accounts.

Federal lawmakers didn’t pose much of a threat to the subprime industry in recent years. Members of Congress received at least $645,000 in donations from Ameriquest and large sums from other big subprime lenders, Federal Election Commission records indicate. They debated new oversight of the industry, but took no action.

The states were a different matter. “What seemed to be developing in the states was that there was going to be a wave of legislation,” Mr. Andrews, the lobbyist, said in an interview.

In 2001, Georgia passed the Fair Lending Act. Among other things, it required lenders to be able to prove that a refinancing of any home loan less than five years old would provide a “tangible net benefit” to the borrower. Ameriquest began lobbying the state legislature to remove that provision, arguing the standard was too vague. Other lenders also complained about the law, as did Fannie Mae, the giant buyer of mortgages.

“Ameriquest was very, very engaged,” recalls Georgia state Sen. Vincent Fort, who authored the law. Mr. Fort says that Adam Bass, a lawyer for Ameriquest, lobbied him directly. The state senator says he accused Mr. Bass of victimizing poor minorities, which angered Mr. Bass. A spokesman for Ameriquest, speaking on Mr. Bass’s behalf, says the meeting “was a very candid conversation about complex policy issues.”

Mr. Andrews, the industry lobbyist, had roots in Georgia. He had attended college and law school there, and in the 1970s, had worked for Sam Nunn, then a U.S. senator from Georgia. Mr. Andrews got involved directly on the subprime matter, lobbying in his capacity as executive director of the Responsible Mortgage Lending Coalition, one of the subprime-mortgage trade groups he ran out of his Washington office. “I wouldn’t say it was a huge effort,” he says. “We were just part of the overall picture.”

Ameriquest began contributing to Georgia politicians. In December 2001, it donated $2,500 to Lt. Gov. Mark Taylor after he emerged as an influential figure in the debate, according to Georgia State Ethics Commission records. It followed up with another $2,500 in September 2002. Mr. Taylor says he remembers Ameriquest as one of the subprime companies that was lobbying, but doesn’t recall meeting anyone from the company or getting the contributions.

In October 2002, Ameriquest announced it would stop doing business in the state until the law changed. Shortly thereafter, Standard & Poor’s Corp. announced it would no longer assign credit ratings to many mortgage securities containing subprime loans from Georgia. The ratings agency said that under the new law, such loans, if found to be in violation of the law, might carry legal risk, potentially tainting the securities. Without credit ratings, such securities are virtually unmarketable. The change raised the possibility that subprime lenders would simply stop making loans in Georgia.

The subprime industry mounted a campaign against the Fair Lending Act. Within months, the Georgia Senate voted 29-26 in favor of a new law that eliminated for nearly all loans the tangible-net-benefit requirement opposed by the industry. The state House passed the law, 148-25.

Problems were also developing for the industry in New Jersey. The state Assembly there passed a similar law against predatory lending, the Home Ownership Security Act. It too contained a tangible-net-benefit rule, but it didn’t provide much guidance on how the standard would be applied. “The New Jersey law makes it impossible for anyone to be in compliance,” Mr. Bass, the Ameriquest lawyer, complained at an industry conference.

In October 2002, Ameriquest and Mr. Andrews’s lobbying firm contributed $4,500 to five New Jersey state senators, state campaign reports indicate. The American Financial Services Association, a subprime industry group that included Ameriquest, predicted the law would cause lenders to abandon the state. Nevertheless, in the spring of 2003, the bill passed the state Senate and was signed into law.

At that point, opponents of the new law got some help. Just as it had done in Georgia, Standard & Poor’s said it wouldn’t rate some securities containing loans from the state. In addition, federal banking regulators issued a series of regulatory orders banning states from applying state consumer-protection rules to federally chartered banks and thrifts, part of a turf battle between federal and state regulators. That put pressure on states to soften predatory-lending rules so federally chartered banks didn’t have an advantage over state-chartered ones.

The subprime industry set to work trying to roll back the New Jersey law. The National Home Equity Mortgage Association, one of the subprime groups run by Mr. Andrews, released a survey predicting that the law would reduce mortgages in New Jersey by $4 billion.

Ameriquest and Mr. Andrews’s lobbying firm began handing out campaign contributions. Among the recipients were John Adler and Gerald Cardinale, two state senators who had voted for the new law. In October 2003, Mr. Cardinale, a Republican, received a $2,200 donation from Ameriquest, according to state election records. In November 2003, Mr. Adler, a Democrat, received $1,200 from the lobbying firm, the records indicate. In early December, the two senators introduced a bill to make changes sought by the industry.

‘Remove Barriers’

“I don’t remember ever being lobbied by Ameriquest,” says Mr. Cardinale. “I do recall that we were trying to make it easier for folks to be able to access funds. And, in general, I feel it is a good thing for us to remove barriers to people being able to buy homes.” He says he doesn’t remember receiving any contributions from Ameriquest. “You guys think we know all of our contributors, but that’s usually on a staff level. I don’t frankly know who Ameriquest is.”

Mr. Adler says he doesn’t recall meeting anyone from Mr. Andrews’s lobbying firm.

That December, Neil Cohen, a state assemblyman who had voted for the new law, received a $500 donation from the lobbying firm, state records show. The Assembly’s Financial Institutions Committee, which was headed by Mr. Cohen, offered its own legislation to soften the lending law. Mr. Cohen couldn’t be reached for comment.

In 2004, as debate over the predatory-lending law dragged on, Ameriquest and Mr. Andrews’s lobbying firm together donated an additional $3,200 to Mr. Cohen, $1,100 to Mr. Cardinale and $1,300 to Mr. Adler, according to state records. Ameriquest gave $10,000 to the Democratic Party in the Assembly, $10,000 to Democrats in the Senate, and $7,000 to Senate Republicans, the records indicate.

Mr. Andrews’s wife, Lisa, then head of government affairs at Ameriquest, was also focused on New Jersey. On the Web site of her Washington public-relations firm, she says that she “built a coalition of mortgage brokers, mortgage bankers, appraisers, title companies, and others involved in home mortgage lending to create a grass-roots lobbying campaign that produced 7,000 emails and faxes to state policymakers in a six-week time frame.”

Rolling Back

In June 2004, New Jersey’s Assembly and Senate unanimously passed bills that rolled back parts of the earlier law, including the tangible-net-benefit rule. Mr. Bass, the Ameriquest lawyer, announced that the company would “be offering a full range of loans in New Jersey.” Thousands of New Jersey homeowners subsequently refinanced existing mortgages or took out new loans with Ameriquest before the subprime market tanked. Many of those loans are now in foreclosure.

After the victories in New Jersey and Georgia, the subprime industry and its lobbyists used similar tactics to fend off unfavorable laws in other states. Texas, for example, was debating new restrictions on home appraisers, whose overly generous valuations contributed to subprime-lending problems. ACC Capital, Ameriquest’s parent company, and its executives gave more than $350,000 to Texas politicians in 2006, including $100,000 to Gov. Rick Perry, according to state records. No new appraisal restrictions were instituted. A spokesman for Gov. Perry says ACC did not ask for the governor to take any action on behalf of the industry.

In the wake of the collapse of the subprime market, Mr. Andrews’s subprime lobbying business has withered. The three trade groups he ran are gone, and most of his subprime clients have stopped lobbying.

“I certainly was not aware of the degree to which many in the industry clearly failed to follow proper underwriting standards — the standards which they represented they were following to those of us who were lobbying,” Mr. Andrews says.

But he also faults the Federal Reserve for letting the industry get out of control.

“Personally, I think and have long felt the Fed should have done more early on,” he says. “But I don’t think anybody realized the level of problems that were going to come out in the last year or two. If you had said to me the industry was going to melt down, I would have said you were absolutely insane.”