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Moab • Sheila Canavan never supposed a couple of sentences she voiced six years ago would become a key part of the evidence gathered by the Financial Crisis Inquiry Commission to later conclude that the banking meltdown was avoidable.
But there she was, on page 17 of the massive report the commission presented to President Barack Obama in January. The document recounted what Canavan, a Moab-based consumer lawyer, declared in October 2005 to three Federal Reserve Governors at a meeting of the agency's consumer advisory council.
It also heralded her long, personal crusade against predatory lending that has seen her slay the giant dragons of the financial industry.
Canavan informed the governors and council back then that 61 percent of recently originated mortgages in California were interest-only, a share more than twice the national average. With such a loan, a borrower's monthly payment covered only the interest due, not the principal, until a balloon payment came due. Default could become a real possibility when that point was reached, especially for hard-pressed debtors.
"That's insanity," Canavan exclaimed. "That means we are facing something down the road that we haven't faced before, and we are going to be looking at a safety and soundness crisis."
Minutes of the meeting don't show what the governors thought of Canavan's assertion.
But a few seconds earlier, Mark Olson, a banker who had been appointed to the Fed's board of governors by President George W. Bush in 2001, suggested interest-only and other subprime loan products promoted to people with bad credit might not be harmful to the U.S. economy.
Subprime defaults were "extraordinarily low, which means the underwriting (standards lenders were employing to assess the creditworthiness of borrowers) has been solid," Olson said.
Other warnings • Olson wasn't the only governor confident the housing bubble, supported by interest-only and other exotic floating-rate mortgages, would not damage the financial system if home prices fell.
Also in 2005, former Fed Chairman Alan Greenspan said if prices were ever to decline they probably wouldn't create serious trouble for the economy. And as late as 2007, after prices had been falling for a year, new Chairman Ben Bernanke told Congress that the economy was unlikely to be damaged by problems in the subprime market.
Later, in 2009 with the economy in shambles, Bernanke told the commission that regulators couldn't have anticipated the "perfect storm" that caused the financial meltdown. But he conceded the Fed's lack of aggressiveness in regulating mortgage lending during the housing boom was a "severe failure."
Greenspan, who stepped down 2006, acknowledged in written testimony to the commission last year that Fed officials underestimated the risks of subprime lending.
All this latter-day confessional talk by arguably the brightest financial minds in America amazes Canavan.
"I'm not a math whiz. I'm not an economist," she said in a recent interview. "If just in the course of my work I could see the dangers, [then] I just am not in sympathy with the point of view that it wasn't foreseeable. It was."
Canavan was halfway through a three-year term on the Fed's consumer advisory council when she made her prophetic assertion. By then, she had a decade's worth of legal experience representing borrowers led astray by unscrupulous lending companies and their representatives, many of whom had cut their teeth in the savings and loan industry before it collapsed.
The beginning • Her passion for taking on powerful financial firms began with a visit in 1995 from an elderly woman who because of Alzheimer's disease had unwittingly wound up in two loans amounting to $41,000 when she thought she was borrowing only about $5,000.
Canavan said the first loan of $20,000 came from First Alliance Mortgage Co., whose loan officer used a lengthy and deceptive scripted presentation to convince her to borrow far more than she wanted.
The client "did not know she was borrowing that much money and had no idea she paid $5,784 in a loan origination fee, points, junk fees and prorated interest [of] 26 percent," Canavan said.
When the woman's children discovered the loan, they attempted to refinance it through a second mortgage loan broker who they hoped was more scrupulous. Instead, the broker contacted First Alliance, which drafted a second loan and sent its own representative to the woman's home for her signature.
That loan was for $41,079. It came with a variable rate that floated between 8 percent and 15 percent, and included more than $10,000 in fees and other charges.
Canavan filed a lawsuit on behalf of the woman. The case was settled for $200,000 after the client's death and a bankruptcy filing by Northwest Alliance in 2002. A companion class-action suit Canavan argued on behalf of the American Association of Retired Persons recovered $75 million for 20,000 mostly elderly Northwest Alliance customers across the country.
In the course of pleading the suits over several years, Canavan came to realize that big Wall Street banks were providing the financial backing that Northwest Alliance and other subprime lenders needed to make high-cost loans to unsuspecting borrowers.
So with the help of famed lawyer Richard Scruggs, Canavan filed another class-action suit, this time against investment bank Lehman Brothers for aiding and abetting First Alliance's schemes to cheat borrowers.
In 2003, a federal jury held Lehman Brothers accountable for fraud at Northwest Alliance and ordered it to pay $5.1 million in damages. The verdict was the first against a financial backer of an abusive lender, according to published reports at the time.
The stress of the Northwest Alliance and Lehman cases motivated Canavan to leave California in 2001. She had been living in San Jose. Northwest Alliance had filed for bankruptcy, which threatened to wreck any chance of recovering damages for her clients. Canavan was also considering whether to launch the class-action suit against Lehman, the powerful investment bank that would soon be known as one of the most notorious packagers of bad subrprime loans in the country.
One summer day that year, she and a friend, screenwriter Janet Peoples, passed through Moab on their way to the Telluride Film Festival in Colorado. Canavan had seen the town before during previous trips to Telluride. This time, exhausted by the two major legal battles weighing on her shoulders, and a Doubting Thomas's belief that financial firms exist only to fleece Americans, Canavan decided to move to Utah.
"What this financial industry does is look at the assets that American people have as assets they want. That's all," she says today.
"What they teach people who sell loans is that the equity in an elderly person's home, [is], 'Why should that go to the kids? The kids didn't earn it.' "
Predatory lenders think the equity could be better used by their firms, and if their loan officers work hard to extract it, they deserve big commissions, Canavan said.
Battling from home • From 2001 on, Canavan's legal battles would be fought by conference call from "the end of the world," as the judge who would preside over the Leh-man case would come to call Moab. And when her presence was required in California, Canavan would jump on a commuter airplane and make her way to the West Coast.
It was Lehman that Canavan believes brought her to the attention of the Federal Reserve and to Stella Adams, who joined the Fed's consumer advisory council a year after Canavan took her seat in 2004.
"She's so awesome," said Adams, director of the Patricia Roberts National Fair Housing Training Academy in Washington, D.C., and former vice chair of the North Carolina Democratic Party.
"She was always really strong in advocating for the rights of people against predatory lenders, particularly on credit card bills and mortgages," Adams said. "In my memory, she was the real leader ... on predatory lending. She was a consumer 'brainiac' and a great teacher."
Soon after being sworn in for a three-year term, it became plain to Canavan how clueless the Fed was about subprime lending and how indifferent or dismissive many of its top officials were of Canavan's views.
Chief among the doubters was Greenspan, the Fed's vaunted chairman who had become legendary for his skill at managing the U.S. economy. Greenspan ignored the council. He wasn't interested, Canavan said.
Contacted last week, Fed spokeswoman Susan Stawick said the agency would not comment on Canavan's assertions.
Emblematic of Greenspan's disdain, he refused to have his photograph taken with the council when it convened for the first time after Canavan was sworn in.
"He wasn't there. I later received a picture. They had obviously photo-shopped him in," Canavan said.
Canavan believed other governors did want to understand how the subprime market operated. But, she said, it was difficult to counter the spiel from the financial industry that the governors had listened to for years. At council meetings, bankers often presented skewed information about their lending activities that were "diabolically different" than how they really operated, Canavan said.
Though her views were unpopular, Canavan wasn't alone. Ally Allen agreed that Greenspan was perennially absent from meetings and that Olson was dismissive of concerns about interest-only loans and about subprime lending.
"We were very frustrated," Allen said.
New Fed leadership • Upon Greenspan's retirement, Bernanke became Fed chairman. Unlike Greenspan, Bernanke attended every meeting of the advisory council, though he usually didn't ask questions, Canavan said.
At the council's June 2006 meeting, Bernanke's reserve changed. Now in control of the Fed, the new chairman took to the podium and said "very directly, very sharply," that if the bankers in the room didn't clean up their act, in two years he would impose standards on the lending industry to ensure borrowers would get mortgages that were in their best interest.
Consumers lawyers in the room were shocked, Canavan said. They couldn't believe Bernanke thought he had two years to work on new standards that would apply only to loans made in the future. Bernanke had said nothing about cleaning up past abuses.
"It was the most stunningly naive statement that I had ever heard," Canavan said. "He was unwilling to exercise his regulatory authority for another two years. He just wasn't going to do it, and then not very well."
Said Adams: "When Bernanke came in, it was too late. [The financial crisis] was already a done deal. It couldn't be undone."
Lehman's collapse in September 2008 almost brought down the entire financial industry, which she foresaw given the lack of effective controls.
Her experiences have reinforced her belief in strong regulation of financial markets. They also taught her that it is hard and takes a long time to change the beliefs of people who have confidence in a system that historically seemed to work well.
"It's very hard to believe that financial institutions of this country now operate to steal the equity of ordinary people. That's what they do, and it is government-endorsed, essentially," Canavan said.
She won't go so far as to say that regulators actually are satisfied with destroying the lives of Americans.
"But that's what happened," Canavan said.
At her home south of Moab, Canavan is preparing another legal case. What it's about, she won't say.
Age • 63
Residence • Has lived in Moab for 10 years
Family • Married, two children
Hometown • Boston
Education • Law degree from Northeastern University, Boston, 1973