Inner City Press Community Reinvestment Reporter

March 27 - May 22, 2000 (Archive #2 of 2000)

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May 22, 2000

   The maneuvering on predatory lending continues. There is little chance of passing legislation before the November elections (notwithstanding the House Banking Committee’s generalized hearing on the issue, set for this week). And so various politicians, politically appointees, and the Washington-based non-profit sector all try to link their names with the issue (while, in most cases, blowing kisses at the banks which are involved in questionable subprime lending). The week in review:

    First, a bit of “straight-CRA” and financial deregulation news. In New York, generally well-meaning Banking Superintendent Elizabeth McCaul gave a long speech about Internet banking -- and did not once mentioned the Community Reinvestment Act, and what duties banks without branches should have. Since the current CRA regulation, as narrowly read by the regulators, appears to limit a bank’s CRA duty to where it has branches or deposit-taking ATMs, the issue must be addressed. But the regulators, state and federal, appear to want to just give the banking charters out first...

    E*TRADE Bank, which fought to limit its CRA duty to Arlington Country, Virginia (where Telebank, which it acquired, was based), completed its acquisition of over 8,000 deposit-taking ATMs, with no public comment period and no announced change to its (limited) CRA plans.

    Back to the New York State Banking Department: this regulator recently awarded an entirely unmerited “Outstanding” CRA rating to North Fork Bank, which no long ago even the NYSBD found was underserving its communities outside of Suffolk County. That was before North Fork hired the NYSBD’s head of CRA. It is unclear what, if any, recusal process was implemented by the NYSBD for this CRA exam...

    The revolving door takes place on the federal level as well. Long-time Federal Reserve Bank of New York big-wig Chester Feldberg, involved in reviewing the Chase-Chemical and Citicorp-Travelers mergers, recently cashed out, being named by Barclays Plc as its new Americas Chairman. The FRBNY’s long-time general counsel’s already jumped to AIG.... The jump from the regulators to the regulateds seems to be becoming more and more attractive; too few “anti-revolving door” protections are in place...

May 15, 2000

    On May 10, the Federal Reserve Board and the FDIC released their proposed regulations implementing the “CRA Sunshine” provision of the Gramm-Leach-Bliley Act. ICP’s May 10 Report, below, provides analysis; here, we will review the industry’s reactions to date.

     The most “hype” reaction was by Bank of America, which held a carefully scripted press conference at the National Press Club in Washington on May 11. CEO Hugh McColl, claiming that his institution made $39 billion in “community development” loans in 1999, under the ten year, $350 billion pledge made during the NationsBank - BofA merger, said that "the CRA really has nothing to do with what we do... We do it because we want to do it, because we like doing it, and because we make money doing it.”

     Across town, Senator Gramm’s office issued a statement, about the CRA Sunshine regs: “What the staff is looking most closely for are provisions to ensure that people receive meaningful information about the activities of their local banks and community groups so that people can decide whether they are living up to their promises.” OK, then, a test case: since Bank of America’s May 11 “report” was so vague, and especially since much of the claimed lending is in Texas, is Senator Gramm going to demand more “meaningful information” from Bank of America and its subsidiaries (particularly the subprime lenders EquiCredit and NationsCredit), “so that people can decide whether they are living up to their promises”? We will follow this test case...

     The bank trade associations hemmed and hawed about the Sunshine rules. America’s Community Banker’s Charlotte Bahin said, “There is a lot under the surface that will have to be resolved... The broadness of the terms takes folks by surprise.” We love it when banks are referred to as (just) “folks.” The industry’s humanization campaign continues... The ABA’s Paul Smith said “we want to be sure our members can comply without fearing that they will find themselves in the wrong.” Perhaps banks and community groups can and will agree, that these regulations are... “void for vagueness.”

    Sadly, the industry’s stated desire to not be “in the wrong” was demonstrably absent at the HUD - Treasury Predatory Lending Forum held May 12 in lower Manhattan. As predicted (see Report dated May 12, below), the “Forum” was carefully scripted and controlled. The “Consumer Panel” consisted of primarily HUD’s own selected Task Force members asking each other questions and answering them; the other Consumer Panel members appear to be current or past HUD funded groups (one profusely thanked HUD’s for its assistance, and said, “let’s hold more of these forums”). Yes, let’s...

    One HUD panelists asked what “sanitizing” loans meant, and whether there wasn’t something “positive” Wall Street firms can do, other than simply stop doing business with predatory lenders. This is a uniquely “New Democrat” strategy -- ignore big business’ sins, just encourage them to make some unrelated, “positive” pronouncements. It’s a “win-win” (for business, which gets to continue its misdeeds, and for the New Democrats, who get to claim to be defending the public interest); only the victims (here, of predatory lenders) don’t win. But you know what? The victims of predatory lenders don’t vote much, either (the logic seems to be).

    Prior to the forum, Treasury Secretary Summers on May 10, speaking to reporters in San Francisco, sounded a conciliatory note to the industry, saying, “[w]hat we've found is that often the best way to stop usury is not to try to ban it, because then people go to get more illicit and separate lenders, loan sharks. I think we've found the better approach is to try to compete it away.... There's nothing wrong with subprime lending per se; indeed subprime lending can make a great contribution....”. This followed Summers’ May 8 speech, in which he proclaimed that "the rapid growth of sub-prime lending has provided a real service to many low-income Americans...”.

     Among the panelists invited by HUD and the Treasury Department was Keith Wofford of Moody’s Investor Service, who penned a recent report essentially giving the green light to further purchases of subprime mortgage-backed securities, without any additional caution or “due diligence.” Wofford wrote that “[t]he implications are potentially very different obviously for the originators than they are for the bonds. Sustained bad publicity is never good from the perspective of a shareholder, but that's not where the investors are." Translation? Don’t buy the shares of the Delta Fundings and First Alliances of the world -- but you can keep buying the bonds backed by their high interest rate loans, with few concerns. While Delta’s bonds have been placed on “watch,” according to Wofford, “[t]he question is whether the litigation is widespread enough against a particular originator that the number of loans in a particular pool that has been securitized might be affected," he said, adding that litigation is likely to impact the pools more so than legislation.

     This dismissive attitude to public outcry and legislation seems like an appropriate segue to a review what anti-CRA Senator Phil Gramm’s been up to of late. Since filing a fraud complaint against the U.S. Mint (for its marketing of the new “golden” dollar) with the FTC, Gramm has opposed the confirmation of a Mexican-American lawyer from El Paso to the 5th Circuit Court of Appeals; on May 8 in Chicago, Gramm spoke out in favor of further deregulation of the swaps market, saying: “The other part of the glue that will hold it together is a real effort at deregulation.... We're going to have to get down to the p's and q's on margins and taxes and on regulatory burden. These are complicated issues, and just a gentleman's agreement won't work when you're writing law... There's got to be something in this bill for everybody in terms of the benefits.'' Something for “everyone” -- everyone, that is, that wants to trade futures based on individual stocks, and swaps without any oversight.

Friday, May 12, 2000

     Today in Battery Park City in lower Manhattan, HUD and the Treasury Department are holding the third of their five planned “Predatory Lending Joint Task Force” fora. Treasury Secretary Larry Summers, HUD’s Andrew Cuomo and Bill Apgar, representatives from Fannie Mae, the National Association of Mortgage Brokers and the National Home Equity Mortgage Association, among others, will fly up to New York, take taxis or government cars to lower Manhattan, and make presentations decrying predatory lending (which they will not define) and predatory lenders (whom they will not name).

      It will begin at 11:30 a.m., with a presentation by Wall Street’s Senator, Chuck Schumer, who was instrumental in passing the financial deregulation bill of 1999, despite that bill’s anti-Community Reinvestment Act provisions. Secretaries Cuomo and Summers will speak; after lunch there will be a panel headed by an executive vice president from Chase Manhattan Mortgage (which has its own high-interest rate lending unit). Four hours into the forum, there will be a “Consumer Panel,” with half of its speakers having flown down from Washington. One half hour is “Reserved Times for Additional Speakers.”

     When this Task Force was announced in late March, it was said that it would make recommendations to Congress to root out the “scourge” of predatory lending. Less than a month afterwards, the Task Force was expanded, to include representatives from all of the lenders’ trade associations, including NHEMA, which has continued to oppose the North Carolina anti-predatory lending law, even after its passage.

    At a meeting in HUD’s cafeteria in Washington, the mission of the Task Force was amended: “you’re not supposed to reach consensus, only do fact finding,” attendees were told. However, up until half an hour before the Task Force’s second forum in Los Angeles, Treasury Department representatives were opposing the inclusion of particular speakers, or seeking to edit what they would say. “Fact finding” does not appear to be the goal of the New York forum. In verifying the correct plural of “forum” (we’re going with “fora”), ICP has concluded that this is not a “forum” at all. Merriam Webster Collegiate Dictionary provides the following primary definition:

fo*rum (noun)... First appeared 15th Century

1 a : the marketplace or public place of an ancient Roman city forming the center of judicial and public business

b : a public meeting place for open discussion

c : a medium (as a newspaper) of open discussion or expression of ideas

      Both (b) and (c) emphasize “open discussion” -- but, here, the line-up goes Schumer, Cuomo, Summers; some carefully selected / pre-screened “case studies” from noon to one; an industry panel; a half-inside-the-Beltway consumer panel, and that always unpredictable half-hour of “reserved time for additional speakers” at the end. Perhaps it’s this final, “reserved” half hour that’s the “forum”...

    Many community groups have criticized the Federal Reserve Board for how it runs its public meeting on mega-mergers (for example, in New York, Chase-Chemical in 1995, and Citicorp-Travelers in 1998).  Those public meetings, however, were nowhere near as controlled and scripted as these HUD / Treasury fora. Any organization that asked the Fed for time to testify, was given time. The Fed did not ask to hear and edit testimony in advance, nor bring its own witnesses from Washington to New York to present evidence to themselves. Nor did members of the public need to “RSVP” to attend the Fed’s public meetings.

     We are told that the reason for HUD’s and the Treasury Department’s attempt to retain tight control over these fora is these agencies’ deep opposition to predatory lending, their concern that if the “wrong” victims attempt to speak, the issue will be discredited. But not only do public hearings (and fact-finding in general) always present this “danger” (in this controlling mindset) -- if HUD and the Treasury Department did not set themselves up as selecting and pre-screening witnesses, they would hardly be to blame if some witnesses were stronger, more articulate, or more credible than others.

    A concern remains (see previous Reports, esp. May 1, below) that one reason for the absurdly tightly controlled nature of these fora is that the “wrong” (i.e., biggest) lenders not be named. “Mom n’ Pop” subprime lenders are easy to attack, without repercussions (including to campaign fundraising); the larger subprime players, like Wells Fargo, Deutsche Bank, Citigroup, HSBC, Chase Manhattan, etc. are not quite the right targets for politicians or politician-appointed Secretaries, of either party. One questions the process by which Chase Manhattan, for example, was designated as a lead presenter. One questions as well why the HUD “outreachers” emphasized that any victims of predatory lending who wished to speak would have to be screened by them, and then by Treasury Department representatives.

   If and when there are answers to these questions, they will be reported in this space. The two final "fora" will be held in Baltimore (May 19) and Chicago (May 25).  For now, below is a summary of the written comments ICP has provided to HUD and its Task Force. And the beat goes on...

    One unrelated development of May 11: FDIC Chairman Donna Tanoue’s recent in-context-anti-CRA statements (see below: San Francisco speech praising Sen. Gramm’s “CRA Sunshine;” N.Y. speech essentially apologizing for not giving out even more “Outstanding” CRA ratings) now have an explanation: her term expires October 3, 2000. President Clinton has submitted her renomination to the Senate Banking Committee; on May 11, Sen. Gramm’s spokeswoman told Bloomberg that the Committee will not be acting on it, apparently in the hope that George W. Bush will win the November election. More in this in our next Report, Monday, May 15....

Written Submission to the HUD / Treasury Department
Predatory Lending Joint Task Force

May 11-12, 2000

  ... We understand that the Task Force’s focus in this New York forum is on “Funding Sources for Predatory Lending.” This is an important issue, and we hope that the brief presentation below, and the attachments hereto, will prove useful to, and be asked on by, HUD and the Treasury Department.

    At the outset, we wish to emphasize that merely providing that banks not receive CRA credit for involvement in predatory loans, one possible recommendation of which we have heard mention, is not enough. None of the companies discussed in this submission sought CRA credit for their activities -- they were in it purely “for the money.” What is required is an extension of fair lending and other consumer protection standards to the enablers of the underlying loans: the investment banks, trustees and custodians, and end-purchasers.

    The explosion in recent years of subprime lending (some of it predatory), reflected by HMDA data and, for home equity and consumer lending, by industry publications, has only been possible due to the involvement of investment banks and “end-purchasers” of securities secured by the subprime loans. We urge HUD and the Treasury Department to make recommendations to Congress on this issue, and to initiate enforcement actions, including on the companies discussed below.

  Since this forum is in New York, and since HUD itself sued the company for discrimination earlier this year, we will focus on Long Island-based Delta Funding. As you know, in 1999, Delta was sued for discrimination by the NYS Attorney General and the NYS Banking Department; in 2000, it had been sued by HUD, the FTC and the Department of Justice. Clearly, there has been credible evidence of discrimination and predatory lending at Delta.

     As reported in the New York Times, and as documented to the Federal Reserve Board, Bankers Trust, now Deutsche Bank, has been the “trustee and custodian” for Delta’s loan pools. During the time that this issue was being raised, in opposition to Deutsche Bank’s applications to acquire Bankers Trust, BT stepped back. On the next Delta securitization, Norwest Bank Minnesota, N.A., a national bank regulated by the Treasury Department’s Office of the Comptroller of the Currency, became the custodian for Delta’s loans. Delta’s loan pools throughout this time period were underwritten by Lehman Brothers.   We have documented to the Federal Reserve Board that Republic National Bank of New York, now owned by HSBC, continued to purchase Delta’s mortgage back securities, even after Delta was being sued by government agencies for discrimination. Delta’s activities, during the time that HUD has alleged Delta engaged in discrimination, were only made possible by the assistance of Bankers Trust / Deutsche Bank, Norwest Bank Minnesota, N.A., Republic / HSBC, and Lehman Brothers.

    While Delta has settled some of the various discrimination lawsuits against it, an issue that needs to be acted on is that if enforcement is directly only at the underlying, generally non-bank originators, these relatively small players can simply declare bankruptcy, and be replaced by other players. The lynch pin of the industry, and of the problem, are the investment banks, the trustees and custodians, and the institutional end-purchasers of the subprime mortgage backed securities.

   We want to emphasize that even when these issues have been raised and documented to the federal regulators, nothing has been done, and the companies have disclaimed any responsibility to “screen” the loans and the lenders they are involved with for predatory practices. Republic (now HSBC), the purchaser of Delta’s loans, told the Fed that it relied on the representations of Lehman Brothers, who sold the pools of loans. Lehman Brothers told the Office of Thrift Supervision that it relied on the representations of Delta, that it was not violating the law (a representation called into question by, for example, HUD’s own discrimination charge against Delta).

    Most recently, Wells Fargo, which owns Norwest Bank Minnesota, N.A., has told the Federal Reserve Board, in a response to ICP’s comments, that:

“while not indifferent to the lending practices of the originators, Norwest Bank Minnesota, N.A. has no role in establishing their business practices, is unaware of any of the specific circumstances underlying the loans which are contributed to the pools and only becomes aware of lending concerns, if any, substantially after the fact.”

     See April 28, 2000 letter of Wells Fargo General Counsel Stanley Stroup

     Wells Fargo’s response on this issue misses the point. Perhaps, for the first pool of loans in which it participated, with Delta and also First Alliance, it was “unaware” of issues surrounding these lenders. But Well’s Norwest Bank Minnesota, N.A. continued to work with Delta after it was being sued for discrimination -- in fact, it stepped in for Bankers Trust, when the spotlight was being put on BT. Wells Fargo’s and its national bank’s responses on this issue are insufficient; HUD and Treasury’s OCC should take action.

    Another New York-related example of “Funding Sources for Predatory Lending” involves the three Japanese banks currently applying to merge and form the world’s largest financial institution: Fuji Bank, Dai-Ichi Kangyo Bank (DKB) and Industrial Bank of Japan (IBJ). Each owns one or more banks in New York, subject to the Community Reinvestment Act. Each has funded questionable subprime lenders, as documented in our April 27, 2000 comment to the Federal Reserve Board. DKB owns a controlling stake in CIT Consumer Finance Group, a major nationwide subprime lender. IBJ has provided warehouse loans to the questionable subprime lender PinnFund USA. Fuji has provided loans to Ameriquest, and others. The roster of funders and enablers of questionable subprime lenders is long, and includes some of the largest financial institutions in the United States, and in the world. BankAmerica Securities, Chase Manhattan Securities and others are major underwriters of subprime loan pools; Chase has also purchased Delta’s loans. Bank of America owns the large subprime lenders EquiCredit and NationsCredit. KeyCorp owns Champion Mortgage; First Union owns The Money Store, National City Corp owns Altegra, Wells Fargo owns Norwest Financial, Directors Acceptance and Norwest Home Improvement, Inc..

In order to ground this presentation in objective, publicly-available HMDA data, here is a summary analysis of the Wells Fargo conglomerate:  [visit our Wells Fargo Watch for this]....

    To further ground this presentation in objective, publicly-available HMDA data, here is a summary analysis of the lending of CIT Consumer Finance Group, controlled by Dai-Ichi Kangyo Bank [visit our "Mizuho" Watch for this]....

   We urge HUD and the Treasury Department, prior to issuing their recommendations, to obtain from the Federal Reserve Board the complete files on the predatory lending issues raised to the Fed in the past two years regarding Bankers Trust / Deutsche Bank, Republic / HSBC, Wells Fargo, and the three Japanese banks currently applying to form “Mizuho.” Based on these four presentations of the above-named banks as “funding sources for predatory lending,” HUD and Treasury should propose regulation and standards for investment banks’, trustees’ and custodians’, and end-purchasers’ involvement in questionable subprime lending. Appropriate referrals should also be made to the Department of Justice for much-need fair lending enforcement actions.

   We wish to re-emphasize that merely providing that banks not receive CRA credit for involvement in predatory loans, how ever defined, is not enough. None of the above-named companies sought CRA credit for their activities -- they were in it purely “for the money.” What is required is an extension of fair lending and other consumer protection standards to the enablers of the underlying loans: the investment banks, trustees and custodians, and end-purchasers.

May 1, 2000

    From the arcane to the surreal: the Federal Register of April 24 contained the Federal Reserve Board’s “Semiannual Regulatory Agenda.” In it, the Fed mentions its duty to promulgate regulations for the CRA portions of the Gramm-Leach Bliley Act. As to the “Sunshine” provisions, the Fed says that it will act by July 1, 2000. Which seems strange, because the requirements “go into effect” on May 12, 2000. The Fed rushed to put out a regulation allow cross-industry mergers like Schwab - U.S. Trust (which is on the Fed’s agenda for action on May 1), but has delayed on the CRA portions of the deregulation law, a delay that may well prejudice the community advocacy groups at which Senator Gramm directed his reporting requirement. Interestingly, the FDIC says it will take action on “sunshine” regulations in May; the Office of Thrift Supervision’s agenda says that action was to be taken in April...

    This lack of coordination between the agencies may, among other things, drive Senator Gramm crazy. Not that he needs help: beyond the Federal Trade Commission complaint he recently filed against the U.S. Mint, for calling the gold appearing new one dollar coin, “gold,” the Senator’s more recently initiatives are to assert jurisdiction over mass transit, and to demand that the International Monetary Fund require “free trade policies” in exchange for loans to less developed nations. Since the IMF has been making these demands for years, Sen. Gramm’s drum beating is a little late (perhaps a reaction to the anti-IMF and World Bank demonstrations in Washington of April 16-17)...

     Further on the increasingly irrelevant arcania of CRA regulation: the Federal Register of April 28 had the agencies’ “new” CRA Q&A, which despite its length sidesteps the important CRA issues of the day, like predatory lending by bank affiliates, bank holding companies’ underwriting of predatory loans, how to assess Internet and other “non-traditional” banks, etc..

    The real action, these days, is around predatory lending. In our April 27 mid-week Report, below, we noted HUD’s expansion of its anti-predatory lending task force to include representatives of most industry trade associations, and predicted this will blunt the import of whatever proposal the much-hyped task force comes up with. On April 28, HUD contacted ICP, noting “the strong views” expressed in this Report, and asking to essentially pre-screen witnesses before they are allowed to testify at the task force’s hearings. ICP’s view is that you either do staged (pre-screened) hearing in Washington, or, if you go out to six cities to hold hearings, they are open, anyone can sign up and testify. The concern is that the (now industry top-heavy) task force will concentrate on witnesses victimized by small, little-known companies, rather than the larger banks and their affiliates. This concerns is not that “strong” a view: the hardly extreme Atlanta Journal Constitution of April 27 reported that “[r]egulating the subprime market issue is a ticklish political issue because banks like Citigroup, Bank of America and First Union all own subprime lending affiliates. The banks maintain a powerful political lobby, which Cuomo was careful not to offend. ‘This is an industry that prides itself in its integrity,’ Cuomo said. ‘No good company would knowingly do business with any of these bad actors.’”

    Let’s analyze: the last quoted statement implies first that none of the banks are “bad actors,” and second that they wouldn’t “do business with any of these [non-bank affiliated] bad actors.” Compare this to the written response ICP received April 28 from Wells Fargo, whose attempt to acquire the largest bank in Alaska ICP and other groups have challenged, including because Wells’ Norwest Bank Minnesota, N.A. does business with subprime lenders like First Alliance and Delta Funding (which has been sued for discrimination by government agencies for more than a year now).

    Wells Fargo’s general counsel, Stanley Stroup, acknowledges that Wells does business with First Alliance and Delta, but writes that “while not indifferent to the lending practices of the originators, Norwest Bank Minnesota, N.A.... only becomes aware of lending concerns, if any, substantially after the fact.” That might have been true of Wells’ first transactions with First Alliance and Delta -- but even after these companies were being sued for discrimination (beginning, for Delta, in 1999), Wells continues to do business with them.

     Ironically, HUD itself has sued Delta for discrimination. So this must be one of the “bad actors” alluded to in the statement quoted above. Wells Fargo does and continues to do business with this and other “bad actors,” and for that reason is among the top three foreclosers on subprime loans in Atlanta (where the last HUD forum was held) and elsewhere. We don’t need to editorialize here, the Atlanta Journal Constitution of 4/27 got to the heart of the matter: “banks like Citigroup, Bank of America and First Union all own subprime lending affiliates. The banks maintain a powerful political lobby, which Cuomo was careful not to offend.”

    HUD’s New York “forum” (perhaps that word was selected to distinguish it from a hearing, where anyone can testify) will be held May 12. Another hearing is being set up for Baltimore, where Mayor Martin O’Malley finally hired a city community reinvestment officer, one of his campaign promises when elected. Baltimore has two representatives on the HUD task force; the community representative was quoted by the Baltimore Sun of April 27 as saying, "[i]t has nothing to do with them being black." Even HUD makes its predatory lending arguments in terms of high rates and fees being targeted at people of color. As noted in the mid-week Report below, the usefulness of this task force remains to be seen.

    ...We’ll close this week with a sample (and pretty witty) letter to the editor we’ve received, about our April 10, 2000 analysis of Larry Lindsey’s call to apathy. In the spirit of “inter-activity,” reader are free to respond directly, or via ICP:

[Editor's update, 4/24/00, 7 p.m.: Due to the volume of direct responses and/or the letter writer's continuing position in "the industry," the writer's name and e-mail, as well as the witicism (it was quite funny, really) are being removed. Ignore the suggestion above to "respond directly;" ICP is still open for responses].

Subj: Lindsey, Bush, & Other Atrocities
Date: 4/18/00 12:38:06 PM EST
From: [REDACTED 4/24/00, 7:00 PM EST]
To: [editor [at]]

Dear ICP:

First, let me say I've been reading you regularly for a long time and am grateful for everything you do... I worked in the mortgage industry for seven years, and was even on the CRA committee of one bank I worked for. If you need to be reminded that you cannot underestimate bankers, let me remind you. [JOKE REDACTED 4/24/00, 7:00 PM EST].

Anyway, having snorted hot coffee through my nose last week over your report on Larry Lindsay's piece in NeighborWorks, I've just now gotten around to downloading and reading it.... I thought I might do an analytical piece on [Bush’s] new housing plan, and continuing your fine work in exposing some of the lies, distortions, and smear campaigning in Lindsey's article.

So here's the point: do you know who this finance provider is he's ragging about, unnamed, which provides the atrocious 100 bps MI premium and makes people turn leftist insurgent? (Okay, I'm paraphrasing here, but his description doesn't make any sense either.) I really really want to check his facts on this one.... Any information you can point me to would be highly appreciated.


[REDACTED 4/24/00, 7:00 PM EST]

   We're less happy with the letter with the joke redacted ("it was fun while it lasted"), but always aim to be accomodative.

April 17, 2000

Will Banks Shake Off the Hook of Predatory Lending Scrutiny?
The Wells Fargo - Norwest Example

    The long-overdue uproar about predatory lending continues, in Washington and elsewhere. In the last week, Senators Sarbanes and Schumer, and Rep. LaFalce, have released proposed legislation on the issue. Treasury Secretary Larry Summers has decided to co-chair, with HUD Secretary Cuomo, a task force on the issue. And, on April 14 in Syracuse, New York, Federal Reserve Governor Edward Gramlich gave a speech on the topic, analyzed in detail below.

    A danger in this seeming consensus that (undefined) “predatory lending is bad,” in the same vague way that motherhood and apple pie are good, is that the high interest rate lenders with more political power, more campaign contributions to give, better and more burnished reputations, will be let off the hook. The industry publication National Mortgage News reports that fully eight of the largest subprime lenders in the United States are banks or bank-affiliates. But consider Fed Governor Gramlich’s statement on April 14:

“HUD compiles an annual list of the subprime lenders that report dataunder the Home Mortgage Disclosure Act (HMDA). For 1998, this list showed 239 subprime lenders, of which 168 were regulated only by the Federal Trade Commission (FTC). Thirty-six of these institutions were banks or subsidiaries of banks and savings and loans that were regulated, and the remaining thirty-five were banks or subsidiaries of bank holding companies, where the holding company was regulated but the subsidiary operated with some freedom from the holding company and its regulator.”

    The Fed seems to be saying that since 168 of the 239 companies that HUD deemed to “specialize” in subprime loans are not affiliated with banks or bank holding companies, there’s little the Fed could or should be doing. Gov. Gramlich’s presentation is misleading, however. The very HUD study he cites (the full title is 1998 HMDA Highlights, by Randall M. Scheessele, U.S. Department of Housing and Urban Development, Housing Finance Working Paper Series HF-009, 1999) makes clear that the list of 239 lenders includes only those HMDA-reporters which “specialize” (or are limited to) subprime lending. The report, in the introduction to the list Gov. Gramlich refers to, says that “since HMDA does not identify... subprime loans, we were unable to separate out the... subprime loans of lenders that do not specialize in those loans. For example, First Union [and] Norwest have been active in the subprime market.”

    First Union is in such weakened state -- its shares have fallen 38% in the past year, and many analysts expect it to be taken over in the coming year -- that we will focus on Norwest, which acquired Wells Fargo and took its name in late 1998 (too late, apparently, for the new name to appear in the HUD report). The loophole here (and the omission in Gov. Gramlich’s presentation) is that Norwest Mortgage, for example, has a subprime business unit called Directors Acceptance, which National Mortgage News lists as one of the largest retail subprime lenders in the country. But its loans, its HMDA data, are reported mixed in with Norwest Mortgage’s other HMDA data. Norwest Mortgage doesn’t (only) specialize in subprime loans, and so is not including in HUD’s list of 239 subprime lenders. The Federal Reserve, since it regulates the bank holding company Wells Fargo, has jurisdiction over Norwest Mortgage and Directors Acceptance. The Fed’s jurisdiction over (and responsibility for) that part of subprime lending that is predatory is larger than Gov. Gramlich present it. More on Wells/Norwest further below in this week’s report.

     Gov. Gramlich’s quotation, above, ends by discussing “the remaining thirty-five were banks or subsidiaries of bank holding companies, where the holding company was regulated but the subsidiary operated with some freedom from the holding company and its regulator.” What Gov. Gramlich doesn’t say is that this “freedom” from the regulators is one that the Fed itself has DECIDED to give. The Fed can conduct examinations, including fair lending examinations, of any bank holding company subsidiary, including subprime lenders. In fact, the General Accounting Office, in November 1999 released a report, Large Bank Mergers: Fair Lending Review Could Be Enhanced With Better Coordination (GGD-00-16, Nov. 3, 1999), which urged the Fed to begin doing such exams, of BHC-subsidiary subprime lenders.

     Fed Chairman Greenspan signed a September 20, 1999 letter to the GAO expressing the Fed disagreement with the GAO Report’s recommendation (“that the Board monitor the lending activities of nonbank mortgage subsidiaries of bank holding companies and reconsider [its] policy with respect to routine examination”). Chairman Greenspan stated that “[t]he matter is one that we recently studied at length.” The GAO report, at 14, stated that “[a]ccording to FRB officials, a long-standing FRB policy of not routinely conducting consumer compliance examinations of nonbank subsidiaries was formally adopted in January 1998.” The Fed’s decision not to examine BHC subsidiaries has let off the hook not only the 35 companies (on the HUD list) that Gov. Gramlich referred to, but also the subprime PARTS of other BHC-subsidiary lenders, like Norwest Mortgage / Directors Acceptance. This is also true of the subprime lender Chase Home Finance, which mixes the data on its high interest rate loans in with the data of the larger Chase Manhattan Mortgage Co., which is not a “pure” subprime lender, and therefore does not show up on the HUD list.

     But, again in light of the Fed’s statements that there is little it can or could do about that part of subprime lender that is predatory, let’s further consider Wells Fargo / Norwest (ICP has been conducting this study, in collaboration with Alaska groups,  including AkPIRG, in connection with Wells Fargo’s proposal to buy the largest bank in that state: click here to view the full challenge, filed April 17).

     Wells Fargo, beyond its banks, and beyond Directors Acceptance / Norwest Mortgage, owns at least three other large subprime lending subsidiaries: Norwest Financial, Island Finance, Norwest Home Improvement Inc.. Furthermore, Norwest Bank Minnesota, NA, partners with many subprime lenders, including the recently bankrupted First Alliance Mortgage (the subject of the New York Times expose of March 15, 2000) and Delta Funding (which was sued for racial discrimination by the New York State Attorney General in 1999, and by HUD, DOJ and the FTC in March, 2000).

   Consider the record of Norwest Home Improvement, Inc. (“NHI”), a Wells Fargo-owned subprime lender based in Alabama. The 1998 HMDA data reported by this entity, which lends are higher than normal interest rates, shows a targeting of communities of color with high cost loans.

    In the Birmingham, Alabama Metropolitan Statistical Area (“MSA”) in 1998, this Wells Fargo subprime lender made 111 home improvement loans to African Americans, and fewer such loans (77) to whites. This is to be compared with the aggregate industry’s home improvement lending in this MSA in 1998: 466 loans to African Americans, and 1733 loans to whites. NHI, a high interest rate subsidiary of Wells Fargo, targets minorities for high interest rate credit.

   In the Tuscaloosa, AL MSA in 1998, NHI made 13 home improvement loans to African Americans, and 11 to whites. Compare these proportions to the aggregate industry’s home improvement lending in this MSA in 1998: 62 loans to African Americans, and 190 loans to whites. NHI, a high interest rate subsidiary of Wells Fargo, targets minorities for high interest rate credit.

   In the Philadelphia, PA MSA in 1998, NHI made 27 home improvement loans to African Americans, six to Latinos, and 14 to whites. Compare these proportions to the aggregate industry’s home improvement lending in this MSA in 1998: 2,032 loans to African Americans, 531 loans to Latinos, and fully 17,484 loans to whites. NHI, a high interest rate subsidiary of Wells Fargo, clearly targets minorities for high interest rate credit.

   This is perhaps most clearly demonstrated by comparing the lending patterns of this Wells Fargo high interest rate lender, NHI (see supra) with Wells Fargo’s (mostly) normal interest rate lender, Norwest Mortgage. In the Philadelphia MSA in 1998, Norwest Mortgage (“NM”) made 106 conventional home purchase loans to African Americans -- versus fully 2,224 such loans to whites. Compare this 21-to-1 white to Black NM ratio to the subprime NHI’s 0.52-to-1 white to Black lending ratio. Wells Fargo is forty times more likely to lend at high interest rates to African Americans than to whites, in the same MSA.

   Another example: in the above-analyzed Birmingham, AL MSA (where Wells Fargo’s subprime lender NHI made 111 loans to African Americans and 77 to whites), Wells Fargo’s normal interest rate lender, NM, made 50 loans to African Americans and 156 loans to whites. Compare this 3.12-to-1 white to Black NM ratio to the subprime NHI’s 0.69-to-1 white to Black lending ratio. In this MSA, Wells Fargo is over four-and-a-half times more likely to lend at high interest rates to African Americans than to whites, in the same MSA. NHI, a high interest rate subsidiary of Wells Fargo, clearly targets minorities for high interest rate credit.

    Wells Fargo’s involvement in predatory lending is not confined to its retail lenders, Norwest Financial, NHI and Directors Acceptance -- it extends to formal corporate relationships with some of the worst (and most sued) predatory lenders, from Delta Funding to First Alliance. Norwest Bank Minnesota, N.A. is listed, in SEC filings, as having a relationship with Delta Funding Home Equity Loan Trusts 99-2 and 99-3 -- by the time of these issuances (and Wells Fargo decisions to participate), not only had the New York Times run a detailed account of problems, including predatory pricing and apparent discrimination, at Delta -- the NYS Attorney General had openly accused Delta of race discrimination, in violation of the federal Equal Credit Opportunity Act. See, e.g., Bureau of National Affairs, June 24, 1999: “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 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).

    See also, “U.S. Cites Abuses by Subprime Lender Delta Funding,” Reuters newswire, March 30, 2000, quoting the Director of the FTC’s Bureau of Consumer Protection that “Delta targeted these low income homeowners for high monthly payments, turning the American dream of homeownership into a nightmare,” and reporting that the Justice Department “alleged in the federal suit that the company had deliberately charged black women more for loans than similarly situated white men.”

   Despite all this, Norwest Bank Minnesota N.A. continued, and continues, to do business with Delta, and to make money off these predatory (and, according to the NYS Attorney General, discriminatory) loans.

    This is not an isolated occurrence at Wells / Norwest. Norwest Bank Minnesota, N.A. is listed in SEC filings are doing business with First Alliance (the subject of the New York Times’ March 15, 2000 expose), in connection with (at least) First Alliance Mortgage Loan Trusts 99-1, 99-2, 99-3, and 99-4. We direct the FRB to the detailed description of First Alliance’s predatory practices, as well as of the litigation, including by state attorneys general, that was pending against First Alliance at the time(s) Wells / Norwest decided to participate in, and make money from, these loans.

     Wells Fargo, the parent of all these companies, is regulated by the Federal Reserve Board -- the same Fed that is now claiming, in speeches to the National Association of Mortgage Brokers on April 10, and in Syracuse on April 14, that there is very little the Fed can or could do about predatory lending. The Fed’s to-date evasive approach, and the ease with which the largest banks in the country, including Wells Fargo, Chase, Citigroup, First Union and Bank America, are placing themselves beyond the scrutiny on predatory lending, call into question how meaningful the reforms that may grow from the current wave of concern will be.

    Hers's a piece of positive anti-predatory lending news: students at the University of Illinois at Urbana-Champaign recently picketed a pay day lender, “Campus Cash,” that set up by the college, offering loans at 469% interest. The school newspaper, the Daily Illini, editorialized against the lender; students passed out leaflets in front of the storefront, and soon it closed down. According to Larry Lindsey (see above), the protesters must be “shakedown artists,” “uninterested in community development,” etc.. Choose your path at the crossroads...

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April 3, 2000

   Contradictions infuse the federal agencies’ statements and actions on community reinvestment. On March 21, 2000, Comptroller of the Currency John Hawke expressed concern about predatory lending, and about the lack of bank branches charging regular interest rates in low income areas. Eight days later, on March 29, his agency the OCC released its monthly list of CRA examinations, for 42 banks. Not a single bank was awarded a less than satisfactory CRA rating. As previously noted, talk is cheap... 

    The Office of Thrift Supervision on March 28 approved another saving bank charter for an insurance company, this time Kansas City Life Insurance Company, whose thrift will offer residential mortgages, home equity and auto loans, and credit cards, through direct mail, telemarketing, and the Internet. But the OTS will apparently limit CRA scrutiny of the thrift to Kansas City. The agencies are backsliding again. When the OTS approved State Farm’s savings bank in 1999, the agency made much of the fact that it would be looking at State Farm Bank’s CRA performance not only in its headquarters city (Bloomington, Illinois), but also where it marketed it products (initially, Illinois, Missouri and Arizona). The OTS even said that the bank’s CRA assessment area would be expanded as its offerings expanded.

    Well, on March 29, State Farm put out a press release stating that “State Farm Bank is now Internet- and telephone-accessible countrywide. Anyone in the United States can use the Internet to open a State Farm Bank deposit account... State Farm Bank is now also accessible countrywide via its 24-hour a day, seven days a week toll-free phone number... at which home mortgages are available in addition to the bank’s deposit products.... An ATM card is currently available countrywide and credit and debit cards will be added later.” There’s been no mention of any expansion of State Farm’s CRA assessment area or program. ICP has now formally challenged this to the OTS; we’ll see.

    Rather than enforcing CRA, the regulators are preparing to start regulating and collecting information on grassroots community groups. At the Federal Reserve’s Consumer Advisory Committee meeting of March 30, Governor Gramlich proposed that the Fed’s regulations implementing Sen. Gramm’s “CRA Sunshine” provision focus on requiring community groups to submit “audited financial statements” to the bank regulators. Some attendees pointed out that smaller non-profits do not currently pay for an audit, and that such a requirement would be a burden -- ICP adds that it would be an unconstitutional burden on the First Amendment petitioning-for-a-redress-of-grievance process. Sen. Gramm’s spokeswoman implied that overall financial statements, audited or not, would not be enough: “we are expecting a detailed account of... how that money was used.”

   Not yet addressed is the fact that, by its terms, the “Sunshine provision” does not only apply to community groups, but to any “non-governmental” entity which discusses CRA, and receives more than $10,000 from a bank. Unless the Fed ignores the language of the provision, there are a number of bank consulting firms, accountants and law firms which fall into the sunshine requirement. An example:

   Earlier this month, ICP filed a comment opposing the first conglomerate securities-banking merger under the Gramm-Leach-Bliley Act, Charles Schwab Corporation’s application to acquire U.S. Trust and its six banks. On March 28, ICP received from Schwab’s law firm an 11-page purported response to the protest. Presumably, the law firm was paid to make this response; it also seems obvious that the firm “discussed CRA” with Schwab and U.S. Trust. As written, the sunshine provision would appear to require not only a disclosure of the payment, but also “how that money is used” (the quote is from Sen. Gramm’s spokeswoman, see above). Will the law firm create a separate account to track the subsequent use of CRA-related money? What’s good for the goose -- is good for the gander...

    The Fed’s disdain for the CRA is exemplified by its regulation to date of U.S. Trust’s lead bank, United States Trust Company of New York (“USTCNY”). The Fed has declared this entity a “wholesale bank,” having “found” that it does not do business with the general public. But USTCNY’s 1999 Loan Application Register shows that the bank received and processed over 750 applications for mortgage loans. How is this “not doing business with the public?” Significantly, while over 340 of the mortgage applications were from the New York City Metropolitan Statistical Area, not a single one was from Bronx County, the lowest income, most predominantly minority county in New York, with a population of over 1 million people. Developing...

   In predatory lending news, DOJ, the FTC and HUD finally sued and settled with New York-based Delta Funding. As Delta disclosed in its prospectus for its 99-3 pool of high interest rate loans, “In or about August 1999, the New York Attorney General filed a lawsuit against [Delta] alleging violation of... the Equal Credit Opportunity Act” and New York State’s anti-discrimination law. “In September 1999, [Delta] and the NYAG settled the lawsuit” -- for $12 million. Delta went on to state, in this SEC filing, that it “contemplate[d] the DOJ joining this global settlement.” Well, six months later, the DOJ HAS sued and settled with Delta, without imposing “any further financial penalties.” Delta operates in 27 states, through a network of 1,500 brokers and its Fidelity Mortgage retail offices. Twelve million dollars -- was getting off cheap....

    HUD on March 30 announced that it is forming a “National Task Force on Predatory Lending,” which it said will hold four public hearings in the next eight weeks, and then issue recommendations. Sen. Barbara Mikulski (D-Md.) pointed out that HUD itself does not have clean hands. “HUD has contributed to the destruction of neighborhoods. FHA was part of what happened in flipping” (repeated refinancing with high points and fees). Mikulski stated that 50% of the FHA homes in Baltimore are in default, and contended that some of those were caused by flipping. We’ll see -- the first public hearing will be in Baltimore.

    In other political news, moderate Republican Jim Leach of Iowa, required to step down as House Banking Committee Chairman due to the three term-limit his party imposed after 1994, has been counting on moving over to chair the International Relations committee. But according to Bob Novak (4/2), the further right wing (and more anti-CRA) Rep. Doug Bereuter of Nebraska is angling to jump over Leach and chair International Relations.... Last week’s rumors that Sen. Gramm (R-TX) would retired from the Senate to head the Texas A&M University System have been denied by the Senator and his staff. His spokesman said, “There’s only one job in life he’d like to have better [than Senator]: athletic director at Texas A&M. There’s not an opening, so he’s staying put.” Go, Aggies!.... Down at the San Antonio Chamber of Commerce on March 27, Gramm vowed to help secure federal money for a light-rail plan, if voters approve it on May 6. Gramm’s wife Wendy last month was named chairman of the “Texas Public Policy Foundation,” which opposes the light rail plan. Gramm claimed not to have read the Foundation’s report opposing the plan. Public policy... takes a back seat to pork, even for this “dismantle the federal government” Republican....

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

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