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Dumpster-Diving Bank Exams Lead to Job as Top Cop for Consumers

2011-10-12 04:01:00.4 GMT

By Carter Dougherty

Oct. 12 (Bloomberg) -- In the summer of 2006, as the mortgage crisis was gathering momentum, Massachusetts Commissioner of Banks Steven Antonakes ordered his examiners to start looking for trouble in a new location: the trash bins of some brokers and lenders.

“We had to start diving in Dumpsters when we arrived rather than looking in files,” Antonakes said in an interview.

“I mean that literally.”

The division’s gumshoeing did more than dirty the hands of bank examiners. The surprise inspections turned up evidence of mortgage fraud that paved the way for enforcement actions and new state legislation less than a year later -- well ahead of efforts in other states.

The events of 2006 and 2007 also cemented Antonakes’s reputation as a banking supervisor who had the chops to take on big projects. That drew the attention of the U.S. Treasury Department, which was looking for someone to run a new corps of examiners at the Consumer Financial Protection Bureau, the agency created by the Dodd-Frank financial-regulatory overhaul enacted in 2010.

“He was our top choice,” Michael Barr, who served as assistant treasury secretary for financial institutions at the time, said in an interview.

In his new role as assistant director for large bank supervision, Antonakes is mustering a 450-strong army of examiners who will police banks for consumer fairness, rather than safety and soundness.

Lifelong Examiner

Except for five summers during high school and college employed as a meatpacker, Antonakes has worked as a bank examiner his whole professional life. When he graduated from college in 1990, Massachusetts was still in the throes of the savings-and-loan crisis, and the banking division was doubling its examination staff. A friend suggested Antonakes apply.

“I’m not sure it’s everyone’s childhood dream to become a bank examiner, but I just fell into it, frankly,” Antonakes said.

That year, he walked into Mechanics Bank in Worcester, Massachusetts for his first examination. He spent the next decade honing his skills as a banking supervisor, and earning two graduate degrees: a master’s in business administration from Salem State University and a doctorate in law, policy and society from Northeastern University.

Antonakes’ big break came in 2003, when former Massachusetts banking commissioner Thomas Curry was nominated to join the board of the Federal Deposit Insurance Corp. and Antonakes, Curry’s deputy, became Massachusetts’ top banking supervisor. Curry is now President Barack Obama’s nominee to head the Office of the Comptroller of the Currency.

Even-handed Approach

Curry and Antonakes won plaudits from the state’s bankers for taking an even-handed approach to their jobs.

“They’ve always had a good balance between consumer protection and the need for the industry to move forward and be a business,” Daniel Forte, president of the Massachusetts Bankers Association, said in an interview.

Tom Callahan, director of the Massachusetts Affordable Housing Alliance, called Antonakes “an honest regulator.”

“If you talk to the bankers association in Massachusetts you’ll hear some of the same things,” Callahan said in an interview. “That’s not always the case.”

Antonakes proved his mettle in the summer of 2006, Callahan said, when information began to trickle in to the commission about increasingly lax mortgage underwriting standards and rising foreclosure rates. 

                         ‘Liars’ Loans’

In August of that year, Antonakes halted all bank examinations and deployed his staff to scrutinize the books of the state’s mortgage brokers, mainly in lower-income areas. They were looking for evidence that brokers were manipulating standards for “stated income” products, which became better known as “liars’ loans,” and underpinned the mortgage-backed securities at the heart of the financial crisis.

Brokers didn’t always cooperate, Antonakes said, so they learned to look for mortgage applications where the income information had been “whited out” and replaced. They watched for brokers who repeatedly submitted a loan for underwriting until they found an income that let the borrower qualify, he said.

“We found at the time, that given the degree of non- compliance, we had to start doing surprise exams,” Antonakes said. 

                        ‘Severe Action’

Antonakes didn’t mince words in a September 2006 memo to every bank, mortgage broker and lender in Massachusetts: The commission would take “immediate and severe action” against any firm that intentionally understated a borrower’s income, and said it “cannot overemphasize the seriousness” of its intent.

The commission shut down 11 of the most egregious violators.

Antonakes also concluded that current law was inadequate and convened a “mortgage summit” of lenders, supervisors and advocacy groups. The brainstorming session in November 2006 led to legislation in 2007 that included rules criminalizing mortgage fraud and requiring counseling for borrowers who sought subprime, adjustable-rate loans.

Now at the consumer bureau, Antonakes is charged with supervising the 111 largest U.S. banks. Unlike the prudential regulators -- the FDIC, the OCC and the Federal Reserve -- his charge is the treatment of consumers, not the safety and soundness of a bank.

That is a shift from Massachusetts, where Antonakes had to look out for both sides of the business. He emphasizes that the two are not mutually exclusive. 

                      Safety v. Protection

“Traditional safety and soundness and consumer protection are not in conflict,” Antonakes said. “A well-run institution with a strong management team and board of directors is generally good at both.”

At the same time, a safe-and-sound institution might not always be profitable, Antonakes said. Banks might underwrite loans prudently only to find that the economy goes bad and so do the loans. Neither does profitability ensure stability, as the industry’s recent experience shows, Antonakes said.

“Sometimes what’s profitable for a bank in the short term is not safe and sound in the long term,” Antonakes said. “The weakening of underwriting standards during the run up in housing prices is evidence of that.”

From starting the job with a staff of one -- himself -- Antonakes has already built a corps of 225 examiners, together with Peggy Twohig, the former Federal Trade Commission official who heads up non-bank supervision at the bureau. By next spring, that number will almost double, Antonakes said. The largest banks -- those with more than $100 billion in assets -- will be under full-time supervision by Antonakes’s troops.

As it happens, one of those banks will be Bank of America Corp. Thanks to a series of mergers, it now owns what was once Mechanics Bank -- the first lender Antonakes ever examined.


For Related News and Information:

Today’s top financial stories: FTOP <GO> On financial regulation: NI FINREG BN <GO> Stories on Steven Antonakes: NI ? 2446607<GO>

--Editors: Maura Reynolds, Peter Eichenbaum


To contact the reporter on this story:

Carter Dougherty in Washington at +1-202-624-1907 or


To contact the editor responsible for this story:

Lawrence Roberts at +1-202-624-1985 or