Georgia understood that impeding the capital flow to subprime loans might raise the cost of borrowing for some state residents—those who, for one reason or another, had poor credit but could and would repay high-priced loans. But Georgia judged that this was more than balanced by protection for its most vulnerable from the scourge of predatory lending and the wrenching costs associated with overpayment and eventual foreclosure. New York, New Jersey, and New Mexico made the same judgment and within two years had enacted their own versions of laws exposing downstream owners of loans to fines if they bought predatory loans.

That's when the feds came in. Some of the biggest players in the secondary mortgage market are national banks, and the states' efforts to curb predatory lending clashed with the banks' fervent desire to keep the market in subprime loans rolling. And so the national banks turned to the Treasury Department's Office of the Comptroller of the Currency. The OCC is a somewhat conflicted agency: While its primary regulatory responsibility is ensuring the safety and soundness of the national bank system, almost its entire budget comes from fees it imposes on the banks—meaning that its funding depends on keeping them happy. It was unsurprising, then, that the OCC leapt to attention when the national banks asked it to pre-empt the Georgia-like subprime laws on the grounds that they conflicted with federal banking law.

While the banks' legal arguments were thin, the OCC issued regulations in early 2004 nullifying the state laws as they applied to national banks. In part, the OCC reasoned that the states just got it wrong: As the then-comptroller explained in a speech to the Federalist Society, "We know that it's possible to deal effectively with predatory lending without putting impediments in the way of those who provide access to legitimate subprime credit." With the state laws nullified, national banks were free to engage in the sharp practices the states were hoping to stamp out. (Indeed, Georgia scuttled its law because it didn't want to give national banks a competitive advantage over its state institutions.) Facing intense pressure from subprime lenders and Wall Street, and left without a real chance of holding investors responsible for purchasing ill-advised loans, state legislatures gave up.