January 1 - March 31, 2000 (Archive #1 of 2001)
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March 26, 2001
First the spin; then the news.
On March 22, the American Bankers Association released a study, which they paid the Brookings Institution's Robert Litan to prepare, that argued against any further anti-predatory lending legislation at the state or local level, and argued that no new federal protections are needed, for at least the next two years. The Report could easily have been penned by Associates First Capital Corp. (sued for predatory lending by the Federal Trade Commission, on March 6, 2001), or by another subprime lender, PinnFund USA, which was sued by the Securities and Exchange Commission on March 21, 2001.
Litan's / the ABA's main argument is that the Federal Reserve has recently proposed amending the Home Mortgage Disclosure Act (HMDA) regulation to require lenders to report the annual percentage rate (APR) at which their loans are made, and that the Fed has recently proposed to lower the trigger for coverage by the Home Ownership and Equity Protection Act of 1994 (HOEPA), so that five percent, rather than the current one percent, of subprime loans are covered. Litan advises that no level of government legislate in this area until this new data is available and can be analyzed. But the Fed's HMDA proposal is just that -- a proposal, still not final, still not the law. Even if it were finalized, and published in the Federal Register, tomorrow, it would, at earliest, cover loans made in 2002, data concerning which would not become available until mid-2003, more than two years from the date of Litan's suggestions (for inaction).
The bogey-man that Litan uses is that "responsible" subprime lenders will simply leave jurisdictions that enact new protections. He has only one example: Countrywide Loans' announcement, earlier this year, that it will leave North Carolina, in view of that state's new anti-predatory lending law. Many industry observers have noted that Countrywide did not have a significant (or tenable) market presence in North Carolina, even before passage of the new N.C. law. Furthermore -- and leading to consideration of one of two major omissions in Litan's / the ABA's study: discrimination (the other omission is the Federal Reserve's refusal to conduct examinations of bank holding company subsidiary subprime lenders, such as CitiFinancial / Associates, see below) -- consider the degree to which Countrywide, through its subprime lending unit Full Spectrum, targets racial minorities with its higher-than-prime interest rate loans.
In the Philadelphia Metropolitan Statistical Area ("MSA") in 1999, Countrywide's subprime unit Full Spectrum made 43 refinance loans to whites, and 41 such (subprime) loans to African Americans (a ratio of 1.05 to 1). The industry as a whole (the aggregate) made 42,476 refinance loans in this MSA to whites, and 5,301 to African Americans (a ratio of 8.01 to 1). Countrywide's subprime unit, Full Spectrum, is more than seven times more likely to target African Americans with high interest rate loans than the industry as a whole in this MSA.
In the New York City MSA, the subprime Full Spectrum in 1999 made 19 refinance loans to whites, and 17 such (subprime) loans to African Americans (a ratio of 1.12 to 1). Countrywide Home Loans, at normal rates, made 667 refinance loans in this MSA to whites, and 302 to African Americans (a ratio of 2.20 to 1). The Countrywide "family" is twice as likely to target African Americans with high interest rate loans in this MSA. The industry as a whole (the aggregate) made 25,648 refinance loans in this MSA to whites, and 7,204 to African Americans (a ratio of 3.57 to 1). Countrywide's subprime unit, Full Spectrum, is more than three times more likely to target African Americans with high interest rate loans than the industry as a whole in this MSA.
Litan's study treads lightly over the question of discrimination in subprime lending: the degree to which subprime lenders target communities of color, and presume that all residents are worse-than-normal credit risks. Litan does not even mention the question of "referral-up": that loan applicants with prime credit histories should be given prime-priced loans, by the lender they apply to, or one of its prime-lending affiliates.
This question of "referral-up" is particularly important in a conglomerate bank holding company like Citigroup, which now owns the large subprime lender, Associates First Capital, having merged it into Travelers Insurance's old subprime unit, CitiFinancial. But Litan, while citing the Treasury Department's and HUD's 2000 study of predatory lending, makes no mention of this study's recommendation, which included that the Federal Reserve should begin conducting consumer compliance examinations of bank holding company subsidiaries which engage in subprime lending. The General Accounting Office made this same recommendation, in 1999; its 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." Litan suggests increasing enforcement agencies' budgets -- but if the agency with jurisdiction (here, the Fed) is unwilling to conduct onsite examinations, an increased budget is not the solution.
On March 23, Fed Governor Gramlich gave a speech about predatory lending, at Cleveland State University. It was largely re-heated, and emphasized the Fed's proposed changes to the HOEPA and HMDA regulations. Of the former, Gov. Gramlich stated: "Now that the proposed revisions to the regulation are out for public comment, we will be able to examine the responses in more detail." Emphasis added. The speech was given March 23; the comment period on the Fed's HOEPA regulations closed on March 9...
After Governor Gramlich's speech, the Financial Times' Abigail Rayner interviewed him. The FT's article (3/26) quotes ICP that "[b]anks have complianc[e] tests every two years but their affiliates like Citigroup's CitiFinancial don't. The FTC action against Associates should be a trigger to say the Fed should be examining some of these affiliates," then reports: "'There is a bit of a hole there,' admitted Mr Gramlich. 'The question of compliance exams is a different issue and its not in anything we've done,' he said, adding that such finance arms were under the jurisdiction of the FTC and the state. Consumer groups would argue that the FTC has limited resources. 'The FTC has less staff, they can't do the kind of examinations that the Fed could,' said [ICP]."
The American Banker of March 26 quotes "[a] Fed lawyer, speaking on condition of anonymity, [that] the agencies... may try to determine whether regulators have any authority to probe a bank's nonbank affiliates that make loans, such as mortgage companies, but do not take deposits." This is misleading. Of course the Fed has "authority" over bank holding company subsidiaries. The only argument the Fed's been able to come up with is that it thinks that the FTC and DOJ have explicit enforcement jurisdiction, under ECOA and/or the Fair Housing Act. Note that that's "explicit," not "exclusive," and that the Fed could bring enforcement actions against BHC subsidiary lenders under other legal theories (including safety and soundness and reputational risk), and/or make referrals to the Department of Justice...
As to the ABA / Litan "report:" it is not surprising that a bank trade association would release a report that opposes consumer protection regulation. That the trade association's report is given the veneer of objectivity, by an ex-Treasury Department official and his more recent Brookings Institution affiliation is more surprising. The omissions in the report reveal it to be an advocacy document, by an industry that wants to prevent passage of consumer protection legislation. The industry, of course, has other weapons in this fight: campaign contributions, and, relatedly, lobbying. This report will provide a patina of academia to these lobbying efforts, in the coming months...
Litan's study for the ABA is available, in PDF format, at <http://www.aba.com/NR/rdonlyres/00003594asmhksfkzepaxsef/LitanReport91.pdf>.
...The Fed also responded last week to another of ICP's long-pending FOIA requests, filed December 13, 2000, for complaints filed with the FRB. The Fed's response included:
Chase Manhattan Mortgage Corp.: Consumer indicates that he did not receive an accurate disclosure concerning prepayment penalties. The RESPA form has "may not" have a prepayment penalty checked when the actual mortgage contract contains a ride that states that a prepayment penalty will be imposed if he refinanced within three years. FRB action: Referred to OCC.
Chase Manhattan Mortgage Corp.: Consumer fell behind in mortgage payments, however tried to get current by sending in the amount due plus one hundred dollars. Bank did not accept this offer; bank foreclosed on the property. FRB action: Referred to FTC.
Chase Manhattan Mortgage Corp.: Consumer faces foreclosure due to the bank's lack of acknowledging past payment. Also, bank failed to provide a detailed copy of the account history. FRB action: Referred to OCC.
Chase Manhattan Bank USA, N.A.: Complainants asked the bank to cancel credit insurance on their account but the bank continues to charge them $60/month for the unwanted insurance. Account has been charged over $500. Additionally, bank's letter to the customers about closing their account did not correctly disclose the [Federal Reserve Bank of New York] address in the [Equal Credit Opportunity Act] language. Resolution: bank were informed that the FRBNY address is incorrect and the complaint was forwarded to the OCC.
The Fed's FOIA response last week did not include Chase's newly-acquired subprime unit, Advanta; ICP will be making a new FOIA request...
* * *
March 12, 2001
Before this week's CRA round-up, we direct readers to our separate report on chickens coming home to roost: on March 6, the U.S. Federal Trade Commission sued Citigroup, and the subprime lender it acquired last Fall, Associates First Capital Corporation, for predatory lending. Citigroup knew, when it bought Associates, that the FTC was investigating the company; Sandy Weill and Robert Rubin apparently believed that their reputations and political connection (and contributions) would discourage the FTC from filing suit. The FTC filed its suit early in the comment periods on Citigroup's applications to acquire European American Bank began -- click here to view ICP's just-filed comments.
Beyond the FTC's March 6 lawsuit, the action was hot and heavy in Washington last week. In the House, Representatives Barrett (D-WI) and Luis V. Gutierrez (D-IL) introduced a "Community Reinvestment Modernization Act" on March 6. The bill, among other things, would extend CRA to all loans and lenders, require a public comment period for all mergers between banks, insurance and investment companies, and more generally (and in the words of the sponsors), make insurance more available, affordable and accessible to people of color and low-income communities. The insurance industry quickly opposed the bill, claiming it is unnecessary, unwarranted, and even "bizarre" (this last from Ken Reynolds, the executive director of the "Association of Banks-In-Insurance"). David Farmer of the American Insurance Association claimed that the "insurance industry is the largest single institutional purchaser of municipal securities -- we're already buying bonds for cities and municipalities, which goes toward building bridges, schools and other public properties in urban, suburban and rural areas." So, great: insurers buy municipal bonds (for the yield, or as a hedge against interest rate changes). What about discrimination in insurance? The insurance industry has fought, at every turn, the application of the Fair Housing Act to homeowners' insurance. Oh, we forgot: they buy municipal bonds...
... Another problem is brewing for Chase, not yet reported in the financial (or other) press. In Texas, the Equal Employment Opportunity Commission is considering a complaint against Chase Manhattan Mortgage. It's not limited to the mortgage operation that Chase bought from Mellon: the complaints were earlier forwarded to, and now, sources say, implicate, Chase's Executive Vice President for Human Relations, John Farrell, Senior Vice President for Employee Relations Claude Weir, and even, sources tell ICP, Chase CEO William Harrison. Meanwhile, the American Banker of Feb. 21 quoted Chase's David Coulter "indicat[ing] that subprime mortgage lending might become a more important business at Chase. 'We think it's an important market,' he said."
Bank of America is the third-largest holding company in the U.S.; J.P. Morgan Chase is second. As to the "Number One," Citigroup, we'll close this week with this description of Citi's practices, from the mail bag:
Subj: Citigroup
Date: 2/26/01 3:57:31 PM Eastern Standard Time
From: [ ] (deleted at correspondent's request)
To: CRA [at] innercitypress.org
Dear Inner City Press
...We recently refinanced using someone in our church body who passed themselves off as a "personal financial analyst," but was really a salesman for Primerica / Travelers. The interest rate offered was higher than the one we already had and we have a spotless credit record. When we questioned this, the rep told us that "interest rates don't matter," "it's all smoke and mirrors," and "this bank calculates the interest differently." To make a long story short, we have come to realize that this bank does nothing differently but scam people, and if we want to get refinanced yet again, we are subject to a stiff prepayment penalty...
How to reconcile this with Citigroup's claims -- for example, to the Cincinnati Enquirer of February 21, 2001: "We have gone across the country, talking with community groups to help develop the best policy. We disagree that we should not be in the communities, because we have been the one to pave the way to give loans to people who don't qualify for prime rates" -- Leah Johnson, director of public affairs for Citigroup. Noticeably absent from those "talking with community groups" has been Clinton's ex-Treasury Secretary, Robert Rubin. [A March 2 SEC filing by Citigroup disclosed Mr. Rubin's 2000 compensation: $45.3 million. Sandy Weill got $127.8 million in salary, bonus, stock and stock options...].
So, in conclusion (for this week): the third largest banks in the United States are each engaged in questionable subprime lending. The Federal Reserve, which has jurisdiction over all three of them, states that the best defense against predatory lending is... consumer education. (Gov. Gramlich, Feb. 26, 2001). While consumer education and "financial literary training" are fine, it's the Fed's job to regulate these companies. For why the Fed doesn't, readers may wish to visit this week's ICP Fed Watch Report.
...Citigroup, meanwhile, remains on the move. Less than three months after "consummating" its acquisition of the subprime lender Associates First Capital, Citigroup has announced another major deal in the United States -- a deal that, unlike The Associates, will be subject to Community Reinvestment Act review. On February 12, Citigroup announced that it intends to apply for regulatory approval to buy European American Bank (EAB), and its 97 branches. Thirty of these branches are in New York City; 67 are in the NYC suburbs of Long Island. The deal would further concentrate the New York market, making Chase and Citi far and away the largest banks, reducing competition and raising prices and fees. Citi would also close a number of branches.
When Citigroup acquired the subprime lender Associates First Capital in the Fall of 2000, over 100 groups commented to the OCC and FDIC, opposing the deal. The OCC said that is was constrained, and could not consider Citi's or Associates' records under the Community Reinvestment Act, which requires fair lending in low- and moderate-income neighborhoods. This Citi-EAB transaction IS subject to the CRA. The unresolved Associates issues will be raised, along with branch closures, antitrust, and the so-called "micro-mortgage" issue. When Citicorp and Travelers proposed to merge in 1998, ICP and others documented Citicorp's disproportionate exclusion of communities of color, including in The Bronx. The New York Banking Department (the "NYBD") required a commitment from Citigroup, to increase its lending in majority-minority census tracts in New York State.
Citigroup claims to have increased its lending dramatically in majority-minority census tracts, and to have complied with the 1998 commitment. However, a close review of Citigroup's 1999 HMDA data shows that the vast majority of these purported improvements consist of loans, under $1,000, reported as home improvement loans.
Citibank, N.A., Citigroup's bank in New York City, supervised by the Office of the Comptroller of the Currency, reported making 1,931 HMDA-reportable loans in The Bronx in 1999. But fully 1,751 (or over 90%) of these were home improvement loans.
These 1,751 home improvement loans in The Bronx were generated off 1,805 applications, for a total dollar volume of $4,064,000 -- an average of $2,252 per loan application, much lower than other lenders' average home improvement loan in The Bronx. This is clearly a program of "micro-loans" directed as majority-minority census tracts, in order to purportedly comply with Citigroup's 1999 commitment, in terms of number of loans, but not dollar volume. The $4 million that Citibank lent in The Bronx under this program in 1998, claiming thereon over 1,000 loans, is dwarfed by Citigroup's (and Citibank's) "real" mortgage lending, in Manhattan below 96th Street, for example. Even in The Bronx, note that Citicorp Mortgage, with normal-size loans, made, in 1999, 44 loans to whites, and only six to Latinos, and only five to African Americans.
Citigroup's disparities in other markets are analyzed on this (ongoing) Citigroup Watch page.
Citigroup has proffered an "explanation" of the micro-mortgages, claiming that in order to re-enter markets like The Bronx, it began to offer small home improvement loans, to establish "relationships." Also, Citigroup has been making presentations about its Associates "reforms," to religious organizations (including those which have filed shareholders resolutions for consideration at Citigroup's April 2001 shareholders' meeting), foundations, and others. It has been suggested that Citigroup squarely address the Associates issues in its EAB applications; we will be running updates.
Regarding the FDIC's "processing" of Citigroup - Associates, ICP has now received two responses from the FDIC to ICP's December 4, 2000, Freedom of Information Act (FOIA) request. The documents released include various FDIC e-mails. These reflect coordination between the OCC and FDIC, regarding both extension of the comment periods; a sudden (and belated) recognition, in mid-November, that Section 307(c) of the Gramm-Leach-Bliley Act required the FDIC and the OCC to request comments from state insurance regulators; Citigroup's unwillingness to tell the FDIC where its / Travelers' insurance companies are "domiciled" -- and, despite this, an accomodative relationship between the FDIC and Citigroup. For example, an e-mail from Mark P. Jacobsen of the FDIC, to other staffers on November 16, 2000, when the FDIC asked Citigroup five questions about subprime lending, states the "you can have Sweet [Citigroup's outside counsel] call me if he has any questions or want to vent as to why we have handled this the way we have." Another e-mail, on November 17, from the FDIC's John M. Lane, recites that "Pam Shea and I returned a call to Carl Howard of Citigroup and he indicated that a response (about 10 pages) to our five questions would be provided around 4 PM today. He has placed a call to Steve Cross and offered to discuss the letter around 5:45 P.M today... We also discussed some additional state insurance commissioners that we intend to notice beyond the two, Connecticut and Texas, that Citigroup had suggested."
The documents also show an awareness of (though, in the end, a dismissal of) Congressional interest in the transaction. An e-mail from Robert C. Fick of the FDIC, to other staffers, on November 30, 2000 (when Citigroup's applications were approved), states: "I heard some comment (unverified) that Congresswoman Waters was intending to ask the FDIC to delay our decision."
The FDIC's interim FOIA determination letter states that 279 pages are being withheld, and that "Our record searches remain in progress. Additional information will be provided to you as soon as it is available." An incongruity: the FDIC has provided summaries of the comments of "61 sources" -- which do not include ICP, which commented, extensively, from September 25, 2000, onwards. Apparently, the FDIC intends to withhold these documents from ICP -- or to heavily redact them. Developing...
Now Chase / Advanta -- and the OCC... On January 8, Chase announced its intention to buy all of the subprime mortgage lending business of Advanta Corporation. This business has been conducted through Advanta's banks, including two national banks. ICP inquired with the Office of the Comptroller of the Currency, the regulator of national banks, about Chase's proposal. ICP was told that the OCC did not anticipate receiving any application from Chase.
Then, Advanta's proxy statement, for its February 27 shareholders' meeting on the proposal, came out, stating that Advanta National Bank would be requesting approval from the OCC to pay a dividend to Advanta Corp, of the money it would receive from Chase. ICP inquired with the OCC, and was told to submit a Freedom of Information Act (FOIA) request -- which ICP did. Well, the OCC has now claimed that any documents responsive to that FOIA request are exempt from disclosure, as a trade secret. A national bank's application to pay a dividend to its parent, after selling off all of its subprime mortgage lending business -- is exempt from disclosure? In its entirety? That's the OCC's claim. ICP has appealed.
On February 5, after news reports that Fleet has sued Advanta, alleging that Advanta Corp. IS selling "substantially all" of its business to Chase, ICP wrote to the OCC, formally asking them to require an application, under the Bank Merger Act's "all or substantially all" standard. Well, in a letter mailed to ICP on February 13, the OCC's Chief Counsel states:
"This is in response to your letter of February 5, 2001... in [which] you requested that the Office of the Comptroller of the Currency ('OCC') require an application under the Bank Merger At with respect to the proposed acquisition by Chase Manhattan Mortgage Company of mortgage loans currently held by Advanta National Bank. Chase Mortgage is an operating subsidiary of Chase Manhattan Bank USA, N.A.. Under the Bank Merger Act, no application is required when a subsidiary of a bank acquires additional assets. Therefore, the OCC does not anticipate receiving an application with respect to this acquisition...".
-emphasis added.
But this response -- hardly explains the matter. First, Chase is proposing to acquire far more than just "mortgage loans" -- it is acquiring Advanta's entire subprime mortgage business, including origination capacity. Second, the matter is not resolved simply by which entity Chase proposes to make the acquisition through (i.e., a bank subsidiary, rather than a bank). The issue is, are "substantially all" of the assets of Advanta National Bank being acquired. Fleet, a national bank, says yes, and cites statistics regarding the percentage of assets, and of business, that Chase is proposing to acquire. The OCC's purported response cites no statistics, percentages, or anything else. It characterizes that Chase is acquiring as mere "mortgage loans," and states that because Chase is doing it through a national bank subsidiary, it will not require an application.
On Citigroup - Associates, the OCC claimed that it could not address the issues raised, due to the limitations of the Change in Bank Control Act. Here, on the next large acquisition of a troubled subprime lending operation, the OCC won't even ATTEMPT to address the issues, won't even require an application, despite one of its national banks' public citation to statistics that, if correct, clearly trigger an application....
On February 15, content with the knowledge that the OCC would, despite all of the above, not require an application, Chase made a presentation about its own subprime lending, to individuals it (Chase) selected to attend a meeting in New York City. Among other things, while Chase claimed that its subprime lending unit, Chase Manhattan Funding ("CMF") does no Home Ownership and Equity Protection Act ("HOEPA") loans, nor single premium credit life insurance, it admitted that it does not have the systems in place to "weed out" such loans from its "warehouse" channel, nor from the loans it securitizes. A more detailed report on the meeting is on ICP's ongoing "J.P. Morgan Chase Watch" page.
February 12, 2001
We return, this week, to the ongoing topic of predatory lending. Anvil Mortgage Banking, Ltd. (which Inner City Press "exposed," in our Bronx Report of January 22, 2001, click here and scroll down) was the subject of an enforcement action, finally, last week, by the New York Banking Department. The NYBD has scheduled a hearing for later this month, on whether to strip Anvil of its license to do business in New York. The company, which targeted people of color, with late-night television ads to a Gospel music background, routinely took a $500 application fee from prospective first-time homebuyers -- and then never made a lending commitment. Simply fining this company will not be enough: it should be put out of business, and all wrongfully taken application fees should be returned.
The Anvil scam is similar to another recently-reported marketing practices, by "Nissan Bancorp," based in California. This firm, despite the name, is not a bank, or bank-affiliate, at all: it offers a credit card, for a $287 application fee. But it turns out not to be a credit card at all, only a card to order products from a catalogue. ("Nissan Bancorp" is not affiliated with the car-maker of that name, by the way). The main "benefit" for the $287 fee is a booklet about credit repair: once you're $287 poorer...
Congress has not passed any meaningful legislation on predatory lending, and so states and localities are enacting what safeguards they can. The big subprimers react with outrage. Most recently, Countrywide Home Loans' subprime unit, Full Spectrum, loudly announced it will stop lending in North Carolina, claiming it can't make a profit, in view of the safeguards enacted there. Countrywide is a company which has repeatedly claimed to be "progressive," to be living up to the spirit of the Community Reinvestment Act even while not covered by this law. (Note that Countrywide IS trying to acquire a bank, Treasury Bank, in Washington D.C. - ICP commented against this application, in Fall 2000, and application remains pending)...
Then you have the cases where the federal bank regulators attempt to "increase the value" of their bank charters by supporting their use to get around state legislation. The FDIC, for example, sought to intervene in a Louisiana case against GE Capital's subsidiary, Monogram Bank, arguing that as long as the bank takes a single insured deposit, it should be able to preempt state law about interest rates, late fees, and other consumer protections. But the only deposit Georgia-based Monogram Bank ever took is from GE itself. The federal district court for the Eastern District of Louisiana, in Heaton v. Monogram, decided on January 5, 2001, to demand the case to state court, finding for the second time that Monogram is not "engaged in the business" of receiving deposits from its customers. The FDIC is now seeking a stay, claiming that it will be converting a previous "General Counsel's Opinion Letter (No. 12) into a regulation, entitled to "deference" by the courts...
Corporate firms, and certain high-profile "New Democrats," are making much money, helping some high interest rate lenders get around state consumer protection laws. The Philadelphia-based law firm of Ballard Spahr represents Green Tree, and has represented Monogram, as one of its three outside counsel, in the above-mentioned Louisiana case. Former Philadelphia mayor Ed Rendell, a major player in the Gore campaign, is now at Ballard Spahr, as is former Philly City Solicitor Alan Davis, and current mayor John Street's former chief of staff, Stephanie Franklin-Suber. Rendell's former chief of staff, David Cohen, is the chairman of the firm. Most recently, Mr. Cohen was reportedly among the lawyers lobbying the Philadelphia city council, in opposition to the predatory lending ordinance it is considering.
Readers interested in the ever-expanding service industry to subprime lenders might want to check out the Web site of the United States Foreclosure Network -- they no longer use that name ("foreclosure"), just the acronym USFN, and their new slogan: "America's Mortgage Banking Attorneys." And how about MERS: a service that seeks "to eliminate the need to prepare and record assignments when trading mortgage loans." This way, borrowers won't even know who owns their loan...
Now, going global -- the Washington (and Wall Street) connection. On February 7, new Treasury Secretary Paul O'Neill toured the trading floor of J.P. Morgan Chase, saying he wants to "blur the distinction between the private and public sector," and "organize a process so there's a regular opportunity for dialogue." The Fed's rubber-stamp approvals of Citicorp-Travelers in 1998, and of Chase - Morgan at the end of 2000, would seem to reflect that, at least for the largest banks, the "distinction between the private and public sector" is ALREADY blurred... J.P. Morgan Chase chairman Sandy Warner told Bloomberg, during the tour, that O'Neill was "soliciting a feel that we have close to markets, close to issues around the world...".
Meanwhile, in Peru, J.P. Morgan Chase's regional director, Susana De la Puente, has been using her company e-mail to send out letter fundraising for conservative, pro-business presidential candidate Lourdes Flores. A spokesman for J.P. Morgan Chase in New York, Andy Tuck, said De la Puente was acting as a private Peruvian citizen, not a bank representative in sending the letter, stating that "J.P. Morgan has a long-standing policy of not endorsing political candidates." The company's massive campaign contributions, apparently, shouldn't been viewed as any "endorsement...".
* * *
On MetLife's still (half) pending application to get into banking, the OCC on January 29 approved a side application, to relocate the main office of Grand Bank, N.A. (which MetLife is applying to the Fed to acquire), from Monmouth Junction to Bridgewater, New Jersey. The OCC's January 29 letter recites that ICP's
"concerns were centered on two main points: (1) it did not believe that the pro forma bank was eligible for a requested wholesale designation under the CRA; and (2) it cited an alleged record of racial discrimination in MetLife's existing insurance operations... Negating the first issue, on December 22, 2000, MetLife withdrew its previous request to the OCC... for the Bank to have a CRA wholesale designation under its acquisition. With respect to the second issue, while this is a matter of great interest to the OCC, the Federal Reserve System will evaluate this issue as part of its review of MetLife's pending application to become a bank holding company and financial holding company through its acquisition of Grand Bank."
We'll see what the Fed does on this "second issue." But it is significant the MetLife withdrew its (bogus) request for "wholesale bank" status under CRA. Relatedly, ICP has submitted a second round of comments on Schwab / U.S. Trust's application to acquire Resource Trust Company, opposing "wholesale bank" status for U.S. Trust's banks. (The FDIC extended its comment period on this application; ICP awaits a ruling from the Connecticut Banking Department and the Fed). This "wholesale" loophole to CRA must be closed, for banks (like Schwab's / U.S. Trust's) which explicitly say that they serve only the affluent, with mortgages, etcetera. Developing...
Meanwhile, J.P. Morgan Chase's proposed acquisition of the subprime mortgage lending business of Advanta has hit a snag. As reported by Reuters on February 2, FleetBoston has filed a lawsuit against the deal:
According to papers filed late on Thursday in the Delaware Court of Chancery, Fleet said its 1998 agreement to buy the bulk of Advanta's consumer credit card business provided that any remaining obligations tied to that sale would be assumed by any buyer of "substantially all" of Advanta's assets.
Fleet contends that the sale by Advanta's of its $15.8 billion mortgage loan servicing portfolio qualifies as the sale of substantially all of its assets.
"Advanta's mortgage banking business comprises 80 percent of its managed receivables, over 50 percent of its net income, and 34 percent of its assets," court papers say. Selling it "affects the existence and purpose of Advanta."
Chase Manhattan Mortgage Corp., of Edison, New Jersey, said in a Jan. 8 statement that, pending shareholder and regulatory approval, it expected the deal for Advanta's servicing portfolio for 200,000 customers and its $1 billion annual origination capability to close in the first quarter 2001. No sale price was specified...
--Reuters newswire, February 2, 2001, emphasis added.
Chase has argued to the Office of the Comptroller of the Currency that it is NOT acquiring "substantially all" of Advanta's national bank. Fleet, clearly, disagrees. It remains to be seen if the OCC may reconsider its initial view of the proposed transaction (as not requiring an application from Chase), in light of Fleet's lawsuit and arguments). We will have more on Fleet's lawsuit against Advanta's sale of its subprime business to Chase, as it develops...
January 29, 2001
From the policy debates, to where the rubber meets the road: last week, the Treasury Department released a report claiming that the Gramm-Leach-Bliley Act has not reduced community lending. It's a strange conclusion to reach, given that post GLB (that is, year 2000) mortgage and small business lending data is not available yet. This specious conclusion is largely based on interviews with bankers, who apparently said they're all aiming for "Outstanding" CRA ratings, in light of the GLB Act's one pro-CRA provision: that less than satisfactory CRA ratings preclude a bank holding company from becoming a financial holding company, and limit the powers of financial holding companies. As reported below (and finalized in the Federal Register of January 3, 2001), the Federal Reserve has unilaterally de-fanged one of these two "teeth," in a December 21, 2000 Christmas gift to Citigroup and Associates National Bank. This, of course, is not mentioned in the Treasury Department study, which was in fact "out-sourced" to the Brookings Institute (the place of exile of Larry Summers, et al.) and Harvard College. Click here for Treasury's outsourced study.
January 16, 2001
The big banks' rapacious interest in high-interest rate mortgage lending was further confirmed by Chase Manhattan's announcement, on January 8, that it is buying the subprime mortgage operation of Advanta. Bloomberg News put the sales price at $1.6 billion. The American Banker reports that in 1999, Chase "originated $2.7 billion of subprime loans; Advanta, $2.6 billion." In 2000, Advanta was hit with a regulatory enforcement action, and its originations declined. But the 1999 volume represents the Advanta subprime unit's capacity. With this proposal, Chase would be doubling its subprime lending. Given the regulatory hoopla about this part of the mortgage business, throughout 2000, you'd expect scrutiny of this proposal, similar to that afforded Citigroup - Associates in the fourth quarter of 2000. But you might be wrong...
The Office of the Comptroller of the Currency doesn't expect any application from Chase for this acquisition, even though the announcement was made by one of Chase's national bank's operating subsidiaries. Since in 1998, when First Union bought The Money Store, the OCC at least received an operating subsidiary notice, considered community groups' comments on the deal, and imposed some conditions, the lack of any application or notice for this 2001 deal represents another effect of the Gramm-Leach-Bliley Act of 1999: banks' ability to buy controversial businesses -- here, a subprime lending operation subject to a cease-and-desist order -- without any pre-consummation notice, and no comment period.
The industry, too, views this as a (re-) legitimization of subprime lending. "This shows that these major financial institutions view the subprime market as a part of the mortgage market they want to be major players in," an analyst at UBS Warburg (yes, that used to be PaineWebber) told trade publications. "They're legitimizing what for some years has been viewed with some skepticism by some investors, and I think these companies are putting their stamp of approval on it."
Inner City Press has gone back, this week, to review the most recent Community Reinvestment Act performance evaluations of Chase Manhattan Bank. The Fed's exam, released in late 1999, is 121 pages long, but does not use the word "subprime" once. The exam purports to have considered the lending of the bank and its affiliates, Chase Manhattan Mortgage, and Chase Manhattan Bank USA, N.A.. In response to ICP's comments in November 2000, Chase reported the following subprime loan volumes, during the period covered by the Fed exam:
Subprime First Mortgage Loans
Chase Manhattan Bank CMMC CMB USA, N.A.
1997 450 7,034 NA
1998 602 13,797 NA
1999 1,225 25,408 NA
Subprime Home Equity Lines/Loans
Chase Manhattan Bank CMMC CMB USA, N.A.
1997 825 NA 3,085
1998 1,155 NA 14,480
1999 472 NA 3,514
That's over 70,000 subprime loans -- not even mentioned in the Federal Reserve's (or New York Banking Department's) CRA performance evaluations of Chase. Apparently, there'll be no pre-consummation scrutiny of Chase's planned purchase of Advanta's subprime lending operation, which would double Chase's subprime lending -- and no "post-consummation" scrutiny, either, absent increased advocacy, and even legislative change. Welcome to 2001...
January 2, 2001
During the holiday lull, the Federal Reserve concluded its de-fanging of the one pro-Community Reinvestment Act provision of the Gramm-Leach-Bliley Act, while the agencies fully-fanged that law's "CRA Sunshine" requirement. The Fed's lawless December 21 rule is analyzed below, in last week's Report; the ramification of the Sunshine regulation, and ICP's December 29 foray into court against Chase - Morgan, will be our focus this week.
Absurd Sunshine
Perhaps the best way to demonstrate the absurdity -- and "unworkability" -- of the CRA Sunshine regulation is to examine the pro-merger comments that U.S. Bancorp and Firstar solicited from non-profit organizations in the last month of the year. ICP protested the merger, on predatory lending groups, on December 4. One of the banks' responses alluded to "a hundred letters" of support. The Fed had never provided copies of these to ICP, so ICP submitted a Freedom of Information Act request. Last week, we received the response: a three inch thick stack of similarly-worded one page letters. We'll review some here:
On December 11, 2000, the National Equity Fund, Inc. ("an affiliate of Local Initiatives Support Corporation," according to its letterhead) wrote to tell the Fed that "in cooperation with NEF... Firstar continues its dedication to community investment."
By the Dec. 21 Sunshine regulation's definition, this is clearly a "CRA communication." Under the reg, we assume the NEF, and LISC and its other affiliates, will be filing Sunshine reports with the agencies, on June 30, 2001. LISC of the Twin Cities also, for example, wrote in, stating that "we look forward to [Firstar's] merger with US Bank." This question of "affiliates" was left unaddressed in the regulation, and will, we predict, become a major mine field in its implementation. Consider:
Neighborhood Housing Services of St. Joseph, Missouri wrote in to the Fed, also on December 11, stating that "Firstar has been a financial contributor to NHS St. Joseph." NHS of Louisville, Kentucky wrote in, praising Firstar. NHS of St. Louis stated that their "relationship [with Firstar] has survived the Mercantile/Firstar merger and we believe it will survive the Firstar/US Bank merger." The NHS' in the Twin Cities, and in Dayton's Bluff (St. Paul, Minnesota), also wrote in. Local NHS' are all, legally, affiliates of one another. NHS of Davenport, Iowa's letterhead states, "member of the national NeighborWorks network," and Community NHS of St. Paul, Minnesota's letterhead bears the NeighborWorks logo. So how many "Sunshine" reports will that be?
The United Way of Southern Kentucky wrote in, that "Firstar Bank has been a major supporter of the United Way of Southern Kentucky for many years." The United Ways of Crawford County, Kansas, Greater St. Louis, and Johnson County, Missouri, wrote in as well. Local United Way's are all, legally, affiliates of one another...
The Louisville, Kentucky Urban League wrote in, on December 7, with a "letter in support of the Firstar Bank Community Development Program." The Urban Leagues of Greater Madison (Wisconsin), Paduka-McCracken County, Kentucky, and St. Joseph, Missouri, also wrote in. Local Urban League's are all, legally, affiliates of one another...
The YMCA of Metropolitan Chicago wrote to the Fed, stating that "Firstar has been... contributing every year to our annual campaign." The agencies' Sunshine regulation appears to give an exemption for such an "annual campaign" -- but only if there is no "CRA communication," which there clearly now has been... From the YMCA of Metropolitan Milwaukee, as well. Local YMCA's are all, legally, affiliates of one another...
Habitat for Humanity offices in the Twin Cities, and in Cincinnati, wrote in; the latter stated that it "encourage[s] your regulatory approval of the Firstar merger with US Bank."
The Herbert Hoover Boys and Girls Club of St. Louis, Missouri, sent in a "letter of support on behalf of Firstar Bank," noting that "Firstar has contributed over $113,500 to the Club." The Boys and Girls Clubs of Greater Milwaukee chimed in to the Fed, stating that "Firstar has... provided major gifts over the years -- $20,000 - $100,000."
Citizens for Community Improvement of Des Moines, Iowa, wrote in, describing among other things Firstar's participation in CCI's annual home buying seminars, and that "Firstar also donates to CCI... to continue our work in Iowa," and stating that "we are in favor of the merger as long as our relationship can continue to assist in furthering the cause of CRA." CCI's letter noted that "with the most recent merger we lost the privilege of [a] 'signed agreement,' because the new bank's upper management had a policy against such agreements." Not any more -- since the agencies' regulation would define such letters as "CRA communications," and such donations as agreements, they will have to be reported on in detail...
The Community Reinvestment Fund, headquartered in Minneapolis, also named dollar figures, "in view of the pending acquisition of U.S. Bank by Firstar Bank." (Actually, it's U.S. Bancorp that's acquiring Firstar, and consolidating the headquarters in Minneapolis -- but who's counting?)
Christmas in April (of Metro St. Louis) wrote in, citing "financial support of Firstar Bank... they are our second largest contributor."
The American Red Cross, St. Louis Area Chapter, wrote in that they are an "advocate for Firstar Bank... in support of the proposed merger of Firstar and US Bank... Firstar is currently helping support Red Cross programs."
The St. Louis Public Schools wrote in. While they might seem to qualify for the "governmental" reporting exception, this is not necessarily clear for all school systems, given the tend toward privatizing particular schools (see this week's ICP Bronx Report, regarding NYC Education Chancellor (and past and future Citigroupie) Harold Levy's planned privatization of schools, including one in The Bronx, to Edison Schools, Inc.).
The March of Dimes' letter was most open-ended, "recommend[ing] Firstar Bank with regard to any business transaction that you might be pursuing." This is an ONGOING "CRA communication...". When the March of Dimes offices are required to submit annual "CRA Sunshine" reports, they'll have Senator Gramm, and the agencies, to thank for it...
Consumer Credit Counseling Services of Central Ohio wrote in, stating that "we at CCCS look forward to expanding our Firstar relationship. As their service footprint expands, so does ours. We are now part of a credit counseling team serving clients in three states. This merger could strengthen these services and Firstar partnerships." This letter, explicitly in favor of the proposed merger, is without question a "CRA communication," as the agencies (and Senator Gramm) have defined it. Another CCCS office (in Dayton, Ohio) also wrote in. Reports from every CCCS office? If not, it'd be selective enforcement...
As pertains to the still-pending U.S. Bancorp - Firstar proceeding, it can be said that the banks "set up" all these groups for detailed reporting, presumably without informing the groups about the ramifications of the letters of support the banks solicited. In the bigger picture, one must question whether the agencies will be demanding detailed financial reports from (every) United Way, Habitat for Humanity, Boys and Girls Club, NHS, Urban League, YMCA, Red Cross, March of Dimes, etcetera. If not, why should / would advocacy groups, alone, be expected to report? Developing...
Chase - Morgan
And now, some news from the courthouse, and the world of on-the-spot self-serving representations by banks (updated at the bottom of this week's Report). On December 29, ICP filed suit against the New York Banking Board's approval of Chase's application to acquire J.P. Morgan, on Open Meetings Law, CRA and other grounds. At an emergency hearing held at 5 p.m. on Dec. 29, Chase "agree[d] that no additional affirmative steps will be taken prior" to a court hearing set for January 2, 2001. Chase claimed it didn't need to take any more steps, that the merger was already on "automatic pilot." Some background:
ICP opposed Chase's applications, in detailed comments submitted from November 6, 2000, onwards (most of these comments are reproduced on ICP's Chase Watch page). Chase required (and still requires, ICP contends) two approvals: one from the New York Banking Board (NYBB), for the holding company merger, and one from the Superintendent (NYBD), for the bank merger. The NYBD extended the comment period to December 8. The NYBB meeting, which is required to be open to the public, was scheduled for December 14.
But on December 14, only eight of the Banking Board members showed up. The New York Banking Board is supposed to have 17 members. Accordingly, and as admitted by the Superintendent of Banks in the minutes of the meeting, there was no quorum. The Superintendent sought to "cure" this, by having the eight members present vote in writing at the meeting, then "procur[ing]" (that's how the minutes put it) the votes of the members who were not present -- who numbered six, because three of the Board seats are vacant. (Actually, many of the Board members' terms have expired, but that's another story, another flaw).
There's a major problem with this. The NYS Open Meetings Law requires "public business be performed in an open and public manner and that the citizens of this state be fully aware of and able to observe the performance of public officials and... listen to the deliberations and decisions that go into the making of public policy." As ICP notes in its lawsuit, filed on December 29, the New York State Committee on Open Government (COOG) has ruled repeatedly that members of public bodies (like the NYBB) cannot cast votes unless physically present at the meeting of the public body. See, e.g., Comm. on Open Gov't OML Advisory Opinion ("AO") 2575 (public bodies must guarantee public ability to "be fully aware of" and "listen to" deliberative process). The COOG has ruled that a member of the Public Service Commission could not validly vote even if "attending" the meeting by 2-way telephone link. OML-AO-2480. In a case directly on point, the COOG has stated unequivocally that "a member of a public body cannot participate unless he or she is physically present at a meeting of the body." OML-AO-2853 (1998).
There are a number of other legal violations in the approvals; this one is clear, a "slam-dunk." As is ICP's claim against the Superintendent's approval of the bank merger: the Superintendent issued this approval on December 7 -- that is, while the comment period was still open! ICP has also noted that four NYBB members who were physically present should have recused themselves from voting. One, John Robinson, is an employee of FleetBoston Financial, which ICP challenged on Dec. 11, 2000. At the Dec. 14 NYBB meeting, just prior to voting, Mr. Robinson stated stated at the meeting his view that the NYBD has "a near perfect record of credibility" in terms of enforcing the Community Reinvestment Act, and that "that credibility is constantly challenged -- as well as the credibility of the banking industry, which by and large does a terrific job responding to CRA -- by a particular group which consistently makes fairly outrageous, and to my experience on this Board, unsubstantiated and unsustained allegations... Maybe I'm just venting my frustration." Transcription of tape of meeting, emphasis added. It is clear from the tape, and context, that Mr. Robinson, whose bank ICP had publicly challenged three days previous to the December 14 meeting, was referring to ICP. His personal "frustration," and "venting" thereof, make it clear that he should have recused himself from voting on ICP's challenge to the Chase - Morgan application.
Another NYBB member, Charles Hamm of Independence Savings Bank, which ICP challenged in late 1997, stated at the meeting, during the Chase-Morgan presentation, that he was "underscor[ing] one of John [Robinson]'s points -- all of which I agree with...". Mr. Hamm also should have recused himself from voting on ICP's challenge to the Chase - Morgan application. Two other board members were also conflicted, through connections to companies which do business and/or compete with Chase and Morgan. And, substantively, ICP's comments on Chase's and Morgan's Community Reinvestment Act record, and involvements with problematic subprime (that's, predatory) lenders (all of which is summarized below on this page) were not addressed, and were not even submitted to the NYBB members, as Section 142 of the N.Y. Banking Law requires.
Immediately following the December 14, 2000, NYBB meeting, ICP requested a copy of the minutes, under the Freedom of Information Law (FOIL), in a letter that plainly said that ICP was considering seeking judicial review. The NYBD only provided ICP with the minutes on December 27 -- two business days before the merger was to be consummated (Dec. 31, according to Chase's and Morgan's own joint press release, which states that "the merger will close on December 31, 2000").
On December 29, ICP filed suit in NYS Supreme Court, New York County, seeking to stay and annual the approvals. ICP telephoned the Banking Department, and they sent a lawyer over to the courthouse. ICP telephoned the banks' outside counsel. Soon, the NYBD's outside counsel, the Office of the State Attorney General, sent a lawyer. As did Chase -- two lawyers in person, and one on speaker phone. And, at five p.m., a hearing was held in the chambers of Justice Phyllis Gangel-Jacob.
After Justice Gangel-Jacob had summarized the claims, one of Chase's lawyers pulled out a document, and claimed that, despite and contrary to Chase's and Morgan's joint press release, the merger had already closed. The document was a December 29 filing with the Delaware Secretary of State. But on closer inspection, the document plainly says that the merger is not "effective" until 11:59 p.m. on December 31. Chase claimed that the merger was now on "automatic pilot" -- nothing could be done to stop it. Justice Gangel-Jacob opined that this was a "sucker punch," and began writing an order that the "parties agree that no additional affirmative steps will be taken prior" to a hearing she was scheduling for Tuesday, January 2, 2001, at 9:30 a.m., before Justice Eileen Bransten. The Chase lawyers, including Chase's outside counsel, on the speaker phone, became agitated. They said that "people all over the world are preparing for the merger," and that "the merged stock will be traded on January 2, 2001." Justice Gangel-Jacob inserts the second of these phrased into the Order.
But a question is: can the companies "de-activate" one of their stocks, and actually consummate the holding company merger, without taking "any additional affirmative steps" between December 29 at 5:45 p.m. (when the Order was signed) and the January 2 oral argument? Chase and Morgan have already created a joint Web site, and Bloomberg of Jan. 1 reports that the companies have, in fact, merged, based on the banks' joint press release, issued at 12:15 a.m. on January 2.
Later on January 2, there were oral arguments, beginning at 10:30 a.m., and running through 3:50 p.m.. The banks' lawyers had prepared affidavits: their chief financial officer Dina Dublon averred that
"[a]ny uncertainty about the future of the company -- even the perceived risk that the company might be broken up -- would likely have enormous adverse consequence to the trading prices of our stock. And because of the size of J.P. Morgan Chase and its prominent role in the U.S. and global financial services industry, any adverse effect on its stock could well spread beyond its stock to affect the broader stock markets generally."
From this, the banks' law firm argued that, even if a stay could be granted (or continued), "Petitioners must first furnish a bond to protect J.P. Morgan Chase from the adverse consequence set forth in the Dublon Affidavit." This point was pressed in oral argument as well, using the figure $3 billion (the banks' self-calculated annual cost savings). By this logic, a corporation or merger as large as this could never be subject to judicial review, except by a party with $3 billion. The banks went further, arguing that, although they needed New York regulatory approval, as Delaware corporation(s), New York courts have no power over them or their merger(s). While claiming this "lack of jurisdiction," the banks at oral argument urged that community groups not be allowed to seek judicial review of New York Banking Board decisions, since New York is a "financial capital," and the inconvenience of judicial review might make it less attractive. Another Chase affidavit cited this Web site, accusing it of providing "extensive commentary that covers a variety of topics including the progress of F[reedom] O[f] I[nformation] L[aw] requests on challenged transactions" (note: why this would be viewed as negative, in the context of this litigation or otherwise, is unclear), and went on to say that "Petitioners' challenges to banks other than Chase are documented not only on the website, but in trade publications such as American Banker and are too numerous to list. Some of the more high profile challenged have been to (a) Deutsche Bank's acquisition of Bankers Trust" (note: yes, on predatory lending grounds); "(b) E*TRADE's application to acquire Telebank" (note: yes, on CRA assessment area grounds, and how CRA should apply to Internet banks); "and (c) the merger of Travelers Group Inc. and Citicorp" (note: which the Independent Bankers of America trade association also sued). Apparently, a community group actually seeking to enforce the Community Reinvestment Act (and such public interest statutes as the Open Meetings Law) makes it, in Chase's view, a pariah (Chase's representative(s) used other, harsher terms, inappropriate for this short update). These were some of the arguments, as afternoon light faded outside in Foley Square...
The Court, alluding in an oral ruling to the bond (that is, $3 billion) issue, declined to impose any stay, stating that the banks showed that they would suffer irreparable harm if the court granted the petitioners' application for a preliminary injunction. The arguments under the Open Meetings Law, the Banking Law (including the New York Community Reinvestment Act), etc., have all been submitted. The banks' memorandum of law, at n.7, states that "[t]he Bank Merger (of C[hase] M[anhattan] B[ank] and M[organ] G[uaranty] T[rust] C[ompany]) is not scheduled to close until July 1, 2001. The ruling, including on that Bank Merger (which the Superintendent of Banks admittedly approved while the comment period was still open), is expected (well before) that time. For or with more information, contact us.
Until next time, for or with more information, contact us.
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