Update of May 15, 2006: On May 11, 2006 in the Third Circuit Court of Appeals in Philadelphia, argument were heard in Inner City Press' ongoing case seeking documents from the Delaware Attorney General about the predatory lending settlement of Household International, now HSBC. Delaware refused to provide any records, saying the Inner City Press request came from out of state. Subsequently the Federal district court in Wilmington declared Delaware's "citizens-only" Freedom of Information Act to be unconstitutional; Delaware appealed, and three judges heard it on May 11.
As recounted in the next day's New York Times, "At the hearing Thursday, a state deputy attorney general, W. Michael Tupman, argued that Delaware had the right to set limits to its records to 'help define the political community and strengthen the bond between citizens and their government.' Judge D. Brooks Smith asked, 'How does restricting a noncitizen strengthen that bond?'" To that, there was no answer. Delaware pressed a narrow definition of journalism, despite (as recounted by Dow Jones), acknowledging that ICP and its requester's "'achievements are truly remarkable on a national level,' Tupman told the court [adding] Delaware fears being deluged with requests for public records if the state's FOIA law is held unconstitutional.'" Too much open government is hardly our problem...
See also, "Court to Rule on Delaware Public Records Law," by Rita K. Farrell, New York Times, May 12, 2006, Pg. C10 (and International Herald Tribune)
"FOIA filing only puzzles U.S. judges - State law refuses queries from non-Delawareans," by Sean O'Sullivan, Wilmington News-Journal, May 12, 2006
"Delaware seeks to shield public records from nonresidents," by Maryclaire Dale, Associated Press, May 11, 2006
"Delaware Defends 'Citizens Only' Public Records Law," by Peg Brickley, Dow Jones Newswires, May 11, 2006
Update of September 12, 2005: The official public hearing on Bank of America - MBNA, required by
state law, is now scheduled for September 27 in Wilmington. These are usually
pro-applicant, with no cross examination allowed...
Update of May 17, 2005: Inner City Press’ 2003 lawsuit against the Delaware Attorney General’s withholding of all information about HSBC/Household’s predatory lending settlement was decided on May 13 -- and ICP won. Delaware’s citizens-only Freedom of Information Act was struck down as unconstitutional in federal court. To the Wilmington News Journal, Del. AG Jane Brady said she plans to “consult with attorneys general in states with similar laws, particularly Pennsylvania and New Jersey, while her office considers an appeal.” The New York Times of May 16 reported that “Judge Joseph J. Farnan Jr. of the United States District Court in Delaware... wrote that consumer advocates and journalists like [those at ICP are] 'particularly suited to advancing the goals of transparency and accountability, whether they are Delaware citizens or not.’” Yep... We have also heard from the Texas Attorney General’s Office that HSBC’s litigation against the release of Household-related documents continues pending in that state, two years after the Texas AG ruled that ICP should receive the information. Abusive. And what of the other states that are withholding information? All in due time. See also, “Delaware Records Act Ruled Unconstitutional,” by Rita K. Farrell, New York Times, May 16, 2005, Pg. C2; and on Marketplace Radio (here in Real Audio), August 9, 2005, by Aries Keck of WHYY Philadelphia
Update of February 13, 2003 -- Inner City Press is back on the Delaware beat, feeling compelled to report on the Delaware Insurance Department ("DID") proceeding, in which HSBC is applying to buy two Household insurance companies legally "domiciled" in Delaware. [Click here for background on Household and HSBC.] ICP and DCRAC commented to the DID on November 18, 2002, and were told that no application had yet been submitted. We commented again on Jan. 13, requesting "party status" for the DID hearing, a status ICP was granted in 2000 by the Missouri Department of Insurance on Citigroup's application to acquire a Missouri domiciled insurer owned by Associates First Capital. We'd had a previous experience with the DID, in 1998 in connection with the Citicorp-Travelers merger (in that case, ICP and DCRAC were allowed to cross-examine Travelers' witnesses, including current Solomon Smith Barney chief Charles O. ("Chuck") Prince III).
What we've found is that the Delaware Insurance Department has now designed a new process that makes public participation virtually impossible. The Commissioner, Donna Lee Williams, on Jan. 23 appointed a hearing officer, and directed him to conduct a "pre-hearing conference" on Feb. 7. Anyone wanted to be a party at the hearing would be required to appear at the pre-hearing conference. The day before, on Feb. 6, HSBC's law firm provided ICP with more than 100 pages of exhibits, in opposition to ICP's and DCRAC's requests for party status. ICP asked for an adjournment, to have time to review the exhibits; this was denied.
The Feb. 7 pre-hearing conference took more than two hours. The DID's opposition to party status claimed that Household's Consent Order with Delaware Attorney General M. Jane Brady was "virtually silent" on insurance practices -- this despite three full paragraphs of insurance-related injunctive relief, and despite the fact that consumer who accept the restitution, set to average $1,400 a head, would be waiving all insurance-related claims. When ICP brought this up, the hearing officer appeared to agree, and asked for further information in this regard. Among other things, the hearing officer stated:
I am sympathetic with the statements that have been made and to the focus of the argument this morning on the terms of the Settlement agreement and in particular paragraph 18 thereof...[M]ake no mistake about it, this was a big deal. And I don't see how the Insurance Commissioner, and I in her stead temporarily, can simply say it's irrelevant, we're not going to talk about it. That paragraph 18, as I read it, is talking about the very businesses of these two Delaware domestic corporations. So I'd like to ask -- I always get the letters mixed up -- HSBC in preparing of the hearing to do a couple of things...
The hearing officer, however, denied the requests for party status, and declined to provide any way to appeal the ruling, or to adjourn the final hearing, scheduled for Feb. 20.
On Feb. 10-11, ICP submitted a motion for reconsideration. Since the hearing officer is not an employee of the DID, a request for made to that Department to ensure receipt of the motion by the hearing officer. The response?
"I received your fax of Feb. 11. The Department will not assure delivery of the motion for reargument to [the hearing officer]. I gave you delivery information for [the hearing officer]. I will be out of the office until next Tuesday (except for Wednesday)."
This came from Delaware Deputy Attorney General Michael Rich; the "delivery information" he'd previously given was at the hearing officer's house, by overnight mail only. ICP and DCRAC have argued -- and continue to contend -- that the Delaware Attorney General's Office is conflicted in this proceeding: it has a Confidentiality Agreement with Household, and has denied ICP access to basic information about the Settlement that other states' Offices of Attorney General have provided. And yet, the Delaware Attorney General's Office is representing the DID in the proceeding, and chose to oppose all requests for party status. The Deputy Attorney General claims there's no need to even respond about this conflict, nor about the fact that the Insurance Commissioner received a $300 campaign contribution from HSBC, and a $1,200 contributions from HSBC's initial lawyer in the proceeding. This Deputy Attorney General has also stated that nothing ICP (or any other commenter) has submitted would be made part of the record, except as relates to party status.
Despite the Deputy Attorney General refusing to provide a copy of the motion for reconsideration to the hearing officer, the hearing officer nevertheless received it, and on Feb. 12 scheduled a telephone hearing on the motion for... Feb. 12. Thereat, the hearing officer summarily denied the motion for reconsideration, but ruled that ICP's and DCRAC's submissions will be made part of the record. HSBC's lawyers informed the hearing officer that they wanted to discuss some undefined "timing" issues with him, after the telephone conference. Later on Feb. 12, it was announced that the hearing will take at least two days, and that the second day (after Feb. 20) will be March 5, 2003. Developing... For or with more information, contact us.
[Some sample prior ICP Del. Reports:]
Update of December 10, 2001: It must be reported, and it will continue to be pursued. On December 1, Royal Bank of Scotland and Citizens Bank "consummated" their acquisition of Mellon's branches in Delaware, Pennsylvania, New Jersey and Maryland. On November 12, ICP had submitted to the Federal Reserve a request for reconsideration of the Fed's November 9 approval. Beyond Citizens' disparate lending record (analyzed below on this page), ICP raised the newly-arising fact that Citizens had done business with the Al Barakaat money transfer business, which in the aftermath of the September 11 plane bombings has had its assets frozen. ICP asked the Fed to inquire into Citizens' and RBS' anti-money laundering safeguards.
By letter dated November 29, the Federal Reserve stated that
[t]he members of the Board have carefully considered your request... in light of press reports that the Boston, Massachusetts, office of an affiliate of Al-Barakaat, an organization suspected of funding the Al Qaida terrorist group, wired money from its accounts at Citizens Bank of Massachusetts to accounts in the United Arab Emirates. The Board has consulted with other federal agencies and received confidential information concerning this matter and Citizens' record of compliance with anti-money-laundering laws and regulations as well as government directives related to official sanctions lists. Based on all the facts of record, the proposal is consistent with approval. Your request has been presented to the members of the Board to give them an opportunity to determine whether reconsideration of the Order is warranted... [N]o member of the Board has requested that the Order be reconsidered or modified in any manner. Accordingly, your request for reconsideration is hereby denied.
And so it goes. We are continuing to pursue these issues....For or with more information, contact us.
Update of November 12, 2001: On November 9, the Federal Reserve Board hauled off and approved Royal Bank of Scotland's and Citizens Bank's applications to acquire Mellon's branches. A formal request for reconsideration has already been filed. Beyond the Community Reinvestment Act, ICP's and DCRAC's comments to the Fed since September 25 have included public records showing that Royal Bank of Scotland served as a correspondent bank for two sanctioned banks in Afghanistan. On October 9, the Fed asked RBS questions about this, and directed RBS to send a copy of its response to ICP. But RBS never did. On November 5, ICP received from RBS a copy of a cautiously-worded cover letter (dated October 31), with all attachments withheld. ICP telephoned the Fed to inquire about the withheld documents, and was told to submit a Freedom of Information Act request. Meanwhile, the Fed simply approved RBS' application. Then, on November 10, ICP received a copy of a November 2 FRB memo stating that
On October 22, 2001, Reserve Bank and Board staff called Eric Fischer and David Shore, counsel for Applicants, to inform them that the staff had reconsidered what information was needed to complete the record. Staff requested that Applicants provide a response to [ICP's] comment letters of September 25 and October 4 rather than provide the information requested in the telephone call on October 9, 2001. Staff also requested that a copy of the written response to the revised information request be provided to [ICP].
So why did the Fed "reconsider" and withdraw its request for information about RBS' and Citizens' correspondent banking practices? ICP has submitted a formal request for reconsideration of the Fed's November 9 rubber-stamp, citing the information in the Wall Street Journal's November 9 story, linking RBS/Citizens to Al-Barakaat, the money transfer business shut down on November 7. Developing...
Midweek update of October 25, 2001: The American Banker newspaper of October 25 quotes Fred Goodwin, the CEO of the Royal Bank of Scotland, as scoffing off questions that have been raised about RBS' correspondent banking relationship with institutions on United Nations sanctions lists. In full disclosure, Inner City Press raises these issues to the Federal Reserve Board, citing the Bankers' Almanac [ICP's and DCRAC's other claims are set forth below on this page]. "The Mellon deal is set to close by yearend, and Mr. Goodwin said it will not be delayed by Inner City Press/Community on the Move. The New York advocacy group wrote to the Federal Reserve after Sept. 11, asking it to look into possible Royal Bank relationships with the Afghan National Bank. 'Absolute nonsense,' Mr. Goodwin said of the allegations."
But note that a Federal Reserve memorandum dated October 10 (only mailed to ICP on October 17) reads as follows:
To: Files October 10, 2001
From: Maya Wilson
Subject: Telephone conversation with counsel for the Royal Bank of Scotland plc ("RBS") and Citizens Financial Group Inc.
On October 9, Reserve Bank and Board staff called Greg Lyons, counsel for Citizens, to ask him to provide the following information in writing to the Reserve Bank: (1) an explanation of RBS's relationship with Afghan organizations, (2) a description of RBS's due diligence process regarding banks for which RBS offers correspondent services, and (3) a list of RBS's correspondent banks. Mr. Lyons agreed to provide a written response to our request. Staff also requested that a copy of the written response be provided to [ICP]
As of October 24, ICP has not received a copy of any response by Royal Bank of Scotland. "Absolute nonsense" or not, Royal Bank of Scotland is required to respond to these questions. And a key question, on this policy issue, will be whether RBS seeks to withhold the Fed requested "list of RBS's correspondent banks."
October 22, 2001
There's been a lull on Citizen Bank's application to the Federal Reserve Board to acquire Mellon's branches, including in Delaware, which ICP and DCRAC challenged in August. In late September, Citizens spokeswoman was quoted in the Harrisburg, PA newspaper that Citizens would be submitting an amended response based on its 2000 lending. That has not been submitted. Citizens' earlier responses (which focused on lending data going back from 1999 all the way to 1995) had sought "confidential treatment" for its presentation about subprime lending. Now some (but not all) of that information has been released. Interestingly, the subprime connection is not limited to Greenwich Capital Markets. Citizens Mortgage Corporation -- the affiliate whose lending Citizens claimed makes up for Citizens Banks' disparities -- has a subprime lending program. The newly-released response vaguely described CMC's so-called "Credit Builder" division, which takes applicants and forwards their applications "to either an unrelated investor or unrelated lender where an origination decision is made... For details of this procedures please see the attached [still] Confidential Exhibit 3." The irony is that CMC reports these loans in its own name (that is, in its Home Mortgage Disclosure Act data). The response describes a scenario in which "the loan closes in CMC's name and subsequently is purchased by the investor." The response does not name the investors, nor make any disclosures about the investors' underwriting standards (or consumer protections). This casts all the more doubt on Citizens' initial defense to ICP's and DCRAC's challenge: that CMC's lending record is better than Citizens Banks' record. Yeah -- by including subprime loans decided on by unnamed investors... Developing. For or with more information, contact us
October 4, 2001
On Citizens' and Royal Bank of Scotland's applications to acquire the branches of Mellon Bank, here is a supplemental comment we have just submitted, on developing issues:
October
4, 2001
Board of Governors of the Federal Reserve System
Attn: Chairman Alan Greenspan, Governors
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Dear Chairman Greenspan, Governors:
This is a supplemental post-September 11 comment in extraordinary circumstances concerning the Applications of The Royal Bank of Scotland Group plc, The Royal Bank of Scotland plc, RBSG International Holdings, Ltd., Citizens Financial Group, Inc., RI Citizens Bank of PA and Citizens Bank (collectively, "Citizens"), related to Citizens' proposal to acquire the banking business of Mellon Bank, N.A., and Mellon Bank, Delaware ("Mellon").
On September 25, ICP submitted a comment concerning Royal Bank of Scotland's reported correspondent relationship with Da Afghanistan Bank, and noting that ICP had not received a copy of any FRS post-comment additional information request to Citizens. [FN 1: The FRS subsequently mailed ICP a copy of its September 19 additional information letter, which directed the Applicants to send a copy of their response to ICP. As noted below, the Applicants have improperly sought to withhold the entirety of their response to Question 5. See below]. Today's American Banker quotes "Heather Campion, the director of corporate affairs at Citizens Financial, said the information that [ICP] cited from The Bankers' Almanac is outdated. NatWest has not had any contact with Afghan National since the pre-Taliban days of 1995, she said. 'This is old and inaccurate.'"
First, we believe that Royal Bank of Scotland and Citizens should be required to make their response(s) on these important issues in filings with the FRS. (In fact, The Scotsman of September 27, 2001, reported that "[t]he RBoS spokesperson said: 'We will deal with all issues lodged with and raised by the Federal Reserve.'" This issue has been "lodged with... the Federal Reserve."
Second, we contend that serious questions are now of record concerning Royal Bank of Scotland's practices. Royal Bank of Scotland should be required to describe, into the record, what due diligence it and its predecessors have used in establishing correspondent accounts, and should disclose a list of correspondent relationships. Last week, regulators in Luxembourg circulated a list of five banks, in addition to the 27 individuals and companies named in the U.S. Executive Order of September 23-24: Al Shamal Islamic Bank, Dubai Islamic Bank, Faisal Islamic Bank, Bahrain International Bank and Kuwait Finance House. The Washington Post of Sept. 29 reported that "Bahrain International Bank said it was erroneously listed. David Mathies, president of a U.S. subsidiary of the bank, said Treasury officials have acknowledged privately that U.S. investigators are pursuing another bank in Bahrain that engages in Islamic banking, and not his, which does not. A U.S. government official confirmed that account."
ICP has identified three major Bahrain-based Islamic banks: Bahrain Islamic Bank BSC, Al Baraka Islamic Bank BSC, and Faysal Islamic Bank of Bahrain. According to The Bankers' Almanac, Nat West (now Royal Bank of Scotland) is a correspondent of Faysal Islamic Bank of Bahrain (a/k/a Shamil Bank).
Additionally, we note that since September 25, the U.K. High Court has ordered Royal Bank of Scotland (and other banks) to freeze accounts related to Nigeria's ex-dictator Sani Abacha. See, e.g., the Financial Times of October 3, 2001, at 1, "UK Freezes Accounts Linked to Abacha." Appropriate due diligence and other questions need to be asked, and answered, concerning this as well.
On CRA / fair lending, we noted that the Harrisburg (Pa.) Patriot News of Sept. 26 reported that "Citizens spokeswoman Barbara Cottam said the bank intends to file an amended response that includes a review of 2000 lending data." It is unclear to ICP if the October 1 submission (large portions of which have been improperly withheld) is the referenced "amended response that includes a review of 2000 lending data." (If so, we note in the interim that Citizens Bank of Massachusetts lending to LMI borrowers declined precipitously from 31.1% in 1999 to 22.0% in 2000 -- the lowest it has been in the six years reported on). It is unclear to ICP if the lending presentation at the beginning of Tab 4 for "CBMA" including Citizens Mortgage Co.'s loans. We also direct the FRS to Citizens' September 28, 2001, letter to the Massachusetts regulation, which, at page 2, purports to response to that regulator's questions about Citizens' "booking of HMDA loans." The presentation does not clarify or justify the disparate record of Citizens' banks. It appears to claim that all residential first mortgage loans are referred to CMC. But Citizens' banks report conventional home purchase loans. [FN 2: For example, in the Boston, Massachusetts MSA in 2000, CBMA received 11 applications from African Americans for conventional home purchase loans, and denied five of these applications, while originating five loans. Meanwhile, CBMA received 98 such applications from whites in this MSA, resulting in 69 originated loans]. The reference to "this pre-determined, non-arbitrary process" is contradicted by the 2000 data.
What particularly troubles ICP [and DCRAC], however, is that the Applicants are seeking to withhold large, presumptively non-exempt portions of their October 1 response. The FRB's September 19 letter, at question 5, asked (appropriately):
Discuss whether CFG or any of its affiliates has business relationships with any subprime lenders (e.g., as warehouse lender, trustee, or securities underwriter). If so, identify the relevant business parties and describe the nature of the business relationship, including the respective roles and responsibilities of the subprime lender and the CFG subsidiaries. Discuss whether the CFG subsidiaries play any role, formal or otherwise, in the lending practices and credit review process of these subprime lenders. Additionally, describe the due diligence concerning a subprime lender's compliance with applicable fair lending laws that CFG typically conducts, if any, when it underwrites a pool of subprime loans and evaluates a subprime lender's request for a warehouse loan or repurchase facility.
The Applicants are seeking to withhold the ENTIRETY of their response to this question. Following its own precedents, the FRB should require that all non-exempt portions of this Response be provided to ICP. Since the FRB's September 19 letter directed the Applicants to send a copy of their response to ICP, ICP should not have to submit a new FOIA request for this improperly withheld material.
The Applicants have also withheld information responsive to questions 4(c) and (d) (regarding community development), and to question 3:
Describe in detail the policies and procedures in place at each of CFG's subsidiary banks and other lending subsidiaries to ensure compliance with fair lending laws and regulations (e.g., the Equal Credit Opportunity Act, Fair Housing Act, Home Mortgage Disclosure Act, and Home Ownership Equity Protection Act). The response should include detailed information regarding any periodic monitoring activities, comparative file analyses, self-assessments, audits (internal and third party), second review procedures, and employee training, including the frequency and scope of such activities.
The withholding is over-broad. Since the FRB's September 19 letter directed the Applicants to send a copy of their response to ICP, ICP should not have to submit a new FOIA request for this improperly withheld material. The information should be provided forthwith, and the adverse information raised above should be appropriately inquired into and acted on.
On the current record, these Applications should not be approved.
If you have any questions, please immediately telephone the undersigned, at (718) 716-3540.
Respectfully submitted,
Matthew Lee, Esq.
Executive Director
For or with more information, contact us
October 1, 2001
Citizens Bank and its parent, the Royal Bank of Scotland, submitted a response on September 10, that did not include any analysis of Citizens' 2000 (much less 2001) lending, but rather made claims based on lending from 1999 back to 1995. Following Citizens' (non-) response, the Federal Reserve Board sent Citizens is series of questions, stating that "[b]ased on our review of the application, the following additional information, including the confidential matter at the end of this letter, is needed." The Fed's Community Reinvestment Act-related questions include:
Describe in detail the policies and procedures in place at each of CFG's subsidiary banks and other lending subsidiaries to ensure compliance with fair lending laws and regulations (e.g., the Equal Credit Opportunity Act, Fair Housing Act, Home Mortgage Disclosure Act, and Home Ownership Equity Protection Act). The response should include detailed information regarding any periodic monitoring activities, comparative file analyses, self-assessments, audits (internal and third party), second review procedures, and employee training, including the frequency and scope of such activities.
For each of CFG's existing subsidiary depository institutions, provide an update on the institution's CRA-related activities since the most recent CRA performance evaluation by the FDIC as of October 1999...
Discuss whether CFG or any of its affiliates has business relationships with any subprime lenders (e.g., as warehouse lender, trustee, or securities underwriter). If so, identify the relevant business parties and describe the nature of the business relationship, including the respective roles and responsibilities of the subprime lender and the CFG subsidiaries. Discuss whether the CFG subsidiaries play any role, formal or otherwise, in the lending practices and credit review process of these subprime lenders. Additionally, describe the due diligence concerning a subprime lender's compliance with applicable fair lending laws that CFG typically conducts, if any, when it underwrites a pool of subprime loans and evaluates a subprime lender's request for a warehouse loan or repurchase facility.
Citizens and Royal Bank of Scotland's response was due on September 28; the Fed instructed that a copy be provided to ICP. ICP will be reporting on the response, which it had not received as of September 30, 2001. In the interim, Citizens continued to spin. The (Harrisburg, Pa.) Patriot-News of Sept. 26 reported that "Citizens spokeswoman Barbara Cottam said the bank intends to file an amended response that includes a review of 2000 lending data." Such an "amended response" has not been received either... This proceeding will continue to be updated, on ICP's weekly Bank Beat -- click here to view, and, stay tuned...
September 11, 2001
Last week, the Delaware State Bank Commissioner approved Citizens' applications. The Commissioner's six-page approval order relies heavily on Citizens Banks 1999 Community Reinvestment Act examinations, which were based on Citizens' lending in 1998. The Commissioner also recites and relies on a statement by Citizens on August 29, 2001, that Citizens is establishing, "in connection with the Mellon Transaction, a $35 million foundation to make charitable contributions to community organizations in the new markets that [Citizens Financial Group] hopes to serve." The phrase "hopes to serve" is appropriate: the Delaware Commissioner's approval cannot be acted on unless and until Citizens receives approval by the Federal Deposit Insurance Corporation, among others. See Delaware Order at Paragraph 7.
Citizens and Royal Bank of Scotland have claimed that the Delaware Banking Commissioner's order vindicates them -- one newspaper in Scotland parroted that "Royal Bank of Scotland's U.S. Subsidiaries" have been "Cleared" of charges. But Citizens still needs approvals not only from the FDIC, but also from the Federal Reserve Board and other regulators; the Delaware Commissioner's order addresses Citizens' 2000 lending in only one market, Boston, and even there does not address Citizens' higher than normal denial rates for African Americans' and Latinos' mortgage applications. See Delaware Order at Paragraph 9. ICP and DCRAC have filed a new round of comments, including a reply, with the Federal Reserve Board. Click here to view. The purported Response that Citizens' outside counsel filed on September 10 does not address Citizens' 2000 lending data, and other adverse issues that have been raised. This proceeding will continue to be updated, on ICP's weekly Bank Beat -- click here to view, and, stay tuned...For or with more information, contact us
August 27, 2001
On July 17, 2001, Mellon Bank announced that it proposes to sell all of its branches to Citizens Financial Group, which is owned by Royal Bank of Scotland. Nineteen of these branches are in Delaware; the remainder are in Pennsylvania, New Jersey and Maryland. Together, the Inner City Public Interest Law Center (ICP) and the Delaware Community Reinvestment Action Council (DCRAC) reviewed Citizens' 2000 mortgage lending record in Rhode Island, Massachusetts, New Hampshire and Connecticut, and found many disparities. Additionally, Citizens' affiliate Greenwich Capital Markets is a major underwriter of securities backed by subprime mortgage loans, apparently without standards or safeguards for this business. And so, on August 27, ICP and DCRAC filed comments opposing Citizens' applications, with the FDIC, the Federal Reserve, and four state regulators. Below is a summary of the comment to the Delaware Office of the State Bank Commissioner. This page will be updated; until then, for or with more information, contact us.
August 27, 2001
Office of the State Bank Commissioner
Attn: Commissioner Robert A. Glen
555 East Loockerman Street, Suite 210
Dover, Delaware 19901
Re: Pre-hearing comment opposing the applications of Citizens Financial Group and its affiliates for a Certificate of Public Convenience and Advantage to charter Citizens Bank (Delaware) and to acquire the banking business of Mellon in Delaware
Dear Commissioner Glen:
On behalf of the Delaware Community Reinvestment Action Council ("DCRAC"), the Inner City Public Interest Law Center ("ICP Law Center" or "ICP;" together, the "Protestants") this is a timely comment which opposes and requests an extension of the comment period on the Applications by Citizens Financial Group and its subsidiaries for a Certificate of Public Convenience and Advantage to charter Citizens Bank (Delaware) and to acquire the banking business of Mellon in Delaware.
As set forth below, in the most recent year for which data is available, 2000, Citizens disproportionately excluded and denied African Americans and Latinos from its mortgage lending. Also, Citizens' affiliate Greenwich Capital Markets ("GCM") is an extensive enabler of troubling subprime lenders, such as Delta Funding (sued for discriminatory lending by the Department of Justice), Aames, Saxon and others. We have reviewed the recently-made-public 2000 Home Mortgage Disclosure Act ("HDMA") data reported by Citizens Bank(s) of Massachusetts ("CBMA"), Rhode Island ("CBRI") and Connecticut ("CBCT") -- and have found glaring disparities in each bank's record. For example:
In the Providence, RI Metropolitan Statistical Area ("MSA") in 2000, CBRI received four applications from African Americans for conventional home purchase loans, and denied all of them. Meanwhile, CBRI received 62 such applications from whites in this MSA, resulting in 44 originated loans.
For refinance loans in this MSA, CBRI received 20 applications from African Americans, and denied 16 of the applications while originating only three loans. From Latinos, CBRI received 34 applications, and denied 29 of the applications while originating only five loans. Meanwhile, CBRI received 995 such applications from whites in this MSA, resulting in 561 originated loans.
A similarly disparate pattern -- of much high denial rates for African Americans and Latinos than for whites -- exists as to home improvement loans. For such loans in this MSA, CBRI received 49 applications from African Americans, and denied 39 of the applications while originating only nine loans. From Latinos, CBRI received 126 applications, and denied 107 of the applications while originating only 14 loans. Meanwhile, CBRI received 1578 such applications from whites in this MSA, resulting in 836 originated loans.
In the Boston, Massachusetts MSA in 2000, CBMA received 11 applications from African Americans for conventional home purchase loans, and denied five of these applications, while originating five loans. Meanwhile, CBMA received 98 such applications from whites in this MSA, resulting in 69 originated loans.
For refinance loans in this MSA, CBMA received 84 applications from African Americans, and denied 60 of the applications while originating only 20 loans. From Latinos, CBMA received 44 applications, and denied 26 of the applications while originating only 15 loans. Meanwhile, CBMA received 590 such applications from whites in this MSA, resulting in 316 originated loans.
A similarly disparate pattern -- of much high denial rates for African Americans and Latinos than for whites -- exists as to home improvement loans. For such loans in this MSA, CBMA received 265 applications from African Americans, and denied 193 of the applications while originating only 59 loans. From Latinos, CBMA received 136 applications, and denied 105 of the applications while originating only 24 loans. Meanwhile, CBMA received 1756 such applications from whites in this MSA, resulting in 842 originated loans.
Citizens' lending volume in Connecticut is lower. But, simply as an example, in the New London CT MSA in 2000, for refinance loans, CBCT received three applications from African Americans, and denied all of them. Meanwhile, CBCT received 73 such applications from whites in this MSA, resulting in 37 originated loans.
A similarly disparate pattern -- of 100% denial rates for people of color -- exists as to home improvement loans. For such loans in this MSA, CBCT received four applications from African Americans -- and denied all of them. From Latinos, CBCT received six applications -- and denied all of them. Meanwhile, CBCT received 127 such applications from whites in this MSA, resulting in 59 originated loans.
For these two loan categories in this MSA, Citizens Bank of Connecticut denied every single application by an African American or Latino. This is a pattern rarely if ever seen for any bank, much less one of Citizens' size and parentage. Citizens Mortgage Corp.'s 2000 lending record is scarcely better. Annexed hereto is a DCRAC-prepared analysis of this lender in 19 MSAs, and an analysis of Citizens' banks small business lending record in 2000. Simply as one example, in Norfolk County, Massachusetts (in the Boston MSA) in 2000, of CBMA's small business loans below $100,000, 102 were in upper- and middle-income census tracts, NONE in low-income tracts, and only four in moderate-income tracts. And see the attached. The Protestants request an extension of the comment period on Citizens' applications, and contend that, on the current record, Citizens' applications could not legitimately be approved.
CITIZENS' BANKS' AFFILIATE, GREENWICH CAPITAL MARKETS, APPEARS TO HAVE NO STANDARDS FOR THE BUSINESS IT DOES WITH SUBPRIME LENDERS: CITIZENS IS AN ENABLER OF PREDATORY LENDING
Citizens Financial Group, the holding company for Citizens' banks, is ultimately owned by Royal Bank of Scotland ("RBS"). RBS also owns Greenwich Capital Markets ("GCM"), which inter alia provides warehouse loans, mortgage-backed securities underwriting and other services to subprime (high interest rate) lenders throughout the United States.
Business Week has identified GCM as the fourth largest securitizer of subprime mortgage loans in the United States. See, "Easy Money," Business Week, April 24, 2000. The New York Times places GCM as the third largest subprime securitizer. See, "Mortgaged Lives: Profiting From Fine Print With Wall Street's Help," N.Y. Times, March 15, 2000, at A1. More recently, Inside B&C Lending has identified GCM as the second-largest subprime securitizer in 2000, with a volume of $9.875 billion, up from $6.2 billion in 1999. As further elaborated below, GCM's recent securitizations include Aames Mortgage Trust 2001-1 ($150 million); Delta Funding 2001-1 ($141 million); First Franklin Mortgage Loan Trust 2001-1 ($246 million); Long Beach Mortgage Loan Trust 2001-1 ($725 million); Soundview Home Equity Loan Trust 2001-1 ($105 million -- this was a pool of Delta Funding Loans sold to Saxon Mortgage by Delta; significantly, in connection with the Delta pools a subsidiary of GCM, Financial Asset Securities Corporation, took ownership of the loans before depositing them into the trust).
It does not appear that GCM (and RBS / Citizens) have safeguards or standards in place for this activity. For example, GCM underwrote a securitization of $471 million of home equity mortgage loans by Aames Capital Corp. (see, e.g., Business Wire of December 19, 2000). GCM's relationships with subprime lenders like Aames goes beyond securitization: in February 2000, GCM's affiliate, Greenwich Capital Financial Products Inc., provided a $15 million loan to Aames "to pay interest to investors in its mortgage-backed securities." See, "Cash-Poor Subprime Lender Struggles for Credit," American Banker, March 2, 2000, at 6.
What standards does GCM (and RBS / Citizens) have for this type of activity? Apparently none.
GCM does business with the most questionable subprime lenders -- for example, with the now-bankrupt ContiFinancial Corporation. Securities Data Publishing's Mergers and Acquisitions Report of October 11, 1999 reported on ContiFinancial's" new whole loan purchase agreement with Greenwich Capital Markets, Inc. That agreement has a maximum aggregate purchase commitment of up to $1.5 billion," quoting an analyst that "Greenwich is well known for taking their pound of flesh."
The New Jersey Law Journal of November 8, 1999, reporting on "the great mortgage scam swirling around Walsh Securities Inc. of Parsippany," recounted court testimony that "DeMola had Kane of Cristo Property make the houses appear to be lived in just before an inspection by Greenwich Capital Markets Inc. of Greenwich, Conn. Greenwich Capital was underwriting the loans, and had pumped $3.7 million into Walsh." The Asbury Park Press of February 21, 2000 was more detailed: "Last October, former Walsh Securities loan officer, Kellie O'Neill, who admitted she had falsified loan documents, said in her court appearance that Robert and James Walsh and Demola watched employees alter loan files to cover up the company's part in the fraud before the files were to be reviewed by Greenwich Capital Markets Inc. The Connecticut-based firm provided the initial funding for the mortgages Walsh approved."
Such lack of standards goes beyond GCM to its and Citizens' parent, Royal Bank of Scotland. In the United Kingdom, FTSE International, jointly owned by the Financial Times and the London Stock Exchange, has created a "FTSE4Good Index" -- which has listed Royal Bank of Scotland as an unethical investment. See, e.g., Belfast News Letter of July 17, 2001. The U.K.'s Financial News of July 16, 2001 reports that "Royal Bank of Scotland does not have a human rights policy for its operation in Indonesia, so it has been excluded." The Herald of Glasgow (July 11, 2001, Royal Bank Fails to Make Ethics List) reports that RBS "has been excluded from the new FTSE4Good ethical investment index because it failed to develop a policy towards human rights in Indonesia, where it is a significant lender."
For the reasons set forth above, the Protestants oppose Citizens' applications, and request an extension of the comment period. Significantly, granting the requested extension of the comment period would not prejudice the applicants, as (1) the comment period on their application to the Federal Reserve extends until at least September 9, and (2) the Massachusetts Board of Bank Incorporation has scheduled a hearing on the proposal, for September 7, with a post-hearing comment period running until September 14, 2001.
Thank you for your attention.
Respectfully submitted,
Matthew Lee
Executive Director
Inner City Public Interest Law Center,
and for the Delaware Community Reinvestment Action Council
NOTE: This page will be updated; until then, for or with more information, contact us.
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[Some previous Delaware collaboration between DCRAC and Inner City Press/Community on the Move:]
July 17, 2000
ICP and the Delaware Community Reinvestment Action Council have advocated throughout the first half of 2000 concerning a bank that Dutch insurer ING is planning to open in Wilmington, Delaware. ING is the fourth largest insurer in the world; it already has similar “direct” banks in Europe and in Canada. In late 1999, it applied to the Office of Thrift Supervision to charter a U.S. “direct” bank, to be headquartered in Wilmington. ICP and DCRAC commented on the application, stating that a CRA assessment area limited to the Wilmington MSA would be insufficient. ING responded by expanding its proposed assessment area to the Wilmington Consolidated MSA, which reaches into Philadelphia. But ING stated it would open a “marketing office” in New York City, outside of the assessment area.
On May 1, 2000, ING announced it would apply to acquire ReliaStar and its thrift, ReliaStar Bank. ICP and DCRAC commented on this application, again raising the CRA assessment area issue, and requesting an “informal meeting” under the OTS’ regulations.
The meeting was held on July 11, 2000, at the OTS’ Jersey City, NJ office. At the meeting, ING reiterated its Wilmington CMSA assessment area, but said that the comments raised deserved further consideration. The OTS representative emphasized that “assessment area” might not be the right word (ICP and DCRAC had reminded the OTS and ING of the nationwide commitments other non-traditional thrifts had made, following advocacy campaigns).
On July 13, ING wrote to the OTS and ICP and DCRAC, referring to a “nationwide lending evaluation program,” and stating that:
“As suggested by [ICP and DCRAC's counsel], Applicants believe that this program is more consistent with ING Direct’s philosophy and purpose of being responsive to the interests and needs of all consumers. Therefore, Applicants have decided, upon consummation of the merger, to adopt this nationwide evaluation program for all lending outside of Savings Bank’s geographic assessment area, so that all of Savings Bank’s HMDA and consumer lending will be evaluated for CRA purposes... Savings Bank will have a distribution of loans within low- to moderate-income geographies that is comparable to or better than its peers... If an inappropriate distribution of loans is determined... the Savings Bank will take corrective action to improve penetration of loans within low- to moderate-income geographies.”
This is far from ideal, but it is a change from ING’s initial position (limiting CRA responsibility to the Wilmington CMSA). Since the OTS, prior to ICP’s and DCRAC’s advocacy on the ING-ReliaStar application, had accepted ING’s Wilmington CMSA-limited assessment area, the message to community organization can only be: silence = death. Since the CRA regulation has become so outmoded, many important issues are being resolved, if at all, on a case-by-case basis. And we all know how a case goes, if the decision-maker hears only from one side (in this case, the banks)... Until the next time...
* * *
April 21, 2000: See, “GM Plans New National Bank: Automaker to Open Company in Wilmington,” by Douglas Hanks, Wilmington (De.) News-Journal, April 21, 2000, Pg. B7
In August 1998, General Motors Acceptance Corporation and its mortgage company applied to the Office of Thrift Supervision for a savings bank charter. Inner City Press/Community on the Move (ICP) and the Delaware Community Reinvestment Action Council (DCRAC) challenged GMAC’s application -- as reported in the American Banker newspaper of September 22, 1998, “GMAC Mortgage Corp’s application for a thrift charter is drawing fire from community activists, who say that the company’s CRA commitment is inadequate... ‘It’s an emerging issue,’ said Matthew Lee, executive director of Inner City Press/Community on the Move... After prodding from Inner City and other activists [DCRAC], Household has promised $3 billion to low- and moderate-income borrowers and to refer more creditworthy customers to lower-rate loans... Nonbanks may be increasingly applying for thrift charters to preempt state laws, Mr. Lee said. They will also be able to secure a lower cost of funds.” CRA Activists Criticize GMAC Thrift-Start Bid, American Banker, Sept. 22, 1998, at page 13.
The Wilmington News-Journal of October 7, 1999, reported: “General Motors Corp.’s plans to start a new thrift in the state got a boost this week when a Wilmington fair lending group and its partner decided to withdraw opposition to the bank... In September 1998, the Delaware Community Reinvestment Action Council, a Wilmington-based fair lending group led by executive director Rashmi Rangan, and New York-based Inner City Press, filed a protest with the Office of Thrift Supervision to block GMAC Mortgage Co.’s plans. The groups argued that GMAC had not fully demonstrated how it would comply with the 1977 federal Community Reinvestment Act... The groups met with GMAC officials during the year, and withdrew their opposition after the company submitted a new CRA plan.
"In the plan, the company pledged to make $6 billion in low-income lending nationwide during its first five years, open at least 10 new loan offices in urban areas and support credit counseling programs, including in Wilmington.
"‘We view their plan as positive. We really tip our hats to them. We believe GMAC has really stepped up to the plate and that should help the processing of their application,’ said Matthew Lee, executive director of Inner City Press.
"‘The CRA plan takes into consideration may of our concerns that we have had historically, Rangan said. “If you are lending nationwide, make your pledges nationwide.’” GM Bank Awaits Federal OK: Groups Withdraw Their Opposition to New Thrift, by Jonathan D. Epstein, Wilmington (DE) News-Journal, October 7, 1999.
On April 20, 2000, the OTS approved GMAC's application.
And the beat goes on...
Delaware Savings Bank / Lehman Brothers [see Feb. 12, 2003 update, below]
On July 1, 1999, the Office of Thrift Supervision issued a press release announcing that it had approved Lehman Brothers’ “emergency” application to acquire Delaware Savings Bank. The Inner City Public Interest Law Center (and the Delaware Community Reinvestment Action Council) had commented to the OTS about Lehman’s involvement in predatory mortgage lending, particularly as an underwriter for Delta Funding, a subprime lending against which ICP has been commenting since November 1998, and which, in June 1999, settled discrimination charges with the NYS Attorney General.
The OTS stated that Lehman “must fulfill the local and national lending commitments contained in its CRA compliance plan,” and that it had considered “the Applications as supplemented by representations by the Applicants (a copy of which is attached hereto)...”. Attached to the OTS’ approval order was a letter, also dated June 30, from Lehman Brothers to the OTS (reproduced in full below, and then analyzed):
June 30, 1999
Mr. Scott Albinson
Managing Director, Supervision
Office of Thrift Supervision
1700 G Street N.W.
Washington, D.C. 20552
Dear Mr. Albinson:
Lehman Brothers wishes to confirm recent statements to you concerning our business practices. We conduct our businesses in accordance with high moral, legal and ethical standards and it is our policy and practice to conduct such businesses in conformity with applicable laws and regulations. This is particularly true of our mortgage businesses.
Applicant and its affiliates conduct a variety of transactions with a broad number of institutional clients. These transactions include investment banking advisory services, broker/dealer services, placement agent or underwriting services, market making, lending and joint ventures. Prior to engaging in new business, Lehman Brothers assesses legal and regulatory issues as well as reputational issues (i.e., the reputation of the prospective client as well as the impact of such business on Lehman Brothers reputation). Lehman Brothers assessment process is intended to assure that all transactions in which the client plays a role satisfy multiple constituencies: the firm, the applicable regulators, the client and potential investors (if any). Lehman Brothers typically conducts a business and legal review and due diligence commensurate with the role it will play and the type of transaction involved. The firm’s inside and/or outside counsel regularly advice Lehman Brothers on its duties and responsibilities, including the scope of due diligence, and other appropriate matters in connection with its business transactions. We expect the Bank to adopt a similar prudent policy and process. While Applicant and its affiliates conduct, and the Bank will conduct, such reviews, they are not and should not be viewed as, guarantors of the legal or moral conduct of their clients.
The Federal Securities Laws impose particular duties and a standard of care on underwriters of securities. In connection with securitizations, Lehman Brothers Inc., together with the other underwriters and counsel to the underwriters, conduct a due diligence review of the issue and the mortgage loans included in that specific securitization, consistent with the procedures and process described below, in order to fulfill such duties and satisfy such standard. The underwriters’ due diligence is intended to confirm, among other things, the accuracy and completeness of the prospectus as required by law. If an underwriting involves rated securities, the rating agencies generally conduct their own due diligence. Moreover, if the securities require a credit enhancement or financial guaranty, the credit support provider also conducts its own due diligence. Finally, the issuer provides representations and legal opinions with respect to various matters, including compliance with laws, as is customary in the type of offering.
Before purchasing a pool of residential mortgage loans or underwriting securities issued in a securitization of residential mortgage loans, Lehman Brothers conducts a review and re-underwriting of a sample of the loans. The re-underwriting process involves both credit and compliance reviews. Both random sample and adverse selection are used in compiling the loans to be reviewed. High cost (Section 32) loans are part of our adverse selection criteria. As part of a review of selected loans, particularly Section 32 loans, Lehman Brothers reviews, among other things, the loan-to-value ratio and evaluates the borrowers ability to repay the loan. This review also includes a review of the legal documentation, such as note, mortgage, title, settlement and compliance documentation, as well as the appraisal and credit documents. Due diligence also includes inquiry into certain information about the issuer, including, among other things, pending or threatened litigation, compliance with laws, operational and quality control procedures, status of mortgage licenses and financial condition. We wish to point out that Lehman Brothers spent more than $5 million reviewing and re-underwriting subprime loans in 1998. Lehman Brothers employs a more extensive due diligence review in the case of a new client.
Applicant is aware of HUD Regulation 12 CFR § 100.125. Neither Applicant nor any of its affiliates consider race, color, religion, sex, handicap, familial status or national origin when deciding to purchase loans, debts or securities which support the purchase, construction, improvement, repair or maintenance of residential real estate or which are secured by residential real estate. This means that neither Applicant nor any of its affiliates consider such factors when purchasing residential mortgage loans, when pooling residential mortgage loans for securitization, in pricing securities to be issued in a securitization involving residential mortgage loans, or in deciding whether to purchase any of such securities. The decision whether to purchase residential mortgage loans originated by others to their underwriting criteria or to purchase mortgage backed securities, as well as the determination of the terms of such purchase, are based solely on legitimate financial and business considerations. Based on the results of Lehman Brothers file and business review of a loan seller or issuer (as described above), Lehman Brothers makes it pricing and purchase decisions on the basis of an evaluation of the following factors: (1) the pool characteristics, i.e., loan to value ratio, weighted average coupon of the loans, loan concentrations and type of loan (single family or multi-family), (2) actual or anticipated securitization structure, i.e., number of classes, rating or anticipated rating of each class of security and the maturity of the class of security, and (3) market conditions, i.e., ability to place the securities or sell the loans.
Lehman Brothers Commitment
As the OTS is aware, Delta Funding as agreed to work with the New York Attorney General to develop certain standards in connection with the origination of subprime residential mortgage loans. We believe that this settlement ultimately will lead to the development and implementation of “best practices” in the subprime residential mortgage market. Lehman Brothers high underwriting and strict loan review standards have had and we believe will continue to have a positive effect on its clients underwriting guidelines and practices.
We intend to support and work with our clients to evaluate and promote the adoption of such standards. Therefore, in connection with its application to acquire Delaware Savings Bank, Applicant agrees as follows:
1. that the Bank will not engage in predatory pricing in originating residential mortgage loans
2. that the Bank will adopt policies and procedures for purchasing and financing residential mortgage loans which seek to identify predatory pricing practices by its clients
3. that Lehman Brothers will continue to include, in connection with its underwriting, loan purchases and financing activities, review procedures appropriate to the circumstances involved which seek to identify predatory prices practices by its clients.
Sincerely,
[Karen C. Manson
Vice President]
[Feb. 12, 2003 update: this Lehman Brothers letter, which the OTS chose to ignore in its "proceeding" in late 2002 on Lehman's proposal to acquire $4.3 billion in deposits from Household International, is now at issue in First Alliance-related litigations against Lehman Brothers...]
What does it all mean? On the positive side, from ICP’s perspective, it is certainly more than the Federal Reserve did, when ICP commented on Bankers Trust’s involvement (as a trustee and “pooler”) with Delta, when Deutsche Bank was acquiring BT. On the other hand, Lehman’s “commitment” is far too general. Its thrift “will not engage in predatory pricing;” as an underwriter, it will seek to “identify predatory pricing practices by its clients.” What cannot be missed is that Lehman Brothers continued to do underwriter for Delta, while complaints mounted, and while Delta was making the loans on which the NYS AG (and ICP and others) charged Delta with discrimination. Furthermore, it is not enough to state, as Lehman does, that it “does not consider” race and other factors while underwriting -- Lehman has a duty to inquire into (and could be found liable under) the disparate impact standard of discrimination that is applicable to the Fair Housing Act. This standard prohibits practices that have a disparate impact by race, whether or not the institution “intended” such consequences, whether or not the institution “considered” race. ICP will be follow up on this... But, “among other things” (as Lehman Brothers’ commitment repeated qualifies), the Federal Reserve and Deutsche Bank -- should be ashamed of themselves.
June 28, 1999
Lehman Brothers, trying to acquire Delaware Savings Bank, has refused to respond forthrightly about its involvement with high interest rate, subprime lenders, including New York-based Delta Funding. The time for obfuscation is now over: on June 22, the New York State Attorney General . announced that Delta Funding, a high interest rate lender that Lehman does underwriting for, has settled racial discrimination in lending charges. This from BNA’s Banking Daily of June 24, 1999):
WASHINGTON (BNA) -- Delta Funding, a Woodbury, N.Y., mortgage lender, has settled claims of biased and predatory lending by agreeing to pay $ 6 million to alleged victims... Spitzer and other officials charged that Delta made over 1,000 "high interest, illegal loans to low-income, minority residents in Brooklyn and Queens over the past three years." ... Delta Funding could not be reached for comment. The company's telephone line was busy throughout June 23.... Delta Funding was in the news earlier this year in connection with Deutsche Bank's acquisition of Bankers Trust Co. The Bronx-based Inner City Press/Community on the Move urged the Federal Reserve Board to turn down the deal, arguing among other points that Bankers Trust had business relationships with Delta, which Inner City Press at that time accused of "predatory lending" practices (72 BBR 292, 2/15/99).
The Fed’s rationale for not acting on Bankers Trust’s involvement with Delta was that BT had only been the “trustee” for Delta’s loans. BT stated, and the Fed concurred, that the Fair Housing Act would have applied to BT, if it had been the underwriter for Delta’s securitization of these discriminatory loans.
Lehman is the underwriter for Delta. See, e.g., the June 17, 1999, Prospectus for Delta Funding Home Equity Loan Trust 1999-2, “Lehman Brothers... Underwriters.” See also Delta’s press releases on P.R. Newswire, dated June 2 and March 23, 1999.
Lehman, however, has refused to respond to the issue, claiming that its proposal to become a thrift holding company is an “emergency” application, not subject to public comment. Lehman is proposing a $2.2 billion CRA commitment, 99% of which would consist of simply purchasing loans that other lenders had already made. Lehman has apparently claimed that it is not the underwriter for Delta’s loans, despite the above-cited SEC filing and Delta press releases. Developing...
* * *
June 14, 1999
Lehman Brothers, trying to get a thrift charter by acquiring for a pittance the reportedly failing Delaware Savings Bank, has finally submitted a Community Reinvestment Act plan. Dated June 9, Lehman’s letter to the Office of Thrift Supervision states, among other things, that “Applicant is willing to make an initial national pledge that over the next three years the Bank and its affiliates collectively will purchase and/or originate at least $2.26 billion of residential mortgage loans to borrowers in low and moderate income census tracts throughout the United States (of which $4.5 million is likely to be originated loans), and at least $1.24 billion of residential mortgage loans to low and moderate income borrowers within the United States (of which $4.2 million is likely to be originated loans).”’
Lehman’s initial application to the OTS, dated April 30, claimed at 3 that “Lehman Brothers expects to originate approximately $1.5 billion in prime quality single family residential mortgage loans in 1999...”. ICP questioned this claim of over a billion dollars of “originations,” given that ICP found no Home Mortgage Disclosure Act-reporting company beginning with “Lehman.” Now Lehman distinguishes between “purchases” and “originations,” making clear that originations constitute two-tenths of one percent of the mortgage activities in its proposed CRA pledge to the OTS. Gone from the pledge language is any distinction between “prime” (normal interest rate) and “subprime” (high than normal interest rate) lending.
Lehman’s June 9 letter states that “Aurora Loan Services, a subsidiary of the Applicant, began single family residential mortgage loan servicing activities in mid-1997 and began a single family residential loan direct origination activities [sic] and correspondent lending single family residential mortgage loan purchase activities in 1998. As a non-banking institution, Applicant has not been required to obtain, compile, track and report all of the HMDA data categories that banks must. For example, current regulations do not generally require mortgage companies to track and report loans to low and moderate income borrowers.” This last statement is simply incorrect. Non-bank mortgage companies like Countrywide and others do compile and report this information. The cut-off is based on mortgage lending volume: over $28 million, you must report. Lehman claims $1.5 billion of “originations” in 1999 (see above) -- clearly triggering a reporting requirement.
In fact, in the 1997 FFIEC HMDA data base, there IS a HMDA-reporter named “Aurora Loan Services,” Insitution Number 1075700003-7. Lehman’s June 9 letter does not state if Lehman acquired this entity, or began it de novo. In either case, its presence in the FFIEC’s data base of 1997 HMDA reporters is inconsistent with Lehman’s June 9 presentation to the OTS.
May 26, 1999
On May 21, Inner City Press received from Lehman Brothers some portions of its application to the Office of the Comptroller of the Currency to acquire Delaware Savings Bank on an “emergency” basis, and to obtain a coveted thrift charter without a formal comment period. As to CRA, the application states that “the Bank will have at least two assessment areas for CRA purposes: the Bank’s current local assessment area and the entire United States... With regard to the national assessment area, Applicant is in the process of developing a CRA plan that will be separately submitted and that will include a three year CRA lending commitment similar to that contained in other applications approved by the OTS in recent months.”
As of late May 25, ICP and the Delaware Community Reinvestment Action Council have not yet received any portion of the referenced CRA plan. Lehman has asked the OTS to approve its application by May 28 (Bloomberg news wire of May 7).
Lehman’s self-description in the application says that “Lehman Brothers expects to originate approximately $1.5 billion in prime quality single family residential mortgage loans in 1999 and is a leading purchaser of residential whole loans from thrifts and other originators... Lehman Brothers also supports the home equity loan market...”. Note how Lehman emphasized “prime” (that is, normal interest rate) quality in the first part of the statement, then adds, without qualification, that it “supports the home equity market.” Lehman is the major underwriter and co-manager of the mortgage backed securities of high interest rate predatory lenders such as Delta Funding, who practices are analyzed in detail on ICP’s Deutsche Bank page.
When ICP receives its copy of Lehman’s CRA plan (which cannot legitimately be withheld), ICP will submit a supplemental comment to the OTS, and will provide an update in this space.
* * *
May 17, 1999
Inner City Press, the Inner City Public Interest Law Center and the Delaware Community Reinvestment Action Council have filed a challenge with the federal Office of Thrift Supervision, opposing the proposed takeover of Delaware Savings Bank, FSB, by the New York investment bank Lehman Brothers. A summary of the comments follows (see also the Wilmington News-Journal of May 18, 1999, at B1, the Philadelphia Inquirer of May 18, and the American Banker of May 17, 1999). This Lehman-Delaware saga will be updated in this space. Stay tuned...
Comment Opposing, and Requesting a Hearing On, the Recent Proposal by Lehman Brothers Holding, Inc. (“Lehman”), to Acquire Delaware Savings Bank, FSB (“DSB”)
The Office of Thrift Supervision (“OTS”) has not placed notice of this proposal on the “Significant New Applications” page of its Internet web site, despite the fact that this is precisely the type of proposal that the OTS has, historically and recently, viewed (correctly) as “significant.” As set forth below, ICP and DCRAC contend that this proposal raises important Community Reinvestment Act (“CRA”) issues -- the type of issues on which the OTS has previously granted ICP oral arguments and informal meetings, and concerning which the OTS has reviewed, at length, other applications. For example, Lehman is currently involved in questionable subprime lending, including by purchase, pooling and re-selling high interest rate mortgages, disproportionately in communities of color, originated by the questionably-compliance subprime lender Delta Funding (see below). On a number of applications for thrift charters by conglomerates involved in subprime lending, the OTS has inquired into the applicant’s activities, and imposed conditions. For example, ICP and DCRAC commented to the OTS on The Travelers Group’s (now Citigroup’s) 1997 application for a thrift charter; the OTS imposed conditions on these issues. The processing, throughout 1998, of American General’s thrift charter application was somewhat similar. Here, however, Lehman appears to wish to avoid such scrutiny, and even public comment, and obtain a thrift on an expedited basis, with no public comment. ICP and DCRAC oppose this, and are concerned how it was that DSB or the OTS selected Lehman as the prospective acquiror / purported “rescuer.”
Before commenting on the CRA issues raised by this proposal, the Protestants note that at least two other large New York-based investment banks have obtained thrift charters on an expedited, non-public basis.
A particularly questionable example of this was the thrift charter the OTS granted to Merrill Lynch in May 1997, in exchange for a relative small transaction with Metro Savings Bank in Orlando, Florida. As publicly reported, “Merrill was looking for a troubled thrift to buy, [an OTS official] said.” Metro Savings President to Quit After Clinching Thrift Bailout, Orlando Sentinel, July 21, 1997, at 7. In that case, Merrill infused “a little more than $1 million” into Metro, in exchange for a de novo thrift charter in New Jersey (which has provided tremendous benefit to Merrill’s nationwide trust business).
The OTS should take notice that sophisticated financial and commercial conglomerates are, like Merrill (and Dean Witter, and now, Lehman), “looking for a troubled thrift to buy.” See supra. This demonstrates that this and other related exemptions are now little more than an anachronistic loophole for the largest and most sophisticated companies to exploit. Numerous questions, directly relevant to Lehman’s instant proposal, remain about the Merrill charter. How, among the companies “waiting to acquire failing thrifts,” was Merrill chosen by the OTS? Who reviewed the fairness, including to the taxpayers and the public, of the exchange of a $1 million infusion for a thrift charter without public comment?
It appears clear that Lehman is as or more interested in obtaining a generic thrift charter and its powers than in acquiring, specifically, DSB. Other applicants for thrift charters submit application subject to public notice and comment, and have their plans, including CRA plans, reviewed and commented on, including, in a number of instances, at oral arguments / informal meetings that the OTS grants to community group commenters. For example, ICP commented on Transamerica’s application for a thrift charter, and was granted an informal meeting at the OTS’ Jersey City office. Transamerica’s application has still not been ruled on (and is presumably being withdrawn and resubmitted, given Aegon’s proposal to acquire Transamerica). Transamerica’s application was to convert a bank it owns to a thrift charter, and the OTS clearly acknowledged CRA and other issues requiring scrutiny existed in connection with the proposal. Similarly, the OTS is scheduling a meeting on the application of Conseco and Green Tree (a subprime lender) for a thrift charter. Lehman’s instant proposal raises more issues -- it is imperative that these comments be considered and inquired into, and that the OTS grant the Protestants the informal meeting they are requesting.
The Protestants are, for the reasons above, particularly concerned about how Lehman was selected. Given the history in the past three years of Merrill Lynch and Dean Witter (see supra), the Protestants ask: does the OTS maintain a list of companies who would be interested in acquiring “undercapitalized” thrifts in exchange for a charter? If such a list is maintained, how is notice of this list provided? Why are the institutions selected (or suggested to undercapitalized thrifts) primarily large investment banks? If, as it might appear, what is for sale is a loophole (unitary thrift holding company status, and/or continued exemption from the Bank Holding Company Act), what procedures are in place to put this loophole up for bid, so that, at least, the best offer is selected?
The OTS (and/or Lehman) might claim that this stealth transaction is in the public interest, because it might save the insurance fund(s), and/or the taxpayers, money. The Protestants question whether this would justify circumventing a public notice and comment process, particularly in this case. But even accepting, arguendo, this logic -- the taxpayers and the public interest would be better served by the OTS ensuring that the best offer for the loophole is solicited and accepted. ICP is submitted a Freedom of Information Act (“FOIA”) request for record reflecting the background of this proposal (and for the application itself), and will submit further comments upon receipt and review of these documents.
The Bloomberg news wire of May 7 reported that “Lehman employs more than 450 mortgage brokers and expects to originate approximately $1.5 billion in single family mortgage loans in 1999...”. [In terms of this claim of “origination,” note that no Home Mortgage Disclosure Act (“HDMA”) data exists in the FFIEC data base of 1997 loans under the search term “Lehman”]. As discussed below, Lehman is deeply involved in subprime, arguably predatory mortgage lending, including with the New York-based subprime lender Delta Funding, currently defendant in numerous consumer protection and fraud class action lawsuits. Lehman’s continuing involvement in questionably subprime mortgage lending should be fully inquired into by the OTS, including at the hearing the Protestants are requesting.
Lehman’s involvement in subprime mortgage lending is extensive. See, e.g., National Mortgage News of April 12, 1999, Lehman Keeps Lead in MBS Ranks; and National Mortgage News of January 25, 1999, Special Report: B & C Lending, listing underwriters of securities backed by subprime home equity loans, including loans originated by Provident Bank ($500 million worth of loans, according to Thomson’s Asset Sales Report of March 1, 1999). See also, Thomson’s Asset Sales Report of May 3, 1999: “FHB Funding Corp., a subprime home equity lender based in Mineola, N.Y., is working with Lehman Brothers to incorporate securitization into its financial strategy. The soon-to-be first time issuer set up a warehouse lending facility with Lehman Brothers last year that has funded the firms loans... FHB is licensed and running in 44 states as well as the District of Columbia. It recently expanded its West Coast Regional Center to include Arizona, Colorado, Utah and New Mexico, in response to big subprime volume coming out of the western sector.”
For purposes of the Protestant’s hearing request, it is Lehman’s extensive involvement with the questionable subprime lender Delta Funding on which the remainder of this first comment, and the attachment hereto, will focus.
Lehman underwrites the subprime home equity loan-backed securities of Delta Funding Corp., a questionably-compliance subprime lender based in New York, most recently as a co-manager of Delta’s $375 million issues in March 1999. What standards does Lehman use in selecting which subprime lenders it will work with, and pool and sell loans from? These are all activities that are subject to the Fair Housing Act and its regulations; see, e.g., 24 C.F.R. §100.125, which reaches, and makes unlawful, “[p]ooling or packaging loans or other debts or securities which relate to, or which are secured by, dwellings differently because of race, religion, handicap, familial status or national origin.”
ICP has geocoded properties in New York City on which Delta Funding has lent, and then securitized the loans. These properties are disproportionately -- VIRTUALLY ENTIRELY -- in minority communities. The concentration of these properties, for higher than normal interest rate loans, in minority census tracts, is troubling. [TABULAR MATERIAL OMITTED]
Examining individual Delta loans and related documentation is also troubling. ICP has reviewed a Delta loan in New York to Oscar and Dorothy Jernegons. The closing statement shows, out of the $101,250 loan, Mr. Jernegons was charged $7,151 in origination fees by Delta, $8,100 in fees to Dunewood Funding, and $6,000 to a Mr. Stanley R. Stern (to whom Mr. Jernegons has stated he was not previously indebted). Mr. Jernegons claims that a Mr. Archer wrote down a rental income figure which had no basis in fact in order to show financial capacity, for qualifications purposes. Mr. Jernegons states that he never saw these loan documents despite numerous requests. This is a most troubling loan, and exemplifies the type of practices that Lehman, which co-manages Delta’s MBS issuances, in an activity subject to the Fair Housing Act, was or should have been aware of.
Delta (like, apparently, Lehman, see supra) get most of its loans from mortgage brokers. Consider the records of the mortgage brokers with which Delta does business and gets the loans with which it subsequently does business with Lehman. On our current knowledge, these brokers have included:
Northeast Mortgage Investment Corp., on information and belief run by a Michael Beyer, relation to David and Barry Beyer, whose Sterling Resources was lambasted in the NYC Department of Consumer Affairs’ study, “Predatory Home Improvement Lending.”
Coastal Capital: an extension of Dartmouth Funding, a/k/a Dartmouth Plan, which has been inquired into by the NY and CT Attorney General’s offices, and which was also critiqued in the “Predatory Home Improvement Lending” study, supra.
ECI a/k/a Equitable Mortgage/Dunewood Funding (see supra and attached re loan to Mr. Jernegons involving Delta and Dunewood): on information and belief, Dunewood and its principal, Robert Shapiro, have been charged by the state comptroller’s office with fraud and issuing unregistered securities.
Delta also long-used a questionable title and abstract company, All Island Abstract, 81 Scudder Avenue, Northport, New York, which also did extensive business with the now defunct Cityscape.
Also, just prior to going public, Delta sold a number of non-performing loans to “NY Mortgage Servicing,” whose officers appear to have been Sidney A. Miller, Hugh Miller and Irwin Fein (the officers of Delta Funding). This appears to be a material related party relationship, never disclosed in Delta’s SEC filings, and appears to have been to artificially deflate Delta’s delinquency numbers.
More recently, there have been a number of transactions of loans between Delta and American Strategic Income Portfolio, Inc., of Minneapolis, MN, which has shared a CEO/President with Piper Jaffray.
A question: as the RESPA / TILA / HOEPA suits against Delta (those reported in the New York Times in January, 1999, and others yet unreported), and conceivably apply to between $1.5 billion to $3 billion of outstanding loans, this could come to have a serious financial effect on Lehman, the applicant here.
Consider, for example, a 1999 class action lawsuit filed against Delta Funding in the New York Supreme Court, New York County. The lawsuit alleges, in detail, that Delta did not comply with a settlement agreement required by the New York State Banking Department in 1996. Questions exist as to whether Lehman knew or should have known of the existence of this settlement agreement and Delta failure to comply therewith; this goes to the harms caused by Lehman’s ongoing, standardless involvement in questionable subprime lending...
ICP asserts that Lehman, which does extensive business with Delta, knew or should have known about the Settlement Agreement, and Delta’s contravention thereof. The entire episode reflects adversely on the Applicants’ managerial resources, and adds weight to the adverse fair lending and CRA issues that, on this record, militate for the requested evidentiary hearing, and for the denial of the Application.
The Protestants further note, in support of their hearing request, the DSB is also apparently involved in subprime lending. See, e.g., The Orlando (FL) Sentinel of January 11, 1999: “Delaware Savings Bank, a little Wilmington, Del. thrift that operates mortgage-production offices throughout the country... says it is not renewing the lease on the Maitland space... The past six months have not been a good time for subprime lending, in which the bank specializes.” Emphasis added. See also, The Orlando Sentinel of April 12, 1998: “Delaware Savings Bank’s Maitland-based mortgage production office is gearing up to get in on some of the refinancing frenzy.. Delaware Savings had concentrated on lending to borrowers with some credit problems in so-called B- and C-grade paper, said Terry Carlson, branch manager. Delaware Savings, a federal savings bank based in Wilmington, Del., has only mortgage-lending offices in Florida.” Further noteworthy: despite this Florida office (and the reference to other offices), the FFIEC 1997 HMDA data base, for DSB in conventional home purchase and refinance loans, reports only loans in the Wilmington MSA. This incongruity, along with Lehman’s reported claim to be originated mortgages (while there is no 1997 HMDA data by a reporter name beginning with “Lehman,” is among the disputes of fact to be inquired into and resolved at the hearing the Protestants are requesting.
As noted above, the Protestants have requested the entire recently-filed Application, and related documents, under FOIA, and will be submitting a further comment upon receipt. For the reasons set forth above, the OTS should not approve this application on this record.
ICP’s and DCRAC’s comments are in; the OTS’s response, including to the FOIA request for all records reflecting its involvement in the selection of Lehman as “rescuer-for-a-(cheap)-loophole,” will be reported on this site.
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The velvet glove of the regulation of financial institutions in Delaware continues to amaze. Delaware's Insurance Commissioner Donna Lee Williams acknowledges taking campaign contribution from insurance companies, including those from Travelers / Citigroup (as reported first in the National Underwriter) -- while continuing to rule on these companies' applications. Timothy McTaggart, until recently the state's Banking Commissioner, has been made a partner at the D.C. office of the Boston-based law firm of Peabody & Brown, in the firm's financial institutions practice, and now opines that "[t]he Community Reinvestment Act is very short... It was intended to be inspirational." See Investment Dealers Digest of 3/22/99. This reductive view of the CRA, which Mr. McTaggart never expressed while he was Commissioner, may explain what emerged as his routine rubber-stamping of banks' merger applications, and dismissal of Delaware community groups' attempts to participate in the process...
2/22/99 -- ICPILC and DCRAC have raised to the OCC that MBNA has sought designation as a "limited purpose" bank for CRA purposes, despite that fact that it is a major small business lender (although disproportionately to businesses in upper-, rather than low- or moderate-income, communities. Click here to view
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