April 1 - Sept. 10, 2001 (Archive #2 of 2001)
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September 10, 2001
This week: Washington Mutual's lending pledge includes subprime; Citigroup's August 30 memo was meant to "get out in front" of the North Carolina Attorney General's enforcement action, announced on September 6; and goodbye to Senator Phil Gramm.
Washington Mutual issued a press release on September 5 announcing a $375 billion lending commitment in connection with its proposal to acquire Dime Savings Bank. It is certainly appropriate that Washington Mutual expand on the lending commitment it announced in 1998, given that since then WaMu has expanded into Texas (Bank United), has bought the mortgage operations of Fleet, PNC and of the subprime lender Long Beach, and now proposes to acquire Dime. But--
ICP has made both Dime and WaMu aware of its concerns about WaMu's subprime lending (and to a lesser degree, Dime's subprime lending, though North American Mortgage Co.). Especially since WaMu would be counting its subprime loans toward the $375 billion commitment, it is imperative that sufficiently detailed consumer protection safeguards apply to WaMu's subprime lending. ICP had encouraged WaMu to disclose what percentage of the $375 billion pledge would be subprime loans. WaMu did not make any such disclosure in its press release. Journalists asked; WaMu gave various answers, including "not significant," and from 10 to 15% (subsequently reduced, by a spokesman, to seven percent). That is not... responsible disclosure.
WaMu's "Responsible Lending Commitments," also released on September 5, are not sufficient. It is significant that Washington Mutual Finance Group and Long Beach (WaMu's two subprime units) have not been examined for consumer compliance by the Office of Thrift Supervision. Nevertheless, WaMu proposes to count these subsidiaries' loans toward its "Community Reinvestment" pledge. This is a policy issue that will have to be addressed...
Last week, in reviewing Citigroup's August 30 dissemination of a purportedly internal memo on reforms to its subprime lending -- largely the de-certification of certain mortgage brokers and correspondents -- we mused that Citigroup was releasing this memo in an attempt to "spin" a more negative forthcoming story. Well, on September 6 the other shoe dropped. The North Carolina Attorney General announced that Citigroup will pay up to $20 million to reimburse customers gouged with single premium credit insurance. Various journalists informed ICP that Citigroup's spokeswoman Leah Johnson refused to answer their questions about this North Carolina fine, an approach decidedly different from Citigroup's willingness to brag out its internal memo the week previous.
North Carolina is only one of over 40 states in which consumers were subjected to these practices; there is little rationale for similar refunds not being made or ordered in other states. Also, single premium credit insurance is only one of the predatory practices at CitiFinancial; many of the practices (including but not limited to absurdly high "loan discount" fees) continue today at CitiFinancial. So this is a developing story...
The American Banker of September 10 quotes Citigroup SVP Pam Flaherty: "Are we perfect? No, but we're on track to keep all our commitments by the end of the year, and we continue to learn." As reported on ICP's CitiWatch, Ms. Flaherty asked that complaints about practices at CitiFinancial branches be transmitted to her -- but when she was asked about lifelong gag orders CitiFinancial has sought from ex-employees, prohibiting them from providing any derogatory information about any Citigroup employee or practice, she responded that these gag orders are "customary," and then stopped responding. So our question remains, about what exactly it is, that Citigroup is learning...
On September 6, the president of the New York Fed, William McDonough, gave a speech in London, on the topic of "Connecting Finance with Communities." In his speech, Mr. McDonough implied that there is no more need for the Community Reinvestment Act, telling the audience that most bankers "say they would continue making these loans and investments even without regulation." This cast a different light on the New York Fed's purported attempts to get community groups' views on how the CRA regulation can be strengthened. One also wonders why some Federal Reserve Banks are conducting public sessions on the Advance Notice of Proposed Rulemaking, and other Reserve Banks aren't...
Finally, we must note and memorialize the announced by Sen. Phil Gramm (R-Tx) last week that he will not run for re-election in 2002. We've had to devote too much space in this report to Sen. Gramm. So we'll close with two squibs from the Austin American Statesman of September 5: a pundit is quoted that Gramm "ran for the presidency (in 1996) and was a complete bust, and I think that closed off one avenue for his energy and ambition, and losing the chairmanship with the Jeffords shift closed off another." The article also notes that Gramm "is not ruling out a post in the Bush administration, perhaps on the Federal Reserve Board." ...
August 27, 2001
The spinning never stops. Most recently, the J.P. Morgan Chase executive in charge of subprime lending, Luke Hayden, has been lobbying in Washington for a proposal that would pre-empt state and local anti-predatory lending legislation for all subprime lenders who consent to examinations for the Fed or OCC. In an interview published in the American Banker newspaper on August 24, Mr. Hayden claims that Chase Home Funding, the subprime division of Chase Manhattan Mortgage which makes $4 billion a year in subprime loans, is already "under OCC oversight because it is a subsidiary of Chase Manhattan Bank, which has a national charter." Actually, Chase's lead bank is state chartered. And in any event, OCC "oversight" seems to mean little. For example, when Chase's subprime lending practices were raised to the OCC earlier this year, in connection with Chase's application to the OCC to acquire the business of a Bank One bank with a Needs to Improve CRA rating, the OCC's approval order stated only that "the Chase Manhattan Corporation, Chase's parent corporation, represented that its subprime mortgage lending is a small part of its mortgage lending business." Some oversight. The OCC's Order made no reference to any onsite consumer compliance or fair lending examination of CMMC or its subprime lending. Mr. Hayden tells the American Banker: "What I would love to see is some sort of Good Housekeeping seal of approval for subprime lenders. If you create a higher national standard, those who subscribe to that standard can broadcast that fact."
Well, Chase is certainly "broadcast[ing]." But without some substance to the non-public examinations of subprime lending affiliates, it is absurd to deem these exams a "Good Housekeeping seal of approval for subprime lenders." It is only... spin.
Jump-cut to Georgia foreclosure action (noticed in the Augusta Chronicle of August 23):
Under and by virtue of the power of sale contained in that certain Deed to Secure Debt from WILLIAM F. DEES AND BIRDIE I. DEES to HomeGold, Inc. dated April 30, 1998, and recorded in Deed Book 595, page 2292, Richmond County records, as last transferred to Citifinancial Mortgage Company, Inc. f/k/a Associates Home Equity Services, Inc. by instrument recorded in aforesaid records, the undersigned will sell at public outcry to the highest bidder for cash before the Courthouse door in said County, during the legal hours of sale, on the first Tuesday in September, 2001, to Citifinancial Mortgage Company, Inc. f/k/a Associates Home Equity Services, Inc., as Attorney-in-Fact for William F. Dees and Birdie I. Dees the following described property...2370 Patrick Avenue, Hephzibah, Georgia.
Related South Carolina CitiFinancial update: sources tell Inner City Press that Tim Delapaz, the CitiFinancial supervisor whose "resignation" Citigroup accepted, after investigating Steve Toomey's July 8, 2001 affidavit (reported here) got... a $29,000 severance check, and was asked to sign a (modified) non-disparagement agreement. A connection to the above? Mr. Delapaz (and his supervisor, Steve Diubaldo) used to work at HomeGold (the subprime lender referenced in the foreclosure sale notice above, as selling loans to CitiFinancial).
For those who wish to contrast the subprime lending "reforms" that Citigroup announced in November 2000 with current practices, we've come across an online version of Citigroup's November 7, 2000, letter to its regulators. It's in PDF format; click here to download. And let us know...
August 13, 2001
While lenders are making few substantive reforms to their practices, money is still being made off the predatory lending issue. At an American Bar Association conference last week in Chicago, Skadden Arps partner Andrew Sandler (lead counsel for Citigroup in the Federal Trade Commission's lawsuit against CitiFinancial) told those in attendance, mostly in-house bank lawyers, that "Every day, there are new class actions being filed against lenders alleging predatory lending... There is no backing away, at least from what we're seeing, on enforcement activity with respect to predatory lending." His message was clear: hire us!
As previously reported, Mr. Sandler's Skadden colleagues Mitch Ettinger and Ben Klubes had their meters running, during an investigation / intimidation mission to South Carolina that was triggered by the July 8 affidavit of ex-CitiFinancial employee Steve Toomey. This mission has resulted (so far) in Citigroup "accepting the resignation" of CitiFinancial supervisor Tim Delapaz, and now offering settlements to other employees. Citigroup has not modified the life-long gag orders it obtained from ex-CitiFinancial employees. In fact, Citigroup is trying to get more of those agreements... Click here for an account of some new CitiFinancial tricks, this time from California...
Also at the ABA conference in Chicago, the Office of Thrift Supervision's regional counsel Stacy Powers spoke out against prepayment penalties, adding that "outgoing OTS Director Ellen Seidman is determined to address worries about potentially abusive loan practices before she leaves the agency. 'She is absolutely committed,' Powers said." But why, then, did the OTS on July 31 waive its own formal meeting regulations, and approve AIG's takeover of American General, despite evidence of loans at up to 40% interest by American General? The OTS wanted to accommodate AIG's claimed time-table: to close by deal on August 15, after the 15-day waiting period applicable to the OTS' Bank Merger Act approval. Now, the OTS' unprecedented speed-up appears to have been in vain. AIG cannot close the deal until September 5, at earliest.
Meanwhile, AIG is still trying to withhold the majority of its response to the New York Banking Department's questions about American General's lending practices. On August 8, the NYBD mailed ICP a version of AIG's response, with full pages blacked-out. On August 10, the NYBD faxed ICP a slightly less blacked-out version. The redactions remain absurd: a sentence begins, "Prior to October 2000, AGHE made loans in New York subject to the federal Home Ownership and Equity Protection Act ('HOEPA') with term"-- followed by three blacked-out lines. On page 5, AIG begins: "A copy of the agreement between AGHE and the broker [REDACTED] is attached as a confidential exhibit. AGHE received [REDACTED] applications in New York from this broker relationship so far this year." There follows a list of "pending cases" -- just the names, not the venue, or any description: Sardar M. Naeem v. American General Finance Inc.; and a list of settled cases (again without venue or summary): AGFI v. Joseph and Shirley Caruso; Willian and Anna May Eastwood v. TransAmerica Credit a/k/a American General Finance Corp.; AGFI v. Timothy Mascord; Roland Davis v. AGHE; Cecelia Prescott v. AGHE, et al.; Rebecca Hackett v. AGFI; Samuel & Beethels Williams v. AGFI. A two page long list of administrative complaints is entirely redacted. AIG's letter leaves unredacted its conclusion: "AIG appreciates the Department's prompt consideration of the Applications...". But for now, AIG's over-broad request for confidential treatment precludes even consideration of its applications, at least by the New York Banking Department... Click here for more details.
The American Banker of August 10 presents the OTS' explanation for its "waiver" of its formal meeting rules: "'We did receive a tentative business plan, but thought it would be more valuable to get a final business plan to allow full public comment on the formal CRA portion,' an OTS spokesman said." Since the CRA is only enforced in connection with mergers, splitting off the CRA review from the merger -- until after the merger is consummated -- is a lawless and bank-friendly (to put it mildly) precedent. The same American Banker, of August 13, reports on the vacation plans of the regulators. Alan Greenspan's going to tennis camp; Jerry Hawke is off to Martha Vineyard; Ellen Seidman's headed to Maine.
Our take on this overly-personalized financial journalism? AIG's chief Hank Greenberg was grooming his son Evan to take over the company, but Evan left, earlier this year. Not, however, before making campaign contributions to the Republican National Committee, and Senators Ensign, Hagel, Roth, Collins and Jeffords (Oops!). Also, Chris Dodd. What might these contributions have to do with the OTS' "waiver" of its formal meeting regulations? One might expect some inquiry by the Senate Banking Committee, into a regulator's unprecedented "waiver" of its own regulations. Then again, one might not expect such an inquiry, given the background...
What will be inquired into is the failure of Superior Bank FSB. The FDIC is now running the bank, continuing making subprime loans, and looking for a buyer. Various media post-mortems on the thrift turn up the names of ex-Comptrollers Eugene Ludwig and John Heimann... So far, there are few Federal Reserve connections to the Superior scandal. But consider that, after WesBanco was informed that it will receive a Needs to Improve CRA rating, and after WesBanco announced that the rating puts its two proposed acquisitions into jeopardy, WesBanco's CEO Edward M. George resigned, falling on his sword in the spirit of a Japanese samurai. Mr. George, it is noted, "began his 35-year banking career as a bank examiner at the Federal Reserve Bank of Cleveland." Apparently, he got some great CRA training there...
We love to see a CRA rating taken serious, a la WesBanco -- but the larger banks are given free passes, even when they own banks with Needs to Improve CRA ratings. Citigroup continues to expand, despite owning a bank with a Needs to Improve CRA rating. And last week, Bank One announced that it had finally gained Financial Holding Company status from the Fed. Bank One had owned a bank with a Needs to Improve CRA rating - but sold everything in it to J.P. Morgan Chase, and then "dissolved" the bank, and its rating, into thin air...
A final note (following in the spirit of the American Banker's personalized piece on the vacation habits of the regulators): Phil Gramm's son Marshall was recently appointed an assistant professor at Memphis' Rhodes College. He just finished his Ph.D. dissertation at Texas A&M. The topic? "A theoretical and empirical analysis of discrimination in mortgage lending and the impact of the Community Reinvestment Act." Gramm pere brags that the screed "conclusively shows that CRA doesn't do what its backers say it does." That, we gotta see...
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August 6, 2001
This week: mon(k)ey-business at the Office of Thrift Supervision; current and former Federal Reserve officials' strange take on high-cost loans; and fall-out from the recent failure of the subprime lending Superior Bank.
The OTS on July 31 "waived" its formal meeting requirements, and approved AIG's application to acquire American General (click here for more detail). The OTS officials who telephoned ICP (which had requested a formal meeting) emphasized a condition in the approval order, that the OTS will provide public notice in three months of a new AIG CRA plan, and will grant requests for formal meetings on that. What the OTS has tried to do is shift the consideration of CRA out of the merger process. But CRA is only enforced on mergers, as the Department of Justice ruled in 1994, when it was proposed that the CRA regulation give regulators the power to fine banks for weak CRA performance. No fines are allowed: CRA is only enforced on mergers. Except, apparently, at the OTS, when AIG comes calling. (This week's Federal Reserve Watch recounts the advocacy strategies of AIG's general counsel, who worked for 30 years at the Federal Reserve Bank of New York, until joined AIG in 1998).
In light of the OTS' "commitment" to provide notice, and grant informal and formal meetings, on AIG's CRA plan, we've gone back to review the status of various thrift acquisitions and charter-grants that the OTS has made, and found that the OTS' commitment to public notice and public participation is mostly words, and rarely substantive. Some examples: when E*TRADE applied to buy Telebank FSB, ICP raised issues about E*TRADE's plan to engage in direct mortgage lending. The OTS denied that E*TRADE Bank would be a direct mortgage lender, and required from E*TRADE only a commitment to buy $750 million in low- and moderate-income mortgages over three years. Well, the American Banker of July 31, 2001, reported that E*TRADE Bank "has funded more than $2 billion of mortgage originations since February, when its parent bought the online originator LoansDirect Inc., now E-Trade Mortgage"
Similarly, the OTS granted Allstate a "trust only" thrift charter; on July 20, 2001, the OTS announced it had upgraded the charter to "full service." No effective notice was provided; the "conditional" approval order does not mention any public comment, or comment period. In the Allstate case, a new Business Plan is required 30 days after the order (as opposed to the 90 days given to AIG). The OTS also hauled off and approved General Electric's application for a thrift charter on June 1, 2001 -- ICP had timely commented on the application in 1998, had heard nothing since, and was not even sent a copy of the GE approval order (for which, strangely, no link was provided on the OTS' GE press release -- as was the case with the OTS' August 1, 2001, AIG approval press release
A prospective connection: when the OTS called ICP on July 31, saying they'd "waived" their formal meeting regulations, ICP asked whether it was their position they could issue the same waiver, in connection with a more conventional thrift merger like Washington Mutual - Dime. "No," came the answer, "we wouldnt do it then." We'll see... For now, we note a recent jury award in Holmes County, Mississippi, against Washington Mutual Finance Group for "convincing customers to refinance loans at a rate nearly seven times higher than other loan offices in the state... on June 13, a Lexington, Miss., jury awarded the plaintiffs $ 69 million in punitives and $ 2.27 million in compensatories." Ouch! Watch for the OTS to argue that it need not look into this WaMu subsidiary, or WaMu's other subprime lending unit, Long Beach Mortgage. But WaMu's position is that "Washington Mutual Finance Corporation has been an active participant in Washington Mutual's efforts to meet the credit needs of low- and moderate-income individual and communities...". Developing.
Following the failure of Superior Bank FSB last week, the FDIC has blamed the Office of Thrift Supervision, for not granting the FDIC's previous request to jointly examine the bank. The Federal Reserve Bank of New York, ironically, included the general counsel of Superior Bank on a panel on consumer compliance, in January 2001, purportedly as a spokesman for "responsible" subprime lending. A representative of ICP was on the same FRBNY panel, and cursory research the day before the presentation turned up, for example, an article from the Baltimore Sun of August 17, 1999, reporting that "Superior Bank FSB of New Jersey claims in a federal court suit filed Aug. 4 that it has been stuck with more than $820,000 in bad loans in Baltimore, most of which are in default or are delinquent. The suit accuses a Utah company, Tandem National Mortgage Inc., of deception in selling 23 loans to Superior between July 1998 and April. The suit claims that reappraisals on 21 of the houses show that they are worth $555,000 total, while the mortgages on those houses amount to $776,900." The Bergen Record of March 28, 2000, reporting on Parmann Mortgage Associates, which PNC Bank charged with using "forged, fictitious, and fraudulent" documents, noted that "Superior Bank FSB in Orangeburg, N.Y., and Valley National Bank in Wayne, say they're owed more than $ 1 million combined." So, Superior's lack of controls were a matter of public record. The only question now is, who was asleep at the switch?
A final aside, for this week: Superior and Alliance Funding continue to operate, under a receivership -- essentially, run by the FDIC. Unless the lending practices changed overnight on July 27, one can imagine a predatory lending lawsuit against... the FDIC.
CRA in the news: West Virginia-based WesBanco Inc. disclosed, in SEC filings on July 23, that the Federal Reserve Bank of Cleveland has sent it "preliminary notification" that its CRA rating will be downgraded to "Needs to Improve." WesBanco says that the downgrade could "adversely affect" its ability to obtain regulatory approval to buy $691 million-asset American Bancorp. of Wheeling and $105 million-asset Freedom Bancshares Inc. in Belington, both in West Virginia. While we certainly think that should be the result, we note that Citigroup owns a bank with a Needs to Improve CRA rating, and the Fed had been approving all of Citigroup's applications, even on an expedited time-frame, like Citigroup - Banamex....
In a CRA-relevant deal announced last week, Washington Mutual announced plans to acquire Dime Bancorp, for $5.2 billion. WaMu CEO Kerry Killinger went on CNBC, here's a squib:
CNBC: Do you have any expectations that there might be a rigorous regulatory review that could delay it at all? KILLINGER: Well, we will naturally go through all of the regulatory filings and we've had excellent relationships with the OTS, who is our primary regulator on this. We are also blessed in that both Washington Mutual and Dime have outstanding CRA ratings. So we look forward to working with the community groups to show why this is a very positive transaction for the greater New York area. CNBC: CRA, for those of you who don't know this, is Community Reinvestment Act, I believe. Isn't that right? KILLINGER: Yes, that's right.
With virtually all of the top-20 banks and thrifts in the United States having been granted "Outstanding" CRA ratings by their (compliant) compliance regulators, the rating doesn't mean much. A "straight-CRA" issue that's sure to arise is whether WaMu will expand its 1998 lending pledge, given that it would be collecting deposits in new states. Another issue will be WaMu's subprime lender, Long Beach Mortgage, which was previously sued by the Department of Justice for racial discrimination...
Finally, for this week, some stray "where are they now" notes: Sen. Gramm's previous spokesperson, Christi Harlan (always fast with an insult to community groups), has moved on, post-Jeffords, to become the spokesperson for FEMA, the Federal Emergency Management Agency. Sen. Gramm's 2000 staffer Dina Ellis is now at the Treasury Department -- as deputy assistant secretary for consumer affairs and community policy. Given the way she maligned community-based (and even some "faith-based") organizations, during her stint with Sen. Gramm, this job title is somewhat surprising. In a speech to the Federalist Society on June 27, Ms. Ellis said: "I would say to you that one of the reasons why we are seeing so many (personal) bankruptcies, why we are hearing so much about instances of predatory lending ... why we are seeing frustrations with credit card disclosures ... stems from the fact that we are not teaching people about finance, and we are not focusing on it at a young enough age." Predatory lending is not the fault of Citigroup, et al. -- it's the schools' fault. Hmm.. Ms. Ellis also noted that "you can go through your entire educational career without one class on basic financial transactions," she said. "So every single credit card statement -- buying a home, buying a car -- all of these transactions to many Americans are simply mystifying." You see? We're not the only ones to use that word...
Another CitiFinancial employee has contacted ICP, describing how CitiFinancial judges each office based on how many "opportunities to sell credit insurance" are missed -- the CitiFinancial forms, this individual states, are called the "Insurance Tracking Reports. The individual describes in detail CitiFinancial offices' attempts, at the end of each month, to drive down the loan delinquencies they have to report. The individual states that he called in complaints to the 1-800 "Ethics Hotline," and then called back, when it was clear that no inquiry had ensued (none ever did). This source has, to date, been unwilling to speak for attribution, in light of litigation being prepared for filing. But since many of the individual's allegations, complete with names of internal CitiFinancial tracking forms, have now been submitted by ICP into the record before the Federal Reserve Board on Citigroup's applications to acquire EAB and Banamex: the individual's allegations can be confirmed or denied, proved or disproved, by the Federal Reserve -- and should be. Developing...
In DeKalb County, Georgia, a proposed ordinance has been introduced, which would prohibit the county from depositing money with institutions engaged in predatory lending. A spokeswoman for the Georgia Bankers Association told the Atlanta Journal-Constitution (6/21) that "the real predators don't do business with the county." But why, then, did Citigroup fly a lobbyist down to oppose the ordinance? The AJC, in an editorial last week, asked: "if the ordinance is meaningless...why are banks and mortgage brokers so eager to stop it? Citigroup even flew down a lobbyist from Washington to appear before the DeKalb County Commission this week."
In other state news, Connecticut, House Bill 6131 has become law. It prohibits prepayment penalties extending beyond the third year of a high-cost loan, the definition of which tracks the federal Home Equity and Ownership Protection Act. In Texas, Senate Bill 1581 was enacted. It prohibits prepayment penalties outright, and vaguely requires lenders to consider the "obligor's payment ability."
...Meanwhile, in an innovative action that should have an United States (and subprime) equivalent, the French non-governmental organization Attac led demonstrations on June 9 on the island of Jersey (an "Offshore Financial Center," 100 miles south of Britain, that plays a large role in money laundering and tax evasion. Attac calls it the start of "haven-hunting season." Next stops? Nauru, Aruba, Liechtenstein... Why stop there? There are today more than sixty offshore banking centers, which have 1.2 percent of the world's population, but hold 26 percent of the world's assets. Offshore havens hold an estimated 31 percent of the profits of US multinational corporations.
During the 1999 debate surrounding the Gramm-Leach-Bliley Act, CRA advocates opposed the creation of wholesale financial institutions (the so-called "woofies"), saying that these would siphon off money that otherwise would be subject to Community Reinvestment Act responsibilities. But the siphoning off is both more pervasive and more stealth than that debate reflected. There's a need for community-based advocates, in the U.S. and elsewhere, to begin digging into the bigger picture, the flow of funds, the (total) regulation of capital. A good first step? Citigroup's proposal to acquire Banamex (click here to view ICP's ongoing reports on this proposed merger).
That the issues of CRA and unregulated offshore banking are related is reflected by the history of legislative attempts to expose, and perhaps affect, these stealth flows. In the last Congress, then-House Banking Committee Chairman Jim Leach (R-Iowa) proposed legislation that would have banned anonymous bank transfers into U.S. banks from abroad. The bill, and companion bills introduced in the Senate, were blocked by -- guess who? -- Senate Banking Committee chairman Phil Gramm (R-Tx), after the Texas Bankers Association said it would hurt the banks' business with Mexico... And so, again: Citigroup - Banamex...
In other subprime news, Freddie Mac CEO Leland Brendsel told the Financial Times, in an interview published on May 25, that "there is plenty of opportunity in sub-prime, alternative credits," and said that Freddie Mac will expand its subprime purchases. Freddie Mac bought $18.6 billion of subprime mortgages in 2000, up from $3 billion two years before...
There are several developments worth noting, in First Union's and SunTrust's battle to take over Wachovia. On May 24, First Union and Wachovia announced a "Community Commitment," which purported to set numerical lending targets, but which did not specify any time frame for the lending. The companies have elsewhere orally specified a five-year time frame; even on this issue, it would seem to be important to assess First Union's compliance, or lack thereof, with its previous lending pledges, particular that made in connection with acquiring CoreStates in 1998. First Union, in its application to the Fed, didn't provide any report on its performance under its CoreStates pledge; in response to ICP's May 14 comment, First Union has acknowledged that it is behind schedule, in both the Community Development and the Small Business / Farm lending portions of its CoreStates pledge.
We'd prefer not to be, but Inner City Press is back on the Gramm-Watch. The Federal Reserve has just responded to ICP's March Freedom of Information request, for its communications with Congress about the Community Reinvestment Act.
The year began with a request from Senator Gramm for information about CRA protests, stretching back to 1977, "to help us a more thorough and comprehensive analysis." In a February 5, 2001, memo, the Fed responded to Sen. Gramm's staff director, "to tell you about some difficulties we expect due to record retention problems, system inadequacies, and staff resources." This Fed memo provides estimates of the person-hours and cost required to respond to Sen. Gramm's request: "If one assumes that the number of relevant application records were reduced to 3000 per year, staff estimates that the cost to the System for researching the additional data items would be nearly $4.5 million, based on three hours of research per record times $50 per hour hourly wage and 10 years of data."
The Fed's memo (apparently unconvinced that the $4.5 million figure would dissuade Senator Gramm) alludes to another unintended consequence of Sen. Gramm's fishing expedition: "Some of these costs would entail the interruption, and thus a slowing down, in the processing of applications across the System." Now you're talking Senator Gramm's language: slower merger approvals? Perish the thought!
The Fed's argument(s) were apparently persuasive to Senator Gramm. In a March 22, 2001 letter to Sen. Gramm, the Fed's Deputy Congressional Liaison Win Hambley recited that "on February 5, 2001, Board staff met with Mr. Abernathy and Mr. Cwiklinksi of your staff to discuss the difficulties the Federal Reserve would have in provided the requested data. As an alternative, Board staff offered at the February 5th meeting to provide information... on CRA-related applications for both 1999 and 2000... Staff is continuing to work on gathering information relating to applications processed from 1989 through 1993." While the Fed mailed these documents to ICP on May 17, the 1989-1993 information was not included. But the 1999-2000 information is of interest: the protested applications listed were by Chase, Centura, Fleet, North Fork Bank, Charles Schwab, Banknorth Group, Dime, National Commerce, Mizuho, Valley View State Bank, Wells Fargo, and New York Community Bancorp. In a separate transmission, the Fed provided Sen. Gramm with the complete files (including "all protests and comments, including positive comments") on several of the above, as well as Firstar / U.S. Bancorp, MetLife / Grand Bank, Chase / J.P. Morgan, AllFirst branch applications, and "Citizens Union / Dupont State Bank." Sen. Gramm is clearly not assessing the completeness of the Federal Reserve's review of these applications: the Fed's memo notes that "we do not have to send the Additional Information letters themselves" -- that is, the question letters that the Fed sends to applicants. Only the protests, and, interestingly, the "positive comments."
Where this is all going is unclear. Senator Gramm's spokeswoman Christi Harlan has been quoted by BNA that "the committee will be dealing with issues other than CRA this year. 'Senator Gramm is very practical. He knows how to pick his fights,' she said... According to Harlan, [Gramm] has asked the banking regulatory agencies as they prepare revisions to CRA rules to incorporate a new feature into the Sunshine provision that would offer easier access to information about how community groups spend grants from banks."
At a recent, open-to-the-public discussion of CRA Sunshine, sponsored by Chicago's CANDO and NCRC, the CRA officers of the nation's three largest banks each explained their understanding (and implementation) of "Sunshine." Citigroup's representative stated that she reviewed the transcripts of public meetings held on the Citicorp-Travelers merger in 1998, and on Citigroup - Associates in 2000, and sent letters to any Citi-grantees who testified, informing them that they are subject to the CRA Sunshine requirements. The Bank of America representative gave a "Power Point" presentation, and stated that it is her understanding that if an investor asks about B of A's community lending, any subsequent transaction is covered by CRA Sunshine. The J.P. Morgan Chase representative stated his understanding that only "a handful" of Chase-funded groups have to submit CRA Sunshine reports, and he specifically dismissed two questions from the audience which suggested that members of Chase's Community Advisory Board whose organizations receive over $10,000 a year from Chase (or Morgan) must report under Sunshine. One audience member quipped: if the banks don't understand Sunshine, how can community groups face penalties for misunderstandings?
As to J.P. Morgan Chase: the American Banker of May 14 runs a profile of the new chief of Chase Manhattan Mortgage, Stephen Rotella, reporting that "like his predecessor, who directed Chase Mortgage through a $1.6 billion purchase of Advanta Corp.'s subprime mortgage business, Mr. Rotella said he considers the segment an important area for expansion... 'We think those businesses are real growth opportunities, particularly in home equity,' Stephen J. Rotella said in an interview Friday. 'We expect to expand those as we move forward, as we have over the last few years.'" The interview was triggered by a May 10 press release issued by Morgan Chase, which recited that "prior to joining Chase, Rotella was Director of Mortgage Products at Shearson Lehman Brothers (now Salomon Smith Barney)." Hey - that's a company with a lot of standards... But consider this, as to Chase itself:
ICP received from the Office of the Comptroller of the Currency last week a print-out concerning complaints the OCC received about Chase, from January 1, 2000 to March 31, 2001. There were a total of 2,168 complaints, including 60 for harassment (and four for "threats"); there were five complaints of illegal discrimination (and 49 regarding violations of the Equal Credit Opportunity Act); there were ten complaints of "force-placed" homeowners' insurance. In the same time period, the OCC received 158 complaints about Advanta Corporation, the subprime lender that J.P. Morgan Chase acquired earlier this year. These also included complaints of force-placed insurance and harassment. While Chase is larger than Advanta (was), a comparison of the number of complaints calls into question Chase's claim that it has procedures in place to "clean up" Advanta, and the other subprime lenders that Chase explicitly intends to acquire...
Meanwhile, Tyco's application to the New York Banking Department to acquire the subprime lender CIT Group includes a January 3, 2001 letter from Chase Manhattan Bank vice president Roger A. Parker "confirm[ing] that The Chase Manhattan Bank has a line of credit in the amount of $1,000,000 to the CIT Group/Consumer Finance Inc. for the period ending December 31, 2001." This is precisely the type of information that Chase claimed, in late 2000, was confidential; as to CIT's lending patterns (and, by implication, Chase's lack of standards), see our Bank Beat Report of May 7, 2001...
The underreported CRA story of the week is Citigroup's just-released response to the predatory lending lawsuit the Federal Trade Commission filed against it on March 6, 2001. Citigroup's response, filed in federal court in Atlanta on April 16, has as its first argument is that "Citigroup Is Not Liable For the Acts of The Associates" (Section I.A), and that "CitiFinancial Is Not a Successor to The Associates and Is Not Liable for Its Acts" (Section I.B). When Citigroup acquired The Associates last Fall, it argued -- including to the regulatory agencies -- that its acquisition would be beneficial to consumers, including Associates' customers. But now, Citigroup argues that it "is not liable for the acts of The Associates," and even that CitiFinancial, into which The Associates was purportedly merged, "is not a successor to The Associates and is not liable for its acts." This corporate dodge is beyond distasteful: it calls into question representations that Citigroup made to its regulators last Fall. What will these regulators do now? Click here to view ICP's May 4 comment to the agencies, and analysis of Citigroup's Associates' high cost lending, which is disproportionately directed at people of color.
....Citigroup's annual shareholders' meeting, held April 17 at Carnegie Hall in Manhattan, was surreal. Beginning at 8 a.m., the sidewalk outside the concert hall began filling with both protesters and shareholders eager to hear Sandy Weill explain Citigroup's seven percent decline in earnings, announced the previous day. Citigroup staffers came out onto the sidewalk, and soon several dozen police officers arrived, and told the protesters that if they did not cross 57th Street, to a "protest pen" set up in front of a luggage shop, they would be arrested. When asked, "What happened to the First Amendment," the officer in charge, Inspector Callahan, said, "Call whoever you want -- you'll go across the street because I say so." In this case, apparently Citigroup writes the law: from the Financial "Modernization" Act of 1999, down to the erosion for First Amendment rights on the streets of New York...
Inside the shareholders' meeting, representatives of the AFL-CIO questioned Weill about Citigroup's standardless financing of the Ratchaburi Electricity Generating Company of Thailand, which is building a plant that will benefit a pipeline part owned by the repressive government of Myanmar. "We'll get back to you," Weill responded, and rejected a request that Robert Rubin, chairman of Citigroup's executive committee, answer the question. "We all have a lot to do," Weill said. Strangely, none of the other Citigroup board members were on the stage: only Sandy Weill, in a pink tie, in front of a small banner with Citigroup's logo on it.
Discussion turned to a shareholders' resolution addressing, among other things, Citigroup's involvement in predatory mortgage lending. Martin Eakes of Self-Help Credit Union spoke, eloquently as always; Weill's primary response was that Citigroup has applied "in 49 states" for permission to sell monthly premium, as well as single (upfront) premium, credit life insurance. Mr. Weill was then questioned [full disclosure: by an ICP representative] on three topics. The ICP representative asked Citigroup's CEO why, despite his claim that Citigroup is a "leader" in consumer protection, Citigroup has expended significant shareholder funds lobbying against anti-predatory lending legislation, most recently in Philadelphia and Chicago. Weill shrugged; no response was proffered.
The second question involved the settlement Citigroup reached earlier this month with the NYS Attorney General, regarding Citigroup's lack of automatic teller machines in low-income sections of New York, where Citigroup has the contract to distribute public assistance and other government benefits. The ICP representative asked whether Citigroup now intends to install new ATMs in these low-income neighborhoods, or simply contract with other institutions to waive their fees. Mr. Weill's response was opaque, though he seemed to indicate that Citigroup will comply by opening new ATMs. But Thomson Financial's publication "CardLine," of April 13, 2001, reported that
Attorney General Eliot L. Spitzer found that Citigroup had few ATMs in neighborhoods with high concentrations of beneficiaries, according to a Wednesday announcement by Spitzer. The agreement gives Citigroup the option of deploying new ATMs that impose no surcharges on EBT cardholders or contract with local ATM deployers to provide surcharge-free ATM access.
The answer to this question, then, will only become clear through time. Finally, the ICP representative asked Weill why, if Citigroup claims to be a leader, it is seeking to withhold even the list of subprime lenders with which it and SSB do business, in the Federal Reserve's proceeding on Citigroup's application to acquire EAB. Mr. Weill shrugged, and indicated that he was unaware of his company's requests that this information be withheld from the public. ICP is pursuing it: click here for an update.
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The answer to the question, "when is an expensive rent-to-own furniture and appliance store a community development project?" is: When politicians, regulators and non-profit organizations declare it so, and the media fails to ask questions. Earlier this month in the South Bronx, politicians and bankers converged at Vyse Avenue and 174th Street to celebrate, and congratulate each other about, the construction of a mall, sponsored by the Local Initiatives Support Corporation and its affiliate, The Retail Initiative (together, "LISC") and a local LISC-funded community development corporation, and lent to by the Bank of New York and EAB (which Citigroup is seeking to acquire). Announced at the groundbreaking: 80% of the mall has already been leased out, to tenants including Pathmark, Rockaway Bedding -- and Rent-A-Center, analyzed below.
New York State Comptroller H. Carl McCall has lauded the mall project, in a press release earlier this year announcing a state deposit into EAB. Articles about this mall appeared in the New York Times, the Daily News, Crain's New York Business, and other publications. None, however, questioned the propriety of the inclusion of Rent-A-Center, a controversial and high-priced rent-to-own chain, in the project. These reporters -- and, more importantly, LISC and the other sponsors and lenders, and the lenders' regulators -- could easily have recognized that Rent-A-Center and its business practices are inconsistent with government-subsidized community development. We'll quote from a recent Bronx Supreme Court case:
Defendant Rent-A-Center (RAC) is in the business of renting merchandise to consumers via "rent to own" transactions. These transactions involve a consumer leasing merchandise such as furniture, an appliance or a consumer electronics product for a brief period of time such as a week or a month. The consumer will make an advance rental payment for that period. It is also possible for the consumer to renew the rental agreement for successive periods under the same terms by making the required payments in advance of each term... It is claimed that RAC engages in fraudulent business practices which coerce consumers into entering into contracts of adhesion that do not adequately disclose the actual economic costs of the transaction. Some of the allegations include claims that: defendant conceals or misrepresents information regarding the true cost of the merchandise, customers who choose the "early purchase option" for goods they rent may pay more than the total cost of the particular merchandise, that defendant does not disclose the "effective interest rate" applicable to the transaction, that defendant utilizes a high pressure sales scheme to coerce consumers into entering into "rent to own" transactions and RAC offers goods for purchase at a "cash price" higher than the price charged by other merchants for similar goods.
Rent-A-Center's own officials brag about their ability to overcharge their customers. In a presentation to investors earlier this month in Atlanta, Rent-A-Center's executives stated plainly that for "items" for which they pay $400, they aim to make back $1,600: a profit rate of 400 percent. These practices have been in the public record for some time: the Wall Street Journal, hardly a consumers-rights publication, has reported that "Rent-A-Center customers pay a total of $1,003.56 over 18 months for a new Sanyo VCR with a suggested retail price of $289.98 -- for an effective annual interest rate of a breathtaking 231 percent... employees are expected to hang fliers on hundreds of housing-project doors each week, in a drill known as blanket brochuring." The Wall Street Journal also reported that "another tactic in Rent-A-Center's repo repertoire is the 'couch payment' -- sexual favors extracted by employees in lieu of cash. Of 28 former store managers interviewed, six said the practice had occurred in their areas. Some store employees have boasted that they 'have gone out to the customers' home, had sex with them, and then repossessed the merchandise anyway,' says Ken Dube, who spent time at a number of outlets as a field auditor."
One needn't even get to the issue of "couch payments" to recognize that this high-cost, "the poor pay more" business is entirely inconsistent with the government subsidies given to the New Horizons mall. It's a free country: if Rent-A-Center contracts to rent a storefront in a low-income neighborhood, little can be done, short of picketing. But this mall, called "New Horizons," is a government-subsidized community development project, owned by non-profit corporations, including LISC, which will be collecting rent from Rent-A-Center. The Times quotes the CDC's director that "We were encouraged by what Frederick Douglass said, 'The struggle continues.'" Indeed...
Finally, for this week, another anology: this time, between the fields of CRA and environmental justice (EJ). An overview article on EJ, and its status in the Bush administration, appeared on the Newhouse News Service of April 10, 2001, assembling of quotes from various observers. They're worth considering -- including as they relate to CRA, and to predatory lending:
A law professor at Georgetown University in Washington, is quoted, as to environmental justice, that "the law on this is not developed, so it takes a lot of initiative on the part of agencies to pursue it. They could do that, or let it quietly diminish and not say anything, or make lots of positive noises and not do anything."
ICP note: this is most similar to the current Federal approach to predatory lending: much noise, many speeches, little action. Federal Reserve governor Gramlich, for example, weekly decries predatory lending and "abusive practices" -- but faced with data and evidence about particular lenders, all the Fed does it refer to the comments to other agencies. I.e., " make lots of positive noises and not do anything."
The president of the Louisiana Chemical Association [by analogy, the National Home Equity Mortgage Association] is quoted: "I don't think the issue is going to die down. It's got legs of its own."
ICP note: Yes, at the state, local and even federal level, the predatory lending issue has "legs of its own." But the industry representative quoted above has in interest in portraying the issues as vibrant and in-flux: the message to federal regulators is, don't worry about taking concrete action right now, there's a lot going on.
The U.S. Chamber of Commerce's vice president for regulatory affairs is quoted: "We've never had a problem with the environmental justice executive order. The problem is when you got into the Title VI guidance documents. Then you were talking about central planning, allowing so many businesses in a certain area to the extent minorities are harmed by specific activities. That would never work."
ICP note: this is similar to the (many) banks which say, "We have no problem with the Community Reinvestment Act -- it's just implementing it that's impracticable."
Finally, the author of the article on EJ provides this analysis (which, more than the above, give rise to this musing): "Environmental justice is one of those midlevel Washington policy debates that presents tough choices for any new administration, especially a Republican one... rolling back policies that had a relatively mild impact to begin with could stir political trouble, drawing protests from coalitions of community groups across the country. That could draw more attention to an issue that is now low on the political radar screen... [C]ommunity groups have filed more than 100 civil rights complaints with the EPA accusing state and local governments of violating their civil rights by approving new industries in their neighborhoods. In response to the complaints, the agency spent years developing an environmental interpretation of the civil rights law. EPA officials promised to finalize the proposal by last fall, then pushed the target back to early this year. They still have not released a final version. Now observers think there's a good chance the policy will remain in limbo."
ICP note: the analogy to CRA should be clear -- if, that is, one agrees that CRA has become a "midlevel Washington policy debate." Recent indications that the federal agencies may, if commenters so request, put off any modification of the CRA regulation in 2002 would seem to make the similarities between the current status of CRA and environmental justice clear...
Until next time, for or with more information, contact us.
Copyright 1999 - 2003 Inner City Press/Community on the Move, Inc.. All rights reserved. As should be clear, but in an excess of caution: under no circumstances does the information in this column (or web site) represent a recommendation to buy or sell securities. For further information, or to request reprint or other permission, contact: Permissions Coordinator, Legal Administration, Inner City Press, P.O. Box 580188, Mount Carmel Station, Bronx, NY 10458. Phone: (718) 716-3540. Fax: (718) 716-3161. E-mail: CRA [at] innercitypress.org