The Mizuho Watch
Dai-Ichi + IBJ + Fuji = ???
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Updated February 4, 2008
On February 5, 2003, ICP filed comments with the Federal Reserve Board, opposing applications by Mizuho which are covered by the Community Reinvestment Act. The comment is below. Following Mizuho's attempt to withhold all substantive portions of its response, ICP on Feb. 17, 2003, commented to the Japanese FSA, also below. For or with more information, contact us.
Update of February 4, 2008: Mizuho Financial Group Inc., by far the hardest hit by subprime among Japanese banks, said its subprime-related loss for the nine months ended Dec. 31 more than doubled from its forecast two months ago to 345 billion yen ($3.24 billion). It warned that the damage could grow to 395 billion yen for the year ending March 31. Mizuho's net profit for the April-December period tumbled 32% from a year earlier to 393 billion yen. For the full fiscal year, it now forecasts a group net profit of 480 billion yen, down 23% from the previous year. Hate to say it, but we told ya so...
Update of February 20, 2006: In Japan, Mizuho Bank will open about 100 branches in six major cities over the next three year starting in April to target individual borrowers, group officials said last week. "Our main battlefield will be the retail banking sector," Mizuho Financial Group President Terunobu Maeda said. We’ll see... For or with more information, contact us.
Sample earlier reports:
Update of May 2, 2005: Ah, Mizuho, we didnt forget you. Mizuho Financial Group announced on April 26 that it has expanded its relationships with, alongside Bank of New York, also Wachovia and Wells Fargo. Both lend to payday lenders, so thats something. Mizuho said it plans to collaborate with both Wells Fargo and Wachovia in four areas: cash management, trade finance, customer referrals, and distribution of investment trusts in Japan. It said the partnership with Wachovia also includes Web site collaboration. Mizuho said that Wells Fargo gives it access to the U.S. West and Midwest, and Wachovia to the East. One wag asked, and what about the South? Mizuhos been known to lend to subprime lenders there.
Update of March 3, 2003: Sneaky ol' Mizuho -- on Feb. 27, it responded to ICP's comments to the N.Y. Banking Department, without providing any more of the CRA and other information it has been withholding. ICP has replied, and has filed a timely "request for reconsideration" with the Federal Reserve. Here's a cursory summary of ICP's reply to the NYBD:
Mizuho's response ignores the issues raised in ICP's comments about the withholding of CRA-relevant information, and the continued withholding of basic information such as the "list of principals of the U.S. Subsidiary Banks ("Confidential" Exhibit 14), "information on the principals of MHHD ("Confidential" Exhibit 13), the "organizational chart for MHFG ("Confidential" Exhibit 15) and the "list of companies engaged in nonbanking activities in the United States in which MHFG [would] own or control more than 5 percent of the voting shares ("Confidential" Exhibit 20). Yet Mizuho insists on and expects an unconditional N.Y. Banking Board approval on March 6 (despite that fact that, to ICP's knowledge, the NYBD staff have not asked Mizuho any the needed CRA-related or managerial / financial related questions). Mizuho's main response / defense appears to be the Feb. 24 Federal Reserve Board ("FRB") order which it annexes -- and of which ICP has now timely requested reconsideration, under 12 C.F.R. §262.3(k)) -- as it that relieves the NYBD/BB of any responsibility to look into the issues.
On CRA matters, the FRB Order at n.12 states that "[t]he commenter questioned whether MCB (USA) suspended its CRA activities for a portion of 1999 and 2000" -- actually, this statement was made directly in Mizuho's application to the FRB, and yet until ICP "questioned" (that is, quoted) it in its Feb. 6 comment, no FRB inquiry had been made. ICP urges the NYBD/BB to inquire further into this issue.
Since Mizuho's stakes its response on the FRB Order, consider: the initial FRB H2A notice listed a comment period running through March 7; subsequently it was clarified as Feb. 6, 2003. ICP submitted a timely comment; the FRB staff, again to accede to Mizuho, churned out a responsive question-letter on Feb. 10, requesting a response by Feb. 14. But on that day, Mizuho requested confidential treatment for virtually all substantive portions of its response. ICP inquired and then submitted a FOIA request (to which the FRB has yet to respond). ICP also then commented to the NYBD. Mizuho then released a small portion of the CRA information, while continuing to withhold basic information such as its organizational chart and list of principles, information that is routinely released in other proceedings on applications by Mizuho's competitors.
The reason for the rush? The FRB approval order contains, by law, a 15 day waiting period. But the rush has led to an FRB order that mis-characterizes the facts (to put it mildly) -- something that the NYBB, particularly following this timely reply, should not do. Leaving aside for the moment the continuing black-out on CRA-relevant information, the FRB Order states blithely that "Mizuho Holdings' stated capital levels exceed the minimum levels that would be required under the Basle Capital Accord... No debt would be issued by the Applicants...". In timely rebuttal, to be addressed by the NYBD/BB, consider: Reuters of Feb. 25, 2003, reported that
Mizuho Financial Group said on Tuesday it planned to issue up to 150 billion yen ($1.27 billion) in preferred shares to overseas investors. The group did not name the investors in its statement. The plan was within expectations after Mizuho, the world's largest bank by assets, said it was seeking to raise around one trillion yen in capital before the end of March.
Merrill Lynch has been identified in a number of media reports in connection with the above-referenced $1.27 billion [citations omitted, but see:] Time International of Feb. 3, 2003, "Faced with vast losses, Japanese banking giant Mizuho must drum up capital or be nationalized."
We also direct the NYBD/BB to the end of FRB footnote 13: that the FRB does not consider "the manner in which Mizuho's [constituent] institutions reacted to the terrorist attacks on September 11, 2001." Given inter alia the NYBD's statements on 9/11 matters, it would be surprising if the NYBD/BB did not address what ICP has raised, or stated that it is outside their jurisdictions.
ICP is troubled by -- and asks the NYBD/BB to consider and adopt a more appropriate position on -- the FRB's logic in note 13 of the Mizuho Order. How ever qualified, it's that "[t]he Board does not consider the non-U.S. lending performance of an applicant" -- ICP argues that the FRB (and NYBD/BB) SHOULD. For example, the FRB and NYBD inquire into global banks' non-U.S. problems with money laundering, as they should. Mizuho's cut-off of small businesses in its home country is, as ICP's timely commented pointed out, consistent with and a predictor of its deteriorated CRA performance in the United States and in New York. ICP is also troubled by the logic in that, for example, as Citigroup exports CitiFinancial's practices beyond the U.S., the NYBD and FRB is turning a blind eye. It works both ways -- but currently at the FRB, particularly when a bank needs a favor (while still withholding basic information), it doesn't work at all. This should not be repeated (or relied on) by the NYBD/BB. On the current record, Mizuho's applications should not be approved. For or with more information, contact us.
Update of February 24, 2003: the secretive Mizuho has now "unredacted" some but not all of its response on CRA issues; it continues to withhold its organizational chart and even the list of the "principals" (or would that be, "principles"?) of its banks in the United States. Mizuho's counsel states that the CRA information was withheld because it would "reveal the strategy" of Mizuho's banks. Among the matters finally unredacted? That Mizuho made "donations of surplus office furniture;" that Mizuho paid for a "Gala" at which, not coincidentally, Mr. Tanaka of (the old) Fuhi and Mr. Noguchi of the old IBJ were honored -- wait, pay-to-play is one of Mizuho's strategies... Meanwhile, on Feb. 21 the Nihon Keizai Shimbun reported that Merrill Lynch plans to "inject" $186 million into a Japanese corporate rehabilitation fund it will run with Mizuho.
Update of February 17, 2003: Here is a portion of ICP's Feb. 17 comment to Japan's FSA:
...ICP is hereby asking the FSA to request, obtain and make public Mizuho's Feb. 13 CRA submission to the FRB. On Feb. 5, ICP submitted a comment to the FRB. On Feb. 10, the FRB posed questions to Mizuho, asking for a response by Feb. 14. ICP anticipated that it would receive its copy of Mizuho's response, and be able to comment thereon in this submission to the FSA. As set forth below, Mizuho is for some reason trying to keep confidential all substantive portions of its response, on CRA relevant issues -- the FSA should obtain Mizuho's response, and ICP is hereby formally requesting to be provided with a copy thereof. Here were the FRB's Feb. 10 questions to Mizuho [see Update of February 11, 2002, below.]
ICP anticipated receiving its copy of Mizuho's response and being able to comment thereon in this submission to the FSA. However, on Feb. 14 ICP received from Mizuho's counsel a letter which confines virtually all of the substantive portions of Mizuho's response to purportedly "Confidential" exhibits (numbered 36-40). In response to above-quoted Question 1, Mizuho refers to "Confidential" Exhibits 36, 37, and 38. To Question 2, Mizuho refers to "Confidential" Exhibit 39; to Question 3, Mizuho refers to "Confidential" Exhibit 40. Then, in response to Question 4, Mizuho states inter alia that the FSA and other agencies have received all of the necessary information to consider the applications.
It is unclear to ICP if the FSA has yet received a copy of Mizuho's response(s) on these issues. The FSA should obtain, and provide the public and ICP with copies of these relevant exhibits. On the current record, Mizuho's applications to the FSA should not be approved.
We will report on the FSA's (and Mizuho's) responses, upon receipt. For or with more information, contact us.
Update of February 11, 2003 -- Following ICP's Feb. 5-6 comment, the Federal Reserve on February 10 faxed the following Question Letter to Mizuho:
To complete the record on this application, please provide the following information (with supporting documentation, as appropriate).
1. For the period covering January 1, 2001, through December 31, 2002, please provide separately, for each calendar year, the number and dollar volume of the community development lending and qualified investment activity of Mizuho Corporate Bank (USA), New York, New York (formerly, Fuji Bank and Trust Company). Include the activity of IBJ Whitehall Bank and Trust Company, New York, New York, and Industrial Bank of Japan Trust Company, New York, New York, prior to these institutions' subsequent merger into Fuji Bank and Trust Company. In addition, provide details describing the qualified loans and investments.
2. Please provide the number and dollar volume of loans to small businesses (i.e., loans to businesses with revenues of $1 million or less) and loans to small businesses located in low- and moderate-income census tracts extended by Mizuho Corporate Bank of California, Los Angeles, California, during calendar year 2002. Provide the information for the institution in its combined assessment areas, and separately, in each of its two assessment areas (i.e., Los Angeles and Santa Clara).
3. Footnote number four on page thirty-three of the application notes that Mizuho Trust and Banking Co. (USA), New York, New York ("MTBC-USA"), suspended its Community Reinvestment Act ("CRA") activities "for part of 1999 and 2000 in conjunction with a plan to convert its status to that of a limited purpose trust company." Please elaborate on that statement. Identify the CRA activities that were ceased during the period referenced and explain why such activities were discontinued. In addition, explain why MTBC-USA abandoned its plan to become a limited purpose trust company. Please provide the number and dollar volume of MTBC-USA's community development lending, qualified investment, and any other significant CRA-related activity(ies) since its last examination by a federal supervisory agency. Provide these totals separately for each year and provide details describing the qualified loans and investments.
4. Please discuss the status of the applications that Mizuho has submitted in connection with the proposal with New York, California, Georgia, and Japan's Financial Services Authority.
To facilitate timely processing of the application, provide six copies of the requested information... by no later than February 14, 2003. If Mizuho should desire confidential treatment for any portion of its response, it should request such treatment... In addition, please send a copy of the non-confidential portion of the your response to [ICP].
[Helen M. Troy for]
Shawn McNulty, Associate Director
We will report (and comment on) Mizuho's response, upon receipt. For or with more information, contact us.
Report of February 10, 2003 (ICP Comment):
On behalf of Inner City Press/Community on the Move and its members and affiliates, and the Fair Finance Watch (collectively, "ICP"), this is a timely comment opposing the applications of Mizuho listed in the Federal Reserve Board's (the "FRB's") Form H2A, with initial comment periods running through February 6, 2003.
As reflected in the Federal Reserve Bulletin of November 2000, ICP in 2000 raised numerous Community Reinvestment Act- ("CRA-") relevant issues in connection with the three-way merger that formed Mizuho at the world's largest banking organization by assets. ICP also raised managerial and financial resources issues, many of which subsequently corroborated in the numerous snafus (and worse) that have plagued Mizuho since 2000. Now there is this proposal, which Mizuho cavalierly expects the FRB to approve "no later than February 24, 2003," according to Mizuho's counsel's cover letter accompanying the Applications. The FRB's H2A initially stated that the comment period ran to March 7, 2003; ICP was then informed that it meant February 6, 2003. Either way, this comment is timely, and the issues raised below must be appropriately inquired into, responded to and addressed.
As set forth below, even in its home country, and even after receiving massive public subsidy, Mizuho has "slashed lending to small and medium-size[d] business by $42 billion in the half-year to September 30 , by far the biggest cut among Japan's top seven banking groups." See, Reuters of Jan. 14, 2003, further addressed infra. If this is Mizuho's performance -- criticized by its home country supervisor even in the absence of a CRA-like statute -- closely scrutiny of and action on Mizuho's performance in the U.S., under the CRA, is needed, in connection with these applications.
Take, for instance, the record of IBJ Whitehall Bank & Trust. Subsequent to the Mizuho merger, this institution's CRA rating was downgraded. The post-Mizuho performance evaluation, conducted by the FRS, states at BB5 that "only one loan was originated during the examination period... Total loans at this examination represent a 32 percent decrease since the previous examination...". The Exam notes "few new initiatives," and that "[d]uring the examination period, the loans originated by the bank's SBIC were outside IBJ Whitehall's assessment area," which consists of the five boroughs of New York City. Further on in the Exam, it is stated that "IBJ Whitehall capitalized a bank subsidiary, IBJ Whitehall Capital Corporation, an SBIC that invests in small business operations in an area that includes the bank's assessment area." But since none of IBJ Whitehall's SBIC's loans were IN the assessment area (where there is no lack of credit needs), it is entirely unclear why the capitalization of this subsidiary is given positive weight in the Performance Evaluation. The Exam re-emphasizes that "most of its activities were outstanding loans and investments originated during the previous examination period." Id. at BB7. Since it has been part of Mizuho, its performance has deteriorated.
The FDIC's more detailed performance evaluation, post-Mizuho, of Dai-Ichi Kangyo Bank of California notes inter alia that "the distribution of small business loans and letters of credit reflects poor penetration among business customers with Gross Annual Revenues of $1 million or less;" the bank is awarded a Low Satisfactory on the CRA Lending Test. The Exam states that "during the reorganization, the bank's lending activity slowed... The drop in volume impacted the lending in low-income census tracts." Id. at 8, 22.
Surprisingly, the CRA-relevant data that is presented in Mizuho's Applications, for which it is requesting expedited approval, covers a time-frame ending in 2001 -- more than 13 months ago. See App. at 30-33. Extremely troubling to ICP is the statement, which Mizuho confines to a footnote, that "MTBC (USA) suspended its CRA activities for parts of 1999 and 2000 in conjunction with a plan to convert its status to that of a limited purpose trust company. Upon withdrawal of that plan, MTBC (USA) resumed its CRA activities." App. at n.4, running from page 33 to 35. ICP is not aware of any authority for an insured depository institution to "suspend its CRA activities" while it contemplates converting to another status. We also note -- and contest the "segmentation" of this proposal implied by the statement that "MHAT plans to close its New York representative office as part of the Reorganization. MHAT will submit appropriate notices at a later date." App. at n.2, p. 12. ICP contends that the "appropriate" notices for this proposed office closure should be filed at this time, particularly since the proposed office closure is explicitly planned "as part of th[is] Reorganization."
Reuters of Jan. 14, 2003, quoted supra, reported
Japan's Mizuho Holdings Inc said on Tuesday it would relist on Tokyo's stock exchange on March 12 after completing a realignment aimed at cutting costs and increasing profits. On that day, Mizuho Holdings, the world's largest bank by assets, will become Mizuho Financial Group, under which Mizuho Holdings will become a full unit. Under the new structure, core bank units will come under the umbrella of the Mizuho Holdings unit.
Shares of Mizuho Holdings, widely considered one of the weakest of Japan's four megabanks, and Mizuho Financial Group will be swapped one-for-one. The current ordinary shares of Mizuho Holdings will be delisted on March 6 ahead of the birth of the financial group.
Alongside the launching of the new financial group on March 12, Mizuho will also merge its two trust banking units -- Mizuho Asset Trust & Banking Co Ltd. and unlisted Mizuho Trust & Banking Co Ltd. The new trust banking subsidiary, Mizuho Trust & Banking Co Ltd., will come under the umbrella of Mizuho Financial Group.
Like other big Japanese banks, Mizuho Holdings is under pressure to step up restructuring and improve its financial health as the government pushes ahead with plans to reduce banks' bad loans. Mizuho, created through a three-way merger in 2000, returned to profit in the first half to September but the company expects to incur losses for the full year ending in March. (Emphasis added).
Having above sketched a review of Mizuho's and its components' continuing under-performance in the United States, consider for the record Mizuho's weak record of lending to small businesses in its home country: Reuters of January 31, 2003, reported that Japan's
Financial Services Agency said on Friday it has issued a business improvement order against Mizuho Holdings Inc to boost lending to smaller firms to meet the bank's target.
Mizuho, the world's biggest bank by assets, slashed lending to small and medium-size businesses by five trillion yen ($42 billion) in half year to September 30, by far the biggest cut among Japan's top seven banking groups. Mizuho had planned to raise such lending by 10 billion yen in the current business year to March. Japanese banks set targets for lending to small firms in their restructuring plans after receiving public funds in the late 1990s. Mizuho received nearly three trillion yen in taxpayers' money to shore up its capital. (Emphasis added).
See also, AFX News of Jan. 31, 2003, reporting that the FSA
will order Mizuho Holdings Inc to improve its lending practices after the bank cut lending to small and medium-sized firms by 5 trillion yen (38 billion euro, 42 billion dollars) as of end-September 2002 from end-March levels, the Jiji Press news agency reported without citing sources. The report said the FSA will issue the order later Friday.
The FSA believes Mizuho is not making enough effort to boost its lending to the small business sector, as is required of banks receiving public fund injections, Jiji said. Economic and Financial Affairs Minister Heizo Takenaka said at a briefing after a Cabinet meeting that the FSA is still investigating the matter and declined to comment further.
Again: even in its home country, and even after receiving massive public subsidy, Mizuho has "slashed lending to small and medium-size[d] business by $42 billion in the half-year to September 30 , by far the biggest cut among Japan's top seven banking groups." If this is Mizuho's performance -- criticized by its home country supervisor even in the absence of a CRA-like statute -- close scrutiny of and action on Mizuho's performance in the U.S., under the CRA, is needed, in connection with these applications. The issues raised above must be inquired into, responded to, and acted on. On the current record, Mizuho's applications could not legitimately be approved.
Despite ICP's FOIA request, we have not been provided with the many
exhibits for which Mizuho has requested confidential treatment. ICP hereby contests
Mizuho's attempt to withhold even the "list of principals of the U.S. Subsidiary
Banks ("Confidential" Exhibit 14), "information on the principals of MHHD
("Confidential" Exhibit 13), the "organizational chart for MHFG
("Confidential" Exhibit 15) and the "list of companies engaged in
nonbanking activities in the United States in which MHFG [would] own or control more than
5 percent of the voting shares ("Confidential" Exhibit 20). Given the centrality
of an assessment of Mizuho's widely-reported "asset quality" problems, see
supra, ICP also specifically contests inter alia the withholding of
"Confidential" exhibits 3 ("Information related to MHCB's asset
quality"), 7 ("Information related to MHAT's asset quality"), and 9
("Information related to MHTB's asset quality"). ICP contests Mizuho's attempt
to confine the entirety of its response to (required) Question 1, regarding Consent to
Jurisdiction and other (FBSEA-relevant) commitments, to "Confidential" Exhibit
21 (and 26). ICP contests the withholding of "Confidential" Exhibit 23
("information concerning the subsidiaries of New MHTB," including name, place of
incorporation, etc.). (ICP has been unable to find the references or identifiers of
"Confidential" Exhibits 11, 12 and 22 in the text; the list of
"Confidential" Exhibits has also apparently not been provided to ICP, but should
be, now, along with the improperly withheld Exhibits).
Finally, for now, we must note (as Bloomberg News of October 4, 2001, did) that Mizuho has a strange and inappropriate approach to the countries beyond Japan in which is does business:
Mizuho Holdings Inc. was quick to announce that most of its employees survived terrorist attacks that destroyed the World Trade Center. The world's biggest bank neglected to say the tally excluded more than 1,000 foreign staff, seven of whom are still missing... Mizuho, formed last year through a merger of Fuji Bank, Dai-Ichi Kangyo Bank and Industrial Bank of Japan, gave its first estimate of casualties four hours after the tragedy. At Fuji's offices, on the 79th through 82nd floors of the trade center's South Tower, 113 of a total 125 employees were confirmed alive, Ide said on Sept. 12. Dai-Ichi Kangyo confirmed the safety of its 80 Japanese workers in the North Tower, while 101 of a total 102 Japanese at IBJ were alive, he said.
Those totals didn't include 273 locally hired workers at Dai- Ichi Kangyo, 500 at Fuji and 411 at IBJ. While Ide later provided a breakdown of Japanese and non-Japanese staff at the three banks, he and other spokesmen couldn't give figures for those still missing.
Mizuho also produced a list of names and ages of missing Japanese employees within hours of the attacks. Spokesman Hiroshi Takahashi declined to provide names of missing local workers. Non- Japanese Mizuho employees in Tokyo say the bank didn't provide information on local employees in New York. Fuji now says 12 Japanese and 6 local staff are still unaccounted for and IBJ says one local employee is missing. Dai- Ichi Kangyo says all its 353 workers are safe, working in New Jersey. Almost 6,000 people in total are either missing or confirmed dead.
"This response showed a real lack of concern for the bigger picture of the disaster," said Tamio Hattori, a sociology professor at Kyoto's Doshisha University. "Of course what happened to Japanese people is a tragedy, but we need to remember the global impact is even worse."
Within hours of the disaster, other Asian companies in the buildings, including five Korean financial firms and Singapore's Overseas Union Bank, reported the total of all their New York employees, mostly local hires.
Based on all of the above, ICP is opposed to Mizuho's applications, asks to timely receive a copy of Mizuho's response to this Comment (and an opportunity to reply), and contends that, on the current record, these applications could not legitimately be approved. ICP requests an evidentiary hearing. For or with more information, contact us.
Update of June 24, 2002: Ah, Mizuho. On June 19, Japan's FSA ordered Mizuho to improve its operations following computer problems that affected millions of transactions in April. Mizuho Holdings President Terunobu Maeda denied a local media report that the bank had obstructed the agency's investigation. Financial Services Minister Hakuo Yanagisawa has expressed concern that the problem could affect Mizuho's profitability...For or with more information, contact us.
Update of April 22, 2002: extensive computer glitches this month are leading to plans to postpone by more than a year the full linkage of two computer systems for individual accounts. Mizuho said it believed problems in a system that linked two host computers -- that of Fuji Bank and DKB -- caused the glitches. "Our top priority at the moment is to repair these system failures," a Mizuho spokesman said... "Mizuho's top people just don't understand how important it is for a bank to have solid information technology," said one banker. "It's like car makers rolling out new cars without full inspection and recalling them after accidents, or airline firms saying they thought a plane could fly after it crashes." Great merger, eh?
Update of August 6, 2001: Mizuho continues to get out of consumer finance in the United States. On July 30, Mizuho agreed to sell its 52% stake, and 77% voting power, in Heller Financial to GE Capital. Earlier in 2001, Mizuho sold its stake in CIT to Tyco. This Report has been slow, because... so's Mizuho, right now.
Update of April 2, 2001: Ah, Mizuho... The Japanese press reported that last that Mizuho and its constituent banks, Dai-ichi Kangyo, Fuji and Industrial Bank of Japan (IBJ), will take a 600 billion yen ($4.91 billion) loan loss charge in the year ending on March 31, up 50 percent from the previous estimate of of 430 billion yen. This has led to threats of litigation against 12 Mizuho officials, including chief executives Masao Nishimura, Yoshiro Yamamoto and Katsuyuki Sugita, if they fail to compensate the bank for the losses within one month. If the case goes ahead, it could set precedents on the liability of corporate directors under Japan's 1997 Antimonopoly Act revision, which allows corporate groups to restructure themselves into holding firms... Great merger, Mizuho...
Update of March 19, 2001: Last week, Tyco announced its intention to apply for regulatory approval to buy a stake in the CIT Group (in which Mizuho has a large stake, analyzed below). For more, see ICP's Bank Beat report...
Update of October 2, 2000: It has begun, the new era of Mizuho. Its stock went up, as it opens, because it's been including in the benchmark Morgan Stanley Capital International index. But observers note that this year, Fuji shares have fallen 18 percent, DKB have fallen 13 percent and IBJ is down 8 percent. Robert Zielinski, an analyst at ABN Amro in Japan, said, "the merger through a holding company is just an artificial show -- it'll just be the same, except they're now lumped together." But at the opening ceremony, Katsuyuki Sugita, president and co-chief executive officer of Mizuho Holdings, said "Mizuho does not only become a financial group that enjoys overwhelming superiority in the home market, but also wins a ticket to be a top-five powerful player on the global financial stage." "I don't think Mizuho will be able to compete with foreign banks in the overseas market anytime soon," said Nozomu Kunishige, senior banking analyst at Lehman Brothers. "Still, it will have new business chances based on its solid client base at home," he said Mizuho -- which means fresh and fruitful rice harvests -- also owns brokerage and trust banking arms and aims to integrate fully the operations of the three banks by March 2002. And, sporadically, we'll be watching (especially but not only as these companies continue their involvement in questionable subprime lending in the United States).
* * *
On April 27, 2000, Inner City Press / Community on the Move filed a challenge with the U.S. Federal Reserve Board to the applications of Dai-Ichi Kangyo Bank, Industrial Bank of Japan and Fuji Bank to merge, and form a company proposed to be called "Mizuho." DKB, Fuhi and IBJ all own banks in the United States, covered by the Community Reinvestment Act. As ICP's challenge (set forth below on this page) demonstrates, all three are involved and intertwined in high-interest rate, so-called "subprime" lending in the U.S. -- lending that ICP contends is predatory, just the sort of lending that the Federal Reserve and other U.S. regulators have recently been decrying.
Update of September 25, 2000: The formation of Mizuho, to replace Deutsche Bank as the world's largest financial institution, is slated for September 28. Bloomberg on September 21 ran a sort of obituary for the constituent banks, noting IBJ's bail out by the Japanese government in 1989, and that each bank's share price has declined to pre-merger announcement levels. Is bigger better? We shall see...
Update of September 18, 2000: Little to report, except that the Mizuho-ites are moving into a new building in Tokyo, and hope to begin trading, as Mizuho, on September 28.
Updated of September 11, 2000: On September 6, the Fed acted on, and approved, three Japanese banks' application to form the world largest financial institution, Mizuho. On the predatory lending issues that had been raised, the Fed's Order is laughable: it simply recites, and claims to have considered the issues, without rebutting them. For example, in a footnote on page 15 of the Order, the Fed states that
"ICP contends that DKB, Fuji and IBJ have indirectly supported predatory lending by providing financing to Delta Funding Corporation, Woodbury, New York ('Delta'), Ameriquest Mortgage Company, Orange, California ('Ameriquest'); and PinnFund USA, Carlsbad, California ('PinnFund'). Mizuho represents that the business relationships cited by ICP were limited to equipment leases to Delta and Ameriquest by subsidiaries of DKB and Fuji, and that a credit facility arranged by IBJ for PinnFund expired without being funded. The Board has considered these assertions in evaluating the managerial and convenience and needs factors in this case."
This avoids the main question raised in ICP's comments: what standards do these companies have, in doing business with high interest rate, subprime lenders? IBJ chose to make funding available to PinnFund. That PinnFund, for its own reasons, didn't draw down the loan does not answer the question that the Fed must consider, under the statutory factors: what safeguards does IBJ have in place in working with subprime lenders? Had PinnFund drawn down IBJ's funds -- would the Fed answer this question? Apparently not: in a half-page footnote on page 9 of the Order, the Fed states that
"ICP's comments include contentions that CIT Group, Inc., Livingston, New Jersey ('CIT'), a subsidiary of DKB, engages in predatory lending by making subprime loans and imposing prepayment penalties more frequently than competitors, and engages in these practices more often in certain metropolitan areas with respect to African Americans than do its competitors. ICP also asserts that CIT has supported predatory lending by purchasing loans from Long Beach Mortgage Company, Orange, California ('Long Beach'). CIT purchased no mortgage loans or had any other business with Long Beach since 1998. The Board has forwarded ICP's comments on CIT to [HUD, DOJ and the FTC], which have responsibility for fair lending law compliance by nondepository companies like CIT and Long Beach. In addition, the Board has considered information submitted by Mizuho on CIT's consumer lending practices, including the processes by which CIT makes credit available to consumer, the compliance procedures established by CIT, the methodology employed by CIT in setting risk-based interest rates, and the relationship of CIT with loan brokers and correspondents."
Here, the Board says it has "considered information submitted" by the banks, without discussing what that information was. In fact, the banks' submission included admissions that few to no background checks (on brokers, for example) are performed. It is in another footnote, number 24, that the Fed wheels out its overall buck-passing strategy: as long as a bank holding company doesn't "control" a subprime company that it funds, there are no repercussions:
"ICP contends that CIT has supported predatory lending by providing financing to... Cityscape Financial Corporation, Elmsford, New York ('Cityscape'). The only business relationships that CIT had with Cityscape involved two credit facilities totaling $105 million. Mizuho represents that CIT did not control Cityscape's underwriting or lending practices, and the CIT was not involved in Cityscape's credit review process...".
So a new standard is erected: as long as you don't "control," you can freely fund and profit from questionable subprime lending. ICP's sense is that even if CIT HAD exercised some control over Cityscape's lending practices, the Fed would simply come up with another defense, another excuse. ICP will be requesting reconsideration of the Fed's approval, under the Fed's rules.
Update of September 4, 2000: While the Mizuho-ites announced, with some arrogance, that their combined company would be listed and begin trading in its own name at the beginning of September, the Federal Reserve Board at the time of that announcement had not voted to approve or disapprove their applications. Late last week, the Fed announced that it had put the Mizuho application on its agenda for Tuesday, September 5. How convenient And this despite the Mizuho-ites evasive answers the Fed's questions about their involvements in questionable subprime mortgage lending in the United States. In our next installment, we will analyze the Fed's decision and order..
Update of August 21, 2000: Evidence of the Mizuho applicants standardless involvement in subprime lending continue to emerge, in response to Federal Reserve questions. An August 11 letter from the applicants to the Fed discloses yet another instance of IBJs funding of subprime lenders, one that ICPs comments didnt even raise: a facility for FirstPlus Financial, Inc., Dallas, Texas. Just last week, the Federal Trade Commission announced that FirstPlus has agreed to settle charges that its advertisements for "debt consolidation" loans were false and misleading. In re FirstPlus Financial Group Inc., FTC, File No. 992 3121, 8/17/00).
Another subprimer than IBJ agreed to finance, Pinnfund, USA, wrote ICP a letter on August 15. As reported by National Mortgage News of September 21, 1998, PinnFund USA and Industrial Bank of Japan have closed a first-of-its-kind subprime warehouse facility that has provided the former with immediate access to a $70 million revolving credit line. ICPs comments to the Fed, available at the bottom of this page, stated that [s]imply to document for the record that the IBJ-funded subprime lender PinnFund USA disproportionately targets protected classes with its... high-interest rate loans, consider PinnFund USAs refinance mortgage lending in the Chicago MSA in 1998: 247 loans to African Americans, 116 loans to whites, a ratio of 2.13 to one. The aggregate industry in this MSA in 1998 had a ratio of 0.120 to one. In Chicago, IBJ-funded PinnFund USA targets African-Americans 17.8 times more frequently than the aggregate with its high interest rate loans.
IBJs and its co-applicants, Dai-Ichi Kangyo Banks and Fuji Banks, August 11, 2000 letter to the Fed stated that [t]he facility for PinnFund, USA, Carlsbad, California, was established in August 1998 and terminated in November 1998 without even having been utilized; liquidity problems in the fall of 1998 were the primary reason that the facility was not used.
Then, dated August 15, comes a letter from PinnFund, USAs CEO, Michael Fanghella, to ICP:
Pinnfund, USA is pleased to respond to your inflammatory and misinformed remarks about its lending practices... Pinnfund, USA is surprised Inner City Press (ICP) exhibits such an elitist and arrogant attitude toward Pinnfund, USA borrowers: individuals who, because of past credit problems, or the need for special loan terms, cannot obtain the benefits of credit from traditional sources, such as FNMA or FHLMC lenders... Pinnfund, USA does not try to fit each borrower into a single, take it or leave it program so common with other lenders, but offers rates and terms to fit almost every credit need, and credit rating: from A to C-... Pinnfund, USA is proud of its HMDA information, and its involvement in offering a helping hand to all, especially to racial and ethnic minorities. If its HMDA numbers show that Pinnfund, USA provided credit to African Americans 17.8 times more frequently than other lenders, the converse is also true: African Americans are 17.8 times more likely to be denied credit by traditional lenders, a fact borne out by Department of Housing and Urban Development Studies... Pinnfund, USA would have to base its lending practices on the basis of race to be more in line with the aggregate industry and accommodate ICP. That would not only be bad for business, but it would be unlawful. We suggest ICP become more acquainted with the Equal Credit Opportunity Act before it suggests further race-based lending. Pinnfund, USA declines to practice racial discrimination to satisfy ICP...Despite ICPs misinformed criticism, Pinnfund, USA will continue to provide credit to persons other lenders decline, even if they are members of a minority groups. Very Truly Yours, Michael J. Fanghella, Chairman & CEO, Pinnfund, USA
Before responding, ICP reviewed Pinnfund, USAs 1999 HMDA data. In the Chicago MSA, Pinnfund USA in 1999 again made more of its subprime refinance loans to African Americans than whites. We decided to look at other MSAs. In the Memphis MSA in 1999, Pinnfund, USA made 80 refinance loans to whites, and 65 to whites: a ratio of 1.23 to one. The aggregate industry made 3120 refinance loans to African Americans, and 7441 to whites: a ratio of 0.42 to one. Pinnfund, USA in this MSA targets African-Americans 2.93 times more frequently than the aggregate with its high interest rate loans.
In the Los Angeles MSA in 1999, Pinnfund, USA made 47 refinance loans to whites, and 109 to whites: a ratio of 0.43 to one. The aggregate industry made 8986 refinance loans to African Americans, and 60,653 to whites: a ratio of 0.15 to one. Pinnfund, USA in this MSA targets African-Americans 2.86 times more frequently than the aggregate with its high interest rate loans.
Having established this pattern of Pinnfund, USAs greater-than-average targeting of African Americans with its (subprime) loans, its time to answer Pinnfunds CEOs questions. One problem is that Pinnfund simply asserts, without proof or any safeguards in place, that the people it lends to at higher than normal interest rates cannot obtain the benefits of credit from traditional sources. Furthermore, while Pinnfund claims it would be unlawful, it seems clear that mortgage lenders, particularly subprime lenders, should be reviewing the correlation between interest rate, race, the credit score. Long Beach Mortgage (now owned by Washington Mutual) was sued by, and settled with, the Department of Justice on precisely these grounds: it was charging people of color more, and failed to review and correct these disparities. It would seem that Pinnfund, USA (and a number of other low-profile, wholesale subprime lenders) may be wide open for a fair lending suit, by DOJ or others. And yes, Mr. Fanghella, we will try to acquaint ourselves with the Equal Credit Opportunity Act. Wed suggest that IBJ, Fuhi and DKB do the same...
The Fed has still not placed the Mizuho application on its agenda for decision.
Update of August 7, 2000: The Federal Reserve Boards questioning of the three banks applying to form Mizuho, on issues of subprime lending, continues. Last week ICP received a copy of the banks July 31 submission to the Fed, responding to a July 26 question-letter from the Fed. The Fed asked if various assurances the banks gave, as to CITCNF, allow appl[y] to CITCNF (NY), CITCNF (TN), and/or CITSF (see below for explanation of this torrent of acronyms). Only in response to this last minute question did the banks, on July 31, disclose that 2 percent of CITCNF(NY)s loans, 1.5 percent of CITCNF(TN)s loans and a de minimus amount of CITSFs loans are to D credit. Subprime mortgage lending is often referred to as B and C lending (with A being prime credits). D loans are at the highest interest rates. The banks had initially claimed, in their May 16 submission, that CITCNF makes loans almost exclusively to A, B, and C credits... fewer than one percent of its loans are to D credits. The reality, for CITCNFs New York subsidiary is double that...
The banks July 31 submission also discloses that, before CIT accepts loans from correspondents, no Better Business Bureau contact is made and no references obtained for a Correspondent. The Fed also asks if CIT gives its correspondents copies of the fair lending compliance booklet that CIT described in its previous submissions. The banks respond that such a booklet is not provided to Correspondents.
These banks inattention to fair lending compliance has become more and more apparent as this proceeding has developed. The Federal Reserve Board held the second of its four hearings on the Home Ownership and Equity Protection Act on August 4 in Boston. Governor Gramlich comments to reporters before the hearing again claimed that the Fed can do very little about predatory lending: [o]ur authority in the overall scheme of things is a bit limited... We certainly can't do it all, Gramlich said. But how about doing SOMETHING? On this application? Developing...
Update of July 31, 2000: The Federal Reserve Board STILL has not place the Mizuho application on its agenda for a vote. Last week, ICP received documents from the Fed in response to ICPs June 12 appeal of the Feds withholding of documents under the Freedom of Information Act. On appeal, the Fed provided several dozen pages it had previously withheld, including a letter, dated before the Mizuho applications were even filed with the Fed, in which the banks lawyers met with Fed officials to discuss the applications behind closed doors. ICP contends that such meetings, and withholding all documents (beyond the scheduling letter) are unfair. The application is subject to public comment, and the Feds Ex Parte rules, prohibiting communications between the Fed and either party to the dispute. The Fed now holds its ex parte communications before the application is even filed. Its as if a party about to file a lawsuit went in to meet with the judge, the day before filing (and then adhering to the rules of due process and against ex parte communications). Governor Fergusons July 26 letter to ICP states that notes were taken at the meeting, but they are not required to be produced. The increasingly routine unfairness of the Feds procedures needs to be challenged. But first, Mizuho:
Also last week, ICP received a copy of IBJs lawyers response to Fed questions of July 19. The Fed asked:
Page 6 of Mizuhos May 16 submission refers to three securitizations of certain mortgage loans, for which [IBJ] acted as arranger. Explain more specifically the role played by IBJ in these securitizations, and the extent to which IBJ was involved in the origination of the mortgage loans involved in the securitizations.
ICP note: here, the Fed is asking the wrong question(s). Underwriters of pool of mortgage loans, particularly subprime mortgage loans, should perform due diligence on the fairness of the loans whatever their involvement in the originations. But in this case, IBJs involvement went further. Its response states that IBJs New York Branch is the manager of WCMC pursuant to an agreement for which it receives a management fee. The response refers to short-term arrangements to warehouse mortgage loans until the time that the lender could arrange longer-term funding. IBJs role in connection with these facilities was as an arranger, for which it received a structuring fee. IBJs presents its due diligence as having been limited to weighted loan-to-property values and borrower credit characteristics -- not fair lending, or any review of prepayment penalties, even compliance with HOEPA. For shame...
Update of July 23, 2000: As of July 23, the Federal Reserve had still not provided the 48-hour notice required before it votes on the Mizuho applications. Meanwhile, this month in Japan it was disclosed that Fuji Bank stands to lose 36.57 billion yen on its loans to the Sogo Group department store firm; DKB is said to be purchasing Shinsei Bank Ltd.'s 42 billion yen in bad loans to struggling construction company Hazama Corp.. A merger premised on a bail-out? We shall see...
Update of July 5, 2000: On June 28, the lawyers for the three banks applying to form Mizuho responded to a series of questions the Federal Reserve asked, by letter dated June 16. The Feds (vague) questions included: For each subsidiary... please describe the process through which the subsidiary makes credit available... and how the Banks currently ensure that the consumer credit granting subsidiaries comply with the applicable consumer protection laws and regulations, particularly the fair lending and fair housing laws. The applicants first answer, as to CIT, is that they maintain a legal staff. Reference is made to a consumer compliance manager (a former regulator with the Texas Office of Consumer Credit Commissioner). The Fed then asked if any of the banks subsidiaries make high cost loans under the Home Ownership and Equity Protection Act of 1994, HOEPA. At least three CIT subsidiaries make such (very) high cost loans; the companies have sought confidential treatment for their responses describing how many....
Update of June 26, 2000: The Federal Reserve has still not place the Mizuho application on its agenda (and, with the June 27-28 FOMC meeting, it may be unlikely this week). The New York State Banking Board meets on June 28, and may act on the state application at that time. The Mizuho-ites have announced their plan to list the stock of the still-to-be-approved holding company on September 28, 2000. Meanwhile, in Tokyo, ING Baring analyst James Fiorillo expresses disappointment at the lack of identifiable focus in this group's business plan. In the United States, a company which already registered, and is using, the web site <mizuhofinancialgroup.com> has intimated that the three Japanese banks may need a different name in the U.S.... The substantive concerns about these banks involvement in questionable subprime mortgage lending have yet to be addressed. The U.S. Treasury Department and HUD on June 20 released a report urging, among other things, the Federal Reserve to more closely examine the subsidiaries of bank holding companies (like these three) for their involvement in questionable subprime lending. Well see...
Update of June 12, 2000 -- Last week, ICP finally received the Federal Reserve Boards response to ICPs April 18, 2000 FOIA request about the Mizuho application. Included were time-line sheets, indicating the Feds plan to circulate a draft/Legal memo by May 6, final memos by May 21, Order and Record Released (to the Governors) by May 27, Date of Press Release/Order June 2. Also reflected is that the Federal Reserve System held a closed-door meeting with the applicants and their lawyers on January 27, 2000. The memorandum on this meeting has been heavily redacted by the Fed. The Fed has, however, released (after the close of the comment period) exhibits that the applicants improperly withheld -- for example, a list of the Principals of DKB (including Tadashi Kudo, Nobuhiro Mori and Akira Miyagawa -- while still withholding their ownership percentages in other depository institutions); and the Regulatory History of DKF (USA). The Fed even redacted the length of the grace period for noncomforming nonbanking activities that the applicants are requesting. The Fed is doing the publics business -- but in an increasingly non-public way... Also last week, the applicants lawyer submitted a 21 page response to the New York State Banking Board, identical to their May 16 submission to the Fed. The NYSBB will rule, at earlier, on June 28. Developing...
Update of June 5, 2000: The Federal Reserves long-delayed response to ICPs April 19 Freedom of Information Act (FOIA) request was received, at least the cover letter, last week. The Fed states: By letter dated May 17, 2000, the deadline for our response to your request was extended... Staff search of appropriate Board records has revealed 20 additional documents that are responsive to your request. Sixteen of these documents will be provided to you in their entirety... Four hundred and five full pages, and portions of others, will be withheld from you... You may appeal this determination.... Which is exactly what ICP is doing. The documents that ARE being released -- will be reviewed here, upon receipt.
Update of May 30, 2000: On June 1, the Federal Reserve Board is supposed to provide ICP with documents responsive to ICPs April 18 Freedom of Information Act request about the Mizuho companies. They will be reported here upon receipt. The Mizuho-ites have announced theyll try to combine their brokerages on October 1, 2000; theyve also announced that theyll be opening an Internet shopping mall, with publisher Kadokawa Shoten and others. Given their involvement with questionable subprime lenders in the United States, we wonder if among the virtual tenants of their mall will be the sarakin (Japanese street money lenders, otherwise known as loan sharks). Developing...
Update of May 22, 2000: On May 16, Fuji, IBJ and DKB submitted a joint response to ICPs April 27 comment. ICPs May 19 Reply, summarized below, gives a sense of the companies interesting, if nothing else, response:
May 19, 2000
Board of Governors of the Federal Reserve System
Attn: Jennifer J. Johnson, Secretary
Chairman Greenspan and Governors
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
RE: SUPPLEMENTAL COMMENT / REPLY /EXTENSION REQUEST IN OPPOSITION TO THE APPLICATIONS MIZUHO HOLDINGS, INC., FUJI BANK, LIMITED (AND HELLER FINANCIAL), INDUSTRIAL BANK OF JAPAN AND THE DAI-ICHI KANGYO BANK, LIMITED (AND CIT GROUP, NEWCOURT FINANCIAL USA AND CIT ONLINE BANK)
Dear Secretary Johnson and others in the FRS:
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, ICP), this is a supplemental comment, including reply (and request for an extension of the comment period, for the reasons set forth below) on the applications and notices of the proposed Mizuho Holdings, Inc., the Industrial Bank of Japan, Limited (with its subsidiaries, IBJ), The Fuji Bank, Limited (with its subsidiaries, including Heller Financial, Fuji) and The Dai-Ichi Kangyo Bank, Limited (with its subsidiaries and controlled companies, including The CIT Group, the proposed CIT OnLine Bank, and Newcourt Financial USA, Dai-Ichi).
Due to the Federal Reserve Boards inexplicably delayed transmission of ICPs April 27, 2000 Protest to the Applicants, the Applicants had until May 16, 2000 to respond. On May 16, the Applicants submitted a Joint Response, 12 pages in length, to which ICP hereinbelow replies.
DKBs, IBJs and Fujis Joint Response mis-summarizes ICPs protest, claiming that that ICP asserts that [s]ubprime lending is synonymous with predatory lending. JR at 3. The JR ignores that ICPs Protest specifically alleges that the subprime lending of DKBs CIT Group/Consumer Finance and the other IBJ-, DKB- and/or Fuji-enabled companies named in the Protest (and CITs and its pre-payment penalties, see infra) are disproportionately directed at minorities, protected classes under the fair lending laws, as reflected by Home Mortgage Disclosure Act (HMDA) data.
The JRs quotation of the FRBs comments about HMDA data (JR at 4) is inapposite: those FRB statements did not concern HMDA datas irrefutable ability to show the demographics of lending (targeting), they concerned analysis of denial rates, and/or using HMDA as a complete measure of an institutions lending. Id. The JRs purported rebuttal of ICPs HMDA (targeting) analysis is simply incorrect when it claims that ICPs aggregate figures lump statistics on conforming loans together with non-conforming loans (JR at 9). ICPs Protest compared each named companies conforming lending with the industrys conforming loans -- as the Applicants and their counsel(s) would have seen, had they merely reviewed the aggregate conforming HMDA data for themselves. The Joint Response is perfunctory and ill-informed, as, apparently, are DKBs, IBJs and Fujis compliance programs, particularly as regards each companys acknowledged involvement in subprime lending.
The Joint Response makes a number of acknowledgments, which should be highlighted for the FRBs record:
--DKBs CIT Group/Consumer Finance makes subprime mortgage loans and charges prepayment penalties (JR at 7);
--CIT committed to $75 million of a $150 million credit facility mad with other lenders to United [Companies Financial Corp.... (JR at 5);
--CIT provided a $30 million pre-[bankruptcy] petition credit facility [to Cityscape Financial Corp.], and CIT committed to $75 million of a $150 million D[ebtor] I[n] P[ossession] credit facility made with other lenders [Note that while, as to United Companies, the JR makes a representation as to CITs average loan under the facility, no such representation is made, in the JRs same paragraph, to CITs average loan under the [Cityscape] facility] (Id.);
--[CITs] Newcourt [Financial] leased approximately $3 million of computers and equipment to Delta [Funding] (Id.);
--CIT purchased... loans from L[ong] B[each] M[ortgage]...[ While the JR says that these CIT loan purchases from Long Beach Mortgage were in the past, this does not address ICPs point: that CIT bought LBMs mortgage during the time frame for which LBM was sued for discrimination by the DOJ, based on a referral from the OTS. It does not even address whether CIT continued to buy LBMs mortgage after the DOJ had charged LBM with discrimination] (Id.);
--Fuji participated in a syndicated loan to United Companies (JR at 6);
--Fujis Heller Financial has an on-going transaction with Ameriquest [The JRs response that ICPs comment is inaccurate in that it calls Heller a creditor of Ameriquest is a defense so technical and semantic as to reflect the entirely evasive nature of the Response, and of the companies approach to their fair lending and other responsibilities. The twice-posed question, what standards do [these companies] have for their involvements in subprime lending -- is never answered, in the Joint Response] (Id.);
--IBJ acted as arranger for.. three [high-loan-to-value mortgage] securitizations (Id.). The JR claims that the National Mortgage News article cited by ICP is misleading. But the article unequivocally ranks IBJ as the SEVENTH largest High LTV Underwriter in 1998, based on data from Moodys;
--IBJ did arrange a facility for PinnFund USA [The Response misses the point, leaving unanswered what the companies (here, IBJs) standards for involvement (here, a warehouse line of credit) with subprime lenders are. In this light -- the light of IBJs acknowledged warehouse line of credit to PinnFund USA -- PinnFund USAs presumptive targeting of minorities with its high-interest rate loans remains relevant] (Id.); and, again
--DKBs CIT Group/Consumer Finance makes subprime mortgage loans and charges prepayment penalties (JR at 7).
On this central point -- DKBs CITs imposition of prepayment penalties, a practice described as predatory by numerous experts in the field, the Joint Response defense (at 7) is that ICP claims that CIT... imposes prepayment penalties on these loans more than other lenders in the subprime industry. ICP has no basis for this comment.
But the National Mortgage News article that the Joint Response quotes from (at 7) itself provides a basis, reporting that Tom Hallman, president and chief executive of the CIT Groups subprime mortgage lending unit... said about 70% of CIT Consumer Finances total existing portfolio carries some kind of prepayment protection and 75% of its new originations are similarly protected. More than 90% of CITs home equity loans that are legally eligible for such protection have it. It is comparing these statistics, provided by DKBs CIT itself, with disclosures in SEC filings for other subprime securitizations, that provide the basis for ICPs comment. The quoted article itself says that CITs extensive imposition of prepayment penalties distinguishes it from its peers. The Response is simply evasive.
Furthermore, while JR acknowledges that DKBs CIT makes C loans, it emphasizes a low percentage of D loans (JR at 7). But at 10, the JR brags that CIT provides disclosure for Section 32 loans under the Home Ownership and Equity Protection Act (HOEPA). Given HOEPAs high threshold for high cost loans, it would appear that CIT is charging D prices to... A, B and C eligible borrowers.
While the Applicants are applying for a needed pre-approval to form the largest bank in the world, the JR claims that there is nothing unusual about the Application (JR at 11). Despite the JRs energetic (but often hollow, see supra) disput[ing] of the presentation in ICPs Protest, the JR then claims that there are no disputed issues of fact (JR at 11). The JR states that ICP admits that the Board already provided ICP with the portions of the Mizuho and DKB Trust Company (USA) applications for which the applicant has not requested confidential treatment (JR at 12) -- this misses the point: the FRB has yet to respond to ICPs Freedom of Information Act request for the entire applications, and for all records reflecting communications between the FRB and the Applicants. In light of all of the above, this comment must be made part of the record, and the comment period should be extended.
On the current record, the Applications could not legitimately be approved. If you have any questions, please telephone the undersigned, at (718) 716-3540.
Very Truly Yours,
Inner City Public Interest Law Center
& Inner City Press/Community on the Move
cc: Mr. Paul S. Pilecki, Esq.
Update of May 15, 2000: Fuji, IBJ and Dai-Ichi have yet to respond to ICPs April 27 comments to the Federal Reserve Board; their response is due, at latest, on May 16, and will be reported in this space. On May 14-15, ICP filed a 19-page protest to the Mizuho applications to the New York State Banking Department, similar to the summary below, but emphasizing that the NYSBDs Acting Superintendent has recently spoken of the need to scrutinize investment banks and wholesale banks standards for involvement in subprime lending. Also, on May 12, information regarding Fujis, IBJs and DKBs involvements in questionable subprime lending was submitted to the Joint HUD / Treasury Department Task Force on Predatory Lending. These agencies responses and actions should also prove interesting...
Update of May 8, 2000 -- While Fuji, IBJ and Dai-Ichi became aware of ICPs challenge on April 27, they have yet to submit their response to the Federal Reserve. On May 5, ICP telephone Federal Reserve staff, inquiring into this. ICP was provided with a copy of a Fed letter, dated May 4, 2000, to the lawyers for Fuji, IBJ and DKB, stating that your response should be received within eight business days of the date of this letter. Which would be... May 16. Meanwhile, the Fed has yet to respond to ICPs Freedom of Information Act request of April 18. Hence, the following letter:
May 8, 2000
Board of Governors of the Federal Reserve System
Attn: Jennifer J. Johnson, Secretary
Chairman Greenspan and Governors
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
RE: SECOND TIMELY COMMENT/EXTENSION REQUEST BY INNER CITY PRESS / COMMUNITY ON THE MOVE AND THE INNER CITY PUBLIC INTEREST LAW CENTER
Dear Secretary Johnson and others in the FRS:
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, ICP), this is a second timely comment (and request for an extension of the comment period, for the reasons set forth below) on the applications and notices of the proposed Mizuho Holdings, Inc., the Industrial Bank of Japan, Limited (with its subsidiaries, IBJ), The Fuji Bank, Limited (with its subsidiaries, including Heller Financial, Fuji) and The Dai-Ichi Kangyo Bank, Limited (with its subsidiaries and controlled companies, including The CIT Group, the proposed CIT OnLine Bank, and Newcourt Financial USA, Dai-Ichi).
The comment periods on two of the (at least) four inter-related Mizuho applications expire today (see FRBNY Weekly Bulletin of May 1, 2000, at 3). On April 18, ICP faxed to the Board and to the FRBNY a Freedom of Information Act request for the complete Applications, and for all records reflecting communications between the FRS and the Applicants. The FRBNY provided portions of the Applications, and, based thereon, ICP faxed a timely comment opposing the Applications to the Board on April 26-27. Thereafter, ICP heard nothing from the Board or from the Applicants. So, on May 5, ICP contacted the FRS. It appears that ICPs April 27 protest was not formally transmitted to the Applicants until May 4. As ICP has noted to FRB Legal Division staff, this delay is inconsistent with the Boards Rules for Processing Applications, and, in this case, prejudices ICPs rights as a commenter. ICP desires to reply to whatever response the Applicants submit, and requests an extension of the comment period to do so. ICP as notes the Boards failure to provide documents responsive to ICPs April 18 FOIA request, as of the time of this submission. On May 5, ICP telephoned four separate FRB staffers attempting to obtain these responsive document: it appears that inquiries for responsive documents had already been made to the Legal Division staff; however, at days end, ICP was informed that the paralegal handling ICPs request wanted to further inquire with other staff. ICP requested an interim response / production of documents, but none has been forthcoming as of the time of this submission.
ICP has raised detailed, adverse issues in opposition to the Applications, as to each of the Applicants (each of which, beyond owning banks in the United States subject to the Community Reinvestment Act, 12 U.S.C. §2901, et seq. (the CRA), is also involved in the mortgage, business and consumer finance lending industries in the United States, including the so-called subprime (high interest rate) consumer finance lending business.
Given the detail with which ICP has timely raised and documented these issues, and given the Boards expressed concern with the part of the subprime lending industry that may be characterized as predatory, ICP believes it is important, for the completion of the record on these Applications, that it be afforded an opportunity to reply to the Applicants response(s) on these issues. The unexplained delay by the FRB in requesting a response from the Applicants should not prevent ICP from being able to reply. Accordingly, the comment periods should be extended. On the current record, the FRB should deny the Application. If you have any questions, please telephone the undersigned, at (718) 716-3540.
Very Truly Yours,
Inner City Public Interest Law Center
& Inner City Press/Community on the Move
* * *
Update of May 1, 2000: IBJ spokesman Osamu Odawara, in Tokyo, confirmed to Bloomberg News reporter Takahiko Hyuga that the banks need U.S. regulators approval; spokesmen for DKB and Fuji declined to comment. We await the banks formal response.
The Fed's procedure is that the banks will be given eight business days to respond to the protest. This page will be updated at least weekly, including once the banks' responses, and the other documents ICP has requested from the Federal Reserve under the Freedom of Information Act, are received. For or with more information, contact us.
PETITION TO DENY AND HEARING REQUEST BY INNER CITY PRESS / COMMUNITY ON THE MOVE AND THE INNER CITY PUBLIC INTEREST LAW CENTER IN OPPOSITION TO THE APPLICATIONS MIZUHO HOLDINGS, INC., FUJI BANK, LIMITED (AND HELLER FINANCIAL), INDUSTRIAL BANK OF JAPAN AND THE DAI-ICHI KANGYO BANK, LIMITED (AND CIT GROUP, CIT ONLINE BANK AND NEWCOURT FINANCIAL USA)
APRIL 27, 2000
I. PRELIMINARY STATEMENT
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, ICP), this is a timely comment opposing and requesting hearings on the applications and notices of the proposed Mizuho Holdings, Inc., the Industrial Bank of Japan, Limited (with its subsidiaries, IBJ), The Fuji Bank, Limited (with its subsidiaries, including Heller Financial, Fuji) and The Dai-Ichi Kangyo Bank, Limited (with its subsidiaries and controlled companies, including The CIT Group, the proposed CIT OnLine Bank, and Newcourt Financial USA, Dai-Ichi).
While the three Japan-based banking corporations which propose to merge to form Mizuho have operations on a global scale, each owns banks in the United States subject to the Community Reinvestment Act, 12 U.S.C. §2901, et seq. (the CRA). Significantly, each is also involved in the mortgage, business and consumer finance lending industries in the United States, including the so-called subprime (high interest rate) consumer finance lending business. Dai-Ichi has long held a controlling stake in a major U.S. finance company that is involved in subprime lending: The CIT Group (CIT). In Section II, infra, this Comment analyzes Dai-Ichi-controlled CITs lending patterns, which raise troubling questions under the fair lending laws: the Fair Housing Act, 42 U.S.C. §§ 3601-3619, and the Equal Credit Opportunity Act, 15 U.S.C. §§ 1691-1691f. CITs lending patterns are also relevant under the CRA, given CITs, Dai-Ichis and Mizuhos applications to charter and control an FDIC-insured institution, the CIT OnLine Bank, to which CITs subprime consumer finance business would be shifted (see Sections II and IV, infra).
Dai-Ichis CIT and Newcourt, IBJ, and Fujis Heller Financial, have also provided direct financing to some of the most questionable (oft-characterized as predatory) subprime lenders, including (for CIT) Cityscape, based in New York, and United Companies, based in Louisiana. Dai-Ichis and CITs Newcourt Financial has financed and enabled Delta Funding, a subprime lender sued for discrimination by the New York State Attorney General, the Department of Justice, HUD and the Federal Trade Commission. Fujis subsidiary Heller Financial is a creditor of the controversial subprime lender Ameriquest (whose high interest rate lending targeted at minorities is analyzed in Section III, infra). Dai-Ichis CIT is an approved investor for Long Beach Mortgage, sued for discrimination by the Department of Justice (the DOJ). Industrial Bank of Japan is a major securitizer of problematic high-loan-to-value (high LTV) loans: the eighth largest securitizer of such loans in the United States, according to the National Mortgage News of February 1, 1999. IBJ also directly provides loans to questionable subprime lenders; for example, IBJ provided a subprime warehouse facility (essentially, a $70 million revolving line of credit from which to make high interest rate loans) to the questionable B&C lender PinnFund USA (whose high interest rate lending targeted at minorities is also analyzed below). See, e.g., National Mortgage News of September 21, 1998, at 21 (B&C Warehouse Breaks New Ground), and see infra Section III.
This Comment timely raises and documents each of these adverse issues into the record before the Federal Reserve Board (the FRB). ICP is requesting an evidentiary hearing (and other actions, including referral to the DOJ for a fair lending enforcement action, see infra), and contends that on the current record, the Applications could not legitimately be approved.
II. THE FRBS EXPRESSED CONCERN WITH SUBPRIME / PREDATORY LENDING; DAI-ICHIS CIT GROUPS DIRECT SUBPRIME LENDING, DISPROPORTIONATELY TO MINORITIES, WITH PRE-PAYMENT PENALTIES
The Federal Reserve Boards Chairman has recently expressed the Boards worries about predatory lending, stating: Of concern are abusive lending practices that target specific neighborhoods or vulnerable segments of the population and can result in unaffordable payments, equity stripping, and foreclosure. The Federal Reserve is working on several fronts to address these issues.... Remarks of Chairman Alan Greenspan Before the Annual Conference of the National Community Reinvestment Coalition, March 22, 2000. See also, Reuters newswire of March 22, 2000: Greenspan Says Fed to Target Abusive Lending; American Banker of March 23, 2000, Greenspan Wades In On Predatory Lending, Joining Other Regulators.
Given the FRBs recently expressed concern about predatory lending, and the Chairmans statement that the FRB is working... to address these issues, this Comment will begin with an examination of Dai-Ichis involvement, through CIT, in direct subprime and, ICP contends, predatory lending. (Dai-Ichis practices merit particular scrutiny in this proceeding, given inter alia the report that IBJ officials will handle risk management and personnel affairs at Mizuho Holdings, DKB [Dai-Ichi] will take charge of planning and of monitoring regulatory compliance and Fuji Bank will send officials to take responsibility for internal financial affairs and information technology-related operations, Asia Pulse, April 4, 2000, emphasis added).
The FRB increasingly claims that while it is concerned about predatory and abusive subprime lending, there is little the FRB can do about it, because few (less than a third, according to FRB Governor Gramlich, see infra) of the lenders specializing in subprime loans are banks or bank affiliates. Mizuho would own at least five FDIC-insured institutions (banks), and a retail subprime consumer finance company, the CIT Group, which is seeking to charter and shift its subprime lending to another bank, which would be Mizuhos sixth in the United States. Furthermore, Dai-Ichi through CIT and Newcourt, IBJ, and Fuji through Heller Financial, have collectively been major lenders to (and enablers of) non-bank-affiliated subprime lenders. See infra Section III.
Dai-Ichis CIT Group Consumer Finance is a subprime lender. Dispositively, it is listed as such in the publication that the FRB is using for its definition of the subprime market: Randall M. Scheessele, 1998 HMDA Highlights, U.S. Department of Housing and Urban Development, Housing Finance Working Paper Series HF-009, 1999, at Table D5b. Thomsons subprime industry publication Origination News of April 2000 lists CIT Group Consumer Finance of Livingston, NJ as the 14th largest wholesale subprime lender in the country: larger, in this channel, than Delta Funding, than National Citys Altegra unit, than Chases Chase Home Finance unit. In terms of retail subprime presence, National Mortgage News of January 25, 1999 listed CIT Group Consumer Finance as the 30th largest retail subprime lender, by number of retail outlets, of which CIT has 31, more than Huntington Mortgage Company, more than KeyCorps Champion Mortgage unit. National Mortgage News of March 27, 2000, at 14, lists CIT Group Consumer Finance as the 16th largest servicer of subprime loans in the country: larger than GE Capital Home Equity Services, than Old Kent Financial, than (again) KeyCorps Champion Mortgage unit. Note that CITs <BrokerEdge.com> Web site confirms that CIT makes not only B and C, but even D loans.
Given CITs extensive subprime consumer finance business (national ranking are recited in the text above, and <CIT.com> states that [t]he CIT Group is one of the country's premier national mortgage and home equity lenders), it is noteworthy that the Mizuho application tries to downplay this (unsavory, see infra) side of CITs and Dai-Ichis business, stating (misleadingly) that CIT is principally engaged directly and indirectly in commercial finance and equipment finance. Mizuho App. at 6, emphasis added. The Board should not allow itself to be misled by this statement; in any event, CITs subprime consumer lending must be considered in this proceeding not only as a fair lending / managerial issue, but also as a CRA issue, since this business would be placed under an FDIC-insured institution (the proposed CIT OnLine Bank) that Dai-Ichi and Mizuho would control. See infra.
Given that Dai-Ichis CIT Group is clearly a subprime (higher-than-normal interest rate) lender, it is relevant to examine the racial demographics of its lending, under the fair lending laws. CITs lending patterns are also relevant under the CRA, given CITs, Dai-Ichis and Mizuhos applications to charter and control an FDIC-insured institution, the CIT OnLine Bank, to which CITs subprime consumer finance business would be shifted. The context for the analysis below is not only that CIT is a higher than normal interest rate lender, but also that it imposes pre-payment penalties on these loans, more than other lenders in the industry. National Mortgage News of December 28, 1998 reports that CIT charg[es] prepayment penalties -- among the practices now widely viewed as predatory, in connection with subprime loans -- and quotes the president of CIT Groups subprime mortgage lending unit, Tom Hallman, that about 70% of CIT Consumer Finance's total existing portfolio carries some kind of prepayment protection and 75% of its new originations are similarly protected, as are more than 90% of CIT's home equity loans.
So, CIT is a lender which charges higher than normal interest rates, and which, more than the rest of the subprime industry, imposes pre-payment penalties. As demonstrated below, CIT and its practices are disproportionately targeted at African Americans and Latinos, protected classes under the fair lending laws. In this proceeding, the Federal Reserve Board (1) must closely consider these patterns (under both the fair lending laws and CRA), (2) should, ICP contends, make a referral for an enforcement action by the Department of Justice, and, (3) on the current record, should deny the Applications.
Consider the record of CIT Group Consumer Financial (NJ) (CIT-NJ) in the Philadelphia Metropolitan Statistical Area (MSA): it made 87 refinance mortgage loans to African-Americans in this MSA in 1998, and 115 such loans to whites, a ratio of 0.76 to one. The aggregate industry in this MSA in 1998 had a ratio of 0.091 to one. In Philadelphia, Dai-Ichis CIT, a subprime lender proud of its imposition of pre-payment penalties, targets African-Americans 8.35 times more frequently than the aggregate for these terms.
In the Chicago MSA, CIT Group Consumer Finance in 1998 made 63 refinance mortgage loans to African-Americans, and 50 to whites, a ratio of 1.26 to one. The aggregate industry in this MSA in 1998 had a ratio of 0.120 to one. In Chicago, Dai-Ichis CIT, a subprime lender proud of its imposition of pre-payment penalties, targets African-Americans 10.5 times more frequently than the aggregate for these terms. [snip - contact ICP for more recent data]
III. DAI-ICHIS, CITS, NEWCOURTS, IBJS, AND FUJIS / HELLERS ENABLING OF SUBPRIME AND PREDATORY LENDERS
As noted above, the FRBs Chairman has recently expressed the Boards worries about predatory lending, stating: Of concern are abusive lending practices that target specific neighborhoods or vulnerable segments of the population and can result in unaffordable payments, equity stripping, and foreclosure. The Federal Reserve is working on several fronts to address these issues.... Chairman Greenspans Speech Before NCRCs Annual Conference, March 22, 2000.
One front that the FRB should be working on to address the scourge of predatory lending is close scrutiny of bank holding companies (BHCs) and their subsidiaries financing and enabling of predatory subprime lenders. This is not only common sense (see, e.g., the New York Times March 15, 2000 exposés focus on Lehman Brothers role in enabling First Alliance, and the Times previous expose of Delta Funding, which focused on Bankers Trusts enable of this company) -- the FRB should note that other regulatory agencies are explicitly considering these issues. For example, in 1999, the Office of Thrift Supervision (OTS) imposed a condition on Lehman Brothers, in connection with its emergency acquisition of Delaware Savings Bank and with reference to Lehmans business with Delta Funding, requiring Lehman to implement fair lending safeguards for this business.
Inquiry into BHCs (here, IBJs, Dai-Ichis, and Fujis, see infra) enabling of predatory subprime lenders is particularly important in light of the FRBs apparent perception that its relative inaction on the issue is justified by a superficial count of how many pure subprime lenders are banks or BHC-subsidiaries. See, e.g., FRB Governor Gramlichs April 14, 2000 speech in Syracuse, New York (justifying the FRBs lack of action on the issue of predatory lending by noting that only a third of the 239 HUD-identified subprime lenders are bank affiliates). Governor Gramlich stated:
HUD compiles an annual list of the subprime lenders that report data under 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.
ICP contends that Governor Gramlichs presentation is misleading, including in a way relevant to this proceeding, in which the FRB must scrutinize Dai-Ichi, IBJ and Fuji and the companies they control, for CRA, managerial resources, and fair lending. First, the HUD study that Governor Gramlich cited (the above-referenced 1998 HMDA Highlights, HUD 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. (In any event, the above-analyzed CIT Group Consumer Finance, controlled by Dai-Ichi, is therein listed as a company specializing in high interest rate loans). The report, in the introduction to the list Governor Gramlich referred 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. It should be noted that several companies financed and enabled by Dai-Ichi and/or Fuji, even beyond those listed below, are in fact engaged in problematic subprime lending.
Gov. Gramlichs 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. One thing that Governor Gramlich didnt say is that this freedom from the regulators is one that the Fed itself has DECIDED to give. The FRB 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.
Chairman Greenspan signed a September 20, 1999 letter to the GAO expressing the Fed disagreement with the GAO Reports 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 FRBs 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, and note only the subprime PARTS of other BHC-subsidiary lenders, but also the activities of BHC-subsidiaries like Dai-Ichis CIT Group, and Fujis Heller, which finance and enable predatory subprime lenders. That must stop, in this proceeding. ICP hereby timely enters into the record in this proceeding the following:
Industrial Bank of Japan: Securitizer, Warehouse Lender and Enabler of Subprime / Predatory Lending in the U.S.
Industrial Bank of Japan is a major securitizer of problematic high-loan-to-value (high LTV) loans: the eighth largest securitizer of such loans in the United States, according to the National Mortgage News of February 1, 1999). IBJ also provides warehouse lines of credit to subprime and high LTV lenders. See, e.g., National Mortgage News of October 5, 1998, at 23, Warehouse Providers Adapt Their Products to Market Changes: [D]emand for MBS has fallen, particularly those backed by products that are perceived as carrying higher levels of risk - such as subprime or high loan-to-value mortgages... Michael Strauss, a vice president in the Industrial Bank of Japan's securities department, said his firm, in response, is offering a hybrid warehouse - securitization structure that gives originators some flexibility in terms of when and where they sell their loans. This might be a time in the market when people are looking for something like this, said Mr. Strauss. IBJ recently provide [a] subprime warehouse of this type. Previously, the structure was used primarily by high loan-to-value originators. Emphasis added.
Industrial Bank of Japans direct enabling and financing of subprime (and, ICP contends, predatory) loans is evidenced by IBJs subprime warehouse facility to the questionable B&C lender PinnFund USA. See, e.g., National Mortgage News of September 21, 1998, at 21, B&C Warehouse Breaks New Ground, by Bonnie Sinnock: PinnFund USA and Industrial Bank of Japan have closed a first-of-its-kind subprime warehouse facility that has provided the former with immediate access to a $ 70 million revolving credit line. The credit facility is backed by a senior subordinate securitization structure....
Simply to document for the record that the IBJ-funded subprime lender PinnFund USA disproportionately targets protected classes with its (IBJ-funded) high-interest rate loans, consider PinnFund USAs refinance mortgage lending in the Chicago MSA in 1998: 247 loans to African Americans, 116 loans to whites, a ratio of 2.13 to one. The aggregate industry in this MSA in 1998 had a ratio of 0.120 to one. In Chicago, IBJ-funded PinnFund USA targets African-Americans 17.8 times more frequently than the aggregate with its high interest rate loans.
Dai-Ichis CIT and Newcourt: Enablers of Predatory Lending
(Delta Funding, United Companies, Cityscape, e.g.)
Dai-Ichis CIT Group last year stepped in to save, via a $500 million debtor-in-possession loan and a warehouse line of credit to, the controversial subprime lender United Companies Financial Corp.. See, e.g., American Banker of March 2, 1999, at pg. 28. The next days American Banker reported that [t]his is the third time CIT Group has arranged similar financing for a failing subprime company, and quoted an industry analyst that CIT Group is uniquely positioned to take advantage of the fall of this industry." Emphasis added. Note that Fuji Bank, Dai-Ichis co-Applicant here, has also financed United Companies. For a description of United Companies questionable practices, see, e.g., Merchants of Misery, by Michael Hudson (1996, Common Courage Press), at 80-84, reporting for example that United Companies also charge upfront fees of 7 percent, compared to a national average of 1.75 percent..., and a slew of pre-bankruptcy consumer and civil rights litigation against the company.
To document for the record that the Dai-Ichi/CIT-saved subprime lender United Companies disproportionately targets protected classes with its (Dai-Ichi/CIT-enabled) high-interest rate loans, consider United Companies Lending Corp.s refinance mortgage lending in the Philadelphia MSA in 1998: 120 loans to African Americans, 102 loans to whites, a ratio of 1.18 to one. The aggregate industry in this MSA in 1998 had a ratio of 0.091 to one. In Philadelphia, Dai-Ichi/CIT-saved United Companies targets African-Americans 13 times more frequently than the aggregate with its high interest rate refinance loans. In the New York City MSA, Dai-Ichi/CIT-saved United Companies targets African-Americans 15 times more frequently than the aggregate with its high interest rate refinance loans.
For further example, Dai-Ichis CIT stepped in with loans for the embattled Cityscape Financial Corp. of Elmsford, New York, both pre- and post-bankruptcy. See, e.g., Mortgage Banking magazine, May 1998, at 22 (pre-bankruptcy loan); Securities Data Publishings Bank Loan Report of December 7, 1998 (CIT as lead lender and agent for $250 million post-bankruptcy debtor-in-possession loan). See also Baton Rouge (La.) Advocate of May 2, 1999, Conflict Issue Raised in United Companies Deal: In both bankruptcies... The CIT Group Inc.... [is] providing hundreds of millions of dollars worth of interim financing for the two troubled lenders. Midanek said she called upon the companies because they have expertise in lending to companies in bankruptcy and financing subprime lenders such as Cityscape and United Companies.
To document for the record that the Dai-Ichi/CIT-saved subprime lender Cityscape disproportionately targets protected classes with its (Dai-Ichi/CIT-enabled) high-interest rate loans, consider Cityscape Corp.s refinance mortgage lending in the Chicago MSA in 1998: 29 loans to African Americans, 102 loans to whites, a ratio of 0.28 to one. The aggregate industry in this MSA in 1998 had a ratio of 0.120 to one. In Atlanta, Dai-Ichi/CIT-saved Cityscape targets African-Americans 2.33 times more frequently than the aggregate with its high interest rate loans. In the New York City MSA, Dai-Ichi/CIT-saved Cityscape targets African-Americans 6.25 times more frequently than the aggregate with its high interest rate refinance loans.
Dai-Ichis involvement in predatory lending is not limited to CIT Group. Dai-Ichis more recently acquired affiliate, Newcourt Finance, is listed as a creditor and financier of Delta Funding (see, e.g., Florida UCC Filing 99000157316, available on the Florida Secretary of States Web site, listing Newcourt Financials security interests in Delta Funding facilities in Florida and New York. By the time of Newcourts financing (and decisions to participate with Delta), 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:
WASHINGTON (BNA) -- [...] 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). --Emphasis added.
See also, U.S. Cites Abuses by Subprime Lender Delta Funding, Reuters newswire, March 30, 2000, quoting the Director of the FTCs 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, Newcourt Financial, controlled by Dai-Ichi and CIT, continued, and continues, to do business with Delta, and to make money off these predatory (and, according to the NYS Attorney General, discriminatory) loans. ICP has previously submitted to the FRB a study of Deltas foreclosures in New York City, showing that they are disproportionately in predominantly minority neighborhoods. The study is incorporated herein by reference, as is the recent DOJ, HUD and FTC action, which speaks for itself.
What standards do CIT / Dai-Ichi / Fuji / IBJ / Mizuho have for working with subprime lenders? None, apparently -- CIT is uniquely positioned to take advantage of the subprime industry (and its customers). Dai-Ichis CIT is an approved investor for Long Beach Mortgage, another subprime lender sued for discrimination by the DOJ.
Fuji: Lender to United Companies and Ameriquest
This enabling of predatory subprime lending is not confined, in this proceeding, to Dai-Ichi and IBJ. As noted above, Fuji Bank has financed the embattled subprime (predatory) lender United Companies (see analysis, supra, in connection with Dai-Ichis CITs debtor-in-possession loan that saved United Companies). Beyond that, Fujis subsidiary Heller Financial (explicitly part of the CRA performance evaluation of Fuji Bank & Trust Company (see, e.g., FDIC Exam, Exhibit 43 to the Mizuho Application, at Appendix A, Scope of Examination, listing Heller and First Capital Corp.), and going forward, of Dai-Ichi Kangyo Fuji Trust Company, formerly Yasuda) is a creditor of Ameriquest, a subprime lender currently the subject of much controversy, and previously sued for discrimination by the Department of Justice.
To document for the record that the Fuji-funded subprime lender Ameriquest disproportionately targets protected classes with its (Fuji-enabled) high-interest rate loans, consider Ameriquest Mortgage Co.s refinance mortgage lending in the New York City MSA in 1998: 371 loans to African Americans, 214 loans to whites, a ratio of 1.73 to one. The aggregate industry in this MSA in 1998 had a ratio of 0.240 to one. In the NYC MSA, Fuji-funded Ameriquest targets African-Americans 7.21 times more frequently than the aggregate with its high interest rate refinance loans. In the Buffalo, New York MSA, Fuji-funded Ameriquest targets African-Americans 10.9 times more frequently than the aggregate with its high interest rate refinance loans... In the Birmingham, Alabama MSA, Fuji-funded Ameriquest targets African-Americans 6.25 times more frequently than the aggregate with its high interest rate refinance loans. And in the Wilmington, Delaware MSA, Fuji-funded Ameriquest targets African-Americans 6.9 times more frequently than the aggregate with its high interest rate refinance loans.
Again, what standards do FUJI / Dai-Ichi / IBJ / Mizuho have for working with subprime lenders? Apparently none.
The Applicants here are involved in, and engaged with, subprime, presumptively predatory, lending on a nationwide scale. Appropriate actions should be taken, including referral to the Department of Justice, and denial of these Applications.
IV. OTHER ISSUES
OVERALL: HIGH DEBT, I.T., HOME COUNTRY SUPERVISION, ETC.
There are, of course, other issues that must be considered in connection with the Applications. The overall rationale of the mega-merger (and the financial and managerial resources of the Applicants) were nicely summarized in an article in Forbes magazine of March 20, 2000, Godzilla Bank: Can the Japanese Megamerge Their Way Out of Bad Loan Portfolios?:
Mizuho Financial Group will be too big for competing U.S. and European banks to ignore, but too technologically backward and burdened by bad debt to pose a serious threat at the time of its October launch... [A]n executive at Citigroup in Tokyo feels cocky enough to dismiss the new rival -- also double Citigroup's size -- as "three drunks in a ditch who are trying to stand up."... "We would not have merged if we did not have an extreme sense of crisis," responds an agitated Masao Nishimura, president of IBJ. IBJ is on the verge of losing its main source of financing, the exclusive right to issue five-year debentures it enjoyed as one of Japan's three designated long-term credit banks.... DKB, meanwhile, saw its ex-chairman commit suicide and 11 top executives be indicted in 1997 in a racketeer-payoff scandal ... Nishimura offers: "The merger of the three banks may not be the end. We might link up with a major U.S. bank, or we might buy one."
Each of the above-described -- high debt burdens, low spending on information technology, previous less-than-successful mergers, and, behind it all, the questionable home country supervision that the Board must consider, under FBSEA -- must be fully scrutinized in connection with this Application. This supervision is not only questionable, but also disparate, as regards the different level of scrutiny and enforcement actions directly at in-country versus non-Japanese institutions. See, most recently, Financial Times of April 20, 2000, at 23 (actions of Japanese Ministry of Finance). While this is far from ICPs main concern, it is raised to discourage any FRB rushing of this Application (a concern to ICP in light of Governor Meyers recent letter proclaiming that foreign banks will be treated fairly [and presumably quickly] by the FRB. The Applicants lack of seriousness is reflected by the presentation, Mizuho App. at 30, of reputation risk management only in terms of tak[ing] appropriate action against rumors and false information that might cause reputational risk. What if the information, like CITs lending patterns, and IBJs funding of questionable subprime lenders, etc., is true? The Application (and Mizuho, Dai-Ichi, et al.) do not address this. The Application should not be approved.
OTHER COMMUNITY REINVESTMENT ACT ISSUES
As noted above, Dai-Ichis CITs lending patterns are of particular relevance to this proceeding because CITs lending would be placed into / under an FDIC-insured institution, the proposed CIT OnLine Bank, which not only Dai-Ichi (in the San Francisco Fed application) but also Mizuho (in the New York Fed application) is seeking prior approval to acquire and run. See, e.g., Mizuho Application at 3: Mizuho... requests authorization to engage de novo indirectly in the United States in industrial loan company activities.... The CRA issues surrounding CIT OnLine Bank (and CITs subprime consumer finance lending) cannot be separated from the Mizuho application, and relegated to some separate Board deliberation and decision on Dai-Ichis (San Francisco Fed) application. ICP timely contends: since Mizuho, Dai-Ichi and CIT intend to use CIT OnLine Bank to conduct nationwide subprime consumer finance business, the statement that its CRA policy... will benefit low to moderate income individuals in Salt Lake County, Utah is a request for a mis-application of the CRA: a nationwide subprime business, the purported benefit of which is a CRA program in one city, the arbitrarily-selected headquarters city. ICP opposes this; and, for the reasons set forth above, the Applications should be denied.
V. PROCEDURAL POSTURE, AND REQUESTS
ICP made a request to the FRB under the Freedom of Information Act (FOIA) on April 18, 2000, for copies of all the applications related to these proposals, and for all records reflecting communications between the FRS and the Applicants and their affiliates. On April 21, the Federal Reserve Bank of New York provided ICP with the portions of the Mizuho and DKF Trust Company (USA) Application for which the Applicant had not requested confidential treatment. On April 24, ICP received from the Federal Reserve Bank of San Francisco a portion of Mizuhos, Dai-Ichis and CITs application to charter and own the proposed FDIC-insured institution, CIT OnLine Bank. This related Application reference to (and incorporates) a Charter and Insurance Application; however, no portion of this has been provided. As of the date of this filing, the FRB has yet to provide any of the other responsive documents, including those reflecting its communications with the Applicants.
The Applicants should be directed to respond to the issues raised in this Comment in, at maximum, eight business days (see FRBs procedural rules). ICP should have (and hereby explicitly requests) an opportunity to reply to the Applicants response. The initial comment period on two of the three applications is said to expire on May 8, 2000; on the third, May 11, 2000. In light of the FRS delay in providing any portion of one of the three Applications, and any records reflecting the FRS communications with the Applicants, ICP requests a consolidation and extension of the comment periods.
For the reasons set forth above, ICP requests an evidentiary hearing on the Applications. On the current record, the Applications could not legitimately be approved.
Matthew R. Lee, Esq.
Inner City Public Interest Law Center
& Inner City Press/Community on the Move
1919 Washington Avenue
Bronx, New York 10457
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