Inner City Press Bank Beat
Archive #2:  July 1999

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July 26, 1999

     Inner City Press/Community on the Move and the Inner City Public Interest Law Center, along with a civil rights group in New Orleans, Citizens Against Legal Abuse, have just filed a 14 page protest to AmSouth’s $5 billion merger with First American Corporation. A summary of the protest is below on this page.

     First, however, in updates to the stories below: on July 20, the Office of Thrift Supervision provided ICP with E*TRADE’s late-filed Community Reinvestment Act plan for Telebank. The OTS has granted ICP 20 more days to comment. E*TRADE’s CRA plan is weak -- it reiterates the absurd argument that a bank which collects deposits and markets mortgages nationwide over the Internet can be deemed a “wholesale bank,” only judged on the loans it buys in its headquarters county. E*TRADE emphasizes that Telebank will begin to collect deposits 24 hours a day by telephone -- E*TRADE argues that this shows that the bank is accessible to low and moderate income people. But Telebank only markets credit products to those on the Internet; the telephone channel is focused on drawing deposits. Stock analysts are beginning to question E*TRADE’s application strategy (its application does not even meaningfully address how FDIC-insured and non-insured products will be distinguished, much less CRA). E*TRADE is telling the stock analysts, “Don’t worry, Telebank has two ex-OTS employees.” This implication of access, of the benefits of the revolving door, is improper, and, here, misleading. Developing...

    Also, on July 22, ICP filed comments with the OTS on Wal-Mart’s application to get into banking, by acquiring the one-branch Federal BankCentre in Broken Arrow, Oklahoma. Click here for a summary of ICP’s Wal-Mart comments;  see also Associated Press newswire of July 23, 16:39 EDT: Marcy Gordon, Wal-Mart Thrift Deal is Opposed.

     And now, the AmSouth - First American comment, filed July 25-26 with the Federal Reserve:

PETITION TO DENY AND HEARING REQUEST BY INNER CITY PRESS / COMMUNITY ON THE MOVE, CITIZENS AGAINST LEGAL ABUSE AND THE INNER CITY PUBLIC INTEREST LAW CENTER IN OPPOSITION TO THE APPLICATIONS AND NOTICES OF AMSOUTH BANCORPORATION TO ACQUIRE FIRST AMERICAN CORP. AND ITS SUBSIDIARIES

JULY 26, 1999

I. PRELIMINARY STATEMENT

    On behalf of Inner City Press/Community on the Move (“ICP”) and Citizens Against Legal Abuse (“CA-LA;” together, the “Protestants”), the Inner City Public Interest Law Center submits this timely comment opposing and requesting hearings on the applications and notices of AmSouth Bancorporation and its subsidiaries (“AmSouth”) to acquire and First American Corporation its subsidiaries (“First American”).

As set forth below, AmSouth and First American have troubling fair lending and Community Reinvestment Act (“CRA”) records, militating for denial of this merger proposal. AmSouth’s denial rates for African American applicants for mortgage loans are as much as four times higher than for white applicants. AmSouth’s July 20, 1999, “Commitment” would not address this; also, AmSouth, even by its own claims, only conducted outreach in three states, neglecting Louisiana, Mississippi, Virginia, Kentucky, Georgia and Arkansas. See Section II, infra.

This proposed merger would have anticompetitive effects, particularly in the Chattanooga market. The Application proposes a market definition for the Chattanooga Market which is broader that the market definition that the Federal Reserve System uses. Then, the Applicants present (in the text of the Application) only HHI calculations for their own defined market. App. at 47. Even then, the HHI would rise by fully 359 points. Id. This proposed merger would have anticompetitive effects in this market; ICP formally challenges the Applicants attempt to re-define the market, in order to gain approval from this anticompetitive merger. See Section III, infra.

Furthermore, this proposed merger would ill-serve the convenience and needs of communities. AmSouth would close at least 24 bank branches. See Section IV, infra.

Beyond the CRA grounds, this merger proposal is ill-conceived, under the other statutory factors, including managerial and financial, that the Federal Reserve Board (“FRB”) must consider. First American, and the erstwhile Deposit Guaranty Corp. (which First American acquired in 1998), have engaged in banking practices that are unfair, unsound, and presumptively illegal. For example (and attached hereto as exhibits), Deposit Guaranty informed the Mississippi Sovereignty Commission about the opening of accounts by civil rights advocates, and, more recently, has treated African American applicants and borrowers quite differently than whites. See Section V, infra, and see <http://www.ca-la.org>, incorporated herein by reference. See also attached letter, dated July 23, 1999, by CA-LA’s Chairman, explicitly joining in this protest and hearing request.   ICP and CALA are requesting public meetings and an evidentiary hearing on this proposal. See Section VI, infra.

II. AMSOUTH HAS A TROUBLING FAIR LENDING RECORD;
THE MERGER SHOULD BE DENIED ON THIS BASIS

     AmSouth is a bank which disproportionately excludes and denies people of color, specifically African Americans. For example, in the Mobile, AL Metropolitan Statistical Area (“MSA”) in 1997, for conventional home purchase loans, AmSouth Bank denied 50% of applications from African Americans, versus only 14.5% of applications from whites. AmSouth’s denial rate disparity between African Americans and whites was 3.45 to 1. While some banks claim that high denial rate disparities might reflect greater-than-normal outreach to protected classes, that is not the case here. In this MSA, AmSouth based on its marketing made 265 conventional home purchase loans to whites, and only 11 such loans to African Americans, comparing unfavorable to not only the demographics, but also the industry aggregate’s lending, in this MSA.

In the Nashville, TN MSA in 1997, for conventional home purchase loans, AmSouth Bank denied 25% of applications from African Americans, versus only 6% of applications from whites. AmSouth’s denial rate disparity between African Americans and whites was 4.18 to 1. While some banks claim that high denial rate disparities might reflect greater-than-normal outreach to protected classes, that is not the case here. In this MSA, AmSouth’s lending compares unfavorable to not only the demographics, but also the industry aggregate’s lending, in this MSA.

In the Montgomery, AL MSA in 1997, for conventional home purchase loans, AmSouth Bank denied 50% of applications from African Americans, versus only 13.6% of applications from whites. AmSouth’s denial rate disparity between African Americans and whites was 3.68 to 1. While some banks claim that high denial rate disparities might reflect greater-than-normal outreach to protected classes, that is not the case here. In this MSA, AmSouth based on its marketing made 91 conventional home purchase loans to whites, and only 12 such loans to African Americans, comparing unfavorable to not only the demographics, but also the industry aggregate’s lending, in this MSA.

In the Jacksonville, FL MSA in 1997, for conventional home purchase loans, AmSouth Bank denied 33% of applications from African Americans, versus only 14.3% of applications from whites. AmSouth’s denial rate disparity between African Americans and whites was 2.31 to 1. While some banks claim that high denial rate disparities might reflect greater-than-normal outreach to protected classes, that is not the case here. In this MSA, AmSouth based on its marketing made 63 conventional home purchase loans to whites, and only nine such loans to African Americans, comparing unfavorable to not only the demographics, but also the industry aggregate’s lending, in this MSA.

First American acquired Deposit Guaranty, in Mississippi, Louisiana and Arkansas. Here is Deposit Guaranty’s record in the New Orleans MSA in 1997, for conventional home purchase loans:

Deposit Guarantee Mortgage Co. made 18 such loans to whites, and only three loans to African Americans. Deposit Guarantee National Bank made 19 such loans to whites, and only one loan to an African American. And Deposit Guarantee Mortgage Services made 42 such loans to whites, and only two loans to African Americans. Cumulated, Deposit Guaranty made 79 such loans to whites, and only 6 such loans to African Americans. Over white-or-Black loans, only 7% of Deposit Guaranty’s loans were to Black. Meanwhile, the aggregate industry in the New Orleans MSA in 1997 made 1007 conventional home purchase loans to African Americans, and 7694 such loans to whites. The industry average, for white-or-Black loans, was that 11.6 percent of such loans went to African Americans. Deposit Guaranty (now First American) was and is substantially below industry average, in service to African Americans. See also Section V, infra, regarding Deposit Guaranty’s long history of discrimination (including informing the Mississippi Sovereignty Commission about the opening of accounts by civil rights advocates, and, more recently, treating African American applicants and borrowers quite differently than whites).

On July 20, 1999, AmSouth and First American issued a press release announcing a “commitment” for “serving the needs of small businesses, low-to-moderate-income families and communities, and helping non-profit organizations...”. AmSouth press release on P.R. Newswire, July 20, 1999. Therein, AmSouth’s general counsel “expressed appreciation to several organizations that provided input during the development on the plan. These organizations include, in Alabama... In Florida... In Tennessee... ‘Our continued relationship with these community partners is critical to the success of this initiative,’ Yoder said.” Id.

As noted, the Applicants control banks in, and this proposal directly affects, communities in Louisiana and Mississippi, as well as Virginia, Kentucky, Georgia and Arkansas. It is significant (and almost inexplicable) that the Applicants do not list any outreach in these states -- they list outreach in only three of the nine states in which they operate. Simply as one example, CA-LA raised the issues of discrimination to Deposit Guaranty, and then First American, for many years. See also attached letter from Mississippi State Representative. These communities neglected by the Applicants -- are also communities neglected by the FRB’s and other federal bank regulators’ scrutiny and enforcement of CRA and the anti-discrimination laws. A public hearing, in the neglected communities, is much-needed on this Application.

III. This Merger Would Have Anticompetitive Effects, Particularly in the Chattanooga Market

The Application proposes a market definition for the Chattanooga Market which is broader that the market definition that the Federal Reserve System uses. Then, the Applicants present (in the text of the Application) only HHI calculations for their own defined market. App. at 47. Even then, the HHI would rise by fully 359 points. Id. This proposed merger would have anticompetitive effects in this market; ICP formally challenges the Applicants attempt to re-define the market, in order to gain approval from this anticompetitive merger.

IV. The Proposed Merger Would Ill-Serve the Convenience and Needs of Communities

AmSouth has announced that it would close at least 24 bank branches if this merger were approved. See, e.g., The Tennessean of July 13, 1999, at 1A; the American Banker of July 14, 1999, at 4; and The Commercial Appeal of July 14, 1999, at C6. Furthermore, AmSouth, which still does not have required regulatory approval to merge with First American, has already begun implementing explicitly merger-related lay offs -- see The Tennessean of July 13, 1999, at 1A: “In the first wave, about 160 employees will be let go beginning Monday the 19th [of July]. The remaining lay offs will occur through February 2000.” See also The Tennessean of July 16, 1999: “Before noon, [he] learned he was among about 130 Nashville staffers being let go in the first phase of more than 1,000 planned layoffs here. Most employees were informed by supervisors yesterday.”

The Protestants formally ask the FRB to inquire into, and act on, this impermissible “gun jumping” by AmSouth.

V. Other Adverse Issues Which the FRB Must Consider

First American, and Deposit Guaranty Corp. (which First American acquired in 1998), have engaged in banking practices that are unfair, unsound, and presumptively illegal.

In chronological order: attached hereto is a memorandum from the files of the notorious Mississippi State Sovereignty Commission (see, e.g., Wall Street Journal of June 11, 1999, A1, 8: “How The South’s Fight to Uphold Segregation Was Funded up North”). The memorandum recites that “Chief L.C. Hicks, of the State Sovereignty Commission, received a call from Mr. Joe Latham... Mr. Latham is a Vice-President of the Deposit Guaranty Bank and Trust Company, Jackson, Mississippi. He informed that the West Jackson Youth Council, NAACP, had opened an account at that bank, depositing $46.80. The individuals who signed for this council were Amos Brown and Theodore Jones, 2030 Barret Avenue, Jackson, Mississippi. Mr. Latham further informed that he had given this information to Mayor Allen Thompson of Jackson, and that Mayor Thompson had briefed Chief of Police Rayfield, of Jackson, in this matter.”

ICP and CA-LA are formally asking the FRB to inquire into and act on this matter. Compare it, for example, to Governor Gramlich’s July 21 testimony to the House Banking Committee, that “[t]he feel that financial information should be private has deep historic roots and bankers and bank customers have long viewed their business relationship as involving a high degree of trust.” See, e.g., Reuters newswire of July 21, 1999, 14:17 EDT.

Also attached hereto is the Statement of Facts of Robert Lucien, black businessman of New Orleans, Louisiana (note that the “Second Circuit Courts of Appeal” referenced in the first paragraph thereof is a Louisiana court, and not the Federal appeals court in New York). And see <http://www.ca-la.org>, incorporated herein by reference.

     CA-LA and ICP are formally asking the FRB to inquire into and act on these matters.

VI. Request for Hearing

     This is a major, $6 billion (now $5 billion, due to the decline in AmSouth’s stock price) merger, that would have substantial effects on communities that the FRB has rarely inquired into, and in which the FRB has never held a public meeting or hearing.

ICP has recently received from the Fed transcripts of the meetings of the Fed’s Consumer Advisory Council. As is relevant here, at the next to last meeting, Governor Gramlich told the Council:

We like the public meetings, and we plan to keep having them. There’s always a question of how many people who want to talk at these public meetings is enough to call the meeting, but we’ve been deciding that in a very liberal way, and I think we’ll keep doing that. That is, if there’s a relatively few number of people that want to talk, then we have it because we think that things come out at the public meetings that we might not hear otherwise, and we just like to get all the information we can on these mergers. We do try to go behind the CRA ratings and ask questions, what they mean, because very often there’s conflicting evidence on some of these mergers, and we try to get into that....

--Emphasis added.

Going behind the CRA ratings will be particularly important as to AmSouth (see supra).   Because of the important factual and policy issues raised by this proposal, ICP is requesting that the FRB schedule an evidentiary hearing on this proposal, as early as possible.

VII. CONCLUSION

For the reasons set forth above, the FRB should forthwith schedule the evidentiary hearing requested above. On the current record, the FRB must deny this proposal.

Respectfully submitted,

_________________

Matthew Lee
Executive Director
Inner City Press/Community on the Move
Tel: (718) 716-3540
Fax: (718) 716-3161

       Until next time, for or with more information, contact us.

* * *

July 13, 1999

     The Office of the Comptroller of the Currency has “preliminarily approved” a charter for an Internet / supermarket bank for Canadian Imperial Bank of Commerce. CIBC now has to apply to the Federal Reserve Board, and obtain the Fed’s approval, before setting up its proposed “Marketplace Bank.”

      CIBC applied to the OCC in December 1998, very quietly -- CIBC did not issue a press release about its plan to open a bank in the United States, and no newspaper articles were written about the application. In May 1999, an alert journalist at the Orlando Sentinel, Barry Flynn, noticed CIBC looking for office space in the Orlando suburb of Maitland, looked into and wrote a an article. Flynn’s article implied that CIBC would be opening an “all-Internet” bank. The story was then picked up by newspaper in Canada, where CIBC is one of the “big” (and ONLY) six banks.

     On May 11, ICP submitted a comment to the OCC, asking for a full copy of the application, and noting the difficulties that all-Internet banks are having in serving low- and moderate-income neighborhoods, as required by the Community Reinvestment Act.

      On May 14, CIBC’s counsel, Charles Horn of Mayer, Brown & Platt, put in a letter to the OCC, that ICP “questions the Bank’s 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 Bank’s proposed activities are made more fully known, which we anticipate will occur no later than the time of preliminary approval.” Emphasis added.

     The OCC withheld virtually all of CIBC’s application. From the few pages provided to ICP, it became clear that CIBC was proposing to limit its CRA assessment area to the Orlando metropolitan statistical area (MSA). ICP submitted a second comment, opposing this limitation of CIBC’s assessment area (since it would be marketing itself nation- and even world-wide, via the Internet), and ICP put in a Freedom of Information Act appeal for the parts of the application the OCC had withheld.

     In early June, a Canadian journalist caught wind of a plan by CIBC to “partner” with the U.S. supermarket chain Winn Dixie. This reporter, Theresa Tedesco of the National Post, wrote this up, quoting an unnamed source inside CIBC. ICP forwarded this article to the OCC, and reiterated that the OCC must now release the withheld portions of the application, since CIBC’s plan with Winn Dixie was now “otherwise publicly available.”

      The OCC has STILL not released CIBC’s application. Rather, on July 12, the OCC simply moved forward and approved the application, in a 19-page “public Order.” For the first time, the public learns what CIBC’s actual proposal is: to open “banking kiosks” in Winn Dixie supermarkets, kiosks that will have automatic teller machines, and Internet and telephone connections to CIBC. The kiosk will often be staffed, by a bank employee that will do such things as check the identity and income of new customers.

      Despite this plan, the OCC’s order goes to great lengths to find that the kiosks would not legally be “branches.” While a 1996 law excluded ATMs and “remote service units” from the definition of “branch,” the OCC subsequently defined the exemption to apply only to “automated, unstaffed facilities...”. OCC Interpretative Letters 772 and 838. CIBC’s kiosks would NOT be “unstaffed” -- CIBC itself says that its staff would be present, and would even check new customers’ identities and incomes.

    The OCC published a notice in the Federal Register of June 14, 1999, proposing to “clarify” that units combining ATMs and remote service units are not “branches” and thus “are not subject to any state-imposed geographic or operational restrictions or licensing laws.” 64 Fed. Reg. 31,749. The timing of this “clarification,” given CIBC’s stealth proposal, is interesting, as is the fact that CIBC chose to apply to the OCC for a national bank charter, rather that to the Office of Thrift Supervision for a savings bank charter (see below). While both the OCC and the OTS are units of the Treasury Department, a cynic might see this as a competition in laxity (or in preemption, more precisely). Most of the recent “innovative” applications for new institutions have been going to the OTS. Telebank (which E*TRADE is applying to buy) and Security First Network Bank (which Royal Bank of Canada has owned since 1998) are both OTS-regulated savings banks...

     By ruling that this new-style type of facility would not be a branch, the OCC allows national banks to evade state laws that apply to branches. Here, it applies to CIBC’s proposal -- but one can imagine First Union, or BankAmerica, or Citibank, N.A., simply installing computer terminals by its teller windows, having a customer type in information while talking with the teller -- and then claiming that its facilities are not “branches,” either.

    It should be noted that CIBC’s proposed Marketplace Bank would be much larger than other recent start-ups. CIBC initially proposed to capitalize the bank with $300 million. The OCC’s July 12 order states that “CIBC plans to provide initial capital to the Bank of $425.0 million in cash... [T]he Bank’s Tier 1 leverage ratio will exceed eight percent....”. As to the switch from $300 million to $425 million, ICP is informed that CIBC explained the increase by stating, “We’ll do what the OCC orders.” Then the OCC’s spokesman said, “It was what the bank proposed.” So -- which is it?

     It is one thing for a regulators to want to allow new-style service -- but to bend the laws to allow this type of institution, while accepting a clearly outmoded Community Reinvestment Act assessment area and plan is unsatisfactory.

     On the CRA assessment area question, the OCC’s order (at page 16) states:

“The commenter [ICP] expressed concern that the proposed Bank would not comply with the letter and spirit of CRA and that the Bank’s assessment area should not be limited to the Orlando MSA because it would not be consistent with the Bank’s plans to operate on a nationwide basis via the Internet...

"The Bank’s main office will be located in Maitland, Florida, which is in the Orlando area. While the Bank will not have any branches, it plans to place deposit-taking ATMs at its banking kiosks initially in the Orlando, Florida area. As such, the Bank’s plan to designate the Orlando MSA as its initial assessment area is appropriate. The Bank is also planning to place deposit-taking ATMs at banking kiosks to be located in other areas in Florida as well as other states and will designate additional assessment areas as required by such expansion...

"To the extent that the Bank’s operations change in the future, its appropriate assessment area will be reevaluated.”

    While the OCC might claim that it is expressly tying the expansion of the assessment area to CIBC opening kiosks in Winn Dixie supermarkets beyond Orlando, the OCC ignores that CIBC’s bank would be accessible via the Internet, from anywhere. CIBC’s hybrid proposal -- taking on kiosks in supermarkets to an Internet bank -- does not allow the OCC to legitimately sidestep the central question: how can a bank be allowed to collect deposits nationwide, over the Internet, but limit its CRA assessment area to the city in which it happens to put its headquarters?

      This question is now before the Office of Thrift Supervision, on E*TRADE’s application to acquire Telebank, FSB. While this CRA assessment area issue is in evolution, it is notable that the OTS at least, on applications by Jackson National Insurance Company and State Farm, provided that changes in the thrift’s footprints could trigger new public notice, and the opportunity for public comment. The OCC did not do that -- this was the one window for public comment, and the OCC went ahead and made a decision while withholding the most basic information about the proposal. It may later require CIBC to expand its assessment area -- but the public will receive no notice, and will have little to no idea when and if this even happens.

    It should also be noted that OTS Director Seidman has spoken publicly of the need to expand the concept of CRA assessment areas. Sen. Gramm (R-TX) has gone out of his way to attack these ideas, saying they would “empower” community groups. As analyzed in ICP’s Community Reinvestment Reporter of July 12, Gramm is ill-informed (click here to view). One might question whether this political brouhaha, and tie-up in Gramm’s committee’s consideration of the Comptroller’s nomination, have had any effect on the OCC’s procedures and decision-making. It would be difficult to quickly answer this question, given the OCC recent delay and obfuscation in responding to Freedom of Information Act requests. Reasonable minds, as they say, might differ on the ultimately correct policy decision. But basic information, about a bank’s application which is subject to public comment, should not be withheld under after the decision is made.

     CIBC cannot open this proposed bank until it applies to the Federal Reserve and gets its approval. The Fed has in the past sidestepped this question (most recently, on Royal Bank of Canada’s application to acquire Security First Network Bank) -- but it will be squarely raised here. In the interim -- watch out for national banks trying to declare their facilities “non-branches,” simply by installing computer terminals in them.

     For or with more information, contact us.

* * *

July 12, 1999

      On July 11, ICP filed with the Office of Thrift Supervision a challenge to E*TRADE’s application to acquire Telebank. A summary of the filing is below. First, though, a slightly surreal Bank Beat roundup, on the theme of “Where Are They Now?”

      One mystery: where’s Eugene Ludwig? The ex-Comptroller of the Currency, who immediately after leaving that post went to work for Bankers Trust, has been little heard from since Deutsche Bank’s acquisition of BT. Ex-Deputy Treasury Secretary Frank Newman has ejected, using his golden parachute. BT CFO Richard Daniel is gone, and risk management chief Elizabeth Rumi is leaving in September. “We wanted some of the staff to go,” DB’s Rolf Breuer told Bloomberg on July 8. But where’s Eugene Ludwig? In March, he gave a speech at the Bank Securities Association’s convention in Palm Springs. In May, Senator Richard Shelby beat the drum for a hearing about, among other things, Ludwig’s actions in connection with Far East National Bank and its previous owner, Henry H. Hwang; Ludwig granted an interview, from BT, denying any wrongdoing. Africa News of June 11 quoted Ambassador to Tanzania Charles Stith (whose Organization for a New Equality used to give Ludwig awards for community service) as saying that Ludwig will arrange meetings between Tanzania’s president and the heads of financial institutions in New York this September. Perhaps DB, now the world’s largest bank by assets, needs or wants this type of global public relations...

     In other revolving-door news: Konrad Alt, who was Eugene Ludwig’s troubleshooter at the OCC when Ludwig was Comptroller, on July 6 was named government affairs official for Providian Financial, the subprime credit card issuer that has been the subject of scandal and numerous lawsuits. Providian announced this hiring on P.R. Newswire, apparently to show investors that it is trying to “get out in front” of its troubles.

     One hopes that, beyond the spin, Konrad Alt moves to change Providian’s practices -- in a way that Eugene Ludwig apparently has not changed Bankers Trust’s ties with predatory subprime mortgage lenders.

    Providian’s “spin machine” is on overdrive, as more than more class actions are filed, following the San Francisco district attorney’s investigation into Providian. In another attempt to show the public (or public officials and regulators) another side of Providian, the company on June 30 announced it plans to hire 700 more employees in Austin, Texas, then on July 6 announced it will hire 1,000 more employees in Kentucky (in exchange for $20 million in tax credits).

      Seems like employing local residents can carry more weight with regulators than curtailing predatory practices -- how else to explain Florida Insurance Commissioner Bill Nelson’s July 9 approval of Fortis’ acquisition of American Bankers Insurance, on the condition that Fortis keep 1,700 jobs in Miami long-term. Controversies about predatory practices have swirled around American Bankers Insurance for months, and the National Association of Insurance Commissioner was supposed working to get the bottom of it. But 1,700 jobs -- allows for the acquisition, and subsequent whitewash. And the beat goes on.

     Here's a portion of ICP's July 12 filing with the OTS about E*TRADE - Telebank:

                                                                 July 12, 1999

Office of Thrift Supervision
Attn: Director Seidman
Messrs. Albinson, Glenn and Corcoran
1700 G Street, N.W.
Washington, DC 20552

RE: Comment opposing, on the current record, the proposal by E*Trade Group Inc. to acquire TeleBanc Financial Corp. and its thrift -- request for the still-not- provided CRA Plan, request for an extension of the comment period, and request for an informal meeting

Dear Director Seidman, Mr. Albinson and others at OTS:

       On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, "ICP”), this is a timely comment opposing on the current record and requesting a hearing on the proposal by E*Trade Group Inc. (“E*Trade”) to acquire TeleBanc Financial Corp. and its thrift (“Telebanc”).

    There are obvious and irrefutable CRA and fair lending issues raised by the accessibility of Telebanc’s (and E*TRADE’s) products and services to low- and moderate-income neighborhoods, and the people of color. Simply for example, and for the record, on July 8, 1999, the National Telecommunications and Information Administration (“NTIA”) issued a study documenting deep disparities by race and income in access to the Internet. See <http://www.ntia.doc.gov/ntiahome/fttn99/contents.html>, hereby incorporated, along with each of the documents it links, into the record on this application.

      As set forth below, ICP believes the disparities in marketing and access that would result from this proposed combination would be even worse that those identified in the above-cited NTIA study, because, on top of disparities in online access, one is adding the further hurdle (and disparities) of the demographic of online securities trading (and securities ownership). The Application, at 2, states that “Telebank’s operations will benefit from... marketing resources provided by E*TRADE, including a potential additional base of more than one milling E*TRADE customer accounts.” There should be inquiry into, and disclosure of, the demographics of E*TRADE’s customer accounts in this proceeding, as both a CRA and a fair lending matter

     There are particularly difficulties for evolving Internet-based institutions and combinations such as the one here 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 supra, and 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.” Emphasis added. This does not mean that Internet banks could not comply with CRA -- but particular attention must be paid, and a credible plan must be laid out, and made public, during this applications process. E*TRADE has stated that it will submit a revised CRA Plan for Telebank “promptly,” but has not yet submitted it. The comment period must be extended.

    ICP wrote to the Office of Thrift Supervision (“OTS”) about this proposal -- requesting a full copy of the application, and making a preliminary comment in opposition -- on June 21, 1999. By cover letter dated July 1, the OTS provided ICP with portions of the application -- but not the (required) CRA plan. The Application, at 36-37, stated that “a revised CRA Plan for Telebank will be provided supplementally promptly after the filing of this Application.” Since July 6, ICP has asked both the OTS’ FOIA unit in Washington, and the OTS’ Southeast Region, for a copy of the CRA plan, but has not received such. ICP contends that the application should not be considered filed until the CRA plan is submitted, and requests an extension of the comment period on this basis.

* * *

      As stated in ICP’s June 21 preliminary comment, numerous issues, including under the CRA are raised by branchless Internet banking. TeleBanc promotes itself as larger than “the next five pure-play Internet banks combined.” Telebank now has 70,000 accounts, and $2.6 billion in deposits. See Richmond Times Dispatch, July 3, 1999. However, to date, TeleBanc seeks to limits its CRA assessment area to an arbitrary area surrounding its Arlington, Virginia, headquarters. ICP opposes this.

     ICP also opposes any continuation of -- and, in fact, urges the immediate rescission of -- Telebank’s designation as a “wholesale” bank. This was an absurd and erroneous designation. (Note also that Telebank’s most recent CRA performance evaluation is “as of February 18, 1997” -- twenty-nine months ago, and clearly out-of-date. See infra).

     The CRA Regulation, at 228.12(w), defines a wholesale banks as “a bank that is not in the business of extending home mortgage, small business, small farm, or consumer loans to retail customers...”.

      Telebank’s Web site, at <http://www.telebank.com/telebank/products/products_default.asp?>, states that Telebank offers “oodles of other services and products.” Directly on this page, for example, there is a link to Telebank’s “Mortgage Services.” This page, at <http://www.telebank.com/telebank/products/tb_services/mortgage_default.asp?> says inter alia “we’re able to give you among the best mortgage rates in the nation,” and provides hot links entitled “Mortgages,” “Seconds,” “Refinancing,” “Apply for a Loan,” etc..

      ICP anticipates, as Telebank’s and E*TRADE’s attempted response, that Telebank, while advertising that it offers mortgages, is actually offering the services of E-Loan. First, ICP contends that as a matter of law, Telebank’s current presentation of itself to the public on its Web site and in other advertisements makes Telebank ineligible for designation as a wholesale bank for CRA purposes. Second, as even the OTS has acknowledged, the CRA statute and even regulation are being left outmoded by technological and legal-structural developments in the industry. This application, by an online broker to acquire the largest “pure play” Internet bank, is the moment to closely consider and act on these issues.

      Note also, for the record, E*TRADE’s July 7, 1999, press release on P.R. Newswire, referencing “the E*TRADE Mortgage Center,” and other “co-branded” services. The OTS cannot accept conglomerate Internet institutions evading the letter and spirit of the CRA by promoting themselves as offering retail credit products, but claiming to be only offering co-branded or “allied” services. These are among the issues ICP will explore at the timely requested informal meeting.

     Continuing: Telebank’s marketing of its services and products is not limited to the Internet (although, as discussed below, serious issues of service and accessibility to low- and moderate-income neighborhoods, and to people of color, are raised by Telebank and E*TRADE). On July 10, I heard a Telebank advertisement on WCBS radio in New York, soliciting deposits to Telebank, claiming that Telebank is full service, with lower costs because it does not have a brick-and-mortar branch franchise. To the degree that Telebank and/or E*TRADE attempt to rebut the disparities found in the NTIA study cited supra by pointing out that one can bank with Telebank by phone, note that Telebank spokeswoman Deborah Newman was recently quoted that “More than 50 percent of [Telebank’s] customer contacts on done online,” and that SmartMoney ranked Telebank near the bottom for customer service, “because of limited customer service hours and mediocre service from customer representatives.” See Richmond Times Dispatch, July 3, 1999.

      Note also that Telebank’s most recent CRA performance evaluation is “as of February 18, 1997” -- twenty-nine months ago, and clearly out-of-date. This CRA Exam, at 4, states that “the Institution... does not market any credit products directly to the public.” But see above, and see <http://www.telebank.com/telebank/products/tb_services/mortgage_default.asp?>.

     This February 1997 CRA Performance Evaluation is totally out of date, and cannot be relied on in this proceeding. Telebank now has 70,000 accounts, and $2.6 billion in deposits. See Richmond Times Dispatch, July 3, 1999, which reports that “Telebank also began offering online service about a year ago.” Emphasis added.

      Absurdly, this out-of-date CRA Exam states, at 5, that “Telebank operates an expansive deposit brokerage operation which obtains deposits from across the United States. Deposits from Arlington County residents represent a very low percentage of total deposits (5.9 percent). Accordingly, the small percentage of loans purchased within the delineated community is not entirely unreasonable.” Here, Telebank’s nationwide deposit gather is used to justify a failure to serve even its (too small) assessment area. Telebank should be stripped of its wholesale bank designation, and should be judged (in this proceeding) on an assessment area substantially larger than Arlington County -- including by the OTS’s (out of date) CRA Exam’s own logic.

* * * *

      In 1996, ICP commented on Toronto Dominion’s 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). ICP’s comments to the FRB, cc-ed to the OCC’s, WNB’s 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 WNB’s 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 WNB’s CRA program, and since the record is currently unclear as to TD’s future plans for WNB’s CRA program, please provide, with the greatest degree of specificity possible, TD’s plan to oversee and develop WNB’s 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. ICP requested a full copy of the application even before it was delivered to the OTS by E*TRADE, but still, three weeks later, does not have the (required -- and promised, see supra) CRA Plan. ICP will be submitting further comments after it receives this (required -- and promised) CRA plan. ICP requests an extension of the comment period. ICP also, on the bases set forth above, hereby timely requests an informal meeting on this application, and requests that this informal meeting be held at the OTS’ Northeast Region office in New Jersey (given, inter alia, that Telebank [and E*TRADE] advertise extensively in New York and New Jersey).

     There are also managerial and other issues for the OTS to consider. See, e.g., Bloomberg newswire of July 9, 1999, “E*TRADE Clients Report Trading Web Site Unavailable Most of Day,” and Reuters of July 9, 1999, “E*TRADE Customers Hit by Online Service Outage.” Note again that SmartMoney ranked Telebank near the bottom for customer service, “because of limited customer service hours and mediocre service from customer representatives.” See Richmond Times Dispatch, July 3, 1999.

     Finally, ICP was troubled to see E*TRADE Chairman Christos Cotsakos’ quote on Reuters on June 28, 1999, that “We continue to work with Telebanc on a daily basis to evaluate and proceed with the integration process.” That is illegitimate. E*TRADE cannot begin ANY integration process absent the required approval of the OTS. The statement is most offensive given that E*TRADE has yet to submit the required (and promised, see supra) CRA Plan. The OTS should act on this. This “gun-jumping” began as soon as the acquisition proposal was announced: see E*TRADE press release of June 2, 1999 on P.R. Newswire, “Telebanc Introduced FDIC-Insured 12-Month CD... Exclusively for E*TRADE Customers; New CD is First Banking Product from Recently Announced Merger of E*TRADE and Telebanc.” Again, the statement is most offensive given that E*TRADE has yet to submit the required (and promised, see supra) CRA Plan. The OTS should act on this “gun-jumping.” ICP awaits the required and promised CRA plan, and the timely-requested hearing.

      On the current record, this application could not legitimately be approved.

       If you have any questions, please immediately telephone the undersigned at (718) 716-3540. Thank you for your attention.

Very Truly Yours,

Matthew Lee
Executive Director

       Until next time, for or with more information, contact us.

July 8, 1999

     When merger rumors fly, and stock prices rise, most companies issue a terse “no comment,” or a statement that “it is our policy not to comment on rumors.” Not so North Fork Bank, always eager to stir investor interest in its Long Island-based franchise. On July 7, North Fork’s trading volume was over five times the daily average, with heavy options trading. North Fork’s CEO, always eager for business press profiles, invariably mentioning him “hunting for wolves” (making a heavy handed analogy to the way North Fork supposedly hunts for banks), couldn’t resist being a quipster. He called the rumor that Chase was preparing a bid for North Fork “silly.” In response to a question about where this rumor might have originated, he responded: “Probably somebody who owns 10,000 shares of North Fork wants to get out.”

     North Fork’s most recent proxy statement discloses that North Fork’s CEO “beneficially owns” 2,310,587 shares of NFB. At $22 a share, that’s over $50 million dollars. The only other director with over one percent of North Fork is the ex-CEO of New York Bancorp, weighing in with 2,581,177 shares, and now running his own eponymous “private investment company.” North Fork’s CEO has his own “family foundation.”

    While Chase as the purchaser remains to be seen, North Fork’s strategy has been clear for some time: buy up smaller banks and thrifts, try to get a foothold in New York City, to assemble a franchise that a larger bank will buy at a premium. In the process, North Fork decimates many of the banks it acquires (for example, closing down the mortgage lending operation of its last acquisition, New York Bancorp and its Home FSB).

    There appear to be problems with North Fork’s strategy, though. First, many of the remaining independent banks are not eager to be sold to North Fork. Twice now, Astoria FS&LA has beaten North Fork out, with friendly offers. When North Fork tries to buy 9.9% of the stock of smaller banks on Long Island, the management and customers of the target invariably protest. While the Fed approves these applications, North Fork often simply sells the stake back to the company, at a profit (80s-style greenmail). North Fork’s other acquisitions (Extebank, North Side, Home FSB) have been subject to Community Reinvestment Act protests, including by Inner City Press / Community on the Move, based on North Fork’s weak record of 1-4 family mortgage lending in low income neighborhoods and communities of color in the markets North Fork has entered through acquisitions. The New York State Banking Department has imposed CRA conditions on North Fork on these grounds. While North Fork has tries to explain its recent de novo branching as reflecting North Fork’s “discipline” in not paying too much for acquisitions, others see it as reflecting the fact that remaining banks do not want to be sold to North Fork.

     The second problem is that more and more “super regional” banks, of the kind that might buy North Fork in order to enter the New York Metro market, now say they’ll grow by the Internet, and not acquisitions. Witness Bank One and its WingspanBank.com, and recent statements by First Union (itself now a takeover target).

     North Fork has shown its impatience, most recently by including an ambiguous reference to its plans for Internet banking in its quarterly report in April 1999. North Fork’s stock quickly shot up 15%, then fell, when analysts and investors realized it was just... a plan. In December 1997, North Fork bought a bank in Connecticut, as a deposit-gathering operation some observers have likened to a “black box.” Meanwhile, in 1999, North Fork runs ads ridiculing other banks that have gone techno. So which is it?

    Maybe the Chase - North Fork rumor IS “silly.” But the clock is ticking on North Fork’s ability to sell its franchise at a premium. The predator who sleeps too long -- gets eaten.

     Until next time, for or with more information, contact us.

* * *

July 5, 1999

     Global mergers reached $1.5 trillion in the first half of 1999, the highest six-month total in history. In U.S. banking, the big ones are Fleet - Bank Boston, HSBC - Republic, AmSouth - First American, Firstar - Mercantile, Zions - First Security, etc.. Notably, the stock price of many acquirers is plunging. Firstar is down 7%, while the Standard & Poor bank index is up one percent. AmSouth is also down 7%. The Independent of June 30 reports a decline in HSBC’s shares, and links that to opposition HSBC faces in the United States. Both Firstar’s and AmSouth’s targets became takeover bait due to too many dilutitive acquisitions. ...

     In New York, brutal cost-cutter North Fork Bancorporation has started running misleading advertisements, making fun of banks which don’t provide customer service with humans. North Fork claims to provide great customers services, “reflected by being named the most efficient bank in 1998.” That efficiency rating was based on North Fork’s layoffs at the banks it acquired, not on customer service. And the American Bankers Association complained about Polaroid’s ads about Y2K, as creating a false impression....

     So when an executive mis-manages a bank, what happens? Well, if you’re Frank Newman, who failed to save Bankers Trust, and sold it to Deutsche Bank for 50% below it previous stock price high -- you get a $70 million golden parachute. Then you allude to “other business opportunities,” and “decline to comment on [your] compensation.” Reuters, June 29. Meanwhile, the Wall Street Journal reports that Deutsche Bank is under investigation for helping its private banking clients evade taxes. (WSJ Europe, July 1). Given that Deutsche Bank asked the Federal Reserve to help it evade taxes, by setting up a U.S. holding company that would not be subject to capital adequacy rules, this shouldn’t come as much of a surprise...

   And that’s this week’s Bank Beat. Until the next time, for or with more information, contact us.

* * *

June 28, 1999

      This Report will focus on the shady characters and businesses trying to get into banking via the savings bank charter administered by the Office of Thrift Supervision. But before descending into this morass, it’s worth taking a look at the supposedly loftier segments of the banking industry:

    Deutsche Bank’s acquisition of Bankers Trust, brokered and approved by the Federal Reserve Board, is degenerating into chaos. BT’s CEO, Frank Newman, met with DB’s Rolf Breuer on June 24, asking when he was going to be appointed to DB’s board of directors. “Never,” was apparently the answer. Financial Times of June 25, also reporting that DB has decided to curtail Frank’s wife Lizabeth’s use of DB corporate jets and chauffeur-driven cars. Now Der Spiegel reports that DB officials plan to contest Newman’s $100 million “walk away” fee, calling it “an insane sum.” But who at DB reviewed Newman’s compensation package, before agreeing to the deal? And what has Deutsche Bank bought, exactly?

     Meanwhile, the New York State Attorney General has taken action on a predatory mortgage lending issue that the Fed refused to touch in connection with DB’s application to acquire Bankers Trust. On June 22, the A.G. announced that Delta Funding, a high interest rate lender that Bankers Trust enabled and did foreclosures for, had settled racial discrimination in lending charges. The Fed was directly confronted with BT’s involvement with Delta during its consideration of DB’s application, but refused to act. Now (this from BNA’s Banking Daily of June 24, 1999):

WASHINGTON (BNA) -- Delta Funding, a Woodbury, N.Y., mortgage lender, has settled claims of biased and predatory lending by agreeing to pay $ 6 million to alleged victims... Spitzer and other officials charged that Delta made over 1,000 "high interest, illegal loans to low-income, minority residents in Brooklyn and Queens over the past three years." ... Delta Funding could not be reached for comment. The company's telephone line was busy throughout June 23.... Delta Funding was in the news earlier this year in connection with Deutsche Bank's acquisition of Bankers Trust Co. The Bronx-based Inner City Press/Community on the Move urged the Federal Reserve Board to turn down the deal, arguing among other points that Bankers Trust had business relationships with Delta, which Inner City Press at that time accused of "predatory lending" practices (72 BBR 292, 2/15/99).

     So, will the Fed take action, now that the NYS Attorney General has? The answer appears to be “probably not,” or, “not anytime soon.” The wheels of justice at the Fed, such as they are, turn absurdly slowly. For example, the Fed is only now (June 29) holding a hearing on Bankers Trust’s VP Guillaume Henri Fonkenell’s bogus sales of derivatives to Indonesian companies and Proctor & Gamble in 1994. That’s five years ago. Justice at the Fed is not swift, and is far from certain.

     The Fed’s rationale for not acting on Bankers Trust’s involvement with Delta was that BT had only been the “trustee” for Delta’s loans. BT stated, and the Fed concurred, that the Fair Housing Act would have applied to BT, if it had been the underwriter for Delta’s securitization of these discriminatory loans.

     And so in May, ICP raised these issues, among others, to the Office of Thrift Supervision, on Lehman Brothers’ application for a savings bank charter (by acquiring Delaware Savings Bank). Lehman is the underwriter for Delta. See, e.g., the June 17, 1999, Prospectus for Delta Funding Home Equity Loan Trust 1999-2, “Lehman Brothers... Underwriters.” See also Delta’s press releases on P.R. Newswire, dated June 2 and March 23, 1999.

     Lehman, however, has refused to respond to the issue, claiming that its proposal to become a thrift holding company is an “emergency” application, not subject to public comment. Lehman is proposing a $2.2 billion CRA commitment, 99% of which would consist of simply purchasing loans that other lenders had already made. Lehman has apparently claimed that it is not the underwriter for Delta’s loans, despite the above-cited SEC filing and Delta press releases. Developing...

     Now we’re in the mud -- the mud of redliners and subprime lenders easing their way into banking and FDIC insurance.     In Oregon, you have the subprime lender Wilshire, and its thrift First Bank of Beverly Hills, F.S.B., which has submitted an application to the OTS:

    ICP is concerned about this proposal, and about the appropriateness of Wilshire’s and First Bank of Beverly Hills’ continued involvement in subprime lending, using a thrift charter. First Bank of Beverly Hills has been designated as a “troubled institution” by the OTS (see, e.g., Wilshire’s press release of June 11, 1999, on Business Wire). Wilshire Financial only recently emerged from bankruptcy, and its stock’s trading has been suspended by NASDAQ since February 1999. Two companies -- American Express Financial Advisors and Capital Research and Management Group -- “now together own 40 percent of Wilshire Financial Services Group... As part of the reorganization, [Andrew] Wiederhorn gave Capital Consultants, Inc., a Portland money management firm run by Jeff Grayson, a 49.9 percent stake in Wilshire Credit Corp.” The Oregonian, June 13, 1999, emphasis added.

    It is unclear from the notice on the OTS’ web site what, exactly, this application is for. First Bank of Beverly Hills is already a subsidiary of Wilshire Financial (which, as noted above, two company just gain a 40% stake in, presumptively triggering the need for an application). The applicant listed in the notice, however, is Wilshire Real Estate Investment Trust.

     In the most recently publicly-available HMDA data, for 1997, First Bank of Beverly Hills only reports conventional home purchase loans, and multifamily loans, in the Los Angeles MSA. Wilshire Credit Corp. (“WCC”), on the other hand, is nationwide. In the New York City MSA, WCC HMDA data is less than credible. For conventional home purchase loans, WCC lists two applications from African Americans, both of them “incomplete.” WCC lists three applications from Latinos -- two “incomplete” and one “withdrawn.” It lists three applications from whites: two approved but not accepted, and one denied. This strange pattern plays out in MSAs all across the country.

     The chaos surrounding First Bank of Beverly Hills and Wilshire should make clear to the OTS that it is ill-advised to allow subprime lenders to use the thrift charter

     And then, another nationwide subprimer, this time the “servicer” Ocwen:

     It is ICP’s understanding that the OTS is conducting a CRA review of Ocwen Federal Bank... Ocwen’s business appears to be buying “distressed” loans and squeezing whatever money possible out of them, without regard to the effects on the stability of communities, including low- and moderate-income (“LMI”) communities. Ocwen is also involved in subprime lending. How these activities are consistent with the purposes of the HOLA and of the thrift charter is something of a mystery to ICP. In the most recently publicly-available HMDA data, for 1997, Ocwen FSB reports conventional home purchase loans in only one MSA: Bergen-Passaic. Its affiliate, Ocwen Financial Services, reports loans all over the country -- in a pattern, however, that makes out a presumptive violation of HMDA. In the New York City MSA, for example, every single application reported is listed as “approved.” This gives rise to an inference of illegal pre-screening, or blatant HMDA mis-reporting.

Beyond the lack of congruence between Ocwen’s activities and the purpose of the thrift charter, activities like Ocwen’s raise safety and soundness as well as managerial issues. For example, the OTS recently declared First Bank of Beverly Hills, owned by Wilshire (another subprime lender and services, like Ocwen) to be a “troubled institution.” ICP is asking the OTS to consider urging Ocwen to relinquish its thrift charter. Ocwen’s business is not necessarily illegal, but it is inconsistent with the purposes of the thrift charter, and even, with safety and soundness and the protection of the insurance fund(s).

    ICP has also become aware of Ocwen’s activities (or lack thereof) in connection with a loan Ocwen bought, secured by a 66 unit apartment complex at 40 High Street in the Maple-High neighborhood of Springfield, Massachusetts. As recounted by Western Massachusetts Legal Services, Ocwen has refused to respond to the entreaties of not only the tenants, but even of the City of Springfield itself. The building and its tenants have been left abandoned, and the neighborhood has been destabilized, by Ocwen’s irresponsible involvement. If the OTS has not to date considered this issue under the CRA, it should begin to do so. Note that the New York State Banking Department (“NYSBD”) and FDIC conducted an inquiry into similar practices (of lenders refusing to take responsibility for the upkeep and security at apartment buildings they own irresponsible loans on) in connection with Greenpoint, in New York State.

      The OTS should begin such an inquiry, with an eye toward Ocwen relinquishing its thrift charter.

      In New York, something called “BRT Realty Investment Trust” recently applied to the Office of Thrift Supervision to form a new savings bank, to be called Bankers Federal. Inner City Press took note -- the application was filed by Fredrick Gould of 60 Cutter Mill Road in Great Neck, N.Y., a principal of Bankers Federal Bank, which Dime Savings acquired in 1997. At that time, ICP obtained a copy of a sworn deposition by Bankers Federal’s chief lending officer, stating:

...I was instructed for many years not to originate loans in black neighborhoods.

Q: Who gave that instruction?

A: Primarily it was members of the Loan Committee.

Q. Do you remember who gave that instruction?

A: Yes, there were really three. Mr. Raymond Lein, James Randall, and Frederick [sic] Gould.

Q: Do you remember any specific conversations concerning that topic with any of those individuals?

A: Well, actually there were a number of conversations in loan meetings as well as outside loan meetings but there was also a tour that I gave to these members of black neighborhoods because being a CRA officer I knew the problems you would have if you didn’t lend equally.... We looked at probably four or five different buildings in different neighborhoods, black neighborhoods... 751 St. Mark’s, I think it is, Avenue in Brooklyn. The building is called the Betsy Ross. 1601 East 17th Street, I believe it is 17th Street. I’m sorry, 1601 Beverly Road, Brooklyn. 25 Lefferts Avenue, Brooklyn and 850 West 176th, Washington Heights, New York.

Q: Were these buildings that had made application for financing from the bank?

A: Yes, they did.

Q: And up to that point is it accurate that you found it difficult to get financing for buildings that were in black neighborhoods?

A: Yes.         Q: And is that why you arranged for this tour?

A: What I did was I said, listen, you have to understand that you can’t discriminate in lending for any reason whatsoever. I said why don’t we go out and look at nicer buildings in these neighborhoods.

And they agreed to that and I took them on the tour. They were already pretty much pre-qualified in reference to the approximate dollars that we could give. So, the tour was made and unfortunately they were turned down...

Q: From a visual standpoint were they acceptable risks?

A: Very acceptable risks...

Q: Now, prior to this tour, do you have any recollection of any buildings in minority neighborhoods which applied for financing but which were turned down?

A: Well, over the course of I would say five to seven years that I was in the position that I actually had before becoming Chief Lending Officer... it was not a written rule but it was more or less an unspoken rule that we don’t lend in black neighbor[hood]s, don’t bring in proposals to finance in black neighborhoods.

Q: How was that rule conveyed to employees of the bank?

A: Not employees, the Chief Lending Officer. they laid this right back in my lap and said just don’t bring them in. Being the CRA officer I said you can’t do this stuff. You will get caught some day and you will have to pay the price... They would in general call these neighborhoods pioneer areas, fringe areas or simply not a good neighborhood...

Q: Were these code words for minority neighborhoods?

A: Yes...     Q: Are you familiar with a property located at 3130 Grand Concourse in the Bronx?    A: Yes.   Q: How did you become aware of that property?

A: I originated the loan, which was a cooperative, under instructions from one of our Board members.

Q: Would that be Mr. Fred Gold?

A: Gould.

Q: Gould? He instructed you to originate that loan?

A: And Mr. Randall.

Q: Did you ever learn that Mr. Gould was getting a commission on that loan?

A: I don’t know whether he got a commission but I know it came from a related company and it was against my moral character to originate that loan.

Q: What related company are you talking about?

A: I think it was BRT Realty Corp. or Gould Capital. I can’t recall the name.

Q: And did that loan go into foreclosure?     A: Yes, I believe it did...

Q: While you were at Bankers Federal, did you get any complaints from mortgage brokers about the way Bankers Federal was processing minority applications?

A: Always... They wanted to know why we wouldn’t lend in black neighborhoods... I would tell them the bank wouldn’t be interested...

Q: Mr. Eslinger, did you ever hear that Bankers Federal maintained any redline maps?     A: Initially they did.   Q: When you say initially, what time period are we talking about?

A: When I took over as Chief Lending Officer... I was given the previous Chief Lending Officer’s office and in the desk were maps crayoned out, shaded areas, where not to go.

Q: And what areas were shaded out?

A: Predominantly black neighborhoods...

--Deposition of William Eslinger, Sr., taken July 18, 1999 in New York, New York.

     ICP has urged the OTS to dismiss Gould’s application for a new thrift charter; updates will be reported in this space.

     Transamerica has had an application for a thrift charter pending at the OTS for a year now. Mid-stream, in February 1999, Dutch insurer Aegon NV announced it was acquiring Transamerica. ICP, a commenter on Transamerica’s application, has not been provided with any amended application, or with notice that Transamerica has withdrawn, as it should, its application. Most recently, Transamerica sold its reverse mortgage lending unit, Transamerica HomeFirst, to “Financial Freedom Senior Funding Corp.” for $200 million. Ol’ Lehman “financed the acquisition,” and will “repackage the Transamerica loans as securities.” Bloomberg, June 21, 1999. Small (and dirty) world, ain’t it?

    Contrary to the Federal Reserve, however, the OTS is at least aware of this issue. The OTS recently declined to approve a subprime lender’s application to acquire a one-branch thrift. n February 4, 1999, ICP commented to the OTS:

Central Financial Acceptance Corporation (“Central Financial”) is a subprime lender, whose interest rates average 26% (Los Angeles Times, January 18, 1998, at D1). ICP is concerned that allowing a business of this type to buy an insured depository institution, particularly a thrift, may not be in the public interest. Significant issues have arisen around the thrift charter applications of other subprime lenders; perhaps most notably, the application of The Associates was suspended from processing, and has yet to be revived.

Central Financial defends its exorbitant (many say predatory -- see, e.g., The (Riverside, Ca.) Press-Enterprise of February 13, 1998, and the Los Angeles Times, January 18, 1998, at D1, supra) interest rates in terms of “provid[ing] infrastructure for the loans.” Id. But it is virtually impossible to see what public (and housing-related) benefit would accrue from allowing such a high interest rate lender to acquire an existing, normal interest rate thrift. Central Financial is already expanding its “outreach” through such venues as K-Mart stores. Central Financial would be able to form a mortgage company, if in fact it desires to offer mortgage loans.

    The OTS should, for example, conduct a file review of Central Financial’s currently outstanding loans, to review the fairness of pricing. Does Central Financial use some form a credit history matrix? What are the lowest interest rates offered by Central Financial, and when and to whom are these rates offered? Or does Central Financial just charge all of its customers subprime rates, while explicitly stating that it is targeting Hispanic borrowers? The OTS should be aware that troubling issues under the Equal Credit Opportunity Act would be raised thereby, and should be inquired into and acted on before any action other than denial is taken on this application.

    The OTS declined to act on Central Financial’s application by the drop-dead date; the deal is dead. What the Federal Reserve would have done on such a proposal -- is anyone’s guess.

    Meanwhile, the FDIC on June 22 announced (quietly) that it had approved a merger application by Bank Hapoalim, which has a rare “Needs to Improve” CRA rating. Inner City had commented on this application, and Bank Hapoalim (the largest bank in Israel), never responded to ICP’s comments. The FDIC has informed ICP that its “review and consideration of this application raised certain questions which management has satisfactorily addressed by agreeing to the following conditions:

New York Branch: $10 million in new community development loans and qualified investments within its assessment area by April 2000;

San Francisco Branch: $1.7 million in new community development loans and qualified investments within its assessment area by April 2000...

    We appreciate your comments and concerns, and look forward to future cooperation to ensure that community credit needs are being properly addressed.”

    It’s certainly more than the Federal Reserve would do...

Until next time, we’ll see you on... the Bank Beat. For (or with) more information, contact us.

     Click here to view ICP's Bank Beat Archive #1 (April - June, 1999).

     Click here to view ICP's Bank Beat Archive # 3 (Aug.-Sept. 1999)

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Copyright 19992-2003, Inner City Press/Community on the Move, Inc..   All rights reserved.  As should be clear, but in an excess of caution: under no circumstances does the information in this column (or web site) represent a recommendation to buy or sell securities.  For further information, or to request reprint or other permission, contact: Permissions Coordinator, Legal Administration, Inner City Press, P.O. Box 580188, Mount Carmel Station, Bronx, NY 10458.  Phone: (718) 716-3540.  Fax: (718) 716-3161.  E-mail: BankBeat [at] innercitypress.org