Inner City Press Hot Issues: Money Laundering, Subprime Lending, Thrift Charters, etc.

Click here for ICP's current CRA Reporter

As the financial services industry becomes more complex -- and deregulated -- new issues of interest and concern to consumers and communities arise. These include the current proliferation of high interest rate, so-called subprime lending, including by large U.S. bank including Citigroup, J.P. Morgan Chase and Wells Fargo; the proper application of the Community Reinvestment Act to Internet banks; and continuing (though somewhat abated by the Financial Services Modernization Act of 1999) dash by insurance and other companies to get savings bank charters, etc.. These three are discussed below. Please send us your suggestions of other issues that should be summarized and partially explained on this page (email to HotIssues [at] innercitypress.org); see also most recent updated to ICP's Frequently Asked Questions (FAQ) page, and ICP's weekly CRA Reporter.

Also, following September 11, 2001, ICP began a Finance Watch, on issues of money laundering and bank accountability more generally.

ICP has now published a (double) book about the inner city-relevant topics of subprime lending, and corporate fraud - click here for sample chapters, here for fast ordering and delivery, and here for other ordering information.

SUBPRIME LENDING

At first, it was a simple idea. If banks refused or were unable to lend to certain people at normal interest rates, other lenders (including both community-based informal lenders, and loan sharks) would step into the breach, offering loans at higher-than-normal interest rates.

Then, larger companies (primarily not banks) saw how lucrative this business could be. Larger (or more systematic) subprime lenders emerged, with names like United Companies, The Money Store (now under by First Union, a bank), The Associates (owned until recently by Ford Motors, now independent), Chrysler First (later bought by NationsBank, and renamed NationsCredit).

Wall Street investment banks began to help these subprime lenders package their high interest rate loans as mortgage-backed securities, which funneled more money back to the lenders. Now the banks saw how profitable this business could be, and began to enter it. Not only NationsBank and First Union (see above), but Citigroup, KeyCorp, Greenpoint, Chase Manhattan, etc..

There remain many “bottom-fishers” in the industry, companies which apparently intentionally make loans that borrowers, given their low or otherwise-tied-up incomes, have no change of paying back, in order to take these people’s homes and resell them. But what is even more systemic in the industry is pricing discrimination: charging people of color, women and the elderly even higher rates than their credit histories would dictate.

Some in the industry offer this defense: they charge every borrower as much as they can. If some people can be gouged more deeply than others, and this falls along racial or ethnic lines, this is not the industry’s fault. That defense should not and does not prevail, against the Fair Housing Act’s disparate impact standard (which, by the way, some in Congress are currently attacking).

Inner City Press/Community on the Move and its Inner City Public Interest Law Center have put particular focus on investigating the high interest rate lenders that are owned by, and affiliated with, banks. There is a systemic danger in these affiliation: ICP found, for example, that NationsBank was paying its bank staff a referral fee for sending borrowers to NationsCredit for higher interest rate loans. Once ICP had documented and raised this at length, the Office of the Comptroller of the Currency announced that NationsBank was suspending all of its referral programs.

ICP compared Bank One’s banks’ and mortgage companies’ lending record to people of color with the record of Banc One Financial Services, a higher interest rate lender, and found that while Bank One’s normal interest rate lenders disproportionately exclude minorities, BOFS targets them. Once raised, this resulted in fair lending conditions imposed on Bank One (though not enough, in ICP’s view. In March 2000, Bank One sold BOFS to Household International).

Then, ICP endeavored to get institutions engaged in subprime lending to commit to charging borrowers the lowest price they are entitled to, under the institution’s pricing matrix. Such an agreement was reached with, for example, Charter One Bank. In 2001, ICP's advocacy resulted in a commitment by the insurance company AIG that its consumer finance units would cease single premium credit insurance (see, e.g., New York Times of July 21, 2001; click here for the campaign story).

An even more troubling (and less scrutinized) issue is the involvement of investment banks, and even wholesale commercial banks like Bankers Trust, in the subprime market, and with predatory loans. This is an issue ICP raised to the Federal Reserve Board in connection with the Bankers Trust - Deutsche Bank merger, and regarding Wells Fargo, and U.S. Bancorp. Other ongoing campaigns include Citigroup and J.P. Morgan Chase.

Contact ICP or the Inner City Public Interest Law Center for more information. A good book in this field is Michael Hudson’s Merchants of Misery (can be ordered from Common Courage Press, Monroe, Maine -- link provided as courtesy; ICP receives no commission). Click here for ICP's current CRA Reporter.

Beyond any particular institution, an issue of particular concern is the proper application of the CRA to Internet banks. When the CRA was enacted in 1977, few could have foreseen, 23 years in the future, the inroads that non-brick and mortar, Internet banks are making. The initial CRA directs regulators to ensure that insured depository institutions meet the credit needs of their communities, particularly low and moderate income neighborhoods. Each bank’s “community” (or delineated assessment area in which the bank’s performance would be judged) was defined as an area around its deposit taking branches -- because this was the way that deposits were collected in 1977. By regulation, the definition of assessment area was later expanded to include the communities where a bank’s deposit-taking automatic teller machines are located.

The use of the Internet to solicit deposits and offer credit products, however, leaves those notions of a bank’s community outdated. Non-brick and mortar banks need only a single headquarters office, the location of which has little to no relation to the communities from which the Internet bank can draw deposits. Nevertheless, many Internet banks seek to limit their assessment areas -- the communities in which they would have a CRA duty to meet credit needs, including of low and moderate income people -- to the city in which they place their headquarters office.

Now, Internet institutions likeE*TRADE Bank are running television advertising campaigns nationwide, with the following message: “We can pay higher interest rates on deposits because we don’t have the expense of branches. Move your money to our bank.” Since the traditional banks in the cities where E*Trade Bank is running these ads have CRA duties in these cities, each dollar withdrawn from them, and placed in Telebank (which seeks to limit its CRA assessment area to Arlington County, Virginia, where its headquarters office is) is a dollar taken out from under a CRA duty in that city.

How have the regulators been dealing with this issue? In short, haltingly, even irrationally. In 1996, the Internet brokerage Waterhouse Securities set up a deposit taking bank, Waterhouse National Bank. Waterhouse Securities has its headquarters in New York City, on Wall Street. It placed the headquarters of its bank, however, in the more affluent suburbs, in White Plains, New York, and got the Office of the Comptroller of the Currency to agree to limit its CRA assessment area to White Plains. When Canada’s Toronto Dominion Bank applied to acquire Waterhouse and its bank, comments were raised (disclosure: by ICP). The OCC did very little. The Federal Reserve Board did inquire into the deal, but went on a tangent, focusing on TD’s lack of experience with the CRA. The Fed ended up requiring TD to make a three to five year CRA plan, but did not meaningfully address the CRA responsibilities of this Internet bank, which does very little to ensure that its credit products are offered and accessible to low and moderate income consumers.

In 1998, another Canadian bank, the Royal Bank of Canada, applied to the Fed and to the Office of Thrift Supervision to acquire one of the first pure-Internet banks, Security First Network Bank, with its headquarters office in Atlanta. The Fed entirely punted on this one, stating in a footnote that the OTS was in the middle of a rulemaking on Internet banks (which has come to nothing). The OTS explained to ICP that the application had to be expedited, and therefore the OTS would not follow its own rules for a public meeting / oral argument.

An interesting hybrid proposal was submitted to the OCC in 1999: yet another Canadian bank, Canadian Imperial Bank of Commerce, wanted to set up a “direct bank” in Florida, using kiosks in Winn Dixie supermarkets which would have direct Internet and phone access to CIBC’s bank. When ICP raises CRA assessment area issues, CIBC made a commitment that all substantial business would have to be done from the kiosks -- from a home computer, a consumer could not even apply for a loan. On that basis, the OCC defined CIBC’s MarketPlace Bank’s assessment area as the communities around its kiosks.

On a policy issues like this, one might assume that each administrative decision is a precedent, a sort of mark in the sand. Not so. In late 1999, the Dutch insurer ING applied to the OTS to set up a “direct bank” to be headquartered in Wilmington, Delaware, but targeting consumers from Delaware up to and including New York City. ING proposes that its assessment area be limited to the Wilmington MSA. Astoundingly, ING’s application states that the “Savings Bank will establish one or more marketing offices in its assessment area or adjoining areas that will house phone lines dedicated to the Savings Bank’s call center, as well as computers with dedicated access to the Savings Bank’s transactional website.” Emphasis added. ING’s proposal does not even comply with the OCC’s CIBC ruling, that assessment areas must include facilities offering dedicated access to an Internet bank’s website. ICP submitted a timely comment to the OTS on ING’s application, and ING somewhat expanded its CRA assessment area.

ICP continues paying close attention to thrift charter applications to the OTS. While the "unitary thrift" loophole, at least for commercial companies, was closed by the Financial Services Modernization Act of 1999 (while the law was being debated, ICP submitted detailed opposition to the thrift charter application of Wal-Mart, for example -- click here for summary), insurance companies (like ING) and others are still applying for thrift charters. For example, a number of questionable subprime lenders are seeking thrift charters, to preempt state consumer protection laws, and gain a lower cost of funds for their high interest rate lending. We'll conclude this page, for now, with one example: the pending application of Conseco and Green Tree for a thrift charter.

Conseco & Green Tree Financial's Thrift Application

On March 10, 1999, ICP filed with the Office of Thrift Supervision a 12-page protest to the Application by Conseco and Green Tree Financial for a savings bank charter. Green Tree is a major nationwide high interest rate (subprime) lender. ICP contends that the goal of this Application is to be able to preempt state consumer protection laws for Green Tree’s activities, and get the veneer (and lower cost of funds) of an FDIC-insured bank. Conseco / Green Tree propose to locate this branchless thrift in Las Vegas, and to limit CRA and fair lending scrutiny to that one area (while lending at high rates nationwide). ICP’s comment points to (1) a $2 million punitive damages (harassment) finding against Green Tree in Texas; (2) a restraining order against Green Tree’s foreclosures in South Carolina; and (3) financial and managerial issues, including Green Tree’s CEO’s Mr. Coss’ unprecedented (over-) compensation, Green Tree’s twice having to restate its earnings, etc.. This -- is not what the thrift charter is for. A loophole (the unitary thrift charter) is not an entitlement. The OTS has already acknowledged ICP’s timely request for a hearing. ICP's challenge was covered in the Indianapolis Star of March 12, 1999 (click to view), and in the American Banker newspaper of March 22, 1999.

Update of September 3, 2002: Conseco took yet another hit last week when the South Carolina Supreme Court upheld an arbitrator's order that it pay nearly $27 million for violations of consumer protection laws by its Green Tree unit. The case affects 3,739 South Carolina customers with home improvement or mobile home loans in the mid 1990s from Green Tree. An arbitrator ruled in July 2000 that Green Tree failed to tell consumers they could choose their own lawyers and insurance companies when getting loans. Conseco -- which bought Green Tree in 1998, the beginning of its end -- was ordered to pay over $20 million to the affected customers... For or with more information, contact us.

Update June 1, 1999:

Conseco and Green Tree, five weeks after receiving copies of ICP’s challenge to their thrift charter application, finally submitted a response to the OTS.

Conseco seems to dispute that Green Tree is a subprime lender. See, e.g., Response Letter (the “Resp.”) at 5, n.2: “A large number of denials is hardly the mark of a ‘subprime’ lender.” But subprime lending, and the issues its raises, that the OTS has taken note of on other recent applications, has little to do with denial rates -- rather, it has to do with INTEREST rates, points and fees. Of particular concern, to ICP, the public, the OTS and the Department of Justice, are correlation’s between higher interest rates and fees and protected classes, by race, ethnicity, age and other factors. See, e.g., DOJ’s fair lending enforcement action against Long Beach Mortgage.

On the same page on which Green Tree denies being a subprime lender (because it has high denial rates), Green Tree states that ICP’s HMDA analysis was skewed because “much of this reported data likely resulted from Green Tree’s Manufactured Housing division, which is a niche lender catering to a certain type of borrower.” Id., emphasis added. What “certain type of borrower” would that be? Whether this is a code word, or simply needlessly opaque and non-responsive, it militates for the meeting the OTS has already committed to hold.

...Problems that Conseco and Green Tree cannot avoid admitting -- Green Tree’s much publicized profit writedowns and presumptive violation of South Carolina’s attorney preference statute, for example -- Conseco seeks to minimize by claiming that other institutions had these same problems. But in the case of some non-bank subprime lenders’ writedowns due to inaccurate (and misleading) profit calculations on loans, the fact that other non-bank subprime lenders, like Mercury Finance, suffered these problems provides no legitimate assurances to the OTS or the public on THIS thrift charter application. See, e.g., Resp. at 2, n.1.

...The CRA performance evaluation of Green Tree’s South Dakota CEBA bank to which the Resp. alludes -- was entirely limited to activities in Rapid City, South Dakota. See <http://www2.fdic.gov/dcacra/1998/34202_980323.pdf>. Accordingly, that exam provides no assurances to the OTS or to the public as to Green Tree’s extensive, nationwide subprime lending.

Also unaddressed in this proceeding are the practices of Conseco Insurance itself. See, e.g., Thomson’s Asset Sales Report of May 10, 1999, Subprime Shadows Cast in Sunshine State, reporting on subprime activities in Florida, particularly as to National Auto Finance, and reporting that “Conseco would also like to eat [National Auto Finance]’s lunch.”

Nowhere in its Response does Conseco address these issues: what interest rates its charges; what fair lending protections are in place; its practices for reporting all timely payments to the credit bureaus (see recent speech by Comptroller Hawke, highlighting this problem among subprime lenders); whether it has or will implement the type of TRAM mortgage recently promoted as a best practice to the OTS; how its applications and business are consistent with the OTS’ express views on high LTV loans, given that Green Tree reportedly “dominates” the revived 125% LTV securitization market. See Thomson’s Asset Sales Report of May 3, 1999, at 1.

... Conseco’s “Response” does not demonstrate, or even attempt to demonstrate, ANY public benefit. At 2, the Resp. recites advantages and benefits it already enjoys or could enjoy. Rather than there state why it wants a thrift charter, and why the grant of a thrift charter and unitary thrift holding company status would have some benefit to the public, Green Tree alludes back to some unspecified section of its application where “as explained in our Application, a conversion to an f.s.b. would provide Conseco and Green Tree with a number of business advantages.” This lack of clarity further militates for the meting the OTS has already committed to hold. Further note that since the Applicants are still seeking to withhold large portions of their Application, and ICP has not received copies of any of the supplements to the initial application, it is impossible for ICP to assess Conseco’s vague claims. These can and should be explored at the meeting the OTS has already committed to hold....

Update August 2, 1999

The OTS has scheduled an "informal meeting," under its regulations, on Conseco's and Green Tree's application for a thrift charter, as ICP had requested. The meeting will be held at the OTS' Northeast Region office, in Jersey City, New Jersey, on August 31, 1999. Here’s a summary of ICP’s most recent comment to the OTS on Conseco’s and Green Tree’s applications for a thrift charter, in preparation for the August 31 informal meeting:

While ICP retains its right to submit and discuss further information at the meeting on August 31, Presiding Officer Satterthwaite’s July 28 letter requested that ICP submit what additional information it could by August 23, 1999. ICP has been reviewing Green Tree’s 1998 HMDA data, recently made available by the Federal Financial Institution’s Examination Council (“FFIEC”), and enters the following written information into the record, in advance of the informal meeting.

First, it is important to note that Green Tree’s lines of mortgage related lending (home purchase, home improvement, and refinance) are each quite different. In some (i.e., home purchase), Green Tree is a subprime, high interest rate lender. These are the lines of business in which Green Tree presumptively targets protected classes. That Green Tree is a subprime, (predatory, ICP contends) lender is supported by recent examples, which ICP hereby enters into the record: see, e.g., Durham (N.C.) Herald-Sun, July 7, 1999, at C1: “One Durham borrower... was charged $11,630 in one insurance premium payment on a $58,800 loan from Green Tree Financial Servicing Corp. in Raleigh, the loan papers state. After that payment and other fees were added, she ended up financing a $71,365 loan over 15 years. Her payment is $695 a month, and on Jan. 4, 2014, she will owe a one-time balloon payment of $63,771. All told, the loan will require her to pay $188,596, or more than three times the original $58,800.”

See also Mortgage-Backed Securities Letter of July 19, 1999, reporting an 11th Circuit U.S. Distract Court case involving “soliciting a high-rate home-improvement loan,” in which the court found Green Tree’s mandatory arbitration clause “to be unenforceable and unconscionable.”

In other lines of lending (i.e. home improvement), Green Tree disproportionately excludes protected classes. Finally, in refinance lending, Green Tree simply refuses to record and report race and national origin information, in violation of HMDA. In the refinance table below, "RNA" stands for "Race Not Available." ICP will demonstrate each of these patterns in a few MSAs:

For conventional home purchase loans in the NYC in 1998, the aggregate made 5416 loans to African Americans, 4018 loans to Latinos, and 35,134 loans to whites. For these race-specified loans, 12.2% of the aggregate’s loans were to African Americans, and 9.0% of the aggregates loans were to Latinos.

Green Tree, a high interest rate/subprime lender, for these race-specified loans, made 40.3% of its loans to African Americans. This is a pattern / targeting quite similar to that, for example, of Delta Funding, which has recently been sued by the NYS Attorney General for predatory lending and discrimination... Green Tree presumptively targets minorities for its high interest rate loans; this militates for denial of Green Tree’s and Conseco’s applications to put this lending under a thrift charter.

Green Tree’s pattern for home improvement lending, on the other hand, is entirely different -- in fact, it disproportionately excludes minorities. Of cumulated African American, Latinos and white home improvement loan originations in the NYC MSA in 1998, the industry made 25.3% of these loans to African Americans, and 16.4% of these loans to Latinos. Green Tree, for (non-subprime) home improvement loans, was below average in both categories: using the same methodology, only 3.3% of Green Tree’s home improvement loans in this MSA were to African Americans (versus a 25.3% industry aggregate), and only 5.9% of Green Tree’s loans were to Latinos (versus a 16.4% industry aggregate).

Green Tree’s record of (non-subprime) home improvement lending is strikingly disparate, and further militates for denial of Green Tree’s and Conseco’s applications to put this lending under a thrift charter.

In refinance lending, Green Tree blatantly violates HMDA’s requirement that lenders request, record and report race and national origin information, so that the fair lending laws can be enforced:

New York City MSA, 1998
Green Tree Financial
Refinance Loans (Table 4-3)

App.’s Orig.’s Den.’s

Blacks 0

Hisp. 0

Whites 0

RNA 743 184 354

In the refinance table above, "RNA" stands for "Race Not Available." Green Tree did not report the race of ANY of its 743 refinance loan applicants in this MSA in 1998. Green Tree does report such information in some other MSAs (though still presumptively violating HMDA there). Green Tree’s presumptive HMDA violations further militates for denial of Green Tree’s and Conseco’s applications to put this lending (and compliance culture) under a thrift charter...

[The OTS also asked for a summary of a July 13, 1999, teleconference meeting that was held]. ICP began the meeting by asking why Conseco and Green Tree want a thrift charter. ICP's understanding of the Applicants’ response is that the main benefit to them would be in terms of cost of funds. Their current credit card bank can only take jumbo deposits; their Utah Industrial Loan Company takes brokered deposits, but faces a limitation on assets. The Applicants stated that they would, if granted a thrift charter, market deposit products to the insurance customers of Conseco and its affiliates. (See below, as to CRA assessment area).

ICP asked what range of interest rates Green Tree currently charges. The Applicants responded:

Home Equity Loans: First Liens: 9 1/2 to 14 percent

Second Liens: 11 to 16 or 17 percent

Manufactured Housing Loans: 9 1/4 to 11 1/2 percent

One of the Applicants’ representatives subsequently stated that some manufactured housing loans carry interest rates of 7 1/2 or 7 3/4 percent.

ICP asked, and the Applicants confirmed, that Green Tree does not offer a conforming (i.e., normal interest rate) product.

ICP inquired into the Applicants’ fair lending compliance and self-testing programs. The Applicants’ responded that they do not review their portfolio for the inter-relation of interest rate and race.

ICP asked if Green Tree reports all payment histories, including positive payment histories, to the credit bureaus. The Applicants stated that Green Tree DOES NOT report such information, as to home equity loans.

ICP asked if, in light not only of Green Tree’s nationwide lending, but of the plan to market deposit products to the nationwide insurance customer base of Conseco and its affiliates, the Applicants were not considering clarifying, as part of a CRA plan, that and how their CRA duties would extend beyond the Las Vegas MSA. The Applicants responded that the current CRA regulation relates CRA assessment areas to branches and deposit-taking ATMs. ICP pointed to the results in such OTS proceedings as the 1997 formation of Travelers Bank & Trust FSB, and the more recent formation of State Farm’s thrift. The Applicants again pointed to the CRA regulation, and, as an example, to the OTS’ approval order for Grange Insurance’s new thrift. [While that Order accepts a CRA assessment area of the Columbus, Ohio MSA, it should be noted that Grange, when applying, was not engaged in lending, and that the Order states that once Grange finds that more than 50% of its lending is outside of the Columbus MSA, it must file a new and revised (i.e., expanded) CRA plan. Here, Green Tree is already a nationwide lender -- far, far less than 50% of its lending would be in the Las Vegas MSA. ICP’s position is that the Grange “precedent” is not applicable to the Applicants’ proposal.]

ICP reiterated ICP’s position that the Applicants’ current CRA plan is superficial, and inconsistent with recent OTS precedents. ICP believes that the informal meeting would be most productive AFTER the Applicants have submitted a revised (and more detailed) CRA plan (but before OTS staff has internally “signed off” [or not] on such CRA plan). An update will follow, after the August 31 meeting at the OTS' Northeast Region office in Jersey City, New Jersey.

Update September 2, 1999

On August 31, the Office of Thrift Supervision held an “informal meeting” on Conseco’s and Green Tree’s application for a thrift charter. The OTS’ presiding officer, from the OTS’ Dallas office, initially suggested that each side make a 25 minute presentation from a podium in the meeting room; both sides agreed to conduct in the meeting in a more “question-and-answer” format. However, Green Tree’s representatives did not answer the questions. For example, one Green Tree representative said that the company does not, or only rarely, engages in loans with balloon payments. But ICP had put into the record, but in its August 31 pre-informal meeting submission, and at the meeting itself, the following, from that Durham (N.C.) Herald-Sun, July 7, 1999, at C1 (House Moves ‘Predatory Lending’ Bill; Committee Oks Curbs on High Rate, Lump Sum Premiums): “One Durham borrower... was charged $11,630 in one insurance premium payment on a $58,800 loan from Green Tree Financial Servicing Corp. in Raleigh, the loan papers state. After that payment and other fees were added, she ended up financing a $71,365 loan over 15 years. Her payment is $695 a month, and on Jan. 4, 2014, she will owe a one-time balloon payment of $63,771. All told, the loan will require her to pay $188,596, or more than three times the original $58,800.” Emphasis added.

Green Tree’s representatives did not respond to the “balloon payment of $63,771” portion of this account. Rather, one of Green Tree’s representatives said that Green Tree look unfavorably on the type of (packed) credit insurance in the account, and implied that if the borrower had called Green Tree, this might have been worked out. This did not resolve the issue however, and, as set forth below, it is unclear how many wronged / injured borrowers do call Green Tree, and whether problems like this ARE worked out. For further example, Green Tree’s representatives explicitly acknowledged that Green Tree does not report payment histories, including positive payment histories, to credit reporting agencies for home equity and perhaps other loans. ICP pointed out that this runs afoul of, for example, the New York State Banking Department’s detailed proposed description of predatory lending. Green Tree’s representatives responded that while they do not report payment histories, including positive payment histories, they would be willing, on a case by case basis, to make a statement on a particular customer’s payment history, at that customer’s request. Left unclear is whether this is a credible solution. When Green Tree’s customers (at interest rates as high at 17%) apply to another lender, it would seem that this other lender would simply order a copy of the applicant’s credit history. It is unclear how many lenders are willing to consider extraneous information before making their decision. There is also no evidence that if a particularly customer called Green Tree’s general telephone number, they would be able to receive the informal statement of payment history to which Green Tree’s representatives alluded.

ICP on September 2 timely requested a formal meeting on Green Tree’s and Conseco’s application, under the OTS’ regulations.

September 13, 1999 Update

The Office of Thrift Supervision’s Midwest Office has granted the request for a formal meeting on Green Tree’s and Conseco’s application, and has stated that the issues to be discussed include:

-- “Opinion by ICP that Green Tree’s high interest rate and sub-prime lending practices and Green Tree’s lack of reporting positive loan payment histories to credit bureaus and indicative of predatory lending;

--Green Tree’s program to review the correlation between interest rate/fees and race in its loan portfolio;

--Green Tree’s program to protect its home improvement borrowers in connection with the work of home improvement contractors;

--Green Tree’s reporting of ‘race not reported’ in the New York City MSA;

--Relationship of Green Tree’s strategy of soliciting savings deposits from Conseco’s nationwide insurance customers to its Las Vegas CRA assessment area,” etc..

--OTS letter of September 9, 1999

The OTS has, for now, decided to hold the formal meeting in Dallas. ICP has requested that the meeting be held at the OTS’ Northeast Region office, or at the OTS’ Washington headquarters.

September 27, 1999 Update

On September 23, the Office of Thrift Supervision’s Midwest Regional Office held a “formal meeting” on Conseco’s and Green Tree’s applications for a thrift charter. While two of the three protesting community groups are based in New York, and the third in Missouri, the OTS denied requests that the meeting be held in New York or Washington, and held it in Dallas. A representative of ICP participated by video conference from the OTS’ Northeast Regional Office in New Jersey; the two other protesting groups participated by telephone.

Evidence was read into the record in support of the proposition that Green Tree is the type of predatory lender which should not be granted a thrift charter. Green Tree’s representatives did not refute this evidence case-by-case; rather, they described the market’s acceptance of their securitized loans as evidence of compliance with law. Green Tree again acknowledged that it does not report positive payment history of its borrowers to the credit bureau, and stated that its short Community Reinvestment Act “plan,” which does not even acknowledge Conseco’s current plan of collecting deposits through its insurance agents, should be sufficient. Green Tree’s outside counsel, at the conclusion of the meeting, emphasized that the “record” on the application closed in March 1999, and that no further extension should be granted. The OTS representative said he agreed with Green Tree, even despite the fact that Green Tree at the meeting read from new documents it had not provided to the protestants, but added that these documents would now be provided, and “you can comment to us.” Which, it goes without saying, the community groups will...

Jan. 22, 2000: The OTS is still considering the thrift charter application ofConseco, whose Green Tree subprime finance unit has admitted it does not report its borrowers’ positive payment histories to the credit bureaus (see above). The FFIEC on Jan. 18 issued an advisory letter criticizing this practice. But it is not yet clear what the OTS will do, as to Green Tree....Developing.

April 28, 2000 Update -- The CEO of Conseco has resigned, after announcing a 73% drop in earnings. Seems that Conseco’s acquisition of the subprime lender Green Tree was a fiasco; Conseco’s now put Green Tree up for sale in what is definitely a buyer’s market. It seems clear that the thrift charter application to the OTS must be put on hold, pending the identity of the acquiror of Green Tree...

July 31, 2000 Update: Conseco has found no buyers for Green Tree; it's most recent announcement is that it will lay off 2,000 employees of this now-toxic subsidiary...

[March 2003: Conseco's acquisition of Green Tree resulted in bankruptcy.... Then Conseco sought to sell the old Green Tree Capital Bank, renamed Mill Creek Bank, to Geneeral Electric -- which ICP challenged in late April 2003, starting a GE Watch...].

On HSBC - Household, on November 19, December 2, 9 and 16, 2002, ICP submitted supplemental comments to the OCC, NYBD and FRB. ICP's Nov. 18 and Dec. 2 OCC comments, and Dec. 9 and Dec. 16 NYBD comments, are summarized below. On Dec. 3, 2002, ICP commented to state attorneys' general who are considering Household's Proposed Settlement of real estate lending practices alleged (by the states) to be predatory. A summary of the issues ICP raised to 45 state attorneys general (e.g., AK, AR, AZ, CT, CA, CO, DC, FL, GA, IA, ID, IL, IN, KS, KY, LA, MA, ME, MI, MS, MT, NC, ND, NE, NH, NM, NV, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VA, VT, WA, WI, WV, etc.) in electronic and/or facsimile filings on Dec. 3, 2002, follows the Dec. 3 Update. The Texas AG's office's response (identical to those from the CT AG and the AG's offices in FL, ID, PA, etc.), and ICP's reply, are in the Dec. 5 Update, along with ICP's Dec. 4 third letter to the Federal Reserve Board. [On Dec. 16, the AGs filed their unmodified consent decrees, as reported and critiqued in the Dec. 17 Update.]. On Dec. 10, ICP filed a second SEC complaint (see below), and filed timely opposition with the U.K. Office of Fair Trading and the European authorities. Both have confirmed receipt. On Dec. 12 and Jan. 3, ICP raised these issues directly to HSBC and its independent directors. On Dec. 13, HSBC held a hastily-schedule conference call, a transcript of which it filed with the SEC on Dec. 16. On Dec. 20 HSBC filed its preliminary proxy statement; on Dec. 23 ICP commented against it, to the SEC, and filed new comments with too many agencies to list here (see Dec. 23 Update, below). On Dec. 23, 4 p.m. ET, we were informed that the Office of the Comptroller of the Currency has extended its comment period on HSBC's Household proposal until Jan. 9, 2003. More comments went in on Dec. 30-31. The NYBD's comment period, for now, runs through Jan 6, 2003. On Jan. 4, we asked the members of the N.Y. Banking Board to have it extended; on Jan. 6, 9, 13, 20 and 27, and throughout February and into March, we submitted more comments. On Feb. 23, ICP's FFW took the campaign to Africa, see ICP's Global Inner Cities Report of Feb. 23, 2003; click here for more...

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On March 22, 2000, Fed Chairman Alan Greenspan delivered a half-an-hour speech in Washington. The majority of Greenspan’s speech extolled the virtues of the “new” economy (and by implication, of his stewardship over it). TV cameras from the financial news networks whirled in the back of the room; CNN-fn was ready to cover it live, if Greenspan took questions (which he didn’t). The live audience, primarily representatives of grassroots community groups, waited for any reference to their issues -- if not CRA, at least fair lending. Finally, well past the half-way point of the speech, it came. In paragraph 17, Greenspan alluded to wealth disparities between whites and “non-whites and Hispanics.” And, in paragraph 19, Greenspan expressed concern about “abusive lending practices,” and said that the Fed “recently convened an interagency group to identify aberrant behaviors and develop methods to address them.”

This single paragraph became the lead for most press coverage of the speech. Reuters’ headline was, “Greenspan Says Fed To Target Abusive Lending.” Hardly -- the Fed convened this “interagency group” in October 1999, and it has only met twice since. Since 1995, the Fed has been charged with issuing a regulation defining unfair and deceptive lending practices, under the Home Ownership and Equity Protection Act of 1994 -- but has yet to issue any such regulation. When confronted last year with evidence of Bankers Trust’s (now Deutsche Bank’s) and Republic’s (now HSBC’s) involvement with predatory lenders, the Fed claimed it could do nothing. The American Banker, to its credit, captured some of this Johnny-Come-Lately (if Johnny comes at all) aspect to Greenspan’s speech, headlining its story, “Greenspan Wades In On Predatory Lending, Joining Other Regulators.”

Not that the other bank regulators are much better. Comptroller Hawke at least mentioned CRA early and often in its March 21 speech. He said, “where we have credible evidence that a national bank is engaged in predatory practices, we will focus on the remedies that are within our power...”. But Republic National Bank of New York was buying the securities backed by Delta Funding’s mortgage loans, even as Delta was being sued for discrimination by the NYS Attorney General. And the OCC has given Eagle National Bank of Upper Darby, PA, a “Satisfactory” CRA rating, after this bank made over 600,000 high-priced payday loans.

The Office of Thrift Supervision appears somewhat more active on the predatory lending issue -- for example, the OTS obtained from Lehman Brothers in 1999 a commitment to avoid predatory pricing practices when it helped pool and sell other companies’ mortgage loans. But Lehman Brothers, after making the commitment, continued to do this underwriting for First Alliance (subject of the New York Times’ March 15, 2000 expose; the company on March 24 filed for bankruptcy). We’ll see what conclusions the OTS’ upcoming examination of Lehman Brothers reaches...

The action, such as it is, on the predatory lending issue is at the level of the states, and even cities. The City of Chicago has proposed an ordinance barring companies which own predatory lenders from doing business with the city. The city is scrutinizing subprime lenders which have higher market shares in communities of color than citywide, including Bank of America’s Equicredit unit. Interestingly, a Bank of America representative was on the dais during Greenspan’s March 22 speech, and, in her introduction, said that in May Bank of America will report that it is “on track” to meeting the ten year, $350 billion “CRA” lending commitment it made during the NationsBank - BofA merger...

There is some federal legislative action. Rep. Jan Schakowsky (D-IL) has introduced the “Anti-Predatory Lending Act of 2000,” H.R. 3901; Rep. John LaFalce (D-NY) is promising a related bill before Congress’ Easter recess.

Finally, for now, an idea worth further consideration: among the major purchasers of bonds backed by predatory loans are unions and their pension funds. While legislation and more enforcement actions are clearly needed, people both within and outside of the labor movement need to document and raise the degree to which union members’ pensions are being invested in predatory loans....

June 22, 1999 -- The New York State Attorney General has taken action on a predatory mortgage lending issue that the Federal Reserve Board refused to touch in connection with Deutsche Bank’s application to acquire Bankers Trust in the spring of 1999. On June 22, the A.G. announced that Delta Funding, a high interest rate lender that Bankers Trust enabled and did foreclosures for, had settled racial discrimination in lending charges. The Fed was directly confronted with BT’s involvement with Delta during its consideration of DB’s application, but refused to act. Now (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).

So, will the Fed take action, now that the NYS Attorney General has? The answer appears to be “probably not,” or, “not anytime soon.” The wheels of justice at the Fed, such as they are, turn absurdly slowly. For example, the Fed is only now (June 29) holding a hearing on Bankers Trust’s VP Guillaume Henri Fonkenell’s bogus sales of derivatives to Indonesian companies and Proctor & Gamble in 1994. That’s five years ago. Justice at the Fed is not swift, and is far from certain.

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.

And so in May, ICP raised these issues, among others, to the Office of Thrift Supervision, on Lehman Brothers’ application for a savings bank charter (by acquiring Delaware Savings Bank). 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...

Here's a sample subprime lending issue, as to the conglomerate Citigroup:

March, 1999 -- Issues concerning subprime lending, referrals, and fair lending compliance, have arisen in connection with Citibank’s / “Citigroup’s” proposal to acquire the mortgage company Source One. Source One does “subprime” mortgage lending, an activity concerning which the Office of the Comptroller of the Currency (“OCC”) has recently expressed concern. See, e.g., SOMC Targets Subprime, National Mortgage News, September 29, 1997. Among the concerns raised by subprime lending is the possibility that protected classes, particularly by race, national origin and age, could pay more than is warranted by their credit histories. See, e.g., the Department of Justice’s enforcement action against Long Beach Mortgage.

These concerns would be exacerbated if Source One were allowed to become part of Citigroup: foreseeably, Citigroup might refer applicants denied by affiliates “down” to Source One’s subprime operation for higher interest rate mortgages, but ICP is not aware of any commitment that applicants through Source One’s subprime channel would be considered for normal interest rate loans by other Citigroup units. See, e.g., American Banker of December 17, 1997, at 10, quoting Source One’s CEO that Source One “had recently opened a subprime office in Brewster, N.Y.. Between this office and referrals from Source One’s network of retail and wholesale offices, he said, the company expects to originate $500 million to $750 million of subprime loans in 1998.” Emphasis added.

ICP also notes that the “notice” of this proposal that ICP was made aware of today -- did not contain any explanatory or identifying information about that filing, only “EXISTNG [sic] OBSUP/NEW ACTIVITIES” -- in fact, from the Weekly Bulletin, one might assume that the filing was for insurance activities. The Comptroller’s Corporate Manual, Volume entitled Investment in Subsidiaries and Equities, discusses at page 68 activities that “do not raise significant policy or supervisory issues...”. Community groups have urged the OCC to specify that subprime lending such as Source One’s raises significant policy and supervisory issues;” the OCC has not yet acted on that request. Since the OCC has recently promulgated a definition of subprime lending, and set forth some of its policy and supervisory concerns about this type of lending, such amendment of the Corporate Manual should now be possible. Even prior to such an amendment, Source One’s subprime lending and referrals, combined with Citibank’s, Citibank Mortgage’s, and Travelers’ (including Commercial Credit’s) lending records, raise significant policy and supervisory issues that should be closely scrutinized.

It should be noted that Citigroup, in its public statements about this proposed acquisition, has not mentioned any safeguards it would impose on Source One’s subprime lending and referral programs. Instead, Citigroup has claimed that “[t]he addition of Source One... enhances Citibank Mortgage’s offerings for low- and moderate income home buyers.” Citigroup press release of March 25, 1999.

Citigroup certainly needs to “enhance” its offering in low- and moderate-income, and minority, communities. In New York City, these two (income and race) are troublingly intertwined. Here was Citibank Mortgage’s lending record to people of color in 1997 (the 1998 data will not be released by the FFIEC until July, ICP has been informed):

Citibank Mortgage in the NYC MSA, 1997, Conv. Home Purchase

Apps. Orig. Denials Den. Rate

Blacks 93 48 20 22%

Hispanics 83 48 15 18%

Whites 535 403 46 9%

In that light, ICP has scrutinized Source One Mortgage’s HMDA-reported lending record in 1997 (as noted above, the 1998 data has not yet been released). Despite the claim that Source One is a major FHA and VA lender, in Citibank’s headquarters MSA, New York City, in 1997 Source One reported, in HMDA Table 4-1, only one FHA / VA origination to an African American applicant, and one to a Latino applicant. For refinance loans in this MSA in 1997, Source One denied 43% of applications from African Americans, versus only 28% of applications from whites. For refinance loans in the Philadelphia MSA in 1997, Source One denied 29% of applications from African Americans, versus only 6% of applications from whites -- a denial rate disparity of 4.83-to-1. On this record, it is hard to see how the addition of Source One would improve Citibank’s service to its whole community, including minorities.

See also, “Activists Challenge Citibank,” American Banker’s Mortgage-Backed Securities Letter, April 26, 1999, at 1. The Office of the Comptroller of the Currency's radically streamlined "Part 5" (12 C.F.R. Part 5) allowed Citigroup to close this deal before the issues above were even reviewed. In a subsequent response, Citigroup stated among other things that it will count Source One's lending toward its 1998 CRA "pledge," without adjusting the pledge upwards. ICP is continuing to pursue these Citigroup and subprime lending issues. For more on Citigroup's record, click here.

* * * *

The CRA and Internet Banks

An issue of particular concern in 2000 is the proper application of the CRA to Internet banks. When the CRA was enacted in 1977, few could have foreseen, 23 years in the future, the inroads that non-brick and mortar, Internet banks are making. The initial CRA directs regulators to ensure that insured depository institutions meet the credit needs of their communities, particularly low and moderate income neighborhoods. Each bank’s “community” (or delineated assessment area in which the bank’s performance would be judged) was defined as an area around its deposit taking branches -- because this was the way that deposits were collected in 1977. By regulation, the definition of assessment area was later expanded to include the communities where a bank’s deposit-taking automatic teller machines are located.

Now in the year 2000, Internet institutions like Telebank are running television advertising campaigns nationwide, with the following message: “We can pay higher interest rates on deposits because we don’t have the expense of branches. Move your money to our bank.” Since the traditional banks in the cities where Telebank is running these ads have CRA duties in these cities, each dollar withdrawn from them, and placed in Telebank (which seeks to limit its CRA assessment area to Arlington County, Virginia, where its headquarters office is) is a dollar taken out from under a CRA duty in that city.

On a policy issues like this, one might assume that each administrative decision is a precedent, a sort of mark in the sand. Not so. In late 1999, the Dutch insurer ING applied to the OTS to set up a “direct bank” to be headquartered in Wilmington, Delaware, but targeting consumers from Delaware up to and including New York City. ING proposes that its assessment area be limited to the Wilmington MSA. Astoundingly, ING’s application states that the “Savings Bank will establish one or more marketing offices in its assessment area or adjoining areas that will house phone lines dedicated to the Savings Bank’s call center, as well as computers with dedicated access to the Savings Bank’s transactional website.” Emphasis added. ING’s proposal does not even comply with the OCC’s CIBC ruling, that assessment areas must include facilities offering dedicated access to an Internet bank’s website. ICP has submitted a timely comment to the OTS on ING’s application.

* * *

UNITARY THRIFT CHARTERS

Until the November 1999 enactment of the Financial Services Modernization Act, one of the few ways for securities, insurance, or commercial firms to own an FDIC-insured institution is through what has come to be known as the unitary thrift loophole.

When the savings-and-loans were failing in the 1980s, Congress, in order to encourage all different kinds of companies to buy the weakened thrift, and thus get these acquirers to help bail the thrifts (and the government out), eased a number of rules.

The savings bank charter’s powers include the ability to preempt all state laws, including consumer protection laws. A growing concern is that the Office of Thrift Supervision will grant savings bank charters to numerous nationwide financial conglomerates, many of which will put their high interest rate subprime lending (see above) into or under their savings bank. This questionable lending will then be subject only to OTS supervision -- at a time when the OTS is dramatically under-staffed. The perfect loophole for a predatory lender to fall in to...

Another issue raised by these nationwide lending companies getting thrift charters is that the applicants argue, and the OTS essentially permits, that their Community Reinvestment Act duties are limited to the city in which they have their headquarters office. On an application ICP opposed in 1997, by the Travelers Group and its subprime lender, Commercial Credit, for a thrift charter, the result of advocacy was that Travelers “took the view” that its CRA duty extends to everywhere it does business, and made a (relatively paltry) $435 million, 3-year lending commitment to low- and moderate-income borrowers. Other applicant have since tried to follow this mold: CRA duty limited to one city, generic lending pledge nationwide. These pledges do not mean that the OTS will be able to -- or will even try to -- examine the companies for fair lending, in the far-flung communities in which they do business... Click here to see some recent sample OTS approval orders for thrift charters.

While the "unitary thrift" loophole, at least for commercial companies, was closed by the November 1999 enactment of the Financial Services Modernization Act (while the law was being debated, ICP submitted detailed opposition to the thrift charter application of Wal-Mart, for example -- click here for summary), insurance companies (like ING) and others are still applying for thrift charters.

Here are some of the pre-enactment applications that ICP is still fighting:

General Electric

Ford Motors

Again, please send us your suggestions of other issues that should be addressed -- on this page or otherwise... Email to HotIssues [at] innercitypress.org , or call us, at (718) 716-3540.

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