Inner City Press Community Reinvestment Reporter

September 25 - December 26, 2000 (Archive #5 of 2000)

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December 26, 2000

       On December 21, the Federal Reserve issued two final regulations, both of them troubling from a Community Reinvestment Act perspective. Along with the three other bank regulatory agencies, the Fed issued its final "CRA Sunshine" rules, implementing the CRA-fetish provision pressed in 1999 by Senator Gramm (R-Tx), and acceded to by most Democrats, including the senior Democrats on the Banking Committees of the House and Senate. We will analyze these "sunshine" regulations below. But unnoticed by the financial press, and our first concern here, was a new provision in the Fed's regulations implementing the "financial holding company" provisions of the Gramm-Leach-Bliley Act.

         Included in that deregulatory law, as its one supposedly "pro-CRA" provision, were two ways in which a less than satisfactory CRA rating could have ramifications on a holding company. A company applying for financial holding company status couldn't have a subsidiary bank with a less than satisfactory CRA rating, unless the rating involved a bank acquired in the past twelve months (in which case a corrective plan would have to be filed). Separately, and with different statutory language, once a company is a financial holding company, if it has a subsidiary bank with a less than satisfactory CRA rating, it loses its GLB powers under 12 U.S.C. Section 1843(k) and (n). This provision, quoted below, does not have an exception for a bank bought in the previous 12 months, nor for a regulator waiving the prohibition in light of a CRA improvement plan.

      But the Fed, in its December 21 final rule, imports this loophole from one (pre-FHC) section, where it appears, to another (post-FHC-designation) section, where it does not appear, presumably (and presumptively) by Congress' choice. Now, despite the statute, the Fed will not impose any ramifications on FHCs that come to own banks with less than satisfactory CRA ratings.

       And who, you ask, might this benefit? To date, only one company: Citigroup. As reported at length elsewhere on this web site, Citigroup has acquired Associates First Capital, the much-sued subprime lender, and its bank, Associates National Bank, which has a rare Needs to Improve CRA rating. ICP raised this issue to the Fed in comments from September 25, 2000 to November 30, 2000, when it filed a formal petition for the Fed to notify Citigroup that, having just become the parent of a bank with a Needs to Improve CRA rating, it could no longer exercise powers under 12 U.S.C. Section 1843(k) and (n). [further legal analysis omitted in this format]

      As soon as Citigroup became the parent of Associates National Bank, with its Needs to Improve CRA rating, ICP asked the Fed to provide notice under the above-quoted section. For three weeks, the Fed did not respond. Then, on December 22, ICP received a letter from the Fed, citing to the revised and final GLB rule, released December 21 in Washington. The Fed's Associate Secretary's letter recites that

"[b]y letter dated November 30, 2000,you petitioned the Board to prohibit Citigroup.. from engaging in additional financial activities after the acquisition by Citigroup of Associates First Capital Corporation... A third party has no standing under the BHC Act, the GLB Act, or the Board's regulations to contest whether a company continues to qualify as a FHC or whether a FHC may engage in financial activities. Accordingly, the Board is returning your petition.

"Please note, however, that section 225.84 of Regulation Y sets forth the circumstances under which a FHC that controls an insured depository institution with an unsatisfactory CRA rating will be prohibited from expanding its financial activities under the GLB Act. AS reflected in this section, the Board has interpreted the GLB Act to require the Board to prohibit a FHC from expanding its financial activities only when one of the FHC's insured depository institutions has received a poor CRA rating while the institution is under the FHC's control. This interpretation gives full meaning to the words of the GLB Act. It also facilitates an important public purpose of allowing FHCs that have insured subsidiary depository institutions with satisfactory ratings to acquire and enhance the CRA performance of insured depository institutions with unsatisfactory ratings.

Sincerely yours, Robert deV. Frierson, Associate Secretary of the Board"

      Thou dost protest too much. The Fed's letter has to say that "the Board has interpreted the GLB Act...giv[ing] full meaning to the words of the GLB Act... facilitat[ing] an important public purpose" -- because the Fed's "interpretation" IS NOT WHAT THE GLB ACT SAYS. The Fed has CHANGED the law, in a way that benefit only one institution: Citigroup, the only FHC to have acquired a bank with a less than satisfactory rating. The Fed's January 2000 interim rule and preamble did not put forward this "interpretation" -- because Citigroup didn't need it then. Without having put this legal-switch out for comment, the Fed's December 21 preamble to its now "final" rule says, at page 14, that

"[t]he Board also has considered the applicability of the CRA provisions to the situation in which a FHC acquires an insured depository institution with a poor CRA rating. The terms of the GLB Act require that the Board apply the prohibitions if 'any insured depository institution subsidiary of such FHC... has received in its most recent examination under the CRA a rating of less than "satisfactory record of meeting community credit needs."' The Board believes that this language is best read to apply only when an insured depository institution received a less-than-satisfactory CRA rating while it is under the control of the BHC. [Footnote 6: Moreover, although the GLB Act requires the Board to impose prohibitions on the activities and acquisitions of a FHC if an insured depository institution of the FHC has received a less-than-satisfactory rating at its most recent CRA examination, the statute does not enumerate a specific procedure or time frame in which the Board must implement this requirement]...This notice will occur, if at all, at the first CRA examination after the poorly rated insured depository institution is acquired by the FHC. If the institution does not achieve at least a satisfactory CRA rating at its first CRA examination following the acquisition, the prohibition would apply to the FHC. This interpretation is consistent with the provision of the GLB Act that allows the Board when evaluating a FHC election to exclude the poor rating of any institution acquired by the company within the preceding 12 months. The Board will monitor the FHC's progress in addressing the CRA performance of any recently acquired insured depository institution and reserves the right also to provide notice that the CRA prohibitions apply if the FHC is not taking appropriate action to improve the insured depository institution's CRA performance."

       The Fed is simply changing the law, dressing it up in verbosity about "interpretation" and "reserving the right." Where the Fed says that the new loophole it creates is consistent with another section of the GLB Act, it ignores that Congress could have, but didn't incorporate this "12 months to fix" loophole into the post-FHC-election CRA provision. It's just not there, and the Board, constitutionally, has no right to read it in. But who's going to (effectively) protest? The Board's Dec. 21 letter to ICP says that "third parties have no standing." How about the Democrats that claimed so much credit for the inclusion of this provision in the GLB Act? Or are they conflicted, since the company the Fed has invented this loophole for is.. Citigroup, major donor? We shall see...

         It's worth parsing the gnarled language of the Fed's Dec. 21 preamble:

"[t]he Board also has considered the applicability of the CRA provisions to the situation in which a FHC acquires an insured depository institution with a poor CRA rating" -- but the Fed didn't raise this issue, for "consideration," in its interim rule of January 2000, or in the accompanying preamble. It only became an issue when Citigroup, the Fed's largest (and apparently favorite) FHC, suddenly had a problem.

"The Board believes that this language is best read" -- this is the Fed's way of acknowledging, as quietly as possible, that it is "reading," that is, changing, the terms of the statutory language -- "Footnote 6: Moreover, although the GLB Act requires the Board to impose prohibitions on the activities and acquisitions of a FHC if an insured depository institution of the FHC has received a less-than-satisfactory rating at its most recent CRA examination, the statute does not enumerate a specific procedure or time frame in which the Board must implement this requirement" -- breath-taking! The Fed, here, is cynically claiming the benefit of a word-for-word reading of the same statute that, above, it felt so comfortable "reading" and interpreting: since the law does say WHEN the Fed has to give notice, it never has to. This Fed statement should trigger outrage among Congressional Democrats. But will it? See above. "

"This notice will occur, if at all, at the first CRA examination after the poorly rated insured depository institution is acquired by the FHC." Note: the statute says NOTHING ABOUT THIS. The Fed is simply making up a time table.

"If the institution does not achieve at least a satisfactory CRA rating at its first CRA examination following the acquisition, the prohibition would apply to the FHC. This interpretation is consistent with the provision of the GLB Act that allows the Board when evaluating a FHC election to exclude the poor rating of any institution acquired by the company within the preceding 12 months" -- as noted, the Fed is referring to another section of the GLB, where this 12 month loophole exists. It doesn't exist, post-FHC-election.

"The Board will monitor the FHC's progress in addressing the CRA performance of any recently acquired insured depository institution and reserves the right also to provide notice that the CRA prohibitions apply if the FHC is not taking appropriate action to improve the insured depository institution's CRA performance" -- wait a minute -- the Fed just said it would give the acquiring FHC until the next exam. Now it says it will be monitoring the FHC, even before the next exam. Again, the Fed's simply invented this procedure, which will take place entirely outside of public scrutiny, even the scrutiny available, in the pre-FHC-election procedure, of the FHC having to file and have accepted a CRA improvement plan.

     By the Fed's logic, even if a bank than an FHC acquired then received a Needs to Improve CRA rating, six months after the acquisition, the Fed could claim that the exam was BASED ON performance before the FHC acquired it. The only thing that's clear from all this is that the Fed will bend the rules for Citigroup, as it did when it permitted the Travelers-Citicorp merger in 1998, before the GLB Act had even been enacted.

      ICP has raised this, in a December 26 letter, to the Federal Reserve Board's Chairman, Governors, and Inspector General. We will report responses on this site...

      And now, the agencies' CRA Sunshine regulation. While even many in the banking industry have said they oppose this provision, and its new "inter-agency" regulation, the agencies were required to finalize a rule. A major issue raised to the agencies was that by limiting reporting to those groups which comment to a Federal bank regulatory agency, an impermissible burden is being placed on petitioning the government for redress of grievances, an activity expressly protected (from interference, or undue burden) by the First Amendment to the U.S. Constitution. The final rule nevertheless maintains this focus -- it even carves out an exception for situations in which the regulators themselves choose a group to solicit comment from. In that scenario, a group is NOT "petitioning the government for redress;" therefore, the agencies impose no reporting requirement. The impermissible targeting of "petitioning" (that is, advocacy) groups could not be more clear in the regulation. It is also demonstrated by the agencies' statement (in the FRB's preamble at 28) that law firms will not be covered, because they'd be considered "representatives of insured depository institutions." The agency, apparently, didn't think of (or care about) the situation in which a law firm (a Legal Services or other public interest law entity) represents not a bank, but a community group. The final rule will also intrude upon attorney-client privilege; or, the agencies are trying to create a situation in which, in a legal proceeding, one side (banks) has legal representation, and the other (community groups and the public) does not...

     Under the final rule, groups that merely comment to a regulator in connection with the agency's CRA performance evaluation of a bank may subject themselves to more burdensome reporting requirements, the exact scope of which is not clear, even from the final regulation. So much for input, even outside of the merger application process... Even the trade group America's Community Bankers said: "Fewer creative and innovative partnerships will be formed because of competitive and privacy concerns, and business arrangements beneficial to the community may be disrupted because of an unwillingness to disclose contracts for proprietary and competitive reasons."

       While less of a Constitutional issue, the agencies statements about what constitutes a "CRA communication" reflect the degree to which this statutory provision, and now its regulation, aim to make "CRA" a pariah word. According to the agencies, no reporting will be required is a "nongovernmental entity or person" (awkwardly referred to as an "NGEP") communicates with a bank only "generally" about the CRA. Reporting is only triggered when the NGEP mentions the "adequacy" of the particularly bank's CRA performance. If you criticize, you must report. If you, by omission, praise, no reporting is required. How this will affect the reporting duties of the generally pro-bank groups represented on the "community councils" of such institutions as Chase Manhattan, Fleet et al. -- remains to be seen. Perhaps they'll say they NEVER discussed the "adequacy" of the banks' performance, in these (closed-door) meetings. But then, what was the point?

        Senator Gramm, predictably, criticized the regulation as soon as it was issued. But the agencies bent over backwards to implement his unconstitutional, "spotlight on the petitioners" scheme. This is kabuki theater: if Sen. Gramm didn't criticize every minor "compromise" the agencies made, the agencies might have made more. There's more to be said about this final "Sunshine" regulation, and we may say more, on this site, as it goes into effect.

Footnote: the FDIC Board's meeting on December 21, 2000, to vote on the final regulation, was more interesting than the Fed's typically cursory (and only briefly) "open" meeting." At the FDIC meeting, Comptroller Hawke gave his view of the goal of the sunshine provision: "It is intended to deal with the perception that some activist community groups were exerting some influence on financial institutions." How about that? The FDIC's Vice Chairman Andrew Hove said, "I hope that our actions and our urgency are not politically motivated." Yeah, we sure hope not...

    Click here for our ongoing Chase Watch.

     Footnote on a footnote: In Reports in previous weeks, we've been covering the Fed's processing of MetLife's application to get into banking (soliciting deposits nationwide, while limiting its CRA program to a single New Jersey MSA), including a discrepancy we raised between the Fed Secretary's FOIA withholding of "three and a half linear inches" of documents from MetLife's application, compared to MetLife's counsel's Nov. 10 letter stating that he had submitted more than "thirty cartons" of documents to the Fed (that was intended, by MetLife, to show how comprehensive the Fed's review has been). Well, in Governor Gramlich's Dec. 12 ruling on ICP's FOIA appeal (which concludes, "I affirm in part and reverse in part the Secretary's decision"), he recites the discrepancy ICP identified, then states: "Board staff confirmed with MetLife's counsel that his 30-carton estimate accounted, in large measure, for the duplicate sets of submissions required to be provided by an applicant during the processing of an application and did not accurately reflect the amount of information submitted by MetLife as of October 6, the cut-off date for your initial FOIA request." Emphasis added. So MetLife, in purporting to response to ICP's challenge, "[in]accurately reflected the amount of information submitted," to make the Fed's review appear to be more comprehensive than it has, in fact, been. Developing...

       Finally, speaking of the brave new world, last week when rumors grew that Kookmin Bank (11% owned by Goldman Sachs) was in talks with merge with Housing & Commercial Bank (whose largest shareholder is ING Barings), Kookmin's workers occupied the corporate headquarters. Kookmin's president Kim Sang Hoon barricaded himself in his office, and soon announced that the merger, which would result in lay offs and give Kookmin a 40% market share of South Korea's retail banking business, was no longer being discussed. But by December 16, Seoul media were reporting that the talks had started up again -- largely at the demand of Goldman Sachs and ING. Ah, globalization...

December 4, 2000

       From the regulators, much talk, little action, on predatory lending and other evasions of the Community Reinvestment Act. After many speeches on predatory lending, and after, just last week, speaking harshly about banks' involvements with payday and title lenders, the OCC on November 30 approved Citigroup's notice to acquire Associates First Capital and Associates National Bank, which has a rare "Needs to Improve" CRA rating. The FDIC and New York Banking Department also approved Citigroup's notices on November 29; less than two hours later, Citigroup "consummated" its deal with Associates. Advocacy will continue (ICP, for one, filed suit against the deal in a Missouri circuit court, on December 1) -- but for now, let's analyze the regulators' carefully-worded approvals of Citigroup's applications.

       The OCC's approval order, "Corporate Decision #2000-21," goes out of its way to state that the "OCC's role... pertains only to Associates N[ational] B[ank], not [Associates First Capital]." So, after a year of speeches about predatory lending, when faced with an application by the largest bank holding company to acquire the most scandal-plagued subprime lender, the OCC claims that it can't get to the issues that are raised. Of course, the OCC could have: Citigroup's decision to acquire Associates First Capital, given its record, raised (and raises) issues about Citigroup's "competence, experience and integrity," one of the explicit factors under the Change in Bank Control Act. The same applies to the FDIC.

      The NYBD's press release announcing its approval at least doesn't have the defensive (and hence, pro-Citigroup) tone of the OCC and FDIC decisions. The NYBD's Director of Consumer Services and Financial Products is quoted: "We are confident the agreement reached will provide increased consumer protections for sub prime borrowers and will help to raise lending standards in the sub prime residential lending market. The Department looks forward to working with Citigroup to resolve any outstanding issues raised and to ensure the proposed pilot programs are swiftly implemented in New York State." The release also states: "Citigroup will work with the Banking Department to resolve issues arising from a 1998 agreement." This, of course, is a reference to the "micro-mortgage" scandal that arose during the proceeding. Citicorp's regulatory counsel, Carl Howard, in a July 22, 1998 letter to the NYBD, had committed that for all of Citicorp's mortgage lenders,

"the percentage of their HMDA-reportable lending in 1998, 1999 and 2000 in the majority minority census tracts in the cities of Buffalo and Rochester, the counties of Erie and Niagara combined and the county of Monroe, respectively, will equal or exceed the percentage of such lending by them in these areas for the first six months of 1998," and that "the percentage of their HMDA-reportable lending in 1998, 1999 and 2000 in the majority minority census tracts in the following areas: 1. Nassau and Suffolk counties combined, 2. Westchester and Rockland counties combined, 3. Queens County, 4. Kings County, 5. Bronx County, 6. New York County and 7. Richmond County, will equal or exceed the adjusted Aggregates' percentage of such lending."

      The way Citigroup then tried to comply with this commitment was by making very small "micro-" home improvement loans, mostly below $1,000, and counting each as if it were a real / regular mortgage in a majority minority census tract. By dollar volume of lending, Citigroup still dramatically trails the aggregate. While the NYBD may have erred in not requiring a dollar volume commitment from Citigroup, Citigroup's actions amount to misleading its regulators. An emerging argument: the micro-mortgages made by Citigroup, based on direct mail, may not have been "HMDA-reportable" at all...

...we wish to explore an analogy that's struck us, during the holiday lull.

      The second half of the 1990s saw a growing outcry, on college campuses and elsewhere, about sweatshop labor being used to make designer-name clothing, shoes, athletic equipment and paraphernalia. Brand-name sellers of these products -- Nike, Disney, Wal-Mart, Kathy Lee Gifford, Levi-Strauss -- came out with a slew of vaguely-worded codes of conduct, few of them providing for outside monitoring of compliance. The Clinton Administration, pro-business New Democrats as always, allowed Kathy Lee in for a photo opportunity, and jerry-rigged its own "Apparel Industry Partnership" code, which similarly provides for little outside monitoring or oversight. Those concerned about predatory lending, and tempted to be heartened by the on-again, off-again interest of Democratic (Party) politicians, ought to keep the lesson of (most of) the New Democrats bumbling on the sweatshop issue in mind...

    Most knowledgeable labor and human rights advocates have concluded with without disclosure -- of which subcontractors the brand names are using, and where -- generalized codes of conduct and "best practices" are near meaningless. For this reason, even in a relative world, the NYBD's approach (requiring disclosure of which subprime companies the banks have worked with) is more substantive than the Fed's soft-ball questions ("tell us about your principles"). As reported on ICP's Bank Beat page, from mid-October onwards, Credit Suisse and DLJ, to whom the NYBD first directed these questions, turned in an inaccurate answer, not even listing two of the subprime lenders to which DLJ had made warehouse loans in the last two years. ICP was able to point this inaccuracy out, because one of the two warehousing relationships showed up in Security and Exchange Commission filings by the subprime lenders. But there are business relationships between investment banks and subprime lenders that are not, and are not required to be, disclosed in SEC filings. How then is a bank's disclosure to be evaluated?  One step, it seems clear, is that inaccurate disclosures must lead to significant penalties. If a company can mis-disclose, and simply amend the answer, if a commenter happens to be able to prove the omission, there's no reason more companies won't try this two-stage disclosure. To date, Credit Suisse and DLJ have suffered no penalty for their inaccurate filing of October, 2000. Their lawyer simply expressed "regret," and the companies consummated their over-all deal, leaving DLJ's New York State trust company behind, with DLJ's ex-parent, AXA.

     The American Banker of Monday, November 27, 2000 reports on the NYBD's question letter, and quotes Chase's outside counsel that "'This will not pose any difficulties for the banks'... Noting that Credit Suisse First Boston and Donaldson, Lufkin & Jenrette were asked similar questions when state regulators reviewed their merger, he said, 'It is becoming part of the application these days.'" "N.Y. Regulator Asks J.P. Morgan, Chase About Subprime Activities," by Rob Garver, American Banker, November 27, 2000, Pg. 1. ICP's executive director is quoted that "[i]f this were as routine an inquiry as they say, they would have addressed it in their application. They were hoping the questions wouldn't be raised."

     In support of that, compare ICP's November 6 comment (set forth on ICP's Chase Watch page) to Chase's November 14 response (the "Resp."), on the issues raised in the Fed's question letter:

    Chase's Resp.'s only (oblique) reference to the slavery issues was a statement, at 2, that ICP's "Comment is replete with references to Chase's alleged history, ranging as far back as 150 years...". That's it -- there is no other response, on the slavery or Holocaust issues. On the subprime lending issues, no mention is made of Morgan, and Chase only responded, however superficially, as to its own, direct subprime mortgage lending. The Fed has now asked about "other consumer" subprime lending, and about Chase's involvement with subprime lenders as warehouse lending and underwriter. If, as Chase's counsel told the American Banker on November 22, Chase and Morgan have no problem responding to these matters, which are simply "part of the application these days," why did not only Chase's application, but also Chase's purported response, not address these issues? And, for the (ongoing) story of the NYBD's somewhat similar information request to Credit Suisse and DLJ (referred to by Chase's counsel, quoted above), see ICP's Bank Beat page, from mid-October to the present.

       ...Meanwhile, in other CRA-relevant news, Bank One's CEO Jaime Dimon (recently ejected from Citigroup) has announced that each Bank One branch will now keep its own profit and loss statement. Dimon claims this will be used "to determine managers' compensation, among other things." Those "other things" could foreseeably include branch closing decisions. Most large bank moved away from compensating their mortgage officers based on dollar volume, realizing that this formally gave an incentive to de-emphasize loans in low- and moderate-income neighborhoods. How is Bank One's new branch manager incentive program different?

       Treasury Deputy Assistant Secretary Michael Barr on Nov. 15 told a National Association of Attorneys General conference on predatory lending that "Banks and thrifts should have in place procedures to ‘upstream’ these borrowers with good credit histories into their prime mortgage units." The Treasury Department's OCC unit, meanwhile, is telling callers that there's little they can do on Citigroup's application to acquire Associates First Capital, and to limit referrals-up to four states (and, even then, only provide a phone number for another Citigroup unit).

      ...Beyond the above-referenced (and linked-to) Chase - Morgan comments, ICP last week asked the OCC to follow a recent precedent of the New York Banking Department: asking investment banks about their involvement in, and standards for, working with subprime lenders. As previously reported, the NYBD last month asked Credit Suisse and DLJ a series of questions on this issue. Last week, ICP directed the following to the OCC, which is considering an application by the investment bank Goldman Sachs for a national bank charter:

[T]here are issues that the OCC should and must review, that are relevant to low- and moderate-income neighborhoods, and communities of color.

For example, as reported by the National Mortgage News of May 17, 1999, "Goldman Sachs, the investment banking firm, has agreed to pay $35 million for Southern Pacific Funding Corp., Lake Oswego, Ore., a bankrupt subprime lender." In the first half of 2000, Goldman Sach was in the list of the top ten underwriters of mortgage-backed securities. See, e.g., National Mortgage News of July 24, 2000. Goldman Sachs also, through its Archon Group unit, makes multi-family mortgage loans and owns multi-family properties (though apparently primarily in non-LMI areas: see, e.g., PR Newswire of November 3, 1999 ("largest luxury apartment community" in Fairbanks, Alaska). All three of these activities -- purchasing and otherwise enabling questionable subprime lenders, securitizing residential mortgage loans, and lending on, and owning, multi-family housing -- affect (or, in the third case, can affect) low- and moderate-income neighborhoods, and communities of color. When an investment bank involved in these activities submits an application to a bank supervisory agencies for regulatory approval (particularly, as here, for a bank charter), the institution's existing activities that affect LMI neighborhoods and communities of color, including the fair lending and other safeguards it has in place, should be reviewed.

In his May 24, 2000, testimony to the House Committee on Banking and Financial Services, Comptroller Hawke stated inter alia that "the subject of abusive lending practices raises important supervisory issues for the [OCC]." In a May 5, 2000, letter to the Chairman of the Senate Banking Committee, the Comptroller wrote that "[t]he type of lending that is characterized as predatory does not appear to be done to any perceptible degree by national banks, and information about unregulated lenders that may engage in these practices is not available to the OCC as part of its supervisory activities."

This application presents the OCC with the opportunity (and responsibility) to act in accordance with its publicly-stated concern about that portion of subprime lending that may be characterized as predatory. Infra, ICP suggests some of the questions that the OCC should ask Goldman Sachs, and that Goldman Sachs, upon receipt from the OCC of this comment, should answer.

In support of ICP's request to the OCC, annexed hereto is a question letter the New York State Banking Department (the "NYSBD") recently send to the counsel for Credit Suisse and Donaldson Lufkin & Jenrette ("DLJ")... [N]ote that Goldman Sachs is involved in subprime auto lending business, as well. See, e.g., Crains Automotive News, September 27, 1999, reporting Goldman Sachs as underwriting a transaction described as "subprime paper for car dealers." Note also Goldman Sachs investment (and subsequent equity stake) in the controversial subprime auto lender Mercury Finance. See, e.g., American Banker, December 23, 1998.

       We await the OCC's and Goldman Sachs' responses, as we and others prepare for the NYBD's November 10 public meeting on Citigroup's applications to acquire Associates First Capital's NYS business (the sign-up form is here).  ICP is also asking the OCC and FDIC, in light of the NYBD's decision to hold a hearing, but with only New York jurisdiction, to reconsider their denials to date of the many hearing requests they've received. The OCC, we've been told, has received at least 150 comments on Citigroup's proposal -- seemingly the most ever on a Change in Bank Control Act notice. Meanwhile, the Fed on November 6 will consider, at a closed meeting, an application by Citibank, N.A. to expand its business in Santiago, Chile. The Fed's received various comments opposing Citigroup, on which it has refused to act, or even to consider in connection with other Citigroup applications pending before it...

      Perhaps because of this incredibly lax regulatory scrutiny, Citigroup appears blissfully (or arrogantly, depending on your perspective) unconcerned about obtaining regulatory approvals. Bloomberg of November 4 reported (citing the Dallas Morning News), that "Associates First Capital Corp., which Citigroup Inc. is acquiring for about $31 billion, will fire about 2,100 workers, or some 25 percent of its workforce in the Dallas area, the Dallas Morning News reported, citing company spokesman Dave Sandor. All but 100 of the workers to be let go work in the company's headquarters in Las Colinas, a suburb of Dallas, the paper said. About 500 employees were notified yesterday and 1,600 were told their jobs will be eliminated next year, the paper said." Also, Associates recently sold $1.5 billion in "floating rate notes" -- through Citigroup's Salomon Smith Barney unit. The "integration" has already begun...

       But, in a parallel universe where the naïve still believe in the rule of law, other state proceedings on Citigroup's applications for regulatory approval continue. ICP turned in its post-hearing brief to the Missouri Department of Insurance on October 30. As set forth in the (too-small type) transcript in last week's report, ICP's brief notes one of Citigroup's lawyers, Carl Howard, schmoozed the Fed on September 5 (the day before the deal was announced), about Associates National Bank's Needs to Improve CRA rating, while another of Citi lawyer, CitiFinancial general counsel Martin Wong, in sworn testimony before the Missouri Department of Insurance on October 18, said he didn't know if Citigroup has communicated with the Fed about this. We over-use this phrase, but here it's particularly appropriate: "developing...".

       ...Citigroup's proposal to buy The Associates has been in the news, but not enough attention has been paid to the regulatory process.    Sure, under the Gramm-Leach-Bliley Act, there's no application to the Federal Reserve Board. But there are applications, to the Office of the Comptroller of the Currency and the FDIC, and to a number of state regulators. On October 24, the New York Banking Department announced a public meeting on Citigroup's applications, to be held on November 10 at the Union Theological Seminary on Broadway and 121st Street in New York City. And, at a hearing before the Missouri Department of Insurance on October 18, Citigroup's officials had to answer questions, under oath, including about the legal effect of Associates National Bank's rare Needs to Improve rating under the Community Reinvestment Act. A portion of the transcript, with ICP's representative at the hearing cross-examining Martin Wong, the general counsel of Citigroup's high-rate lender, CitiFinancial:

7 [ICP's MR. LEE:] ....is it your understanding, Mr. Wong, that

16 question.

          Inner City Press has been trying to get "the answer to that question" -- whether, as Citicorp and Travelers did in 1998, the now-combined entity has sought private advice and assurances from the Federal Reserve Board. ICP has just received from the Fed, in "further response" to its September 19 Freedom of Information request, partially blanked-out copies of two Fed e-mails, both from Thursday, September 7, the day after Citigroup announced its plan to acquire The Associates.

     The New York Fed's Joyce Hansen writes to Thomas Baxter: "This follows up on the call Bill, Betsy and I had with Carl Howard on Tuesday where he disclosed that CA has three credit card banks, one of which is a Delaware national bank with a less than satisfactory CRA rating."   The rest of the e-mail has been withheld from ICP. But note that "Tuesday" was September 5 (the day before the deal was announced), and that Carl Howard is one of Citigroup's regulatory lawyers. So, as in 1998, the Fed has been willing to meet behind closed doors with companies who will later have to submit applications subject to public comment, and give out advice, that the Fed then withholds from the public. The e-mail also calls Mr. Wong's answers, above, into question. In the above-quoted portion of the hearing, Mr. Wong claimed that he (and by implication Citigroup) have not knowledge regarding whether the acquisition of a bank with a Need to Improve CRA rating, as here proposed, would result in a loss of powers -- powers that Citigroup's competitors would not lose. But the law, and regulation, are clear: 12 U.S.C. 1843(l)(2). amd 12 DFR  225.84(a).

     So Mr. Wong's testimony (that "the Federal Government themselves have not rendered interpretations regarding this law" Tr. at 67) was inaccurate. It wouldn't seem that the Fed staff at the September 5 meeting with Citigroup's Carl Howard too strongly hammered home the effects of acquiring Associates National Bank...

      A funny aside (this beat needs humor!): the New York Fed's Joyce Hansen's above-quoted reference to Citigroup buying "CA" was corrected by her colleague Darryll Hendricks: "I think this is a different company from Computer Associates, which is more of a software and consulting firm." Yes, Computer Associates, based on Long Island, New York, is a computer company. Who said the Fed wasn't paying attention to predatory lending? Why should a bank regulator have ever heard of The Associates?

      More seriously, Mr. Wong's statement that he does not know if Citigroup has sought a ruling by the Federal Reserve Board on this issue is contradicted by the September 7 e-mail (referencing a September 5 meeting) that the Fed provided to ICP, late, under FOIA.

          ...The FDIC has tentatively agreed to compensate 3,000 of its current and former African American employees to settle allegations of race discrimination in promotions, as reported by the Washington Post. State Farm Insurance on October 9 announced it has received OTS approval to offer "nationwide banking" by the end of 2001. The OTS received comments from all over the country when State Farm initially applied for a savings bank charter. At that time, State Farm said it would limit its services to three states. Now, without any public notice or comment period, the OTS has apparently agreed that State Farm's actual service area can expand. Whether or not State Farm's CRA assessment area will also expand -- is an issue we're inquiring into. The OTS awarded Lehman Brothers' savings bank, engaged in subprime lending, a "Satisfactory" CRA rating, and ruled that Warburg Pincus, which is acquiring up to 24.9% of Dime Savings Bank, wouldn't "control" Dime. Seems like the application of a less-than-meaningful definition of "control"...

        The Federal Reserve Board, however, ruled directly on CRA last week -- and it was not pretty. In a long but rubber-stamp toned order dated October 10, the Fed approved Wells Fargo's application to acquire First Security. The Fed included a paragraph noting "disparities" in Wells Fargo's lending, but dismissed these disparities in light of the "limitations" of Home Mortgage Disclosure Act data. While Wells continues not only its own questionable subprime lending (on which the Fed refused to rule, stating that it referred the comments to the FTC, HUD and Justice Department -- as if the Fed didn't have jurisdiction over Wells Fargo Financial, and Wells Fargo Mortgage (and Equity) Resources), but also acts as trustee for such multiply-sued subprimers as Delta Funding and First Alliance, the Fed claimed that Wells has no responsibility for this collaborations with lenders, like Delta, which have settled race discrimination charges. This is the nut that must (and can and will) be cracked. Wells does not and will not rest, from its acquisitions binge, and neither will the growing movement of groups concerned with Wells Fargo's practices... The Fed emboldened Wells, and other banks, by ruling that the "pledges" they make, and submit to the Fed on mega-mergers, are "outside CRA," and not enforceable by the Fed. You can bet that Fleet, leading up to its application to acquire Summit, likes this Fed ruling...

      Question: if the Fed views these pledges as outside CRA, why didn't it advise Senator Gramm to that effect, before passage of a bill that imposes onerous reporting duties on community development groups, as a purported amendment to the CRA statute?

        OK -- we can resist no longer! -- now, a report on Citigroup - Associates. We'll begin with an issue that relates directly back to the Clinton-Gore administration's claim that the Gramm-Leach-Bliley Act of 1999 strengthened CRA (and did not, as it appeared, simply allow more cross-industry mergers, with less public review and opportunity for review of institution's record of treatment of low- and moderate-income neighborhoods and communities of color).

         The only even arguably pro-CRA provision in the Gramm-Leach-Bliley Act was the one providing that when a financial holding company owns a bank with a less than satisfactory rating, it cannot use (or acquire) the new Gramm-Leach-Bliley Act powers. Since less than two percent of U.S. banks are awarded less than satisfactory CRA ratings, this rarely comes up. But now it has: Associates National Bank has a Needs to Improve CRA rating, based on an OCC finding of "reason to believe discrimination occurred." Citigroup is applying to acquire Associates First Capital and Associates National Bank. So the one pro-CRA "tooth" of the Financial Modernization Act of 1999, of which most Democrats expressed pride, is about to bite down on Citigroup -- no?

        We have news on this front, and it is indicative of how meaningless Citigroup views this pro-CRA "tooth" of the GLB Act as being. (We are not proud of the preceding sentence, nor of the dry tone of what is to follow: but, facing deadline pressures, our emphasis is on getting the news, including Citigroup's below-quoted October 14 response, out to our readers. Grammarians and literati, we apologize in advance).

         As previously reported, Citigroup in its Change in Bank Control Act notices to the OCC and FDIC did not address how Associates National Bank's Needs to Improve CRA rating would impact Citigroup's powers, if the acquisition is consummated. Citigroup's September 20, 2000 SEC Form S-4, which included a five page presentation of "Regulatory and Third Party Approvals," makes no mention of Associates National Bank's less than satisfactory CRA rating. Citigroup's Form S-4, in explaining the factors that its board of directors considered "in reaching its determination to approve the merger," does not mention ANB's less than satisfactory CRA rating, even among the six enumerated "adverse factors." The S-4 states that this list "is believe to include all material factors considered by the Citigroup board."

       ICP raised this issue in its September 25, 2000 comments to the agencies. Citigroup has not responded, to the comments, or to journalists who have inquired. See, for example, Dow Jones Newswire's article of September 26, 2000, "Group Using CRA Mandate to Fight Citi-Associates Pact," which reported that "[a]sked if the rating was seen as a potential legal barrier to the merger, a spokeswoman for Citigroup declined immediate comment."

        While Citigroup's refusal to answer this simple question may be surprising to some, ICP has endeavored to have the question answered in more formal settings. ICP commented to the South Dakota Division of Banks ("SDDB"), and was granted "full party" status for the SDDB's hearing on October 10, 2000, on Citigroup's application to acquire Associates' Hurley State Bank. On the night of October 9, via letter to the SDDB, and at the beginning of the hearing on October 10, Citigroup again attempted to contest ICP's party status. The SDDB upheld ICP's full party status, and right to cross examine at the hearing.

       Citigroup's lead witness, Eugene Rowenhorst, testified inter alia that Citigroup "has policies and procedures to address the issues raised by Inner City." On cross examination, ICP asked Citigroup to describe some -- any - of these "policy and procedures." The Citigroup witnesses refused, stating that they "stood" on their previous testimony: the mere words, "we have policies and procedures." Citigroup also refused to answer questions about the implications and effects of Associates National Bank's Needs to Improve CRA rating.

        Similarly, while a state insurance department has ruled that ICP has a right to conduct discovery, Citigroup's lawyers have opposed providing any responses to ICP, and explicitly opposed answering a straight forward question about changes Citigroup would implement at the various Associates subsidiaries. Citigroup was directed to answer ICP's questions about its position on the implications and effects of Associates National Bank's Needs to Improve CRA rating, and why these were not disclosed in Citigroup's September 20, 2000, SEC Form S-4.

        Citigroup's answers, dated October 14, 2000, remain evasive, stating (in response to ICP's question about the effect of ANB's CRA rating): "Even if, as suggested by the question, the GLB Act were to limit Citigroup's new activities following the merger to those permissible for a bank holding company...." and, in response to ICP's next question, "The SEC Form S-4 was prepared by Citigroup, Associates and their respective legal advisors, all of whom have substantial experience with securities disclosure documents.... [I]t was determined this matter was not material to the combined company and therefore, no reference to the status of Associates National Bank (Delaware) was warranted or required with respect to the SEC Form S-4."

       So the one pro-CRA "tooth" of the Financial Modernization Act of 1999 is not even viewed as "material" by Citigroup, while it is applying to buy a bank with a rare Needs to Improve CRA rating. There are Democratic Congressmembers commenting to the OCC and FDIC about Citigroup - Associates (some, unwisely, have chosen to praised Citigroup, and only ask for scrutiny of Associates: this is unwise, for one reason among others, because the agencies' scrutiny is focused on Citigroup, as applicant). Will these Democratic Congresspeople, some of whom claimed "victory" for including the pro-CRA "tooth" in the deregulation bill, take action on Citigroup's dismissive treatment of this provision of the law? Developing...

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October 9, 2000

      On predatory lending, we have good news, and we have bad news. In that order:

      Last week, the Federal Trade Commission finally filed suit against the California-based subprimer, First Alliance. In Washington, D.C., the U.S. District Court denies Capital City Mortgage's motion to dismiss the fair lending case against it, finding that "reverse redlining" (targeting communities of color with high interest rate loans) can be a violation of the Fair Housing Act. And in New York, the multiply-sued subprime Delta Funding announced that it will stop making loans that cost so much they fall under the Home Equity and Ownership Protection Act of 1994, HOEPA.

      There's even some relatively (or, temporarily) good news, as a transition to the bad news: on October 5, the Office of the Comptroller of the Currency and the FDIC both announced that they're extending their comment periods on Citigroup's applications to buy Associates First Capital's banks, to October 18. Many observers had predicted that because the Community Reinvestment Act is not a statutory factor on these (Change in Bank Control) applications, the OCC and FDIC would do nothing before rubber-stamping them. Well, the agencies have yet to substantively do anything: but they did extend the comment periods. Sources report that within the OCC, the decision to extend the comment period was a compromise. Some staff members favored granting the requests for a public hearing. The OCC stated on its Web site that it has denied the hearing requests. The FDIC , in a letter to Citigroup's lawyer, said the comment period extension was based on "the number of comments received the date and the apparent public interest in the proposals." The word "apparent," of course, has two meanings: "seeming," and/or "obvious." We hope the obvious nature of the extensive opposition to Citigroup's applications is made clearer to the agencies, by October 18.

     It's also worth reporting that a shareholders' resolution, against participation in predatory lending, is being prepared for Citigroup (the deadline for filing is November 17th). Similar resolutions are being considered for Conseco / Green Tree, Lehman Brothers, and H&R Block.

   . ..Update, from Queens County Savings Bank's ("QCSB's") response:

       ICP focused its September 15, 2000 comment on (1) QCSB's Needs to Improve ratings, by both the FDIC and the NYSBD, under the CRA Investment Test; (2) CFS's "Low Satisfactory" CRA Investment Test rating in one assessment area, and "Needs to Improve" ratings under the Lending, Investment of Overall CRA tests in another assessment area; (3) QCSB's plan, announced to investment analysts, to close or sell 15 of CFS's branches; and (4) disparities identified in QCSB's lending record, by HMDA data and otherwise.

      QCSB's Response at 3 states that "[t]he investment test component of the CRA examination has come under increasing criticism from bankers, regulators, and the public." Apparently, QCSB is asking the FRB to disregard its rare Needs to Improve rating under the CRA Investment Test because the Chairman of the FDIC has suggested that the test be reconsidered in 2002. As a back-up argument, QCSB's Response, at 4, claims to have increased its self-described "qualified investments" by slightly less than $2 million. For an institution with over $2 billion in assets, here seeking to acquire an institution with approximately $3 billion in assets, it is far from clear that the eleventh hour investment of less than $2 million results in any material "upgrade" from a level that both the FDIC and NYSBD found inadequate.

       On September 25, 2000, QCSB filed with the Securities and Exchange Commission (the "SEC") a Form S-4 which states, at 43-44, that ICP "has submitted a letter to the Federal Reserve Board indicating its opposition to the notice submitted by Queens with respect to the merger on the grounds of Queens County Savings Bank's and CFS Bank's Connecticut branches' CRA compliance. Queens and Haven believe that such opposition is without merit, although we cannot assure you that such opposition will not delay or otherwise affect our obtaining regulatory approval of the merger. As a result of the most recent Federal Deposit Insurance Corporation and New York State Banking Department examinations, Queens County Savings Bank received an overall CRA compliance rating of 'Satisfactory,' and as result of its most recent OTS examination, CFS Bank received an overall CRA compliance rating of 'Satisfactory.'"

       QCSB does not mention the branch closing / selling issues (QCSB told investment analysis it will CLOSE or sell 15 branches, but has now told the FRB, in a non-binding fashion, that it really meant "sell") in its S-4. Nor does QCSB's (partial) disclosure in its S-4 note that QCSB received rare "Needs to Improve" ratings under the CRA Investment Test, from both of its regulators; nor does it disclose that CFS Bank received an overall "Needs to Improve" CRA rating for the State of Connecticut (and a "Low Satisfactory" under the Investment Test, in New York). QCSB affirms that both banks find the issues ICP has raised to be "without merit."

       Typing this in with the Citigroup - Associates discussion above, QCSB's S-4 does not mention the CRA issues (including NTI sub-rating, and statewide rating in Connecticut) as among the factors that the boards of directors of either QCSB or Haven considered. We repeat the question we asked above: how can it be, even given the one "pro-CRA" provision of the Gramm-Leach-Bliley Act, that adverse CRA ratings are not even "material"? We will be pursuing this...

         On the "branch disposition" issue, QCSB states that "the CFS Connecticut / New Jersey supermarket branch locations do not comport with QCSB's long-term strategic planning." Response at 4. But the American Banker of June 29, 2000, at 14, reported: "In a conference call with analysts Wednesday, Mr. Ficalora said that the post-merger company would sell or close Haven's 15 supermarket branches in New Jersey and Connecticut. Though he did not rule out an eventual expansion into the attractive New Jersey and Connecticut suburbs, he said these branches would simply take too long to become profitable without the support of a traditional branch network. 'We cannot continue those operations and provide for our shareholders the kind of returns they expect,' he said. 'We're not all that patient.'" Emphasis added.

         Mr. Ficalora's references was to "sell[ing] or clos[ing]." Mr. Ficalora's reasoning was not QCSB's "long-term strategic planning" -- he did not say that QCSB has no interest in being in those communities "long term," rather that QCSB is "not all that patient." Safety and soundness is one thing; closing or selling 15 of the target's branches due to a lack of "patien[ce]" is something else. The Response's vague and non-binding statement about not "currently plan[ning] to close these locations" is just that: vague and non-binding. The mere "provi[sion of] details" about the "disposition" of branches, after the fact, does not resolve or address this issue.

        So: on QCSB's application, the Board is faced with an applicant with current "Needs to Improve" ratings on the CRA Investment Test from both of its primary regulators, seeking to acquire a bank which, in one of the states in which it does business, made, as of its most recent CRA exam, no community development loans, and no CRA qualified investments, resulting in a CRA rating for that state of "Needs to Improve." The required outcome here, on the current record (even as supplemented by QCSB's and Haven's September 26, 2000 submissions) is clear.

       And now Countrywide -- oh, Countrywide! On a central issues raised by ICP's timely September 12-13, 2000 comments -- that protected classes who apply to the Countrywide conglomerate are disproportionately served (at presumably higher rates) by Countrywide's "subprime" Full Spectrum unit -- Countrywide's response is that since ICP purportedly "admitted" that it "does not know what the actual interest rates" of Full Spectrum are, its claims "should be questioned." Response at 3.

      Countrywide's application to the Fed, at Section II(C)(2)(e), states that "Full Spectrum offer a wide range of competitively priced, fix- and adjustable-rate loan products to borrowers who may have been turned down for traditional conforming credit-grade loans... The company... is undergoing steady expansion efforts." Emphasis added.

        That Full Spectrum is a higher than normal (prime) interest rate lender is not disputed. Full Spectrum is identified on HUD's 1998 and 1999 lists of subprime lenders. That ICP does not know that precise interest rate on each loan made by Full Spectrum is both understandable and irrelevant. The public does not have access to interest rate information on all of Full Spectrum's loans. Significantly, Countrywide's purported response includes no information about the rates charged by Full Spectrum. This information should be requested by the regulators. Nor does Countrywide's Response describe any fair lending safeguard procedure whereby it checks or assesses the correlation of protected class status and interest rate and/or fees. As such, Countrywide's submission evades the key fair lending / consumer compliance issues raised in ICP's comments, and in this proceeding.

          The same National Mortgage News article that Countrywide (cynically) cites in its defense confirms Countrywide's inattention to (or lack of understanding of) the need for fair lending safeguards, including review of race and rates, reporting that "[a] Countrywide official did not seem concerned with [ICP's] opposition. 'I'm not sure I understand what the concern is all about,' said the official." For the record, this "concern" is that, as demonstrated in ICP's previous submission, Countrywide's subprime lending unit, Full Spectrum, disproportionately targets protected classes with its higher than normal (prime) interest rate loans, and that, as evidenced by Countrywide's September 27 submission, Countrywide appears to have few fair lending safeguards in place.

         On the second issue raised by ICP's comments -- the proposed one-city CRA assessment area -- Countrywide is also evasive. Its purported response, which it was required to send to ICP, refers to "the confidential business plan." Resp. at 3. ICP has requested access to this document, on which Countrywide now bases its response to ICP's comment. ICP's formal FOIA request to the FRB has yet to be ruled upon. While, beyond referring to a document for which it is requesting confidential treatment, Countrywide's only response is that "Effinity Bank has not yet made any loans," the application to the Fed states that "the Bank's lending territory will be nationwide" (FRB App. at 36, emphasis added) and that "Effinity Bank anticipates that customers will contact the Bank primarily through the Internet or by mail or telephone" (Fed App. at 17). These statements militate against the proposed one-city CRA assessment area; the highlighted statement in the FRB application is quite different from the evasive approach adopted in the Resp.. On this issue as well, the applications should not be approved.

         Despite having evaded both issues raised, Countrywide begins its Response with a request that "the opposition... should not be considered by" the regulators. We'll see...

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

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