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March 27, 2000
On March 22, fresh off raising interest rates the day before, Fed Chairman Alan Greenspan delivered a half-an-hour speech to the NCRC annual conference in Washington. Its worth analyzing both the narrow focus of Greenspans speech -- he claimed he was prohibited from commenting on CRA -- and subsequent press accounts focus on a single paragraph in the 23 paragraph speech, a brief tip-of-the-hat to predatory lending.
Greenspan began by saying, because we are now in the final stages of drafting regulations on the Sunshine Provisions of the Gramm-Leach-Bliley Act, I am prohibited from commenting [on CRA] at this time. This was an artful dodge, an allusion to legal principles in order to mystify. Agencies are constantly in the rule-making process; if this precluded them from commenting on the underlying laws, they would never speak at all. In fact, Comptroller John Hawke, whose agency is participating with the Fed in writing the CRA Sunshine rules, spoke extensively on CRA on March 21.
The day before Greenspans speech, a senior Fed staffer was asked what we would be speaking about. Technology and changes in banking, she replied, continuing: Not CRA -- thats too political. Another Fed staffer, a senior economist, acknowledged that the Fed had gotten involved in politics last year -- but only on structural issues, he added. Analysis: Greenspan is not prohibited from commenting on CRA; rather, he does not want to anger the anti-CRA Senator Gramm, who delivered such a Fed-friendly deregulation bill last year.
The majority of Greenspans speech extolled the virtues of the new economy (and by implication, of his stewardship over it). TV cameras from the financial news networks whirled in the back of the room; CNN-fn was ready to cover it live, if Greenspan took questions (which he didnt). The live audience, primarily representatives of grassroots community groups, waited for any reference to their issues -- if not CRA, at least fair lending. Finally, well past the half-way point of the speech, it came. In paragraph 17, Greenspan alluded to wealth disparities between whites and non-whites and Hispanics. And, in paragraph 19, Greenspan expressed concern about abusive lending practices, and said that the Fed recently convened an interagency group to identify aberrant behaviors and develop methods to address them.
This single paragraph became the lead for most press coverage of the speech. Reuters headline was, Greenspan Says Fed To Target Abusive Lending. Hardly -- the Fed convened this interagency group in October 1999, and it has only met twice since. Since 1995, the Fed has been charged with issuing a regulation defining unfair and deceptive lending practices, under the Home Ownership and Equity Protection Act of 1994 -- but has yet to issue any such regulation. When confronted last year with evidence of Bankers Trusts (now Deutsche Banks) and Republics (now HSBCs) involvement with predatory lenders, the Fed claimed it could do nothing. The American Banker, to its credit, captured some of this Johnny-Come-Lately (if Johnny comes at all) aspect to Greenspans speech, headlining its story, Greenspan Wades In On Predatory Lending, Joining Other Regulators.
Not that the other bank regulators are much better. Comptroller Hawke at least mentioned CRA early and often in its March 21 speech. He said, where we have credible evidence that a national bank is engaged in predatory practices, we will focus on the remedies that are within our power.... But Republic National Bank of New York was buying the securities backed by Delta Fundings mortgage loans, even as Delta was being sued for discrimination by the NYS Attorney General. And the OCC has given Eagle National Bank of Upper Darby, PA, a Satisfactory CRA rating, after this bank made over 600,000 high-priced payday loans.
The Office of Thrift Supervision appears somewhat more active on the predatory lending issue -- for example, the OTS obtained from Lehman Brothers in 1999 a commitment to avoid predatory pricing practices when it helped pool and sell other companies mortgage loans. But Lehman Brothers, after making the commitment, continued to do this underwriting for First Alliance (subject of the New York Times March 15 expose; the company on March 24 filed for bankruptcy). Well see what conclusions the OTS upcoming examination of Lehman Brothers reaches...
The action, such as it is, on the predatory lending issue is at the level of the states, and even cities. The City of Chicago has proposed an ordinance barring companies which own predatory lenders from doing business with the city. The city is scrutinizing subprime lenders which have higher market shares in communities of color than citywide, including Bank of Americas Equicredit unit. Interestingly, a Bank of America representative was on the dais during Greenspans March 22 speech, and, in her introduction, said that in May Bank of America will report that it is on track to meeting the ten year, $350 billion CRA lending commitment it made during the NationsBank - BofA merger...
There is some federal legislative action. Rep. Jan Schakowsky (D-IL) has introduced the Anti-Predatory Lending Act of 2000, H.R. 3901; Rep. John LaFalce (D-NY) is promising a related bill before Congress Easter recess. In a stray but encouragingly bipartisan note, source say Rep. Steven LaTourette (R-OH) will be supporting one or both of these bills; LaTourettes aide said the support derives from being able to relate -- LaTourettes parents were immigrants, targeted as such by various hucksters and predators...
March 20, 2000
Predatory Lending; Gramm and the Internet
The scourge of predatory lending was finally given some mainstream media play, in the March 15th New York Times and ABCs 20/20 television show, both focusing on First Alliance Corporation -- and this predatory lenders main Wall Street enabler, Lehman Brothers. Ex-First Alliance loan officer Greg Walling has said, in a sworn affidavit, that customers with A credit would pay the same high loan fees as customers with D credit.
But it is the Wall Street connection to predatory lending that is most in need of further investigation. In mid-1999, Inner City Press and the Delaware Community Reinvestment Action Council documented to the Office of Thrift Supervision that Lehman Brothers was underwriting the mortgage-backed securities of Delta Funding, a New York subprime lender then being sued for discrimination by the NYS Attorney General. In order to address this issue (and to gain approval for its take-over a Delaware Savings Bank), Lehman Brothers submitted to the OTS a letter, dated June 30, 1999, stating that it would adopt policies and procedures for purchasing and financial residential mortgage loans which seeks to identify predatory pricing practices by its clients and that Lehman Brothers will continue to include, in connection with its underwriting, loan purchase and financial activities, review procedures appropriate to the circumstances involved which seek to identify predatory pricing practices by its clients.
(For the full text of this Lehman Brothers letter, see ICPs Delaware Reporter of July 6, 1999 -- click here to view).
Lehman made that commitment on June 30, 1999. But the New York Times, on March 15, 2000, reported that First Alliance received $103 million raised through Lehman Brothers just three months ago -- that is, more than five months after Lehman made the above-quoted commitment. ICP questions whether Lehman Brothers has lived up to its June 1999 commitment, and has this week formally asked the OTS to rule on this matter.
It bears remembering that First Alliance is by no means the only lender over-charging consumers regardless of their credit histories. As recently reported by BankRate.com, similar overcharging is currently taking place at Citigroup and its affiliates, and at Wells Fargo and its subsidiary, Norwest Financial. And there are more, which will be addressed in coming weeks in this space.
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ICP feels compelled to reprint, in full, Senator Phil Gramms March 17th, 2000 letter to the editor of the American Banker, criticizing a recent article by ICPs editor in that newspaper (the article Sen. Gramm is attacking is substantially similar to the Jan. 3 Report, at the bottom of this page, CRA and Internet Banks):
American Banker, March 17, 2000, Pg. 7
HEADLINE: Gramm Says Activist's Plan Would Undermine the CRA
BYLINE: Phil Gramm, Chairman, Senate Banking Committee
To the Editor:
I make no efforts to disguise my belief that the Community Reinvestment Act is a flawed statute. Apparently, Mr. Matthew Lee doesn't much care for it either.
(Mr. Lee, executive director of Inner City Press/Community on the Move and the Inner City Public Interest Law Center, wrote the March 10 "Viewpoints" article "Revamp CRA Rules for Web Age.")
CRA is based on the notion that a bank should do business in the community where it is located. CRA was enacted in 1977 out of the concern that banks were not reinvesting in their local communities. The language of the statute plainly states as its purpose, that "regulated financial institutions have (a) continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered."
To say, as Mr. Lee does, that CRA requires a bank to do business wherever its customers are located -- which could be around the globe -- rather than where the bank is located would, in fact, undermine the very community basis of CRA, the foundation for the act itself. CRA would be meaningless if "community" were to be interpreted as anywhere in the United States where an institution happens to have a customer.
But it is understandable that Mr. Lee would advocate a national CRA. From his headquarters in the Bronx, he seems quite content to assert representation of the interests of communities in places like Atlanta, Wilmington, Chicago, and Miami.
For those who truly believe in CRA and its purposes, Mr. Lee's proposal would cause the downfall of the act, taking dollars out of our local communities and steering them wherever the politically advantaged may direct.
Chairman, Senate Banking Committee
ICP has submitted the following reply to the American Banker:
To the Editor:
I appreciate Senator Gramms March 17 response to my March 10 Viewpoints article, Revamp CRA Rules for Web Age, and this opportunity to reply. Sen. Gramm summarizes my argument as that CRA requires a bank to do business wherever its customers are located. Leaving aside the fact that a bank obviously IS doing business where its customers are located, I note that Sen. Gramms critique does not once mention the words Internet, Web or anything beginning with an e-.
The whole point of my article was that while when the CRA was enacted, banks could only collect deposits through branches (and then automatic teller machines), now they can collect deposits over the Internet. This is what triggers a CRA responsibility -- the solicitation and collection of deposits, under the aegis of federal deposit insurance and the taxpayers.
My article did not advocate construing community as, in Sen. Gramms phrase, anywhere in the United States where an institution happens to have a customer. The focus is on the solicitation and collection of deposits. Telebank, soon be to known as E*TRADE Bank, runs targeted television advertisements in New York City, for example, encouraging viewers to deposit their money with the bank, which says it pays higher interest, since it doesnt have branches and their attendant costs. Nevertheless, the Office of Thrift Supervision has accepted this bank limited its CRA assessment area to Arlington, Virginia, where it has its headquarters.
My proposal was and is simply this: if a bank actively solicits deposits in a community, and obtains them, it should have some CRA duty in that community. Sen. Gramms claim in such a case appears to be that imposing such a duty would take dollars out of Arlington, Virginia. But ascribing deposits solicited from Brooklyn, New York, to Arlington, Virginia, simply because E*TRADE Bank happens to have its computer there, makes little sense. If this regulatory policy continues, Internet banks in formation will simply place their computer and headquarters in the most affluent cities, and, being politically advantaged, ask Sen. Gramm to help them ensure that no portion of the deposits they collect are required to be reinvested in the communities from which they are collected.
Sen. Gramms quotation from the CRA statute (focusing on the local communities in which [banks] are chartered) is of no avail, either. Since the passage of the interstate banking laws, banks chartered on one state can and do have CRA responsibilities in other states, where they collect deposits. The issue seems to turn on the question of whether customers make their deposits in a physical facility (like a branch or ATM), or through a purportedly virtual facility, like their computer. E*TRADEs March 13 announcement that it is buying Card Capture Services Inc. and its 8,500 ATM machines may help clarify this question. Even under the current CRA regulation, CRA assessment areas must include all of an institutions deposit-taking ATMs.
Sen. Gramms letter concludes that Mr. Lees proposal would cause the downfall of the act, taking dollars out of our local communities and steering them wherever the politically advantaged may direct. Im delighted with the implication that I, or members of the South Bronx-based non-profit organization which I direct, are politically advantaged. It is certainly news to us. Knowledge is power! -- Matthew Lee, etc.
More on the reference to E*TRADEs recently announced purchase of 8.500 ATM machines: Bloomberg of March 13 quotes a (Fleet) analyst that one of the things weve seen in online banking is people who are reluctant to send checks via mail. This gives E*Trade and Telebank a physical access channel.
In the second half of 1999, ICP raised questions to the OTS about the legitimacy of Telebanks Arlington, Virginia CRA assessment area, given its television ads soliciting deposits in other markets. On November 12, 1999, E*TRADEs lawyers at Brobeck Pheleger and Harrison wrote to the OTS that in response to ICPs comments, E*TRADE believes that the delineation of Arlington County, Virginia, as Telebanks CRA assessment area is in conformance with the OTS regulations.
In light of E*TRADEs purchase of deposit-taking ATMs, lets review the OTS CRA regulation, at section 41: the assessment area(s)... must... include the geographies in which that bank has its main office, its branches, and its deposit-taking ATMs.... E*TRADEs purchase of Card Capture Services Inc. and its 8,500 deposit-taking ATMs now requires a dramatic expansion of E*TRADE Banks CRA assessment area; ICP has just put a formal request to that effect in with the OTS.
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February 28, 2000
The surreal politics of CRA continue unabated. We will focus this week on the Federal Reserve Boards bank-heavy Consumer Advisory Council. Of the seven most recent Fed appointees, five represent the financial services industry, including a credit card executive who was nominated to the Fed by Bob Dole (now in private legal / lobbying practice) as well as by Democrats in Congress. But first, a recap of (some of) the weeks CRA news.
OTS Director Ellen Seidman on Feb. 23 called on community-based organizations and banks to work together to shut out predatory lenders. While these mentions of predatory lending (which the regulators still refuse to even try to define) may be helpful, the federal regulators tend to characterize whatever banks do as subprime lending, and claim that predatory lending is limited to non-banks. FDIC Chairman Tanoues recently announced that the FDIC will be conducting examinations -- but only to ensure that banks and thrifts do no unwittingly lend support to the predatory lending practices of nonbank lenders. But what of the predatory practices of banks and their own affiliates?
A recent mystery-shopping of Citigroup affiliates in upstate New York found that Citifinancial would charge 12% interest on a loan that Citibank would make at 9.95% -- $11,000 more over the 15 year life of the loan. Citibank spokeswoman Maria Mendler claimed that Citi is trying to solve this disparity (as Citi has been saying for some time now), but would not even attempt to set a deadline for correction. National City Corps Loan Zone subprime lending stores have no policy of referring prime-credit customers who apply for loans at its locations to a bank branch, according to Mark Decello, Loan Zones EVP of production. (Quotes from BankRate.com -- click here to view). As reported below, this did not stop the Cleveland Federal Reserve Banks president Jerry Jordan from nominating National Citys CRA officer to the Feds Consumer Advisory Council...
More than National City and the Cleveland Fed, however, its Citigroup that brings together the various strands of CRA today. In a February 23 letter, the Local Initiatives Support Corporation, a large non-profit chaired by Citigroups Robert Rubin, explained its October 1999 decision to support the Gramm - Leach - Bliley deregulation law: We concluded... that an acceptable outcome would be for this Congress to pass a financial services bill so long as the fundamental principles and integrity of the CRA remained intact.... [B]oth parties in Congress and the Administration struck a compromise on the legislation. Clearly, there were some problems, including the sunshine provisions, which would potentially cause compliance issues for LISC and many grassroots organizations. However, we concluded that it was highly unlikely that the President would veto the bill over sunshine provisions, and we felt that these provisions could be negotiated with the regulators after the legislation was passed.
This is LISCs attempt to explain its support for the deregulation bill, as a matter of assertedly pro-CRA political calculation. But on LISCs Board of Directors are not only Citigroups Bob Rubin, but also Citigroups head of CRA, Pam Flaherty, Chases Marc Shapiro, and J.P. Morgans Nicolas Rohatyn. (Morgan announced on Feb. 22 it will open new branches in 18 cities this year for high-net worth clients. Meanwhile, Mr. Shapiros Chase is closing branches in the Bronx, Upper Manhattan, and Brooklyn).
When the same banks which desperately wanted deregulation are on the policy-making board of a non-profit which later attempts to explain its support for regulation in entirely CRA-related terms, questions must be asked. Questions that have yet to be answered.
Back to the Fed:
"Consumer" Advisory Council?
On January 5, 2000, the Fed announced the appointment of seven new members to its thirty-person Consumer Advisory Council. As Inner City Press reported at that time, five of the seven new members represent financial institutions. ICP filed a Freedom of Information Act request for background documents, to which the Fed last week finally responded, with over 700 pages. The documents reflect how even the Feds one consumer advisory body has been hijacked by the institutions the Fed is supposed to be regulating -- hijacked with the Fed Governors encouragement and consent.
In June, 1999, the Fed invited nominations for the seven upcoming vacancies on its Consumer Advisory Council. The documents reflect the log-in of 167 nominations, suggesting 125 different people. A Dec. 13, 1999 memo to the Governors from the Fed staff makes clear that the Feds goal is that full half of the 30 seats on the Consumer Advisory Council be held by Industry Members -- that is, bankers. The other fifteen seat are split between what the Fed calls Academic / State Government Members and Consumer / Community Members. While of the seven Members whose terms expired on Dec. 31, 1999, three were Consumer / Community and four were Industry, they were replaced by five Industry representatives, supplemented by one representative of a community development intermediary, and a lawyer for the Chickasaw Nation, who used to be Senior Counsel at Fannie Mae.
While withholding all information about how the Fed staff and Governors Meyer and Gramlich arrived at their recommendations, the Fed has provided ICP with documents reflecting all of the nominations the Fed logged in. The first nomination listed was submitted by Senator Phil Gramm (R-TX), who nominated Dan Angel, the President of Stephen F. Austin State University in Nacogdoches, Texas, who is already on the board of the Dallas Fed (perhaps explaining that Reserve Banks series of anti-Community Reinvestment Act research reports).
There were several other interesting nominations:
Bob Dole, now of the law firm Verner Liipfert Bernhard, nominated Russell Shrader, SVP of VISA U.S.A., who was selected by the Board. Mr. Schader was also nominated by Doles partner Ann Richards, by Sens. Barbara Boxer, Richard Shelby and Tim Johnson, and Reps. Peter King and Marge Roukema -- reflecting the clout of the credit card industry.
New York Rep. John LaFalce nominated the Legislative Counsel of MNBA America Bank.
The Feds fair lending specialist / consultant, Robert Cook of the Maryland law firm Hudson Cook, LLP, nominated Lester Firstenberger, the general counsel of the Mortgage Lenders Network of Middletown, Connecticut (who the Board ended up appointing to the CAC).
The Mortgage Bankers of America (where ex-Governor Lyle Gramley works) nominated Teresa Bryce of Bank of America Mortgage (who was, in fact, accepted by the Board).
The Richmond Feds Al Broaddus nominated Elizabeth Schulhof, a vice president with Bank of America in Richmond.
The San Francisco Feds Robert Parry nominated the Compliance Officer of Union Bank of California. Parry also nominated Kelly Walsh, CRA officer of Bank of Hawaii (who used to be the head of CRA at the San Francisco Fed). Parrys successful nomination was of the CRA officer of CAL FED Bank.
The Cleveland Feds Jerry Jordan nominated the Compliance Officer of Security National Bank of Springfield, Ohio, and the Corporate Community Development Manager of National City Corp., Pittsburgh, PA.
The St. Louis Feds Randall Sumner nominated the CRA officer of Mercantile Bank.
The Philadelphia Feds Ed Boehne nominated the Community Affairs Director of Greenwood Trust Company in New Castle, Delaware, as well as an official of FCC National Bank in Wilmington, Delaware.
Wells Fargo General Counsel Stanley Stroup nominated his own banks CRA officer, Karen Wegmann.
The Compliance Officer of Chevy Chase Bank, FSB, Richard Harvey, nominated himself.
The IBAAs Ken Guenther nominated Anthony Abbate of Interchange Bank in New Jersey, whos always been fast with a quote trashing the CRA.
Lawyer Thomas Noto of Kirkpatrick & Lockhard nominated the General Counsel of PNC Mortgage Corporation of America.
House Democratic leader Dick Gephardt, along with Rep. Ike Skelton, nominated the CEO of Great Southern Bank of Springfield, Missouri.
Rep. Tom Barrett (as well as Reps. Jerry Kleczka and Jim Sensenbrenner) nominated William Brouse, CEO of The Brouse Company of Brookfield, WI, who the Fed listed under the rubric, Government.
New Jersey Senator Bob Torricelli nominated the general counsel of the NJ-based finance company, The CIT Group.
From these nominations, the Fed selected five industry representatives, supplemented by one representative of a community development intermediary, and a lawyer for the Chickasaw Nation, who used to be Senior Counsel at Fannie Mae. Thus the Fed is advised on consumer issues...
A follow-up to last weeks ICP Federal Reserve Report about Fed economists anti-CRA quotes in a recent article in the New York-based City Journal (Trillion-Dollar Bank Shakedown, Winter 2000): further analysis has revealed that sitting on the Publication Committee of this Nouveau Right Wing journal is one Kathryn Wylde, previously of the New York City Housing Partnership and now of LBO king Henry Kravis New York City Investment Fund, a frequent speaker at purportedly pro-CRA events, including those sponsored by the Fed. LISCs support of the financial deregulation compromise was one thing -- but this individuals role in a publication blatantly trashing the CRA needs further exploration....
Amplification, Feb. 22, 2000, 4:40 p.m.:
Inner City Press has received this afternoon the following letter regarding the above Report:
Dear Mr. Lee:
Chase notes the reference in Inner City Press web site that the North Carolina Attorney General stripped the license of subprime lender Chase Mortgage Brokers, triggering a process to close the companys Wilmington, NC office.
Chase Mortgage Brokers, whose legal name is Dylan Mortgage, Inc., is not in any way related to or an affiliate of The Chase Manhattan Corporation or Chase Manhattan Mortgage Corporation. In fact, in January 1999, in response to Chases objection, the company agreed to cease using Chases name.
As many of your readers will assume that Chase Mortgage Brokers is a Chase affiliate, I am requesting that you clarify this information on your web site. I know that you would not want to mislead your readers.
Mark A. Willis
Executive Vice President
The Chase Manhattan Bank
Editors note: Since Chase Manhattan was not mentioned elsewhere in the above Report, ICP saw no needs to state no relation to Chase Manhattan in order to avoid misleading its readers. Nor, for example, did the Raleigh, NC News and Observer of Feb. 15, 2000 (although that paper did run a clarification on Feb. 16, apparently at Chase Manhattans request, stating that its previous story should have said that the Wilmington-based company has no connection to Chase Manhattan Mortgage Corp.). To assist Chase Manhattan in its efforts, ICP notes that Chase Mortgage Brokers is still listed by that name in the Nashville (TN) Life, on the web site of the state of South Carolina, Registered Mortgage Brokers (Dylan / Chase), and in Mortgage Magazine. Furthermore, a recent (Feb. 14, 2000) online article refers to Chase Enterprises, a Hartford-based developer, without stating that it too is unrelated to Chase Manhattan. For the record, (1) Chase Mortgage Brokers is unrelated to Chase Manhattan Corporation; (2) Chase Manhattan does engage in subprime, high interest rate lending, through its Chase Manhattan Funding unit, which will be analyzed in a future (unrelated) Report. If any reader was misled by the Report above, this clarification is being posted less than 24 hours after initial publication, and thirty minutes after receipt of Chase Manhattans request. --ML
The above-mentioned U.S. Trust, the first bank acquiree under Gramm-Leach-Bliley, is more January 18, 2000
New York City was ground-zero for CRA rhetoric last week. At the $500 a head conference at the Sheraton in midtown Manhattan on Jan. 13, President Clinton claimed that when we passed the Financial Modernization bill... we expanded the CRA, as well.... First Lady Hillary Clinton, the previous day, said we fought so hard to preserve the Community Reinvestment Act... It is a valuable tool that I will stand firmly beside Reverend Jackson and Secretary Summers and others always to protect.... Larry Summers chimed in, We have maintained and strengthened the Community Reinvestment Act..... On CNN the next day, anchor Leon Harris asked, correctly, wheres the beef: Well, Mr. Secretary, talk in cheap.....
Talk is cheap, because when push came to shove on the financial deregulation bill, the Administration and most Congressional Democrats caved in on CRA, giving Senate Banking Committee Chairman Phil Gramm at least three anti-CRA provisions, in exchange for a near-meaningless requirement that financial holding companies have Satisfactory CRA ratings (which, currently, over 98% of banks are already awarded). Still the spin continues: Clinton claims they enhanced the CRA; Summers claims they strengthened it. At a Jan. 13 event at Boricua College in Brooklyn, Clinton went out of his way to thank Sandy Weill from Citigroup -- the company that had the most to gain from the deregulation law.
The January 17 holiday provided another opportunity for grandstanding. HUD put out a press release, the text of which included: In the Martin Luther King Day announcement... Secretary Andrew Cuomo today announced a public awareness campaign to help people fight back against house discrimination..... But the weeks main fair housing news was the scandal of HUD granting $297,000 to the Boston Housing Authority, which only last July settled discrimination complaints by residents of the Old Colony and Bunker Hill developments. HUDs FHIP programs supposedly does not allow funds to be used to settle legal claims, but thats what appears to be doing on here.... Or, at a minimum, the perverse message that discriminators will be granted Federal cash to improve their practices....
In Washington, the new CEO of the thrift trade association Americas Community Bankers, Diane Casey, said that the CRA exemption that Clinton and the Democrats agreed to in November, for banks with assets below $250 million, should be expanded to include all banks with assets under $1 billion. New Yorks new Senator, the soft Democrat Chuck Schumer, told a senior citizens group in upstate Amherst that his next plan is to deregulate the power industry. We have the technology to do the same thing on a national basis for electricity, he said, explaining legislation he is planning with Texas Sen. Phil Gramm. If a Texas company wants to solicit you, NiMo or NYSEG has to allow it. Buffalo News, Jan. 12. Ah, Schumer and Phil Gramm, together again... In related news, Carol Parry, formerly of Chase Manhattan and now personally promoting her nomination to the Federal Reserve Board, told Bloomberg in a Jan. 12 interview that I dont think theres a conflict between me and Senator Gramm on community lending... the rules need to be simplified for banks. If these are her views, community groups, now ask, why were they supposed to take a positive view of her nomination in the first place?
More substantively, the Office of Thrift Supervision on January 10 hauled off and approved E*TRADEs application to acquire Telebank. While, subsequent to CRA protest, the applicants expanded their CRA plan to include an additional $750 million in loans to low- and moderate-income borrowers that they will purchase, and a $1 million digital divide-related plan with the Boys and Girls Clubs, the OTS refused to address the more fundamental issue, of tying the banks CRA duty to where it solicits and collects deposits, and where it plays a role in making credit directly available. According to the Boston Herald of January 16, OTS director Ellen Seidman says her office plans to review community reinvestment regulations in 2002, once Internet banking evolves a little further. That is, once the horse is not only out of, but miles away from, the barn...
Washington lawyer Ronald Glancz, of the Venable Law Firm, tells SNL Compliance Watch that [t]he CRA is an evolving thing with the OTS and, here, they are not actually making the loans. But the OTS requires that if they are going to be a nationwide operation, they will have to do something on a nationwide basis to satisfy CRA and that is what they will be doing. But theres a difference, between an operation like Lehman Brothers thrift, which only purchases loans (no one believes theyre getting a Lehman Brothers mortgage, or goes to Lehman for such a loan), and one like Telebank, which right on its web site says, Click here for a mortgage, which takes you to another Telebank web page. Its a crucial distinction, entirely avoided by the OTS Jan. 10 order. Mr. Glancz, by the way, represents ING, which has applied for a thrift charter for a phone-and-Web bank, but seeks to limit its CRA assessment area to Wilmington, Delaware. Hmm....
The Federal Reserve Board on Jan. 10 approved two applications by North Fork Bank, to acquire savings banks in New York State. The Feds order acknowledges that [t]he record... reflects that North Fork Bank received a significantly smaller percentage of HMDA-related loan applications from minority and LMI individuals than did lenders in the aggregate, and that the bank made a correspondingly smaller percentage of its HMDA-related loans to minority and LMI borrowers. For example, in 1998, North Fork Bank made 3.3 percent of its HMDA-related loans to African Americans and 2.6 percent of such loans to Hispanics, compared with rates of 10 percent and 5.8 percent, respectively, for lenders in the aggregate. By the Feds own numbers, North Fork is 66% below the aggregate in lending to African Americans. But the Fed goes forward, stating that in general... North Fork Bank continues to address the disparities in its lending record. The Fed previously noted disparities at North Fork (based on its 1996 and 1997 HMDA data), when it acquire New York Bancorp in 1998. The Fed required quarterly reports from North Fork, but North Forks lending still remains disparate. To the Fed, apparently, as long as the data can be massaged to highlight any arguable improvement, merger approvals can continue to be handed out. The North Fork (and Fed) Watch(es) continue...
As previously noted in this space, the Federal Reserves enforcement of the fair lending laws was strongly criticized by the General Accounting Office last November, in the GAO study Large Bank Mergers: Fair Lending Review Could Be Enhanced With Better Coordination (GGD-00-16, Nov. 3, 1999). ICP recently obtained a copy of the Fed Chairman Greenspans reaction to this study, in the form of a letter to the Senate Committee on Government Affairs, dated December 28, 1999. In this letter, Chairman Greenspan disavows any connection between fair lending compliance and the Community Reinvestment Act, claiming instead that the Fed can only consider compliance with fair lending laws in its review of an organizations managerial resources. Greenspan writes that we disagree with the part of the [GAO] recommendation that urges the Board to seek information about consumer complaints -- for the other banking agencies, HUD and the FTC -- during the application process. Why? The Board believes that most individual complaints involving regulated entities are already taken into account by the appropriate federal regulator in the supervisory process... this behavior is generally noted in the examination report and then taken into account by the Board.....
But, for example, in its Jan. 10, 2000 order concerning North Fork Bank, the Fed relies on consumer compliance and CRA exams of the bank from the year of 1997 -- three years old. Greenspans letter also reiterates that the Board has no interest in examining bank affiliates for fair lending compliance, claiming that HUD and the FTC are already doing this. FTC staff have informed ICP that FTC has limited staff time, and concentrates what time it has on lender which are not affiliated with banks, based on the (seemingly reasonable) assumption the Fed is examining such entities. So the loophole continues, despite a detailed GAO report that sketches it and calls for its closure....
The Fed has yet to respond to ICPs FOIA request for documents underlying the GAO report, including those reflecting the Feds supposed adoption of a policy not to examine bank affiliates (a policy adopted with out public notice or comment). More forthcoming...
This is not to say that CRA and convenience and needs enforcement is ideal at the other agencies. Beyond the Office of Thrift Supervisions questionable E*TRADE / Telebank approval of January 10, on January 11, ICP received from the FDIC a letter declining to extend the comment period on the Dime - Hudson United merger application. ICP had requested from the FDIC a listing of the branches that would be closed if the merger were approved -- the type of list that the FDIC has requested and received from Hudson United, and North Fork Bank, in previous mergers. The FDICs January 11 letter states that [t]he information on potential branch closings or consolidations is included in the public file, which was sent to you on January 4, 2000. But the only reference to branch closings in this public file is the cursory statement that [p]otential branch overlaps within concentrated geographic areas, generally one-half mile apart or less, have been identified in six New Jersey communities and one community in Rockland County, New York. ICP staff telephoned the FDIC, to confirm that this was the information on potential branch closings that the FDICs letter referred to. Yes, ICP was informed. No explanation was offered as to why other applicant have been required to file lists including the street addresses of branches. The bigger the proposed merger, the less review, apparently....
The FDIC wrote ICP a second letter, on January 13, stating that we reviewed your correspondence... and consider it to have sufficient merit to constitute a protest for purposes of this application. The FDIC also sent a letter to Hudsons CEO, Ken Neilson, stating that the issues raised regarding the banks lending activities require further analysis... You may respond to the protest until January 24, 2000. Updates forthcoming...
In legal news, the Virginia Supreme Court on Jan. 14, 2000, overturned the $100 million of punitive damages awarded against Nationwide Insurance in October, 1998, based on racial redlining in property insurance. The ruling stated that, with due respect for HOMEs worthy mission of providing equal housing opportunities in the metropolitan Richmond area, we conclude nonetheless that HOME lacks standing to maintain its action against Nationwide. This decision raises the question: how are cases of systematic discrimination in insurance to be prosecuted?
In more positive CRA news, the City of Baltimore is moving to open its own Office of Community Reinvestment, to advocate as city administrations in Cleveland and Pittsburgh have been doing for years.
... midtown Manhattan on January 13th will play host to one of the more surreal events of the young millennium: Citigroups Sandy Weill proclaiming his commitment to the Community Reinvestment Act. It will take place at the Sheraton Towers on 52nd Street. The registration fee required is five hundred dollars, not including a gala fundraiser later than night on the floor of the New York Stock Exchange (thatll set you back another $500).
Not only will Mr. Weill proclaim his conglomerates commitment to CRA -- he will also claim that the financial deregulation bill, signed by President Clinton on November 12, 1999, effectively expanded CRA onto insurance companies like Travelers. Neither assertion will be true.
Consider Citigroups record of mortgage lending, in the New York City Metropolitan Statistical Area: in 1998 for conventional home purchase Citigroup (combining Citibank, N.A. and Citicorp Mortgage) denied the applications of African Americans 2.97 times more frequently than the applications of whites. This compares unfavorably to the industry aggregate in the NYC MSA: a 2.15 denial rate disparity in 1998. Citigroups defense cannot be that it does more outreach to communities of color than other lenders. While for the industry as a whole in this MSA in 1998, 12.2 percent of conventional home purchase loans went to African Americans, for Citigroup, the figure was only 6.6 percent. Citigroups disparities for Latinos are also glaring: a denial rate disparity of 2.3 (compared to the industrys figure of 1.75); 5.9 percent of conventional home purchase loans to Latinos, versus the industrys 9.0 percent. How exactly do Mr. Weill and Citigroup support the CRA?
In a December 17 op-ed, Weill proclaimed: I support community reinvestment and am delighted that the Financial Services Modernization Act, which President Clinton recently signed into law, will give a shot in the arm to investment of capital into our communities. Question: what is the shot in the arm to which Weill is referring? It sure couldnt be the slow-down in CRA examination for 80% of the banks in the country. Could it be the reporting requirements impose on community development groups? Virtually no community-based organizations view the Gramm-Leach-Bliley Act as being positive for CRA. Citigroup wanted and needed the law, because it made moot the Federal Reserves requirement that it divest its insurance operations in two to five years. Citigroup clearly got a shot in the arm from the new law -- but what about communities?
As supporters of the new law, the Clinton administration (and Citigroups Weill) point to the Reverend Jesse Jackson. On Dec. 15, Rev. Jackson held a press conference in the AT&T building in lower Manhattan. The main purpose was to promote the upcoming Wall Street Project conference, slated for Jan. 12-14 in New York. But, standing next to Citigroups Weill, Rev. Jackson claimed again that the Gramm-Leach-Bliley Act is good for communities. Two press accounts catch the flavor:
Newsday of Dec. 16 reported: In an allusion to recent criticism of the Wall Street Projects strategy of working with corporate America, Jackson said the approach is not trickle down economics, but growing up.
The American Banker newspaper of Dec. 16 reported: Despite much criticism of the law by community reinvestment activists around the country, [Jackson] said the legislation did in fact expand CRA protections, specifically to ensure that insurance companies comply.
The last statement simply is not true. The only even plausibly related provision of the law is that only holding companies whose banks are rated Satisfactory or better under CRA can acquire insurance companies. It is inaccurate to claim that the law that Clinton signed specifically ensure[s] that insurance companies comply with CRA. This is a classic New Democrat strategy: sign (or support) a law that sells out a supposedly core principle, then simply claim that thats not what the law says. And with an unwary press, the strategy appears to work. The Associated Press of Dec. 15 reported that Jackson said he wants to harness the legal requirements of the federal [CRA], which requires banks and insurance companies to lend money... in low-income neighborhoods. Strengthened community reinvestment requirements are part of the recently passed financial overhaul bill.
If communities could harness the Clinton administrations and its controllers (e.g. Citigroup) and supporters spin, that would be one thing. But the bill that Clinton signed does not advance CRA, much less apply it to insurance companies...
Meanwhile, at the agencies: on Jan. 5, just after Greenspans renomination, the Federal Reserve Board announced it has named seven new members to three-year terms on its Consumer Advisory Council. Incredibly, fully five of the seven new members work for banks (from whom the Fed hears through its Federal Advisory Council, its Thrift Advisory Council, and more informally). Onto its consumer council, the Fed on Jan. 5 named bankers from BankAmerica, Cal Fed Bank FSB, Mercantile Bancorporation, Visa USA and the Mortgage Lenders Network USA, Inc.. On the other side of the equation are two non-bankers: a lawyer for the economic development division of the Chickasaw Nation, and the CEO of the Philadelphia-based Reinvestment Fund. The Feds Consumer Advisory Council remains top-heavy with bankers, including from Huntington, Banco Popular, ABN AMRO and the State Bank & Trust Company of New Ulm, Minnesota. More on the Feds selection process later.
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January 3, 2000
Looking into the new year, there are several important and unresolved Community Reinvestment Act issues that need to be addressed, by consumers, by Congress, by banks and by the regulators. In these January 2000 editions of Inner City Press CRA Reporter, well explore some of them: the appropriate application of CRA to Internet banks; the need for review of upcoming bank - insurance mergers; the continuing lack of enforcement on predatory subprime lending, fairness in small business lending, etc..
CRA and Internet Banks
When the CRA was enacted in 1977, few could have foreseen, 23 years in the future, the inroads that non-brick and mortar, Internet banks are making. The initial CRA directs regulators to ensure that insured depository institutions meet the credit needs of their communities, particularly low and moderate income neighborhoods. Each banks community (or delineated assessment area in which the banks performance would be judged) was defined as an area around its deposit taking branches -- because this was the way that deposits were collected in 1977. By regulation, the definition of assessment area was later expanded to include the communities where a banks deposit-taking automatic teller machines are located.
The use of the Internet to solicit deposits and offer credit products, however, leaves those notions of a banks community outdated. Non-brick and mortar banks need only a single headquarters office, the location of which has little to no relation to the communities from which the Internet bank can draw deposits. Nevertheless, many Internet banks seek to limit their assessment areas -- the communities in which they would have a CRA duty to meet credit needs, including of low and moderate income people -- to the city in which they place their headquarters office.
Now in the year 2000, Internet institutions like Telebank are running television advertising campaigns nationwide, with the following message: We can pay higher interest rates on deposits because we dont have the expense of branches. Move your money to our bank. Since the traditional banks in the cities where Telebank is running these ads have CRA duties in these cities, each dollar withdrawn from them, and placed in Telebank (which seeks to limit its CRA assessment area to Arlington County, Virginia, where its headquarters office is) is a dollar taken out from under a CRA duty in that city.
How have the regulators been dealing with this issue? In short, haltingly, even irrationally. In 1996, the Internet brokerage Waterhouse Securities set up a deposit taking bank, Waterhouse National Bank. Waterhouse Securities has its headquarters in New York City, on Wall Street. It placed the headquarters of its bank, however, in the more affluent suburbs, in White Plains, New York, and got the Office of the Comptroller of the Currency to agree to limit its CRA assessment area to White Plains. When Canadas Toronto Dominion Bank applied to acquire Waterhouse and its bank, comments were raised (disclosure: by ICP). The OCC did very little. The Federal Reserve Board did inquire into the deal, but went on a tangent, focusing on TDs lack of experience with the CRA. The Fed ended up requiring TD to make a three to five year CRA plan, but did not meaningfully address the CRA responsibilities of this Internet bank, which does very little to ensure that its credit products are offered and accessible to low and moderate income consumers.
In 1998, another Canadian bank, the Royal Bank of Canada, applied to the Fed and to the Office of Thrift Supervision to acquire one of the first pure-Internet banks, Security First Network Bank, with its headquarters office in Atlanta. The Fed entirely punted on this one, stating in a footnote that the OTS was in the middle of a rulemaking on Internet banks (which has come to nothing). The OTS explained to ICP that the application had to be expedited, and therefore the OTS would not follow its own rules for a public meeting / oral argument.
An interesting hybrid proposal was submitted to the OCC in 1999: yet another Canadian bank, Canadian Imperial Bank of Commerce, wanted to set up a direct bank in Florida, using kiosks in Winn Dixie supermarkets which would have direct Internet and phone access to CIBCs bank. When ICP raises CRA assessment area issues, CIBC made a commitment that all substantial business would have to be done from the kiosks -- from a home computer, a consumer could not even apply for a loan. On that basis, the OCC defined CIBCs MarketPlace Banks assessment area as the communities around its kiosks.
On a policy issues like this, one might assume that each administrative decision is a precedent, a sort of mark in the sand. Not so. In late 1999, the Dutch insurer ING applied to the OTS to set up a direct bank to be headquartered in Wilmington, Delaware, but targeting consumers from Delaware up to and including New York City. ING proposes that its assessment area be limited to the Wilmington MSA. Astoundingly, INGs application states that the Savings Bank will establish one or more marketing offices in its assessment area or adjoining areas that will house phone lines dedicated to the Savings Banks call center, as well as computers with dedicated access to the Savings Banks transactional website. Emphasis added. INGs proposal does not even comply with the OCCs CIBC ruling, that assessment areas must include facilities offering dedicated access to an Internet banks website. ICP and the Delaware Community Reinvestment Action Council has submitted a timely comment to the OTS on INGs application; on December 29, the OTS informed ICP that it has asked ING questions based on the comment, and will grant ICP and DCRAC the requested hearing, once ING has answered.
Currently, these issues are being argued on a case-by-case basis. It would make sense for the regulators to amend the CRA regulation to address the issue of Internet banks assessment areas. Each regulator, however, has its own motives for ignoring this issue. The Fed, for example, seems happy to defer on the issue, or delegate to other agencies (as it did on Royal Bank of Canada - SFNB, see above); the Feds focus right now is quickly making regulations to allow banks to acquire insurance companies. The OTS and OCC are apparently concerned that Republicans in Congress, lead by Phil Gramm (R-TX), would attack any attempt to write regulations on this issue. Gramm publicly attacked OTS Director Seidman in the summer of 1999, after she gave a speech noting that CRA and assessment areas must keep up with industry changes. Congress and Congress alone can make policy, Gramm wrote in an open letter to Ms. Seidman. Gramm is wrong (the whole multi-decade history of federal administrative law proves him wrong) -- but regulators like the OCCs John Hawke are not eager to confront Senator Gramm. And so this important issue is left to be argued on a case by case basis, as has taken place since mid-1999 on the E*TRADE - Telebank application.
Telebanks evasion of CRA illustrates another regulatory blindspot. Not only does Telebank seek to limit its CRA assessment area to Arlington, Virginia -- it also claims that it should not be evaluated in terms of the role it plays in making credit available to low and moderate income consumers, but rather only under a wholesale CRA test. Telebanks website says clearly, click here for mortgages, and the consumer is taken to a Telebank mortgage page (Telebank also offers car loans, and, now, insurance). But Telebank claims that because the loans are closed by E-Loan, Telebank is not lending at all, and should be considered a wholesale bank, like Morgan Guaranty Trust, for example J.P. Morgan is wholesale because it hardly deals with the retail public at all. But Telebank is running TV ads directed at retail customers, saying, Deposit your money with us; click here to get a mortgage. This wholesale bank loophole should also be closed -- but see above. Also, existing holding companies with regional branch networks currently set up new Internet banking operations, soliciting deposits nationwide, without expanding their assessment areas. For example, Bank One in 1999 set up WingspanBank.com, using an existing First Chicago bank, without expanding its CRA assessment area beyond the states where Bank One has branches. More and more activities, including those that could put the FDIC insurance fund at risk, are begun without any formal review by regulators or the public. But, for the reasons explained above, the regulators are either uninterested in addressing this issue, or afraid to. And so, the issues are argued on a case by case basis, and will become increasingly prominent in the year 2000.
Washington items: The Financial Services Roundtable, which claims as members the top 100 financial services institutions in the U.S., last week reported the responses of 56 of its members, who claim to have made $2.2 billion in community development loans in 1998, along with $59.9 million in contributions to community development organizations. Throughout 1999, Sen. Phil Gramm (R-TX) claimed that CRA extortion / donations have become bigger than General Motors. Sixty million dollars doesnt cover GMs income for a day. A full year of hoopla (and perhaps another years hoopla to come), over $60 million dollars, nationwide, most of it the result of unilateral (and public relations-minded) decisions by banks.
Roundtable President Steve Bartlett said of the study, We deliberately didnt finish compiled it and release it while the debate [over financial reform] was going on. We didnt want to make a statement pro or con regarding reinvestment. This purported restraint by the Roundtable did not extend to fair lending: the Roundtable in November 1999 signed on to a letter urging the Federal Reserve to abandon its proposal to allow banks to monitor the race and gender of small business and consumer loan applicants, for fair lending purposes. The Roundtable letter claimed that [t]he data will be obtained by advocacy groups and the media and used to draw inaccurate conclusions regarding the fair lending performance of lenders. The above-reported Roundtable survey, which the Roundtable circulated to the media, is apparently a more accurate view.
On the fair lending front, it has now been reported that the Feds stealth settlement with the tiny ($45 million) Foxdale Bank, announced by vague Fed press release on Dec. 6, concerned Foxdales purchase of auto loans on which the initial lenders charged discriminatory prices. Strangely, the Fed uses a (correct) legal theory against a $45 million bank that it refused to equally apply to the $45 billion bank of Republic New York Corporation, which bought mortgage-backed securities based on high interest rate loans issued by subprime lenders like Delta Funding, even after Delta was deemed a predatory and discriminatory lender by New York State authorities. The Feds fair lending theory apparently rides on the size of the bank at issue -- or the Feds desire to approve mega-acquisitions like HSBC - Republic. This theory, too, bears watching in 2000...
Until next time, for or with more information, contact us.
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