Inner City Press Bank Beat
Archive #1: April - June, 1999
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June 21, 1999
...Inner City Press on June 18 learned that, in connection with Central Bank Corp.s proposal to acquire Huntingtons branches in Sault Ste. Marie, Michigan (which would, according to the DOJ, raises HHI levels to near 4,000, compared to a supposed cut-off of 1,800), Central Bank Corp. does not propose to divest any branches or assets. The Fed never gave notice of this application on its web site(s). Its very hush-hush; Central Bank Corp. CEO Frenchy LaJoie is on the Board of Directors of the Federal Reserve Bank of Minneapolis, where the application was filed. All the way back in 1984, the Fed referred to the Sault Ste. Marie banking market as already highly concentrated (while approving another acquisition without divestiture, see Federal Reserve Bulletin of June 1984, at page 515). Its only grown more concentrated since -- but no one in the Fed told Frenchy hell simply have to divest some branches, so the application moves forward. Now at the Board in Washington -- well see...
Meanwhile, north of the border, the plot thickens around Canada Trust. British American Tobacco (which has a U.S. savings bank charter, by the way) says it is considering buying the rest of Montreal-based Imasco, and selling off Imascos Canada Trust unit. CIBC has expressed interest, but CIBC CEO John Hunkin thinks the price will be too high, according to the Globe and Mail. (Meanwhile, CIBC is applying for a U.S. national bank charter, see below).
In the U.K., Bank of Scotland, recently burned by Pat Robertson, will this week announce a joint venture with Clydeport Plc, to develop office space, housing and a five star hotel on the River Clyde in Glasgow, according to the Sunday Telegraph. Sort of like Robertsons Virginia Beach spread, without the ideology... Meanwhile, Bank of Scotlands search for a substitute U.S. partner goes on, and the bank has still not withdrawn its Robertson-based application to the Office of the Comptroller of the Currency.
On the psychological front, Deutche Bank, fresh off taking over Bankers Trust (which it says will take two years to integrate), is now requiring employees to attend psychological training classes to rid them of the frightful stereotypes of each other that were discovered in recent polls of the workers, according to Der Spiegel magazine. Deutsche Bank Brings Psychological Bootcamps to U.S. -- with that headline, we leave you... Until the next time (at latest, next week), for or with more information, contact us.
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June 17, 1999
And the beat goes on. Fifth Third Bancorp has announced it will apply to buy CNB Bancshares, owner of Civitas Bank in Indiana, Kentucky, Michigan and Illinois. A review of data Fifth Third has filed with federal regulators shows that in 1997 in the Indianapolis Metropolitan Statistical Area, Fifth Third Bank of Central Indiana denied the conventional home purchase mortgage applications of African Americans 6.25 times more frequently than the applications of whites. Fifth Third Bank of Kentucky, in the Louisville MSA, denied the applications of African Americans 3.53 times more frequently than whites applications. In the Lexington MSA, Fifth Thirds denial rate disparity between African Americans and whites was 4.65. Each of these are to be compared to industry averages, which are approximately 2-to-1.
A year ago, Fifth Third made a $1.25 billion Community Reinvestment Act pledge -- but only in Ohio. More recently, First Third hired a new director of community reinvestment for Kentucky. 1998 mortgage lending data is about to be released - it remains to be seen if Fifth Third has improved, particularly outside of Ohio. Earlier this year, Fifth Third acquired Enterprise F.S.B. in Cincinnati, with plans to close four of its 11 branches, and lay off 40% of its employees. In 1998, Fifth Third perfomed similar acts on CitFed in Dayton. See, e.g., Dayton Daily News of May 10, 1998, Pg. 1A: "CitFed's Loss May Hit Poor." The beat, as we said, goes on...
On the antitrust beat, Inner City Press has learned this week that DOJs bank merger review unit is dramatically under-staffed, but is nonetheless not rolling over for the Fleet-BankBoston proposal, but rather is conducting an inquiry into the issues, including automatic teller machine issues. Click here to view an internal Fleet Merger Update memo just obtained. Among other things, if you can stomach the Dilbert-like jargon (Job mapping, I-Teams, etc.), it reveals a level of coordination between Fleet and BankBoston that is inappropriate given that the banks have none of the required approvals for their (anticompetitive) merger.
On the heels of Fleet Boston comes another in-market monopoly proposal, Zions - First Security in Utah. Even with their divestiture proposal, the combined bank would control (over) 40% of deposits in the state. If the Federal Reserve is even half-serious about antitrust, this merger will be outright denied.
In mid-week updates, Bank of Scotland has now apologized to its shareholders for the Pat Robertson fiasco (which the OCC, or Bank of Scotlands advisors, might have helped the bank avoid in the first place), but says it is still searching for U.S. partners. Well be there...
A more comprehensive report is forthcoming Monday, June 21. Until then, for or with more information, contact us.
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June 14, 1999
Never a dull moment on the bank beat. Politics, in the form of proposed set-asides for small banks of branches that would have to be divested, boils around the Fleet-BankBoston proposal. AmSouth says it will acquire First American of Nashville; Zions says it will acquire First Security in Utah (note: the $1.5 billion proposed divestiture will not cut it). Firstar has just filed its application with the Federal Reserve to acquire Mercantile of St. Louis; HSBC prepares its application to acquire Republic (and close many of its branches, and raise its fees). Perhaps most intriguingly, E*Trade says it will buy Telebanc, an internet bank in Virginia. Well be there (and see preliminary Firstar and AmSouth analyses, below).
Canadian Imperial Bank of Commerces stealth application for a bank charter in Florida (see below) has become more concrete: CIBC is negotiating with the Winn Dixie supermarket chain, to install a mixture of ATMs and kiosks in markets throughout Florida and then the country. See National Post of June 3, and Orlando Sentinel of June 10, followed by confirmation by CIBC on Bloomberg of June 10. Will these CIBC facilities be considered bank branches, thereby automatically triggering the application of the Community Reinvestment Act to CIBCs practices throughout its Winn Dixie partnership markets? Or will CIBC still claim it must only serve Orlando under the CRA? The application to the Office of the Comptroller of the Currency doesnt make this clear (and didnt, when the OCC formally closed the comment period early this year). Does the OCC allow stealth application, where institutions only fill in the blanks later, after the comment period has closed? Developing...
Meanwhile Lehman Brothers, trying to get a thrift charter by acquiring for a pittance the reportedly failing Delaware Savings Bank, has finally submitted a Community Reinvestment Act plan. Dated June 9, Lehmans letter to the Office of Thrift Supervision states, among other things, that Applicant is willing to make an initial national pledge that over the next three years the Bank and its affiliates collectively will purchase and/or originate at least $2.26 billion of residential mortgage loans to borrowers in low and moderate income census tracts throughout the United States (of which $4.5 million is likely to be originated loans), and at least $1.24 billion of residential mortgage loans to low and moderate income borrowers within the United States (of which $4.2 million is likely to be originated loans).
Lehmans initial application to the OTS, dated April 30, claimed at 3 that Lehman Brothers expects to originate approximately $1.5 billion in prime quality single family residential mortgage loans in 1999.... ICP questioned this claim of over a billion dollars of originations, given that ICP found no Home Mortgage Disclosure Act-reporting company beginning with Lehman. Now Lehman distinguishes between purchases and originations, making clear that originations constitute two-tenths of one percent of the mortgage activities in its proposed CRA pledge to the OTS. Gone from the pledge language is any distinction between prime (normal interest rate) and subprime (high than normal interest rate) lending.
Lehmans June 9 letter states that Aurora Loan Services, a subsidiary of the Applicant, began single family residential mortgage loan servicing activities in mid-1997 and began a single family residential loan direct origination activities [sic] and correspondent lending single family residential mortgage loan purchase activities in 1998. As a non-banking institution, Applicant has not been required to obtain, compile, track and report all of the HMDA data categories that banks must. For example, current regulations do not generally require mortgage companies to track and report loans to low and moderate income borrowers. This last statement is simply incorrect. Non-bank mortgage companies like Countrywide and others do compile and report this information. The cut-off is based on mortgage lending volume: over $28 million, you must report. Lehman claims $1.5 billion of originations in 1999 (see above) -- clearly triggering a reporting requirement.
In fact, in the 1997 FFIEC HMDA data base, there IS a HMDA-reporter named Aurora Loan Services, Insitution Number 1075700003-7. Lehmans June 9 letter does not state if Lehman acquired this entity, or began it de novo. In either case, its presence in the FFIECs data base of 1997 HMDA reporters is inconsistent with Lehmans June 9 presentation to the OTS. ICP is pursuing this, and it will be updated in this space.
Lehmans is a stealth application, which Lehman is arguing is exempt from public comment, and which has barely been reported in the financial press. Other proposed mergers, however, will require full applications with public notice, and thirty day comments periods. For example, Firstar has just filed its application with the Federal Reserve to acquire Mercantile of St. Louis. This comment period runs to July 12.
Firstar merged with Star Bancorp last year, just after Star had made a $5 billion CRA commitment. The commitment was not raised in that merger, and, to date, has not been raised in connection with the Mercantile proposal. Firstars only announcement is that it will begin an adopt-a-block program in a few cities. Firstar Home Mortgage Corp. in 1997, for conventional home purchase loans in the Chicago MSA, denied 20% of application from African Americans, versus only 3.1% of applications from whites, for a denial rate disparity of 6.45. The enigmatic Firstar Credit Card Bank NA also made home purchase loans in Chicago, denying African Americans 2.75 times more frequently that whites.
AmSouth, in its home state of Alabama, is no day at the beach. Down by the beach, in the Mobile MSA, AmSouth in 1997, for conventional home purchase loans, denied 50% of application from African Americans, versus only 14.5% of applications from whites, for a denial rate disparity of 3.45. In the Montgomery, Alabama MSA in 1997, AmSouth denied the applications of African Americans 3.68 times more frequently that the applications of whites. In the Nashville, Tennessee MSA, AmSouth in 1997 denied the applications of African Americans 4.18 times more frequently that the applications of whites -- and thats the city where First American, which AmSouth is trying to buy, is headquartered.
June 1, 1999 (Update to Canadian Imperial Bank of Commerce story, below. See also ICP's most recent CRA Reporter, for analysis of First Union's and Bank One's recent turn from branches to the 'Net, and banks' loss of wallet (and loan) share to mutual funds and e-traders like Charles Schwab. See also Fed Reporter, for an analysis of the Fed's most recent "Consumer Advisory Council meetings, including a Q &A between present and prospective Governors. And finally, see also ICP's Bankers Trust - Deutsche Bank page, for an analysis of the Fed's strange supervision of BT).
On May 28, ICP received from the OCC a portion of CIBCs revised / amended Application for a national bank charter. The entirety of CIBCs CRA plan is being improperly withheld. ICP is today submitting a FOIA appeal for these documents, which must be available to the public during the pendency of an application for a new national bank, particularly a non-traditional proposed bank like CIBCNB. ICP is requesting an extension of the OCCs comment period...
The comment period on CIBCs application (re-) began on April 19, 1999, when CIBC submitted the required (and apparently substantially revised) CRA Statement, and two other documents even the names of which have been withheld from ICP. See April 19, 1999 letter from CIBCs counsel to Mr. John Graetz of the OCC, which also states that another required part of the Application will be provided within the next few weeks. ICPs first comment, submitted only 22 days after this CIBC submission, was timely.
CIBC is still withholding information not entitled for confidential treatment under FOIA, information that ICP has a right to review and critique before the comment period can close. The entire Revised CRA Statement has been withheld; the earlier submission, at Section III, Community Reinvestment Act Statement, is entirely crossed out. Id. at pp. 12-13. Since CRA must be considered in connection with this application, it is impermissible for the Applicant to withhold the entirety of its CRA Statement and still expect the comment period to close.
ICP notes that the OCC recently granted a number of extension of the comment period on a de novo national bank application by Bank of Scotland, precisely because information, including the CRA Statement, were being withheld. It would be arbitrary to treat CIBCs application, and overbroad request for confidential treatment, differently. The comment period must be extended.
ICP is also appealing the following redactions:
a full paragraph from page 2 of the December 16, 1998, submission (the First Submission);
the entirety of pages 4-7 of the First Submission;
a full paragraph from page 8 of the First Submission;
pages 12-13 of the First Submission, headed Community Reinvestment Act Statement;
the redactions on pages 18 and 19 of the First Submission;
the entirety of pages 20 and 21 of the First Submission;
two full paragraphs, and an additional line-and-a-half, from page 22 of the First Submission;
the entirety of pages 23-25, 27, and 29-30 of the First Submission;
bullet points 4 and 5 on page 1 of CIBCs counsels letter to the OCC, dated April 19, 1999;
items 2 and 4 on page 2 and all redactions on page 3 of this letter; and
all withheld attachments to CIBCs counsels April 19, 1999, letter and all other withheld CIBC submissions.
To not formally extend the comment period on this Application would fly in the face of the principles of the CRA and of the publics right to comment thereon, and on applications for new national banks. The Orlando Sentinel newspaper of May 12, 1999, reported that CIBC officials have said they wouldnt disclose their plans until a charter is granted. The Canadian National Post of May 12, 1999, reporting on this proceeding, quoted CIBC: Weve submitted an application and its complete. Sam Eskenazi, a spokesman for the Office of the Comptroller in Washington, said CIBC addressed the CRA in its application but thats all I can say.
It appears to be CIBCs argument that it is not required to disclose ANY of the nature or substance of its plans during the comment period on its application for a new national bank -- not even its CRA plan. The OCC has not in the past accepted this. Nor has the Federal Reserve Board. In fact, even by CIBCs proposed time table of (delayed) disclosure, the nature and substance of its plans would be made public, as they must be, before it applies to the FRB. The irony would be that the OCC would preclude comment to it on a new national banks CRA plan, leaving the public with the lone option of commenting to the FRB on the national banks CRA plans. This makes no sense. Since CIBCNB could not open for business until CIBC receives FRB approval, and CIBC implies it will release the nature and substance of its plan on or before the OCCs preliminary ruling, CIBCs argument for the confidentiality of this information is undercut. The comment period should be formally extended, the CRA and other information, and ICP must be allowed to comment thereon. On the current public record, this proposal could not legitimately be approved.
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May 26, 1999 (Update to Lehman Brothers story, below. See also ICP's most recent Fed Reporter, for an analysis of the bank-CEO members of the Federal Advisory Council, minutes of the meetings of which the Fed is trying to withhold).
On May 21, Inner City Press received from Lehman Brothers some portions of its application to the Office of the Comptroller of the Currency to acquire Delaware Savings Bank on an emergency basis, and to obtain a coveted thrift charter without a formal comment period. As to CRA, the application states that the Bank will have at least two assessment areas for CRA purposes: the Banks current local assessment area and the entire United States... With regard to the national assessment area, Applicant is in the process of developing a CRA plan that will be separately submitted and that will include a three year CRA lending commitment similar to that contained in other applications approved by the OTS in recent months.
As of late May 25, ICP and the Delaware Community Reinvestment Action Council have not yet received any portion of the referenced CRA plan. Lehman has asked the OTS to approve its application by May 28 (Bloomberg news wire of May 7).
Lehmans self-description in the application says that Lehman Brothers expects to originate approximately $1.5 billion in prime quality single family residential mortgage loans in 1999 and is a leading purchaser of residential whole loans from thrifts and other originators... Lehman Brothers also supports the home equity loan market.... Note how Lehman emphasized prime (that is, normal interest rate) quality in the first part of the statement, then adds, without qualification, that it supports the home equity market. Lehman is the major underwriter and co-manager of the mortgage backed securities of high interest rate predatory lenders such as Delta Funding, who practices are analyzed in detail on ICPs Deutsche Bank page.
When ICP receives its copy of Lehmans CRA plan (which cannot legitimately be withheld), ICP will submit a supplemental comment to the OTS, and will provide an update in this space.
May 20, 1999
Bank Beat presents... the worlds most incomprehensible letter.
On May 11, ICP filed comments and a Freedom of Information Act (FOIA) request with the Office of the Comptroller of the Currency, on Canadian Imperial Bank of Commerces request for a new bank charter in Orlando, Florida. Canadian journalists told ICP that when they requested CIBCs application, they were given only six pages, with no detail about what products the proposed bank would offer, and how. This is why, although CIBC filed its application with the OCC in December 1998, nothing about the application was publicly reported until May 1999: no one knew what the application was.
ICPs comments are summarized in a report below. But on May 19, ICP received from the OCC a copy of a letter submitted by CIBCs counsel, Mayer, Platt and Brown of 1909 K Street, Washington, D.C.. In celebration of James Madison, the so-called Father of FOIA, whole inscrutable sections of the letter are presented for your viewing pleasure:
Office of the Comptroller of the Currency
250 E Street, S.W.
Washington, D.C. 20219
Re: CIBC, National Bank: Inner City Press/Community Letter
Thank you for forward to us the May 11, 1999 public comment of [ICP]... ICP appears to be opposed to the Banks limiting its CRA assessment area to the Orlando MSA and questions the Banks ability to meet CRA obligations in this limited area, based on the belief, apparently derived from incomplete press reports concerning the Application, that the Bank will be operating a traditional Internet bank... We believe that those concerns will be fully resolved once the nature and substance of the Banks proposed activities are made more fully known, which we anticipate will occur no later than the time of preliminary approval...
Consequently, we ask that the OCC address ICPs CRA concerns in the ordinary course as part of a preliminary approval of the Application, inasmuch as we believe that the resolution of ICPs concerns will be best achieved with prompt processing of the Application.
Thank you for your consideration with respect to the foregoing. Please contact me... if you have any questions concerning the foregoing.
Charles M. Horn
cc: Nora Brooks
As best as ICP can make out, the banks letter encourages the regulator to consider ICPs comments, which it says will be addressed by information the bank will reveal no later than the time of... approval. An application for a new bank charter is subject to public comment, but Canadian Imperial seems to believe it can withhold the nature and substance of the Banks proposed activities -- until the moment the OCC approves the application.
The bank ascribes ICPs concerns to incomplete press reports -- while the bank withhold all information about the nature and substance of its proposal. How could press reports fail to be incomplete? Only on the Bank Beat... Until next time...
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May 12, 1999
Mega banks and investment firms have stepped up their pace quietly applying for regulatory approvals that evade Community Reinvestment Act and public participation principles, while the CRA is being attacked in Congress in connection with proposed financial modernization legislation.
This week, Inner City Press has come across, and now commented upon, two such stealth proposals. On May 11, ICP submitted comments to the Office of the Comptroller of the Currency, on Canadian Imperial Bank of Commerces application to charter a large all-Internet bank in Orlando, Florida, and limit its CRA responsibilities to only Orlando. On May 12, ICP and the Delaware Community Reinvestment Action Council (DCRAC) filed comments with the Office of Thrift Supervision, on Lehman Brothers application to get a savings bank charter by buying Delaware Savings Bank, which application Lehman has asked the OTS to approve by May 28, as an emergency and without allowing any public comments. Sections of ICPs CIBC, and then Lehman, comments follow; see also Wilmington (DE) News-Journal and Philadelphia Inquirer of May 18, and American Banker of May 17, at pg. 1. The Lehman saga will be updated on ICP's Delaware Beat page...
(1) ICPs Comment On the Application of Canadian Imperial Bank of Commerce to Charter the Proposed Columbus First National Bank (CFNB) and Engage in Nationwide Internet Banking
...ICP is concerned whether and how CFNB would comply with the Community Reinvestment Act (the CRA). It appears, from recent public reports cited below, that Canadian Imperial is proposing a bank that would collect deposits nationwide via the Internet, and would offer mortgages and consumer loans, also presumably via the Internet. As a policy issue, ICP would oppose the Office of the Comptroller of the Currency (the OCC) allowing CFNB to limit its CRA assessment area to the Orlando, Florida Metropolitan Statistical Area (MSA), given Canadian Imperials ambitious plans for deposit collection and the offering of retail loan products nationwide via the Internet. CFNB would have to have a credible and detailed plan of how it would reach and meet the credit need of low- and moderate-income consumers. It appears, however, that Canadian Imperial is seeking to withhold most of its plans.
The first public report of this proposal was in the Orlando Sentinel newspaper of May 4, 1999, at B1: Canadas biggest bank has quietly chosen the Orlando area in which to seek its first U.S. bank charter. But the company is not disclosing its plans for doing business in this country... [it] has been looking furtively for office space in Maitland. A CIBC spokesman would not disclose how much space the bank wants, saying only that the amount depends on what business functions regulators permit the bank to perform. Since then, two Canadian newspapers, and the Bridge news wire service, have picked up on the story. See, e.g., The Toronto Star of May 6, 1999: Canadian Imperials plan has only now become public. To the degree that notice was published in the OCCs Weekly Bulletin, there was no way for the public to know what the application was about. This comment should be considered in connection with Canadian Imperials application, and, as previously noted, the OCC should institute a Significant New Applications notice section on its Internet web site, similar to that already provided by the OCCs sister agency, the Office of Thrift Supervision (OTS).
ICP is particularly concerned whether Canadian Imperial and its proposed bank would comply with the letter and spirit of the CRA. From the above-mentioned public reports, it appears that CFNB would have only one brick-and-mortar branch office, in a Maitland, Florida, office park. Even prior to seeing the full application (which ICP is requesting), ICP is opposed to CFNB limiting its CRA assessment area to the Orlando MSA. The Orlando Sentinel of May 10 reports that Canadian Imperial proposes initial capitalization of $300 million -- which would support assets of approximately $4 billion, and indicates a plan to collect deposits actively, on a nationwide basis. It is also reported that that CFNB would office mortgages and consumer loans. While it is possible that CIBCs application does not connect the two businesses, note that CIBC is already engaged in the mortgage business in the United States. Harrison Scott Publications, September 1998: CIBC World Markets recently hired two executive directors to bolster its origination effort. Frank Tardif will work out of the banks New York office, coordinating with several mortgage brokers... Meanwhile, David Burt will be in charge of loan production in the Western U.S., working out of CIBCs Los Angeles office. CIBC is also involved in the asset-backed securities market in the U.S.. See, e.g., Foreign Banks Invading Asset-Backed Market, American Banker, July 9, 1997.
ICP believes that, given that Canadian Imperial plans to offer mortgages and consumer loans, CFNB would have to comply with the CRAs lending test, and not only in the Orlando MSA, which appears to have been somewhat arbitrarily chosen. Why base all of this in Orlando? David K. McGown, CIBCs tight-lipped public relations director, said: Its one of the fastest growing communities in North America. Id. But it appears clear that Canadian Imperials plan is to collect deposits nationwide, via the Internet, and to offer retail credit products, presumably also over the Internet.
There are particularly difficulties for new, Internet-based institutions such as the one proposed to sufficiently serve the credit needs of low- and moderate-income consumers. There remain disparities in computer ownership and Internet access, by both income and race. See, e.g., Scott Wooley, Virtual Banker, Forbes, June 15, 1998, at 127: Internet-savvy bank customers tend to be high-balance types. Booz, Allen figures Internet customers, with their average household income of $80,000, are two to four times as profitable as other customers. This does not mean that Internet banks could not comply with CRA -- but particularly attention must be paid, and a credible plan must be laid out, and made public, during this applications process.
In 1996, ICP commented on Toronto Dominions application to the Federal Reserve Board (FRB) to acquire Waterhouse National Bank (WNB). The application stated that WNB would offer its credit products only to those trading securities electronically). ICPs comments to the FRB, cc-ed to the OCCs, WNBs regulator, asked: given the demographic of customers, and the applicants lack of a CRA record, how would the target bank serve low and moderate income borrowers? The FRB, after a three month long proceeding, required Toronto Dominion to submit a detailed three to five year CRA plan. See, e.g., letter from Mr. Glenn Loney of the FRB to counsel to Toronto Dominion, dated August 16, 1996, which stated:
In order to provide the Board with information that would give it the ability to evaluate the issues involved in this matter... we are again requesting additional information regarding the CRA program at WNB and the plans of TD to oversee and implement the further development of WNBs CRA program. We understand that, since TD is a Canadian company and owns no banks or thrifts in the United States, it has no record of dealing with the [CRA]... since the Applicant would be assuming responsibility for WNBs CRA program, and since the record is currently unclear as to TDs future plans for WNBs CRA program, please provide, with the greatest degree of specificity possible, TDs plan to oversee and develop WNBs CRA program over the next three to five years... with time frames for anticipated actions, proposals for monitoring, progress reports and the like.
It would be more than a little surprising if less scrutiny was given here. From all accounts, Canadian Imperial has requested confidential treatment for most material portions of its Application. ICP has requested the application immediately following the first public report of this proposal, and will be submitting further comments soon after it receives the application and CRA plan. On the current public record, this proposal should not be approved.
ICPs comments are in; CIBC's and the OCC's response, including to the FOIA request for the portions of its application that CIBC is withholding, will be reported on this site.
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(2) Comment Opposing, and Requesting a Hearing On, the Recent Proposal by Lehman Brothers Holding, Inc. (Lehman), to Acquire Delaware Savings Bank, FSB (DSB)
The Office of Thrift Supervision (OTS) has not placed notice of this proposal on the Significant New Applications page of its Internet web site, despite the fact that this is precisely the type of proposal that the OTS has, historically and recently, viewed (correctly) as significant. As set forth below, ICP and DCRAC contend that this proposal raises important Community Reinvestment Act (CRA) issues -- the type of issues on which the OTS has previously granted ICP oral arguments and informal meetings, and concerning which the OTS has reviewed, at length, other applications. For example, Lehman is currently involved in questionable subprime lending, including by purchase, pooling and re-selling high interest rate mortgages, disproportionately in communities of color, originated by the questionably-compliance subprime lender Delta Funding (see below). On a number of applications for thrift charters by conglomerates involved in subprime lending, the OTS has inquired into the applicants activities, and imposed conditions. For example, ICP and DCRAC commented to the OTS on The Travelers Groups (now Citigroups) 1997 application for a thrift charter; the OTS imposed conditions on these issues. The processing, throughout 1998, of American Generals thrift charter application was somewhat similar. Here, however, Lehman appears to wish to avoid such scrutiny, and even public comment, and obtain a thrift on an expedited basis, with no public comment. ICP and DCRAC oppose this, and are concerned how it was that DSB or the OTS selected Lehman as the prospective acquiror / purported rescuer.
Before commenting on the CRA issues raised by this proposal, the Protestants note that at least two other large New York-based investment banks have obtained thrift charters on an expedited, non-public basis.
A particularly questionable example of this was the thrift charter the OTS granted to Merrill Lynch in May 1997, in exchange for a relative small transaction with Metro Savings Bank in Orlando, Florida. As publicly reported, Merrill was looking for a troubled thrift to buy, [an OTS official] said. Metro Savings President to Quit After Clinching Thrift Bailout, Orlando Sentinel, July 21, 1997, at 7. In that case, Merrill infused a little more than $1 million into Metro, in exchange for a de novo thrift charter in New Jersey (which has provided tremendous benefit to Merrills nationwide trust business).
The OTS should take notice that sophisticated financial and commercial conglomerates are, like Merrill (and Dean Witter, and now, Lehman), looking for a troubled thrift to buy. See supra. This demonstrates that this and other related exemptions are now little more than an anachronistic loophole for the largest and most sophisticated companies to exploit. Numerous questions, directly relevant to Lehmans instant proposal, remain about the Merrill charter. How, among the companies waiting to acquire failing thrifts, was Merrill chosen by the OTS? Who reviewed the fairness, including to the taxpayers and the public, of the exchange of a $1 million infusion for a thrift charter without public comment?
It appears clear that Lehman is as or more interested in obtaining a generic thrift charter and its powers than in acquiring, specifically, DSB. Other applicants for thrift charters submit application subject to public notice and comment, and have their plans, including CRA plans, reviewed and commented on, including, in a number of instances, at oral arguments / informal meetings that the OTS grants to community group commenters. For example, ICP commented on Transamericas application for a thrift charter, and was granted an informal meeting at the OTS Jersey City office. Transamericas application has still not been ruled on (and is presumably being withdrawn and resubmitted, given Aegons proposal to acquire Transamerica). Transamericas application was to convert a bank it owns to a thrift charter, and the OTS clearly acknowledged CRA and other issues requiring scrutiny existed in connection with the proposal. Similarly, the OTS is scheduling a meeting on the application of Conseco and Green Tree (a subprime lender) for a thrift charter. Lehmans instant proposal raises more issues -- it is imperative that these comments be considered and inquired into, and that the OTS grant the Protestants the informal meeting they are requesting.
The Protestants are, for the reasons above, particularly concerned about how Lehman was selected. Given the history in the past three years of Merrill Lynch and Dean Witter (see supra), the Protestants ask: does the OTS maintain a list of companies who would be interested in acquiring undercapitalized thrifts in exchange for a charter? If such a list is maintained, how is notice of this list provided? Why are the institutions selected (or suggested to undercapitalized thrifts) primarily large investment banks? If, as it might appear, what is for sale is a loophole (unitary thrift holding company status, and/or continued exemption from the Bank Holding Company Act), what procedures are in place to put this loophole up for bid, so that, at least, the best offer is selected?
The OTS (and/or Lehman) might claim that this stealth transaction is in the public interest, because it might save the insurance fund(s), and/or the taxpayers, money. The Protestants question whether this would justify circumventing a public notice and comment process, particularly in this case. But even accepting, arguendo, this logic -- the taxpayers and the public interest would be better served by the OTS ensuring that the best offer for the loophole is solicited and accepted. ICP is submitted a Freedom of Information Act (FOIA) request for record reflecting the background of this proposal (and for the application itself), and will submit further comments upon receipt and review of these documents.
The Bloomberg news wire of May 7 reported that Lehman employs more than 450 mortgage brokers and expects to originate approximately $1.5 billion in single family mortgage loans in 1999.... [In terms of this claim of origination, note that no Home Mortgage Disclosure Act (HDMA) data exists in the FFIEC data base of 1997 loans under the search term Lehman]. As discussed below, Lehman is deeply involved in subprime, arguably predatory mortgage lending, including with the New York-based subprime lender Delta Funding, currently defendant in numerous consumer protection and fraud class action lawsuits. Lehmans continuing involvement in questionably subprime mortgage lending should be fully inquired into by the OTS, including at the hearing the Protestants are requesting.
Lehmans involvement in subprime mortgage lending is extensive. See, e.g., National Mortgage News of April 12, 1999, Lehman Keeps Lead in MBS Ranks; and National Mortgage News of January 25, 1999, Special Report: B & C Lending, listing underwriters of securities backed by subprime home equity loans, including loans originated by Provident Bank ($500 million worth of loans, according to Thomsons Asset Sales Report of March 1, 1999). See also, Thomsons Asset Sales Report of May 3, 1999: FHB Funding Corp., a subprime home equity lender based in Mineola, N.Y., is working with Lehman Brothers to incorporate securitization into its financial strategy. The soon-to-be first time issuer set up a warehouse lending facility with Lehman Brothers last year that has funded the firms loans... FHB is licensed and running in 44 states as well as the District of Columbia. It recently expanded its West Coast Regional Center to include Arizona, Colorado, Utah and New Mexico, in response to big subprime volume coming out of the western sector.
For purposes of the Protestants hearing request, it is Lehmans extensive involvement with the questionable subprime lender Delta Funding on which the remainder of this first comment, and the attachment hereto, will focus.
Lehman underwrites the subprime home equity loan-backed securities of Delta Funding Corp., a questionably-compliance subprime lender based in New York, most recently as a co-manager of Deltas $375 million issues in March 1999. What standards does Lehman use in selecting which subprime lenders it will work with, and pool and sell loans from? These are all activities that are subject to the Fair Housing Act and its regulations; see, e.g., 24 C.F.R. §100.125, which reaches, and makes unlawful, [p]ooling or packaging loans or other debts or securities which relate to, or which are secured by, dwellings differently because of race, religion, handicap, familial status or national origin.
ICP has geocoded properties in New York City on which Delta Funding has lent, and then securitized the loans. These properties are disproportionately -- VIRTUALLY ENTIRELY -- in minority communities.
[Tabular material omitted]
Examining individual Delta loans and related documentation is also troubling. ICP has reviewed a Delta loan in New York to Oscar and Dorothy Jernegons. The closing statement shows, out of the $101,250 loan, Mr. Jernegons was charged $7,151 in origination fees by Delta, $8,100 in fees to Dunewood Funding, and $6,000 to a Mr. Stanley R. Stern (to whom Mr. Jernegons has stated he was not previously indebted). Mr. Jernegons claims that a Mr. Archer wrote down a rental income figure which had no basis in fact in order to show financial capacity, for qualifications purposes. Mr. Jernegons states that he never saw these loan documents despite numerous requests. This is a most troubling loan, and exemplifies the type of practices that Lehman, which co-manages Deltas MBS issuances, in an activity subject to the Fair Housing Act, was or should have been aware of.
Delta (like, apparently, Lehman, see supra) get most of its loans from mortgage brokers. Consider the records of the mortgage brokers with which Delta does business and gets the loans with which it subsequently does business with Lehman. On our current knowledge, these brokers have included:
Northeast Mortgage Investment Corp., on information and belief run by a Michael Beyer, relation to David and Barry Beyer, whose Sterling Resources was lambasted in the NYC Department of Consumer Affairs study, Predatory Home Improvement Lending.
Coastal Capital: an extension of Dartmouth Funding, a/k/a Dartmouth Plan, which has been inquired into by the NY and CT Attorney Generals offices, and which was also critiqued in the Predatory Home Improvement Lending study, supra.
ECI a/k/a Equitable Mortgage/Dunewood Funding (see supra and attached re loan to Mr. Jernegons involving Delta and Dunewood): on information and belief, Dunewood and its principal, Robert Shapiro, have been charged by the state comptrollers office with fraud and issuing unregistered securities.
Delta also long-used a questionable title and abstract company, All Island Abstract, 81 Scudder Avenue, Northport, New York, which also did extensive business with the now defunct Cityscape.
Also, just prior to going public, Delta sold a number of non-performing loans to NY Mortgage Servicing, whose officers appear to have been Sidney A. Miller, Hugh Miller and Irwin Fein (the officers of Delta Funding). This appears to be a material related party relationship, never disclosed in Deltas SEC filings, and appears to have been to artificially deflate Deltas delinquency numbers.
More recently, there have been a number of transactions of loans between Delta and American Strategic Income Portfolio, Inc., of Minneapolis, MN, which has shared a CEO/President with Piper Jaffray.
A question: as the RESPA / TILA / HOEPA suits against Delta (those reported in the New York Times in January, 1999, and others yet unreported), and conceivably apply to between $1.5 billion to $3 billion of outstanding loans, this could come to have a serious financial effect on Lehman, the applicant here.
Consider, for example, a 1999 class action lawsuit filed against Delta Funding in the New York Supreme Court, New York County. The lawsuit alleges, in detail, that Delta did not comply with a settlement agreement required by the New York State Banking Department in 1996. Questions exist as to whether Lehman knew or should have known of the existence of this settlement agreement and Delta failure to comply therewith; this goes to the harms caused by Lehmans ongoing, standardless involvement in questionable subprime lending.
This 1999 Class Action lawsuit alleges inter alia that:
Deltas business as a licensed mortgage banker in the State of New York is regulated pursuant to Article 12D of the New York Banking Law and the regulations promulgated thereunder by the [NYSBD]. Under such regulations, mortgage bankers, including Delta, at all times relevant to the Complaint herein were prohibited from charging customers any fees in connection with a mortgage loan application prior to closing except for a mortgage application fee which is to be designated as such. Upon information and belief, beginning in or about 1985, Delta charged virtually all of its customers a processing fee, at times as high as $1,000, in contravention of the regulations of the Banking Department pursuant to Article 12D.
In January 1995, Theresa Leonardi, a resident of Brooklyn, submitted a written complaint regarding Delta to the Banking Department in which she complained about her treatment by Delta in connection with an alleged mortgage transaction.
Upon information and belief, as a result of the complaint of Theresa Leonardi, the Banking Department investigated Deltas lending practices and concluded that Delta was systematically violating the Banking Departments regulations by charging an illegal processing fee to its borrowers. In June of 1996, Delta entered into a settlement agreement (the Settlement Agreement) with the Banking Department pursuant to which Delta acknowledged that Part 38.1(b) of the General Regulations of the Banking Department clearly stated that the application fee is to include the cost of processing the loan application and acknowledged the Departments position that separate processing fees may not be charged. In the Settlement Agreement, Delta agreed to refund the processing fee paid by Mrs. Leonardi and further agreed unconditionally to refund all such processing fees paid to Delta by any of its customers who thereafter requested a refund of such fees within the six months following the Settlement Agreement...
Thereafter, Delta kept secret the existence of the Settlement Agreement with the Banking Department and did not disclose to any of its customers that they were entitled to request a refund of any processing fees paid by them. Nor did Delta disclose the existence of the Settlement Agreement with the Banking Department when it filed documents with the Securities and Exchange Commission in connection with its public offering of securities...
Upon information and belief, as many as 50,000 Delta customers may have paid illegal processing fees of up to $1,000. Accordingly, Delta may have obtained illegal profits is excess of $20 million form its customers.
ICP asserts that Lehman, which does extensive business with Delta, knew or should have known about the Settlement Agreement, and Deltas contravention thereof. The entire episode reflects adversely on the Applicants managerial resources, and adds weight to the adverse fair lending and CRA issues that, on this record, militate for the requested evidentiary hearing, and for the denial of the Application.
The Protestants further note, in support of their hearing request, the DSB is also apparently involved in subprime lending. See, e.g., The Orlando (FL) Sentinel of January 11, 1999: Delaware Savings Bank, a little Wilmington, Del. thrift that operates mortgage-production offices throughout the country... says it is not renewing the lease on the Maitland space... The past six months have not been a good time for subprime lending, in which the bank specializes. Emphasis added. See also, The Orlando Sentinel of April 12, 1998: Delaware Savings Banks Maitland-based mortgage production office is gearing up to get in on some of the refinancing frenzy.. Delaware Savings had concentrated on lending to borrowers with some credit problems in so-called B- and C-grade paper, said Terry Carlson, branch manager. Delaware Savings, a federal savings bank based in Wilmington, Del., has only mortgage-lending offices in Florida. Further noteworthy: despite this Florida office (and the reference to other offices), the FFIEC 1997 HMDA data base, for DSB in conventional home purchase and refinance loans, reports only loans in the Wilmington MSA. This incongruity, along with Lehmans reported claim to be originated mortgages (while there is no 1997 HMDA data by a reporter name beginning with Lehman, is among the disputes of fact to be inquired into and resolved at the hearing the Protestants are requesting.
As noted above, the Protestants have requested the entire recently-filed Application, and related documents, under FOIA, and will be submitting a further comment upon receipt. For the reasons set forth above, the OTS should not approve this application on this record.
ICPs and DCRACs comments are in; the OTSs response, including to the FOIA request for all records reflecting its involvement in the selection of Lehman as rescuer-for-a-(cheap)-loophole, will be reported on ICP's Delaware Beat page.
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April 21, 1999 -- ICP has been informed by knowledgeable sources that, in connection with the House Banking Committees inquiry into hedge funds and the Feds role in arranging the bail-out of Long Term Capital Management last September, the House Banking Committee is allowing LTCM officials to testify behind closed doors, in private briefings, with no subpoenas. And so the ultimate insiders, including ex-Fed Vice Chair David Mullins and ex-Salomon wunder-trader John Meriwether, continue to get kid glove treatment, and to never be required, or even be asked, to publicly explain their actions and their request (in telephone calls from Mullins and Meriwether) for Federal Reserve intervention. Now the Financial Times reports that Meriwether and Goldman Sachs Jon Corzine (in his personal capacity) are studying buying out the 14 institutions that the Fed encouraged to bail out LTCM in September. Developing...
Meanwhile, Goldman Sachs has nominated as one of only two outside directors, in connection with its IPO, Jim Johnson, until recently the CEO of FannieMae. Can you say... permanent government?
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First, on the Federal Reserve and its ever-closer relations with the Wall Street banks: the Inner City Reporter has been informed, by reliable and well-placed sources, that at a recent cocktail party in New York City, a Federal Reserve official was heard to (loudly) brag that the Fed had brokered the combination of Bankers Trust and Deutsche Bank, and was proud of it. Developing... In that case, theres a direct conflict in the Federal Reserve Boards ruling on that merger...
Next, at the high level of the take-over titans: during the wave of mega-mergers in 1998, meetings were held about what would have been an unprecedented four-way merger: First Union - Bank One - Norwest - Wells Fargo. Meetings were held in San Fransisco. The deal fell through because the egos involved couldnt agree who would run the bank -- and First Unions Fast Eddie was most insistent about getting the position. Could be revisited...
At the lower link of the good chain, among closely held private banks: Hudson Valley Bank in Westchester, New York, currently embroiled in the scandal surrounding the husband of Westchester District Attorney Jeanine Pirro, turns out to be a bank with a less than 40% loan-to-deposit ratio, which excludes low- and moderate-income areas in Westchester from its lending, while reaching out and doing small business lending in, of all places, Georgia. Word on the street is that things are about to blow, for this bank...
Another neat small bank, a trust company in New Jersey, whose aging CEO has been known (and sued) for sexual harrassment, enjoys reduced rate legal representation from Wall (that would be Broad) Street law firm, due to its CEOs history during World War II. We like principle, but are more concerned with whats happening now, not fifty years ago...
Finally, in the revolving door of now: consider the case of Richard Kim, whose tours of duty in banking law began at the Federal Reserve Board, then shifted, at a pay increase, to the New York office of the Chicago-based law firm, Mayer, Brown & Platt; from there to NationsBank, where he compiled paperwork for pre-determined merger approvals, and now, post Bank of America bloodletting, to of cousel status with Wachtel, Lipton, working on mergers, beginning with the Bankers Trust-Deutsche Bank merger application, filed with... you got it, the Federal Reserve. The speed of these revolving doors picks up, as consolidation and lay offs continue...
Until next time, well see you on... the Bank Beat. For (or with) more information, contact us.
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