Garn – St. Germain Act of 1982

Ronald Reagan’s presidency marked a discernible shift in U.S. housing policy. In his Presidential Inaugural Address, Reagan famously declared that “government is not the solution to our problems; government is the problem.” The Regan Administration advanced a free market economic philosophy guided by decreased government regulatory oversight of private sector industries. Under Regan’s direction, the legal and business boundaries between commercial credit markets and securities markets blurred with a series of legislative and regulatory actions. In what Reagan praised as “historic reform,” “the most important legislation for financial institutions in the last 50 years,” and “the first step in our administration’s comprehensive program of financial deregulation,” Congress passed the Garn – St. Germain Act of 1982.

Significant to the eventual growth of the subprime mortgage sector, Title VIII, often referred to as the Alternative Mortgage Transaction Parity Act (Parity Act), eradicated “regulatory disparities” between state and federally chartered mortgage banks by authorizing non-federally chartered housing creditors to offer alternative mortgage transactions.” This provision defined “alternative mortgage transactions” as “a loan or credit sale secured by an interest in residential real property in which the interest rate or finance charge may be adjusted or renegotiated.” After the passage of the Parity Act, the Federal Home Bank Board (FHLBB), the Office of the Comptroller of Currency (OCC), and the National Credit Union Administration promulgated rules permitting variable rate mortgage products. The Parity Act also preempted existing state lending mortgage usury laws. Removing any provision of the “constitution or the law of any state expressly limiting the rate or amount of interest, discount points, finance charges” on any mortgage loans, provided the transaction were made in conformity with regulations issued by federal regulatory agencies.”

In the same year as the Parity Act, BankAmerica Corp. applied to the Federal Reserve for approval under section 4(c) (8) of the Bank Holding Company Act of 1956 to acquire 100 percent of the voting shares of Charles Schwab, a retail securities brokerage. Securities Industry Association brought a legal challenge questioning whether the Federal Reserve Board has statutory authority to allow a bank holding company to acquire a non-banking affiliate engaged principally in retail securities brokerage. The Supreme Court upheld the Federal Reserve decision that the BankAmerica acquisition would not violate the Bank Holding Act.

In 1986, overriding Paul Volcker’s opposition, the Federal Reserve voted to empower banking holding companies “on a case-by-case basis” to pursue an assortment of securities activities previously denied. Known as “Section 20 subsidiaries”, allowable underwriting activities included corporate debt and equity, asset-backed securities, and mortgage-backed securities. Bank holding companies could derive only 5 percent of their gross revenues from underwriting corporate debt and equity securities from Section 20 subsidiaries.

According to press reports, Wall Street and key White House officials were against Volcker’s reappointment. When his term expired, President Ronald Reagan replaced Volcker with Alan Greenspan, who advocated a “free market” deregulatory approach toward financial markets. The blueprint, and most far-reaching developments, in the movement toward financial reform was the unraveling of the Banking Act of 1933 previsions (sections 16, 20, 21, and 32), collectively known as “Glass-Steagall.

In his first statements before Congress as Chairman, Greenspan told Congress that the Federal Reserve Board “strongly recommend that [Congress] adopt legislation to repeal the Glass-Steagall Act and to put in its place a new framework allowing the affiliation of banking organizations and securities firms.” During a May12,1988 conference, Chairman Greenspan expressed additional concerns that federal regulatory oversight for housing finance was defective and unsustainable and financial deregulation was essential in order to make the system more efficient.

In 1989 the Federal Reserve increased the allowable gross revenue stream for Section 20 subsidiaries to 10 percent and then to 25 percent in 1996. In January 1998, a policy statement formalized the Federal Reserve Board deregulatory approach towards consumer compliance examination and investigates of consumer complains. The statement declared that the Federal Reserve would no longer “routinely conduct consumer compliance examination” or “investigate consumer complains related to nonbanking subsidiaries of bank holding companies.”

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