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December 27, 1999
What are the Community Reinvestment Act duties of an Internet bank? Inner City Press has been exploring this (and other) questions with increasing urgency, most recently in the pending Telebank - E*TRADE merger application.
Telebank Maintains Evasive CRA Position --
Will the OTS Accept It?
On December 23, 1999, a representative of Inner City Press participated in a conference call with the Office of Thrift Supervision and three officials of Telebank, including its CEO Mitch Caplan. During the hour-long call, Mr. Caplan reiterated Telebanks position that it is only subject to the Community Reinvestment Act in Arlington, Virginia (where Telebanks headquarters office is located), despite the banks solicitation of deposits nationwide. Mr. Caplan stated that Telebank does not make loans, explaining that making loans is expensive. Mr. Caplan emphasized Telebanks November 20, 1999, commitment to increase the percentage of its assets that are CRA loans from the current 5% to 10%, stating that this is a significant commitment, since CRA loans are less profitable.
Inner City Press has submitted comments to the OTS opposing the proposed Telebank - E*TRADE merger, on CRA and other grounds. ICP timely requested an informal meeting on the application. The OTS representatives on the call, however, began by stating their position that the OTS informal meeting rules dont apply to the E*TRADE - Telebank application, but that the OTS was nevertheless offering this conference call. ICP maintains that an informal meeting is required, but thanked the OTS for holding the conference call (which was set up on short notice -- the OTS left a message for ICP on Dec. 21 proposing such a call, and attempted to set the call for the next day, Dec. 22).
One might infer, from the timing, that the OTS is considering imminently approving the E*TRADE - Telebank application. In fact, Mr. Caplan during the call referred to other meetings he has had with OTS officials about the banks CRA program, without notice to, or the participation of, ICP. The implication was that the OTS has already agreed to Telebanks plan of 10% of assets devoted to CRA, and a $1 million program with the Boys & Girls Club. ICP encouraged Telebank (and the OTS) to compare Telebanks proposals to the announced programs of other large brick-and-mortar banks. For a bank with $4 billion in assets to make so much of a $1 million plan calls for such a comparison.
More fundamentally, ICP urged Telebank and the OTS to compute and disclose what percentage of Telebanks current 100,000 depositors live in low or moderate income census tracts, and similar demographics for the people who apply for and obtain mortgage credit through Telebank. Mr. Caplan claimed to not have such data, and the OTS said nothing on the topic.
The conference call was civil, but raises the question of whether the OTS is now rushing to approve the E*TRADE - Telebank application, giving in to the banks self-imposed deadline for closing the deal. If the OTS had already agreed to Telebanks CRA proposal, what was the purpose of the call? This is a mystery that, in all probability, will soon be clarified.
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Meanwhile, the Federal Reserve on December 23 circulated a draft of its proposed survey of banks on the profitability of Community Reinvestment Act lending. Under the Gramm-Leach-Bliley Act, signed into law by President Clinton on November 12, the Fed must finish and publish the results of its survey by March 15, 2000. The Fed will be asking banks to return the survey by February 29, 2000.
The Feds draft asks, among other things, whether banks instituted their special CRA programs to minimize the likelihood of CRA protests in applications for mergers or acquisition, or to improve [their] public image. The Fed also proposes to leave it up to the banks to estimate their return on equity from CRA and non-CRA lending.
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North Fork Bank Has Stopped Government-Sponsored Mortgage Lending --
What Will the Fed (and FDIC) Do About It?
The Federal Reserve Board has asked North Fork Bank, as part of North Forks protested applications to acquire Reliance and JSB savings banks in New York, to explain any decisions since 1997 to alter the focus of its lending activities or composition of its loan portfolio. In a December 15 response, North Fork stated that it decide in 1998 to discontinue originating government sponsored mortgage loans, and the number of such loans declined.
The Fed on Dec. 20 asked two follow-up questions: Please discuss whether North Fork has eliminated its participating in all state and federally sponsored affordable mortgage programs, and Please describe any affordable mortgage lending programs in place at Jamaica Savings Bank or Reliance Federal Savings Bank that will be retained or adopted for use by North Fork Bank. To this last, North Fork responded that neither Jamaica Savings Bank nor Reliance Federal Savings Bank offer affordable mortgage lending programs.
On Dec. 16, JSB Financial announced it was moving back its shareholders meeting on North Forks bid from Jan. 13 to February 10, 2000. JSB did not give a reason for the data change. Reuters, Dec. 16....
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December 20, 1999
The discourse of community reinvestment becomes more Orwellian by the week. Cant tell the players without a scorecard, and cant discern the truth without returning to the language of the laws being discussed. The American Banker newspaper of Dec. 17 contained a Viewpoint piece by Citigroup CEO Sandy Weill, saying that I support community reinvestment and am delighted that the Financial Services Modernization Act, which President Clinton recently signed into law, will give a shot in the arm to investment of capital into our communities.
Question: what is the shot in the arm to which Weill is referring? It sure couldnt be the slow-down in CRA examination for 80% of the banks in the country. Could it be the reporting requirements impose on community development groups? Virtually no community-based organizations view the Gramm-Leach-Bliley Act as being positive for CRA. Citigroup wanted and needed the law, because it made moot the Federal Reserves requirement that it divest its insurance operations in two to five years. Citigroup clearly got a shot in the arm from the new law -- but what about communities?
As supporters of the new law, the Clinton administration (and Citigroups Weill) point to the Reverend Jesse Jackson. On Dec. 15, Rev. Jackson held a press conference in the AT&T building in lower Manhattan. The main purpose was to promote the upcoming Wall Street Project conference, slated for Jan. 12-14 in New York. But, standing next to Citigroups Weill, Rev. Jackson claimed again that the Gramm-Leach-Bliley Act is good for communities. Two press accounts catch the flavor:
Newsday of Dec. 16 reported: In an allusion to recent criticism of the Wall Street Projects strategy of working with corporate America, Jackson said the approach is not trickle down economics, but growing up.
The American Banker newspaper of Dec. 16 reported: Despite much criticism of the law by community reinvestment activists around the country, [Jackson] said the legislation did in fact expand CRA protections, specifically to ensure that insurance companies comply.
The last statement simply is not true. The only even plausibly related provision of the law is that only holding companies whose banks are rated Satisfactory or better under CRA can acquire insurance companies. It is inaccurate to claim that the law that Clinton signed specifically ensure[s] that insurance companies comply with CRA. This is a classic New Democrat strategy: sign (or support) a law that sells out a supposedly core principle, then simply claim that thats not what the law says. And with an unwary press, the strategy appears to work. The Associated Press of Dec. 15 reported that Jackson said he wants to harness the legal requirements of the federal [CRA], which requires banks and insurance companies to lend money... in low-income neighborhoods. Strengthened community reinvestment requirements are part of the recently passed financial overhaul bill.
If communities could harness the Clinton administrations and its controllers (e.g. Citigroup) and supporters spin, that would be one thing. But the bill that Clinton signed does not advance CRA, much less apply it to insurance companies.
Interestingly, Citigroups Weills op-ed makes a more nuanced (and technocratic) argument: that by united under one roof an investment bank, a commercial bank, and an insurer... a company can not only underwrite the tax-exempt bonds providing [a] projects underlying mortgage but also underwrite the bonds providing a second level of debt, insured the property and syndicate the tax credits that are awarded by a state agency, all at once. It should be noted that even prior to the Gramm-Leach-Bliley Act, the Fed was allowing banks to engage in a certain amount of securities underwriting, certainly enough to perform the functions that Weill describes. By Weills logic, consumers should support the merging of all companies into one, for greater convenience.
Weill last seek filed with the SEC to sell $60 million of his shares in Citigroup -- this is less than 10% of the Citigroup shares that Weill currently owns, beyond the 5.8 million other shares he has an option to buy. Now that -- is a shot in the arm.
In further Orwellian obfuscation, the Consumer Bankers America in a Dec. 17 press release argued that because many consumers are still under the impression that lenders discriminate, the Fed should not go forward with its regulatory proposal to allow banks to collect race and national origin information about small business loan applicants. The logic is convoluted: if people perceive discrimination, we should not test or monitor for it, because the perception would only grow. Only if people dont perceive there to be a problem, by the CBAs logic, should the Fed allow testing and monitoring. But the proposal is only on the table because theres perceived to be a problem....
December 6, 1999
The Community Reinvestment Act debate has split ever more in two: pipe dreams and obfuscations at the top, marginalization at the bottom. Recent examples:
On December 2, Comptroller of the Currency John Hawke unveiled an idea under active consideration at the OCC: encouraging banks to form consortia to share the risk of offering services in low and moderate income neighborhoods. At a conference where he began by extolling the supposed consumer protection strengths of the recently-enacted Gramm-Leach-Bliley Act, Hawke outlined a plan under which special purpose national banks jointly owned by existing national banks would receive special concessions from the OCC, to help address an enormous problem: the lack of bank branches in poor urban neighborhoods. In response to a statement that the continued scarcity of fair credit in poor neighborhoods shows a lack of effectiveness or enforcement of the CRA, Hawke said: I certainly dont deny that, and I think that is a major challenge.
The answer, however, is not for the regulators to provide even more special concessions to the banks, which are reporting record profits. How is it that the OCC (even more than the other regulatory agencies) grants virtually every national bank a Satisfactory or Outstanding CRA rating, even as they underserve, and close branches in, low income neighborhoods? Comptroller Hawke and the other regulators have in their hands the tool to require greater service to poor neighborhoods: finally assigning Needs to Improve CRA ratings to some banks, and truly inquiring into banks records of service when they apply to merge. Only because CRA is not being meaningfully enforced is such a consortium scheme under active consideration.
Also on December 2, Citigroup in New York celebrated itself, while alluding to the advantages of the Gramm-Leach-Bliley Act. CEO Sandy Weill said Citigroup is planning to take advantage of the synergies possible under the new bill that will enable us to expand our CRA activities. Question: what CRA activity was precluded prior to the financial deregulation bill? And why isnt Citibank, N.A., supervised by Comptroller of the Currency John Hawke, not serving the low income neighborhoods about which Hawke on Dec. 2 expressed so much concern? In the South Bronx, for example, an area with half a million residents in Citigroups headquarters city, Citigroup has a total of one consumer branch. Apparently, in Hakwes and Weills view, the near-trillion dollar Citigroup needs further governmental concessions and subsidies to take the risk of serving neighborhoods such as this. In terms of risk, the Argentine newspaper La Nacion on Dec. 3 reported that Citigroup is now under investigation for money laundering in Argentina.
At the Citigroup affair, Rev. Jesse Jackson said that the Gramm-Leach-Bliley Act succeeded in not only keeping CRA, but in expanding it... We must including new markets, underutilized talent and untapped capital. We plan to build an infrastructure for the implementation of CRA across America.
As detailed in ICP CRA Reports below (from mid-October to mid-November of this year), the Clinton Administration found some of its only community support for its signing of Gramm-Leach from the hardly grassroots Local Initiatives Support Corporation, whose chairman is Bob Rubin, now of Citigroup, and from the Rev. Jackson (whose phraseology above closely mirrors Clintons new markets rhyming). A substantial majority of community groups that actually enforce and implement CRA in poor neighborhood see the Gramm-Leach bill as a rollback of CRA, and not an expansion. But, as noted above, the CRA debate has split ever more in two: pipe dreams and obfuscations at the top, marginalization at the bottom.
On the CRA enforcement front, more details emerged last week about E*TRADEs proposal for CRA compliance with the Internet bank it is seeking to acquire, <Telebank.com>. Under OTS cover letter dated December 1, 1999, ICP has been provided with a copy of E*TRADEs November 20 submission to the OTS, including on CRA issues.
E*TRADEs Letter recites the OTS request that Telebank quantify recent historic and projected levels of community development lending, qualified investments and community development services in Arlington Country, Virginia, as well as the broader statewide or regional area that includes Arlington County and the levels of performance that it seeks to attain in Arlington County and nationwide during the term of it Business Plan with respect to those factors mentioned in the CRA Plan, including projected lending to low- and moderate-income borrowers. Letter at 27.
This line of OTS question is ambiguous: compare the second of the above-quoted OTS requests (for level of performance... nationwide) to the first request (implicitly applying only a community development test, and only in a statewide or regional area that includes Arlington County). It is inappropriate to apply only the CRA wholesale bank test to an institution like Telebank that actively markets to retail customers, and openly offers mortgage loans (on <Telebank.com>). Morgan Guaranty and Bankers Trust (now Deutsche Bank) are wholesale banks: they hardly do business with retail customers, and offer such products as (jumbo) mortgages only as an accommodation to private banking customers. Telebank is a different, new style institution -- it pitches itself to retail customers, including through television advertisements, soliciting deposits and, on its website, pitching click here for mortgages. It would be a perversion and weakening of the CRA for the OTS to apply only a wholesale bank / community development in a limited area CRA test to Telebank, particularly as it proposes to become part of the even more actively advertised E*TRADE, and would become legally affiliated (through SOFTBANK) with the entity that technically makes the mortgages that Telebank markets (E-Loan).
E*TRADEs November 20 response to the OTS questions evades the OTSs request that Telebank explicitly state the levels of performance that it seeks to attain... nationwide.. with respect to... projected lending to low- and moderate-income borrowers. E*TRADEs response devotes three paragraphs to the community development test -- only one of the two OTS questions quoted above. E*TRADEs only reference to a nationwide plan is not for what the OTS requested (levels of lending to LMI borrowers, see above), but is rather to a community development service project to educate LMI individuals about earning, savings and investing using the Internet. Letter at 28. To this purportedly nationwide project, the Applicants propose to commit a total of $1 million dollars -- less than one tenth of one percent of Telebanks deposits (and even less of assets).
E*TRADE and Telebank have still not answered the OTS question (regarding nationwide lending to LMI borrowers)...
November 22, 1999
In a frenzy of self-congratulation about finally repealing the Glass Steagall Act and liberating U.S. financial institutions, Congress ended its session last week. Its final action was to pass a compromise budget. Anti-Community Reinvestment Act demagogue Phil Gramm was active again, this time threatening to block the budget over a satellite television loan guarantee proposal. Ironically, Gramms ended up being more conciliatory on this (TV) dish bill, promising to revisit in the next session, before the end of March. In a departure from the supposed philosophic underpinning of his attack on CRA, Gramm said: Some social goals are not necessarily met by market forces.
This new revelation must have hit him after the November 4, 1999, Senate vote on the anti-CRA financial deregulation bill. According to the Washington Post (11/20), Gramms change of philosophical heart took place after [c]onstituents flooded his office with calls urging him to let it go, Phil, said a GOP source. Football is important in Texas and if they arent going to be able to get it on TV, its going to be hot.
Of course, you need to be able to get a mortgage in order to get a home to even watch the football game in... But apparently banking is an industry in which Gramm either believes that market forced meet all social goals, or theres no reason to have any social goals...
Gramm, by the way, loves his pigskin. The Omaha World-Herald of November 18 reports that Gramm dined with Texas A&M officials at V. Mertz [restaurant] when the Aggies were in Nebraska to play the Huskers.... And free-market musings clearly rule in the Gramm household -- the Senators wife, Wendy, co-chairperson of the new e-Texas commission, told Cox News Service (11/16) that Government by its very nature doesnt have competitive pressures (like) other businesses competing to tell you when to change.
Gramm and his far-right colleagues decry pandering, finger-in-the-wind politics. But Gramms cave-in in the face of constituents who want to see their college football games is classic finger in the wind (or finger on the remote control) politics. Why doesnt CRA have the a similarly-sized constituency as college football and betting pools? Because few of the people -- home mortgage seekers and small businesses and their employees -- who benefit from CRA have ever even heard it.
Meanwhile, Rep. Maxine Waters (D-CA) is preparing a bill that would repeal the anti-CRA provisions of the financial deregulation bill that Clinton signed on November 12. What remains unclear is whether the provisions proposed by Rep.s Gutierrez and Barrett (CRA on all lenders, and HMDA-like reporting for property insurers) will be included in Waters bill.
Overseas, the United Kingdom continues to move toward enactment of CRA-like legislation. Her Majestys Treasurys economic secretary Melanie Johnson told the Times of London (11/16) that we do not want to have to legislate to compel banks to serve all sections of the community, but if voluntary action is unproductive and monitoring shows insufficient progress, it may be necessary to consider other options. North of the border in Canada, calls mount for a US-like CRA. Canadian Bankers Association spokesperson Sharon Wilks told the Toronto Star (11/18) that banks arent in the business of encouraging home ownership, adding that the situation in the U.S. is very different than Canada. How then do you explain Reuters November 15, 1999 article, Canadian Banking Stocks Soar on U.S. Law Change?
On the regulatory front, the comment period had now closed on the Federal Reserves proposal to allow banks to collect data about small business loan applicants, to monitor for discrimination. Numerous banks which say the right things in public ended up commenting against this change, which most community groups, and all (guilty) Democrats on the Senate Banking Committee support: First Union, KeyBank, Compass Bancshares, Huntington, PNC, Fleet Boston, HSBC, Deutsche Bank, Northern Trust, Wachovia, La Salle... Bank One emphasizes the difficulty of collecting such data in the Internet age. Chase and Wells Fargo say they want to collect such data, but demand that it be kept confidential (which defeats the purpose). The Fed is expected to enact the change, while emphasizing the collecting such data is entirely voluntary.
More indicative of the Feds position on CRA is its proposed methodology for the study of CRA loan default rates that Senators Gramm and Bennett squeezed into the financial deregulation bill. The Fed proposes to conduct a poll of some 500 banks, expecting a 20% response rate, asking the banks open-endly what their default rates are for either borrowers with incomes 80% of or below median income, or for undefined special loan programs. Such a methodology would allow banks to characterize many of their defaulting loans as CRA loans, and to include high interest rate subprime loans for which the banks dont even seek CRA credit. Fed and Treasury Department staff are meeting on November 22. While the GAOs recent study critical of the Fed (see last weeks Report, below) was virtually unreported by the press, watch in Spring 2000 for the Feds unscientific study of CRA default rates to be given a lot of play.
The Feds inattention (and resistance) to CRA is nothing new: the Houston Chronicle (11/12) reports that the Fed hasnt issued a negative rating for the Texas banks its supervises since 1993. The Clinton administrations one CRA win -- that only banks awarded CRA ratings of Satisfactory or higher can buy insurance companies and exercise new powers -- appears more meaningless by the day.
A final Fed note: the Fed ignored an April 12, 1999 Freedom of Information Act request for documents reflecting its communications concerning financial modernization legislation for seven months, until November 17, after the bill was signed. The Feds November 17 letter now promises another interim response, with over 200 pages withheld. The documents will be reviewed in this space. Developing...
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November 15, 1999
On November 12, 1999, President Clinton signed the financial deregulation bill, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999. The bill will trigger a wave of applications by banks to buy insurance companies, and of securities companies to buy banks. Wall Streets quite happy, as demonstrated by a stock market surge (particularly of insurance companies shares) when Clintons support was announced on October 22. But the gaping holes in consumer privacy protections, and the erosion of the Community Reinvestment Act, to say nothing of the creation of larger and larger financial services giants, bode badly for the public.
To Clinton, the signing of the bill was an opportunity for a New Democrat sound byte: You heard Senator Gramm characterize this bill as a victory for freedom and free markets. And Congressman LaFalce characterized this bill as a victory for consumer protection. And both of them are right. And I have always believed that one required the other.
Its symmetrical, its modern, its the perfect triangulation: free markets and consumer protection, one requiring the other. Theres only one problem: its not true, as to this piece of legislation.
Observers as disparate as far-right Senator Richard Shelby (R-AL) note that the bill contains virtually no privacy protections, even as it allows health insurers and banks to become affiliated. Twenty Congress members wrote to Clinton on November 5, opposing the bills anti-CRA provisions. The bill allows mutual insurance companies to switch states to go public, without returning any of the money to their policy holders. Ex-Federal Reserve Governor Alan Blinder said, in a November 9 speech in New York, that there is very little, if any evidence of cost savings attributable to expanding into new lines of business, and that hes skeptical that any cost-savings would be passed to consumers. Business Week, a strenuously middle-of-the-road publication, ran an Economics Viewpoint piece (11/15) stating, correctly, that Glass-Steagall was not repealed to improve the efficiency of the markets. Nor did Congress have consumers especially in mind when it took the decision to rescind the act. It was repealed mainly to pave the way for more megamergers.
First in line are insurance companies: American General, Allstate, Lincoln National, Jefferson-Pilot, ReliaStar, et al.. Watch for some or all of these to be bought by banks. Under the compromise agreed to be Clinton and most Congressional Democrats, theyll be no need for federal regulatory approval of these acquisitions -- no comment period, no prior approval. Just the mere check that the acquirers banks have Satisfactory CRA ratings, which it is virtually impossible for them not to get (98% of banks are awarded Satisfactory or higher CRA ratings by the regulators). This hardly preserves the relevance of the CRA, as Clinton and dozens of Democrats have claimed.
Heres how Clinton put it upon signing the bill on November 12: The legislation I sign today establishes the principle that, as we expand the powers of banks, we will expand the reach of that act [CRA]. In order to take advantage of the new opportunities created by the law, we must show a satisfactory record of meeting the needs of all the communities a financial institution serves. I want to thank Senator Sarbanes and Congressman LaFalce for their leadership on the CRA issue. I want to applaud the, literally, hundreds of dedicated community groups all around our country, that work so hard to make sure the CRA brings hope and capital to hard-pressed areas.
Talk is cheap.
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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