The Federal Reserve was warned rountinely since 1999 about the practices inflating the subprime mortgagage bubble, but did nothing about it.
Washington Post: The visits had a ritual quality. Three times a year, a coalition of Chicago community groups met with the Federal Reserve and other banking regulators to warn about the growing prevalence of abusive mortgage lending.
They began to present research in 1999 showing that large banking companies including Wells Fargo and Citigroup had created subprime businesses wholly focused on making loans at high interest rates, largely in the black and Hispanic neighborhoods to the south and west of downtown Chicago.
The groups pleaded for regulators to act.
So part of this story is regulatory arbitrage. It was embarrassingly easy for these companies to create affiliates outside the regulatory lines.
That being said, it’s worth wondering what regulations the Fed might have taken had they listen to the “coalition of Chicago community groups.”
The advocates amassed evidence of abusive practices by lenders, such as Fleet Finance, an affiliate of a New England bank that eventually paid the state of Georgia $115 million to settle allegations that it charged thousands of lower-income black families usurious interest rates and punitive fees on home-equity loans. The National Community Reinvestment Coalition pressed the Fed to investigate allegations against other affiliates.
You have to ask yourself, what the National Community Reinvestment Coalition wanted the Fed to do. The prudent thing would have been to encourage the banks to lend much less in poor areas. But the NCRC almost certainly wasn’t looking for that — instead they were looking for more low-interest-rate lending, which wouldn’t have solved much.
Granted, there is some evidence that many potentially-prime borrowers were shepherded into subprime loans, with higher interest rates, but there’s little evidence that it was these high interest rates that caused the wave of defaults and foreclosures, which followed.
Bottom line, had the Fed listened to the NCRC, they almost certainly would have urged more lending at lower prices, rather than less lending, which is what would have been needed to prevent the bubble.