Schwab / U.S. Trust: Deficient CRA Performance of First GLB Act Combination

Schwab / U.S. Trust

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Update of July 19, 2004: It’s more than a little ironic that the first cross-industry merger permitted by the Gramm-Leach-Bliley Act, Charles Schwab’s acquisition of U.S. Trust, is now reportedly coming apart....For or with more information, contact us.

Update of November 24, 2003: we're curious to see what action will be taken on reports that U.S. Trust, long coddled by the Fed, even before the Board let Schwab buy it, helped Rush Limbaugh smurf his way around the $10,000 anti-money laundering threshhold. U.S. Trust delivered $9,900 to El Rushbo -- helping a client in need, apparently. "To get his business, Limbaugh said, U.S. Trust told him that 'if I needed cash, they would bring it to me.' They also suggested he take out less than $10,000 at a time to help cut down their paperwork, he said." Great... . Will the enforcement hammer further fall, on this the first spawn of the Gramm-Leach-Bliley Act? We'll see.

Update of April 23, 2001: Schwab is selling U.S. Trust's corporate trust business to Bank of New York. Schwab's earnings are dramatically down: just how good, then, was Schwab's acquisition of U.S. Trust?

Updated March 5, 2001

On December 7, 2000, The Charles Schwab Corporation, the first non-bank company to take advantage of the Gramm-Leach-Bliley Act of 1999 (through its 2000 acquisition of U.S. Trust) announced a proposal to acquire another bank, Resource Trust Company of Minneapolis. This bank "requires prospective clients to have $3 million of investable assets." Minneapolis Star Tribune, December 8, 2000. Inner City Press has taken a look at U.S. Trust's (and Resource Trust's) CRA records. The main evasion of CRA here is that these banks, which explicitly exclude low- and moderate- (and even middle-) income consumers, claim to be "wholesale banks," despite engaging in the retail lending that is CRA's focus. Below are the January 29, 2001, comments that ICP filed, with the Federal Reserve Board, the FDIC and the Connecticut Banking Department; before that, ICP's February 5, 2001, supplement comment:

Update of March 5, 2001: On February 26, the Fed approved Schwab's acquisition of Minneapolis-based Resource Trust Company, in a perfunctory 10-page Order, stating that "[t]he Board has forwarded the comments of Protestant to the appropriate Federal banking agencies for the depository institutions so that they can be considered in the next examinations of the institutions." The Fed is supposed to address and rule on the issues raised, in connection with a bank's application to expand -- but here, it refers the comments to other regulators, for consideration after Schwab is allowed to buy another bank (which even the Fed describes as serving (only) "high net worth individuals." How is this consistent with the CRA, which requires FDIC-insured banks to meet the credit needs of low- and moderate-income neighborhoods? This will be updated. For or with more information, contact us.

Update of February 20, 2001: The Federal Reserve has informed ICP that "on February 7, 2000, U.S. Trust withdrew its request for confidential treatment of the 1999 Consolidated Financial Report for Resource Trust Companies...". Of course, that's two days after the comment period closed -- an issue not addressed in the Fed's FOIA response. Schwab's and U.S. Trust's most recent response, dated February 12, makes much of a $750 grant (that's not a typo: it's seven hundred and fifty dollars) made to a trade association in Washington, D.C.. This is Schwab, the first non-bank to enter banking through the Gramm-Leach-Bliley Act; this is its CRA program. The letter also "acknowledges ICP's request for its 2000" lending data, and says this will be provided "as soon as practicable." We'll see...

Update of February 12, 2001: The Federal Reserve Board extended its comment period on Schwab's and U.S. Trust's applications to acquire Resource Trust Company, to accept ICP's February 5 comment (below). Schwab's outside counsel, Skadden Arps, states in a Feb. 5 submission that U.S. Trust in the District of Columbia, where it has a branch, has made... a single "investment," which is a certificate of deposit. No response, yet, to ICP's request to U.S. Trust for its and its affiliates 2000 Loan Application Registers, which will show the degree to which U.S. Trust engages in retail lending, but still seeks to evade CRA with an outdated, no longer merited "wholesale bank" designation...

February 5, 2001

Board of Governors of the Federal Reserve System
Attn: Secretary Jennifer J. Johnson
20th Street and Constitution Avenue
Washington, D.C. 20551

Re: Supplemental comment opposing the applications/notices of The Charles Schwab Corp. and U.S. Trust Corp. to acquire Resource Companies and Resource Trust Co.

Dear Secretary Johnson, Mr. Johnson, Ms. Villanueva, others:

On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, "ICP"), this is a suppemental comment opposing, and requesting a evidentiary hearing on, the Applications and notices of The Charles Schwab Corp. ("Schwab") and U.S. Trust Corp. and its affiliates ("U.S. Trust") to acquire Resource Companies and Resource Trust Co. ("RTC").

On January 29, 2001, ICP submitted a timely initial comment opposing this application. ICP has yet to receive a response from the Federal Reserve System (the "FRB") -- but it has received a response to a similar comment made to the FDIC, on the related application by U.S. Trust Company, Connecticut ("UST-CT") to acquire RTC. For your information, the FDIC has granted ICP's request (also made to the FRB, but yet to be acted on by the FRB, to ICP's knowledge) for an extension of the comment period.

Central to the CRA issues raised in ICP's initial comment is whether U.S. Trust's banks' (including UST-CT's) and RTC's service of the credit needs of their communities, including low- and moderate-income ("LMI") neighborhoods (and communities of color), should and can legitimately be reviewed as "wholesale banks" in this proceeding. ICP says no; its initial comment analyzed the institutions' 1999 HMDA data, as to both volume of retail loans, and (glaring) disparities by race.

ICP has now requested, from U.S. Trust, a copy of a the Loan Application Registers ("LARs") of U.S. Trust's subsidiaries for the previous year, 2000. While ICP understands that LARs are not "due" until March 1, 2001, ICP assumes that U.S. Trust already has, or can quickly compile, this information for the year that concluded more than a month ago. ICP has asked U.S. Trust to provide it with the information as quickly as possible; ICP also hereby urges the FRB to request this information, and other information that would update U.S. Trust's banks' (including UST-CT's) and RTC's out-of-date CRA exams. ICP notes that the Connecticut Department of Banking's CRA exam (the "CT Exam") of UST-CT states, at 8, that "[t]he branch in Wayne, PA has recently opened and has had a minimal effect on the bank's overall CRA performance. As such, it has been excluded from the analysis during this examination." Emphasis added. Nor does the CT Exam even mention (much less analyze the CRA performance of) UST-CT's Washington, D.C. branch, and its CRA duties in the District of Columbia.

The CT Exam does, however, recite what has been U.S. Trust's main CRA "defense" in recent years: that its offices are located in areas that are "affluent" (CT Exam at 11) and where "opportunities to target low- and moderate-income families or geographies may be limited." Id. That certainly cannot be said of the District of Columbia (or of state member bank UST-NY's "outer borough" assessment areas) -- for this reason, as to UST-CT, performance (to date, unexamined) in the District of Columbia is particularly pertinent in this proceeding. Furthermore, the failure of any of the UST-CT CRA examinations to date to consider this bank's performance in Wayne, PA and Washington, DC is a matter than must be addressed in this proceeding. The Interstate Banking Act makes it imperative that the CRA performance of interstate (out-of-main-state) branches be evaluated; that is particularly true here, where Schwab and U.S. Trust propose that RTC's current assessment area become just another satellite for UST-CT, a bank the CRA performance of which in Wayne, PA and Washington, DC has yet to be examined.

As a CRA and fair lending matter, ICP explicitly contests that U.S. Trust's banks' (and UST-CT's) lending patterns are justified by the location of its offices in areas where "opportunities to target low- and moderate-income families or geographies may be limited" (CT Exam at 11, see supra). The CT Exam (like U.S. Trust's Web site) is relatively candid: "The bank offers a variety of loan and deposit products geared primarily toward upper income individuals." CT Exam at 4; see also, <www.ustrust.com>. Significantly, this regulatory finding that UST-CT "offers a variety of loan and deposit products" makes it clear that UST-CT CANNOT legitimately, in this proceeding, be considered as a "wholesale bank," for CRA purposes. Also, it makes clear that UST-CT (and Schwab's and U.S. Trust's other banks) do not target the affluent because their offices happen to be in affluent areas -- rather, these banks locate in affluent areas because of their pre-existing predisposition to target only "upper income individuals," with "a variety of loan and deposit products." This is contrary to the letter and spirit of the CRA; what ICP has seen to date, including since Schwab's acquisition of U.S. Trust, does not, particularly given U.S. Trust's banks' product mix, constitute a sufficient CRA program that would support any legitimately approval of this Application.

Given these issues, we urge the FRB to request U.S. Trust's banks' (and RTC's) 2000 LARs, and other information that would update U.S. Trust's banks' (including UST-CT's) and RTC's out-of-date CRA exams.

The FRB should be consistent, from application to application, Reserve Bank to Reserve Bank. ICP contends that the FRB's review of CRA issues (particularly in light of the out-of-date CRA exams of record in this proceeding) should be no less thorough than, for example, that just-begun on the Fifth Third Bancorp / Old Kent Financial Corporation proposal, in which the FRB, in a letter dated January 31, 2001, asks inter alia:

"please provide an update of each subsidiary depository institution's CRA initiatives and programs since its last examination (and that of its predecessors). Please include the following information for each subsidiary depository institution separately by calendar year 1999 and 2000... for all community development loans, please provide the total number and total dollar amount of loans... For CRA investments, provide the total dollar amount of (1) low-income housing tax credits, (2) commitments (both the commitment's amount and the amount currently outstanding); and (3) grants / contributions... Identify each major community development loan and CRA-qualified investment (including commitments)... For non-HMDA reportable consumer lending for 1999 and 2000, please provide the total number and total dollar amount of loans made by borrower income and by borrower geography... Detailed information regarding any CRA products or programs that have been added since the last examination... its results to date... Please provide a copy of the policies and procedures in place at each... affiliate to ensure compliance with fair lending laws and regulations...".

All of these questions, and more, should be asked of Schwab / U.S. Trust and RTC. Schwab was and is the first non-bank financial firm allowed into banking by the FRB under the GLB Act, but, the CRA exams of record on this subsequent acquisition all date from before Schwab's entry into banking. [FN: Note also that on January 31, 2001, Schwab announced that, along with Toronto Dominion, it is now seeking to acquire Scotland's Aitken Campbell & Co.; and that the Wall Street Journal of January 31, 2001, reported that "Charles Schwab Corp., facing sagging revenue...is asking a huge chunk of its work force... to take some Fridays off in an effort to cut costs... The firm's fourth-quarter revenue fell 27%, and failed to meet expectations..."]. And, here, the very premise of U.S. Trust's banks' (including UST-CT's) purported compliance with CRA -- "wholesale bank" status -- is being challenged, based on the institutions' continued and explicit offering of retail loan products, in a way that has excluded low- and moderate-income borrowers, and, even more so, protected classes (African Americans and Latinos).

On the current record, this proposal should not be approved.

If you have any questions, please immediately telephone the undersigned at (718) 716-3540. Thank you for your attention.

Very Truly Yours,

Matthew Lee, Esq.
Executive Director

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January 29, 2001

Board of Governors of the Federal Reserve System
Attn: Secretary Jennifer J. Johnson
20th Street and Constitution Avenue
Washington, D.C. 20551

Re: Timely comment opposing the applications/notices of The Charles Schwab Corp. and U.S. Trust Corp. to acquire Resource Companies and Resource Trust Co.

Dear Secretary Johnson and others:

On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, "ICP"), this is a timely comment opposing, and requesting a evidentiary hearing on, the Applications and notices of The Charles Schwab Corp. ("Schwab") and U.S. Trust Corp. and its affiliates ("U.S. Trust") to acquire Resource Companies and Resource Trust Co. ("RTC").

ICP asserts that U.S. Trust Company, Connecticut ("UST-CT") (into which RTC would be merged), UST-CT's affiliates, and RTC are not serving the credit needs of their entire communities, including low- and moderate-income ("LMI") neighborhoods, as required by the Community Reinvestment Act ("CRA"). Relatedly, ICP contends that UST-CT, its affiliate banks, and RTC are not, in fact, eligible for treatment as "wholesale banks" under the CRA regulation -- which has been the loophole through which both institutions have, to date, evaded the CRA.

Under the CRA, the Federal Reserve Board (the "Board") on this application must consider all of the involved institutions' actual service low- and moderate-income ("LMI") neighborhoods and communities of color (see, e.g., the Fair Housing Act, 42 U.S.C. � � 3601-3619, and the Equal Credit Opportunity Act, 15 U.S.C. � � 1691-1691f -- to which this Comment separately refers).

UST-CT, in 1999 -- the most recent year for which final Home Mortgage Disclosure Act data is publicly available -- reported making 12 conventional home purchase loans in the Stamford, Connecticut Metropolitan Statistical Area ("MSA"). Ten were to whites; two were "Race Not Available; none were to African Americans or Latinos. All 12 were to applicants with incomes over 120% of MSA median income. In this MSA in 1999, UST-CT reported making six mortgage refinance loans -- all to whites. Of the eight refinance applications received, seven were from applicants with incomes over 120% of MSA median; one was "income unknown." [FN: ICP urges the Board to request and review UST-CT's and its affiliates' 2000 Loan Application Registers, including on the question of UST-CT's eligibility for "wholesale bank" status under the CRA, which ICP is contesting. ICP has previously commented to the Board on U.S. Trust's self-reported 1999 Loan Application Register; herein, ICP comments on the final, publicly reported 1999 HMDA data].

In the Hartford, Connecticut MSA in 1999, UST-CT made two home purchase loans to whites; none to African American or Latinos. In this MSA in 1999, UST-CT reported making seven refinance loans: four to whites, three to "race not available," none to African Americans or Latinos. All eight refinance applications were from applicants with incomes over 120% of MSA median income.

This type of record -- lending only to the most affluent segment of a bank's community, and entirely excluding protected classes (in this case, African Americans and Latinos) -- should and would normally result in a less than satisfactory CRA rating [FN: Note that UST-CT has banking offices in Greenwich and West Hartford, and other offices in Stamford and Essex, in Connecticut; as well as "interstate banking offices" in Wayne, Pennsylvania and Washington, D.C.. It does not appear that UST-CT's most recent CRA examination by the FDIC (dated February 23, 1998-- fully three years ago) took into account the West Hartford, Wayne, and Washington, D.C. offices -- another reason that these CRA examinations are of only limited value (and weight) in this proceeding. Note in particular that since UST appears to have done little, if anything, in Washington D.C. since taking on a CRA duty in the District of Columbia, it is questionable what benefit UST would bring to the Minneapolis market, where it now seeks to acquire another bank. Nor does it appear that the UST banks' performance has been improved, to any perceptible degree, by UST's acquisition by Schwab in 2000], and possibly (as ICP is hereby urging), a referral to the Department of Justice, on fair lending grounds. In this case, UST-CT claims to be a "wholesale" bank. But UST-CT makes retail, HMDA-reported mortgage loans. This is also true of its affiliate banks:

U.S. Trust Company of New York ("USTCNY") in the New York City MSA in 1999 reported making 94 conventional home purchase loans to whites, 81 to "race not available" -- and NONE to African Americans. In the Nassau-Suffolk MSA in 1999, USTCNY reported making 14 conventional home purchase loans to whites, 17 to "race not available," and none to African Americans or Latinos.

U.S. Trust Company, N.A., Texas ("UST-TX") in 1999 in the Dallas MSA reported making 21 conventional home purchase loans to whites, and NONE to African Americans or Latinos. U.S. Trust Company of Florida ("UST-FL") in 1999 in the Naples, Florida MSA reported making six conventional home purchase loans to whites, and none to African Americans or Latinos. In 1999, UST-FL in the West Palm Beach MSA reported making seven conventional home purchase loans to whites, and none to African Americans or Latinos.

U.S. Trust Company, N.A., California ("UST-CA") in 1999 in the Los Angeles MSA reported making nine conventional home purchase loans to whites, and none to African Americans or Latinos. In 1999, UST-CA in the Orange County MSA reported making nine conventional home purchase loans to whites, and none to African Americans or Latinos.

As noted above, the FDIC's most recent CRA examination of UST-CT is from three years ago, and states that "the bank's performance under the community development services [sic] is limited due to the short period of time that is has operated as an insured institution." This outdated exam does not provide a basis for approving this application, particular in light of the more recent information put into the record, supra. At the time of the exam, approximately one-third of UST-CT's assets were "in the form of loans... Approximately 84% of these loans were 1-4 family residential mortgages and the remaining 16% were personal loans." ICP contends that UST-CT is not eligible for "wholesale bank" status, for CRA purposes, and that, in light of the record analyzed above, UST-CT does not have a sufficient record of serving LMI neighborhoods to permit approval of this application.

ICP is requesting that UST-NY and its affiliate banks be stripped of their wholesale bank status, and the FRB, in connection with this Application, finally explicate its (apparently arbitrary) standard for deeming quantities of mortgage lending (here, over $400 million) insignificant and/or exempt from CRA analysis.

In a 2000 Order (the "Order"), the FRB stated that UST-NY’s $400 million of mortgage lending, only to the affluent, was "less than two percent of the bank’s noninstitutional accounts." Order at 10. [FN: The FRB, in that Order, erred in its statement, at n.18, that ICP "complained that UST-NY does not have a branch in Bronx County or Brooklyn." This was an incorrect statement. What ICP HAD noted was that of Schwab’s nine retail offices in NYC, none are in the outer boroughs (The Bronx, Brooklyn, Staten Island or Queens). And what is the status, today, in 2001?] ICP contests that analysis. The reality is that UST-NY, with $2.6 billion in deposits (Order at 3), made $400 million (that is, at least 15% of its deposits) in mortgage loans. The "two percent" figure used by the Fed to justify essentially exemption U.S. Trust from CRA is the wrong measurement -- it is like exempting Citigroup from CRA because it has a lot of accounts overseas. [FN: Similarly, the FRB's 2000 Order, at note 16, stated that "CRA applies only to depository institutions and not to Schwab’s brokerage or other subsidiaries... [T]he CRA Regulations... require wholesale bank determinations to be made on the basis of the activities of the bank and do not restrict the affiliations of a wholesale bank." As applied by the FRB in this Order, this will allow banks that combine with securities firms to simply shift their lending out of the bank, over to the securities firm, and then claim that their banks are "wholesale," and are only required by CRA to make a few grants, rather than lend fairly]. The review of this Application should including a check on the status of Schwab's and U.S. Trust's meeting of the "expect[ations]" expressed in the 2000 Order, slip op. at 14.

The FRB claims that "wholesale bank" designations, and decisions about when a particular volume of lending (here, over $400 million) becomes "significant," and subject to CRA analysis, are made on a case-by-case basis. In this case, the FRB must also consider, for the first time, Resource Trust Company:

Resource Trust Company in 1999 in the Minneapolis MSA reported making a conventional home purchase loan to a white applicant; none to African Americans or Latinos. In this MSA in 1999, RTC reported making two refinance loans two whites, and none to African Americans or Latinos. RTC's most recent CRA performance evaluation reference a higher level of mortgage, and consumer, lending, than is reflected in RTC's 1999 HMDA report. Specifically, the exam states that, as of March 31, 1998, 23% of the bank's loan portfolio, by dollar amount, consisted of "Real Estate Mortgage," 16% of "Consumer" loans, 24% of "Commercial" loans, and only 37% of "loans that are made for the purpose of purchasing or carrying securities." On this basis, Resource Trust Company is, ICP contends, not eligible for "wholesale bank" status for CRA purposes.

ICP requested a complete copy of this Application, and related documents, on January 5, 2001... The Federal Reserve Bank of San Francisco sent ICP the portions of the application for which Schwab and U.S. Trust did not request confidential treatment. ICP has yet to receive any response from the Board... Despite its January 5, 2001, request, and despite the fact that the comment period purportedly expires on January 29, 2001, as of this submission, on January 28, ICP has not received any response from the Board, or any documents from the Reserve Bank, beyond those described above. ICP is today submitting an additional FOIA request; ICP hereby requests an extension of the comment period, on the grounds set forth above.

On the current record, this proposal should not be approved.

If you have any questions, please immediately telephone the undersigned at (718) 716-3540. Thank you for your attention.

Very Truly Yours,

Matthew Lee, Esq.
Executive Director

This will be updated. For or with more information, contact us.

[Some earlier Schwab - U.S. Trust Reports:]

June 5, 2000

On June 1, Schwab put out a press release announcing the consummation of its acquisition of U.S. Trust. The (Schwab-chosen) headline? “Close of Deal Launches New Model for Serving the Affluent Investor.” The first deal under the Gramm-Leach-Bliley Act, which supposedly preserved and even expanded the Community Reinvestment Act (CRA), is a deal in which the acquirer unself-consciously describes as entirely focused on “the affluent.” Schwab now has a CRA duty, its currently programs are laughable, and its mortgage offerings nearly entirely exclude low and moderate income neighborhoods. We will be following this up...

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May 15, 2000:

On May 2, the day after the Federal Reserve Board voted to approval Schwab’s application to acquire U.S. Trust (analyzed below), ICP received from the Fed several dozen pages of Schwab’s application, that Schwab had erroneously asked the Fed to withhold from the public -- to withhold only until after the approval was done, apparently. ICP’s formal request for reconsideration will be due at the Fed on May 16, and will be set forth here, at that time. Similar reconsideration may be sought of the New York State Banking Board’s May 4 approval (ICP has requested the transcript of the meeting from the NYSBD, and will review it, in this space, upon receipt).

Federal Reserve Board Governor Gramlich, in a May 3 letter to ICP, confirms that “in connection with this [FOIA] appeal, staff discovered a single page of notes taken by a Board attorney during the prefiling meeting that were for the attorney’s exclusive, personal reference. The attorney did not share or offer to share these notes with any other Board employee at any time and, in fact, did not refer to them at any time after the meeting. Under these circumstances, the notes are personal notes that do not constitute an agency record. See Inner City Press/Community on the Move v. Federal Reserve System, 1998 U.S. Dist. LEXIS 1533, at *15-17 (concluding, under similar circumstances, that attorney’s meeting notes were not an agency record).” The case Gov. Gramlich refers to concerned the Citicorp - Travelers merger, prior to announcement of which, the Fed met with the companies’ lawyers about, essentially given them the green light, implicitly assuring a Fed approval, even before the required public comment period. This process was repeated on Schwab - U.S. Trust. For shame...

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Updated May 1, 2000, 7:20 p.m. EST

Late this afternoon, the Federal Reserve Board announced its approval of Schwab - U.S. Trust. As summarized by Bloomberg News (18:07 EST, J. Rega): “The Fed rejected an application to deny the acquisition, lodged by Inner City Press/Community on the Move, a community lending activist group in New York. The group argued that U.S. Trust, in focusing on wealthy customers, avoids making loans to low- and moderate-income people as required by the 1977 Community Reinvest Act. Inner City Press added that Schwab will be able to operate as a bank without having to serve the community. The Fed said U.S. Trust has received passing grades in its most recent community lending reviews.” There’s more to the story:

The Fed’s Order (available on its web site) reveals how a combination of the Gramm-Leach-Bliley Act and the Fed’s lax approach to enforcing the Community Reinvestment Act can allow a major financial conglomerate to nearly-entirely evade the letter and spirit of the CRA, which is to serve the credit needs of low- and moderate-income areas.

U.S. Trust owns six banks, the largest of which, U.S. Trust Co. of New York (UST-NY) is based in New York. U.S. Trust holds itself out as “serving affluent individuals and their families” (the quote's from U.S. Trust's web site); in 1999, UST-NY made over $400 million of mortgage loans, virtually all to upper income, non-minority borrowers, and none, simply for example, in Bronx County, which has 1.3 million residents (and is the lowest income, most predominantly minority county in U.S. Trust’s headquarters city, all of which U.S. Trust has a duty to serve under CRA). This flies in the face of the CRA.

Despite UST-NY’s over $400 million in reported mortgage lending in 1999, the Fed’s Order paradoxically states that U.S. Trust is “not engaged in the business of mortgage lending.” Order at 13. How can a bank make $400 million in mortgage loans and not “be in” that business? This should be news to thousands of small banks and thrifts around the country -- under this standard, they too could be exempt from CRA.

The Fed also attempts to exempt UST-NY’s $400 million of mortgage lending, only to the affluent, by saying that it is “less than two percent of the bank’s noninstitutional accounts.” Order at 10. The reality is that this bank, UST-NY, with $2.6 billion in deposits (Order at 3), made $400 million (that is, at least 15% of its deposits) in mortgage loans. The “two percent” figure used by the Fed to justify essentially exemption U.S. Trust from CRA is the wrong measurement -- it’s like exempting Citigroup from CRA because it has a lot of accounts overseas.

The Fed claims that “wholesale bank” designations, and decisions about when a particular volume of lending (here, over $400 million) becomes “significant,” and subject to CRA analysis, are made on a case-by-case basis. But the standards the Fed uses are not explained in the Order. Frankly, ICP infers that one or more Fed staffers played with numbers to come up with a sound-byte that most minimized U.S. Trust’s mortgage lending (“2%”), and that the Fed Governors read only the draft (and misleading) Order, prior to voting. And thus CRA is eviscerated...

The few things that U.S. Trust (and now Schwab) do under CRA are hardly related to the credit needs of low income areas: the Fed’s given CRA credit for grants to the American Red Cross (Order at 12), and for stand by letters of credit that never result in actual loans (Order at 11, n.17). The Fed erred in its statement, Order at n.18, that ICP “complained that UST-NY does not have a branch in Bronx County or Brooklyn.” What ICP HAD noted was that of Schwab’s nine retail offices in NYC, none are in the outer boroughs.

The gist is confined by the Fed to footnote 16: “CRA applies only to depository institutions and not to Schwab’s brokerage or other subsidiaries... [T]he CRA Regulations... require wholesale bank determinations to be made on the basis of the activities of the bank and do not restrict the affiliations of a wholesale bank.” As applied by the Fed in this order, this will allow banks that combine with securities firms to simply shift their lending out of the bank, over to the securities firm (witness how Schwab will now be offering mortgage loans, with E-LOAN,, see below) -- and then claim that their banks are “wholesale,” and are only required by CRA to make a few grants, rather than lend fairly.

In its apparent desire to rubber stamp the first proposal under the Gramm-Leach-Bliley Act (for passage of which the Fed intensively lobbied in 1999), the Fed has, in this Order, bent CRA beyond recognition, opening up new loophole that portend badly for low income consumers, as the now-deregulated industries converge, and, apparently, leave low income communities behind, not coincidentally in the clutches of high interest rate predatory lenders... (see ICP’s on-going Wells Fargo and Mizuho (Fuji, IBJ and Dai-Ichi Kangyo Bank) pages for more).

Schwab and U.S. Trust still require New York State Banking Department approval (ICP will be making a final comment to the NYSBD prior to its May 4 meeting); prior to U.S. Trust’s shareholders’ meeting on May 31, ICP among other things will be requesting Fed reconsideration of its Order on the grounds above. This will be updated...

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Updated April 30, 2000

On March 13, 2000, ICP filed a challenge to The Charles Schwab Corp.’s application to the Federal Reserve Board and New York State Banking Department to acquire U.S. Trust Corp., under the Community Reinvestment Act, which requires service to low- and moderate- income neighborhoods.

The Federal Reserve Board is slated to consider Schwab’s application on Monday, May 1. The Fed’s action will be analyzed in this space, by May 8th at latest. The final week of the Fed’s “processing” of the application saw some new development. On April 25, Schwab’s counsel made a submission to the Board, stating that Schwab had just announced an agreement with E-LOAN, whereby Schwab would begin offering mortgage products to Schwab’s “customers and other prospects that visit the broker-dealer’s website.” Schwab’s April 25, 2000, letter to the FRB (the “Letter”), at 1.

ICP commented to the Fed that this was relevant to the Community Reinvestment Act (“CRA”) issues that ICP has timely raised in this proceeding. Schwab has claimed that both the current U.S. Trust, and the proposed combined entity, should be viewed as “wholesale,” for CRA purposes. ICP contends that on this issue that United States Trust Company of New York’s (“USTCNY’s”) current mortgage lending volume (over $400 million in HMDA-reported mortgages in 1999), combined with other facts of record, including that USTCNY’s mortgages are not only to existing (or even actively prospective) USTCNY customers, disqualifies USTCNY for “wholesale” status and an exemption from CRA’s otherwise-applicable Lending Test.

Now Schwab, which proposes to acquire U.S. Trust and USTCNY, states that it will be offering mortgage products to retail customers. Paradoxically, Schwab claims that it “would make the service available only to its customers and to other visitors to its website... Schwab has no current plans to offer this service to U.S. Trust customers.” Letter at 2.

Schwab is requesting an approval whereby “U.S. Trust’s customers” would become customers of Schwab & Co., rendering the above-quoted a distinction without a difference. Schwab’s newly-announced arrangement with E-Loan, to offer retail mortgage products to “its” customers (which would include, under the proposal, U.S. Trust’s customers) and to the public at large (that is, anyone who can visit the Web site) makes the argument for “wholesale” treatment under CRA completely untenable.

We also note that Schwab, which is applying to become a bank holding company (as well as a financial holding company) in this proceeding, is receiving “stock and warrants which, if exercised, would represent approximately 24 percent of [E-Loan’s] then outstanding stock.” ICP contends that Schwab, proposed parent of U.S. Trust and USTCNY, will control E-Loan, making E-Loan (the company in one sense “offering” the loans that Schwab/U.S. Trust would be holding out to the public) an affiliate of U.S. Trust and USTCNY. Any attempt to argue that USTCNY should retain “wholesale” status of CRA purposes since the additional (beyond $400 million a year) mortgages would be offered by another company would represent a twisting of the CRA. This logic would allow, for example, Chase Manhattan Bank to apply for wholesale status, if mortgage loans were only made through Chase Manhattan Mortgage. The FRB should not, and cannot legitimately, accept such logic.

We particularly note (and direct the FRB’s attention to) the following quote, from Schwab EVP Daniel O. Leemon, in the press release that Schwab annexed to its letter: “We performed extensive research that showed a significant number of our customers would seek a mortgage if it were available via schwab.com...”. In this (Schwab selected) view, the offering of mortgages is hardly incidental (rather, it will be to “significant number[s]” of customers, which, under the proposal, could include U.S. Trust and USTCNY customers, or even prospects. This proposed combination, the first allowed by the Gramm-Leach-Bliley Act, which explicitly retained and did not in any way repeal the CRA, should not be treated as “wholesale,” purportedly not offering retail consumer credit (including mortgage) products, evading CRA’s Lending Test, while “on the ground” (and offered to the public at large over the Internet) it would be eminently “retail.” The current and projected CRA programs and activities are entirely inconsistent with the size and actual business lines of the proposed combined entity; the current bank component of the conglomerate blatantly fails the Lending Test that is central to the CRA. This new Schwab acquisition significantly affects the CRA issues that the FRB must consider in connection with the Applications; the comment period should be re-opened.

The Fed has still not provided any documents about its August 1999 meeting with Schwab, nor the improperly witheld documents about its January 10, 2000 meeting with the institutions (which were in that meeting referred to, somewhat absurdly, as “Patriot” and “Socrates.” Schwab’s counsel has since explained that it routinely uses code-words in its M&A work, so that lower-level employees don’t catch wind of an impending merger and trade on the information. ICP’s view: it’s one thing for a law firm to engage in this smart-ass Wall Street game; it’s another thing for the Fed to be sucked into it.

The Fed has kept Schwab-U.S. Trust on its agenda for May 1; the Fed’s action will be analyzed in this space, by May 8th at latest.

* * *

April 24, 2000: ICP's most recent submission, of April 19, is summarized below. It responds, among other things, to the Applicants' admission that U.S. Trust's New York bank made over $400 million in mortgage loans in 1999 (all to upper income people), an amount they argue is insignificant, and should not be subject to CRA scrutiny. The Fed and NYSBD are bending beyond recognition the CRA law, for the convenience of U.S. Trust and Schwab. For or with more information, contact us.

April 19, 2000

Board of Governors of the Federal Reserve System
Attn: Secretary Jennifer J. Johnson
20th Street and Constitution Avenue
Washington, D.C. 20551

Re: SUPPLEMENTAL COMMENT BY INNER CITY PRESS / COMMUNITY ON THE MOVE AND THE INNER CITY PUBLIC INTEREST LAW CENTER IN OPPOSITION TO THE APPLICATIONS AND NOTICES OF THE CHARLES SCHWAB CORP. TO ACQUIRE U.S. TRUST CORPORATION AND ITS SUBSIDIARIES

Dear Secretary Johnson, et al.:

On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, “ICP”), this is a supplemental comment opposing and requesting an extension of the comment period, and an evidentiary hearing on the Applications and notices of The Charles Schwab Corporation (“Schwab”) to acquire U.S. Trust Corporation and its bank- and nonbank-subsidiaries (“U.S. Trust”).

Since ICP’s April 7 timely submission, ICP has received (1) an April 18, 2000 submission (hereinbelow, the “Subm.”) by Schwab’s counsel, “respond[ing] to request by members of the Federal Reserve staff; and (2) an April 14, 2000 response (hereinbelow, the “Resp.”) to ICP’s April 3 comments. Both are commented on below.

ICP was troubled to read, in the U.S. Trust / Schwab S-4 of April 7, 2000, that “[o]n August 18, 1999, representatives of Schwab met with representatives of the Federal Reserve Board to discuss issues that might be raised if Schwab were to acquire a bank holding company.” Records about that meeting were clearly responsive to ICP’s Freedom of Information Act (“FOIA”) request, but were neither provided or identified as being withheld. While ICP’s timely FOIA appeal of April 5, 2000, contests certain other redactions and withholdings [FN 1: In light of the April 7 S-4, which states that the Jan. 10, 2000 meeting included, inter alia, Mr. Maurer of U.S. Trust, and in light of the one released record’s reference to “Patriot” and “Socrates” (leading to an inference that those who met with the Fed desired to keep the companies’ identities secret only from the public, and not from the FRB), it becomes more imperative that records surrounding that meeting (and the August 18, 1999) meeting, be released], it should be read as demanding all records concerning the “August 18, 1999” meeting with the FRB referred to in the companies’ April 7 S-4. While the S-4 states that “U.S. Trust was not identified at that meeting,” by implication, Schwab was identified at the meeting, and records from that meeting are clearly responsive to ICP’s FOIA request and appeal. In light of the silent withholding of these responsive records, the comment period must be extended, and this submission must be made part of the record.

ICP will respond first to Schwab’s April 18 Submission (the “Subm.”). Most dispositively, the Subm. discloses that U.S. Trust Company of New York (“USTCNY”) made over $400 million in HMDA-reportable mortgage loans in 1999. Subm. at 5. To attempt to characterize over $400 million of mortgage lending, in a single year, as insignificant or “incidental,” or somehow exempt from CRA / low- and moderate-income scrutiny, is outrageous. Consider that the threshold at which mortgage lender must report HMDA data (a working definition of a significant volume of loans) is below $30 million. Consider that what the Gramm-Leach-Bliley Act (the “GLBA”) adopted as its definition of a “small bank” (eligible for less frequent CRA examinations) was a level of total assets under $250 million. USTCNY volume of HMDA-reportable mortgage loans, in the single year of 1999, is more than 60% higher than the GLBA’s cut-off for small banks, and is more the 13 times higher than HMDA’s definition of a significant mortgage lender.

ICP contends that these comparisons (to thresholds of “small bank” and significant mortgage volume under the GLBA and HMDA, respectively) are relevant to the Applicants’ increasingly ludicrous argument that USTCNY can legitimately be considered a wholesale bank, despite its over $400 million in HMDA-reportable mortgage lending in 1999. The arguments advanced by the Applicants twist the definition of wholesale bank beyond recognition, and are inconsistent with (and undermine) the CRA, which, as noted, Congress expressly retained in the GLBA. To offer mortgage loans -- to the tune of $400 million a year -- only to the affluent, through an insured depository institution, constitutes a Substantial Non-Compliance with the letter and spirit of the CRA. These Applications, on this record, should be denied.

While it is ICP’s position that USTCNY’s $407 million of HMDA-reported mortgage lending in 1999 place it outside of any plausible definition of wholesale bank [FN 2: Similarly, the FRB’s apparent substitution of a market share test (see Subm. at 4, and recited FRB question re “signfican[ce]”) for a legitimate wholesale bank test (that USTCNY’s $400 million in 1999 mortgage loans clearly fails) is troubling to ICP. By that logic, a community bank in the NYC MSA which made $400 million in mortgage loans would also be considered “insignificant” (based on market share), and would enjoy the type of exemption from the CRA lending test that USTCNY is claiming for itself], the Applicants’ attempt to invoke the formalities of the other “wholesale” tests (that might apply to a bank with a much smaller volume of mortgage lending) are also unconvincing. Schwab’s counsel’s April 14 Resp. states at 3, in an artful phrasing, that “[w]e understand that UST-NY does not hold itself out as offering retail loans.” First, the evasive nature of the “we understand” qualification of the statement should not be accepted by the FRB. If the submitter of the Response cannot, in fact, respond, U.S. Trust itself should be required to state, one way or the other, whether it holds itself out as offering retail loans. Second, it is difficult to understand how a bank could make over $400 million in retail, HMDA-reportable loans without “hold[ing] itself out as offering retail loans.” How were the 626 originated mortgage loans applied for? Mind reading? It is hard to believe that over 650 people would apply to USTCNY for mortgage loans if USTCNY did not “hold itself out” to them as offering mortgage loans.

While, again, the volume is dispositive in this case, the Subm. provides a break-down of what percentage of mortgage borrowers “have asset management relationships with UST-NY” or (even) “are in active dialogue with UST-NY about establishing additional relationship.” Subm. at 2. This does not answer the relevant questions (for purposes of wholesale bank status), nor the FRB questions that Schwab recites in the Subm.. For example, what percentage of UST-NY’s 382 mortgage borrowers in 1999 who, as of April 18, 2000 “have asset management relationships with UST-NY” had such relationships at the time of application and origination of the loans? A loan made “on an accommodation basis” is one made to an existing customer, not one made with the hope of generating additional business from the borrower. Under the Applicants’ proposed test, many clearly retail mortgage lenders could obtain wholesale bank status, since they expressly hope to generate “additional relationships” with these borrowers. (As the FRB knows, institutions like Bank of America pride themselves on, and track, additional relationships formed, post-loan, with their borrowers). Finally, on this point, what exactly does “active dialogue” mean? Schwab does not define it. Would simply mailing a solicitation for other business constitute a dialogue? And how can the Applicants explain the borrowers who neither “have relationships” (as of April 18, 2000) nor are even “in dialogue about additional relationships”? How could USTCNY be making such loans, without have “held itself out” as offering retail loans? It’s simply impossible, and defeats the Applicants’ arguments. If the Applicants persist in their increasingly ludicrous argument that USTCNY does not “hold itself out as offering retail loans,” the FRB should request contact information for the above-specified borrowers (more than 40, at USTCNY, in just 1999), and ask them whether USTCNY held itself out to them as offering retail loans.

The Applicants’ arguments about U.S. Trust’s advertisements (in both the Subm. and the Resp., and see the attachments to the Subm., and <www.ustrust.com>) are premised on the idea that if an institution characterizes itself as a “private” bank, it can thereby escape the CRA lending test, whatever its volume of lending (here, for USTCNY, over $400 million in HMDA-reportable loans in 1999). The advertisements, and the Web site, offer “private banking” services to the public at large. Jumbo mortgages (a retail loan product) are part of the “private banking” offering. Retail loan products are being offered (or “held out”) to the public (at least those with Internet access, or who read “national magazines,” see Subm. at 3), as reflect by not only the ads and Web site, but also the HMDA data.

The above-identified, improperly withheld records (including of the August 18, 1999 FRB-Schwab meeting) must be released (including in response to ICP’s already-pending FOIA appeal -- ICP sees no reason to separately supplement its FOIA appeal, since records about the August 18, 1999 meeting were clearly responsive to ICP’s initial FOIA request), and, based on the extraordinary circumstances )for purposes of Regulation Y and its preamble) the comment period must be extended.

U.S. Trust’s volume of retail lending (the FRB should also inquire into consumer lending, but apparently has not) takes it outside of any plausible definition of wholesale bank for CRA purposes. Under the letter and spirit of the CRA statute and regulation, USTCNY has a record of substantial non-compliance with CRA; this Application should be denied.

Respectfully submitted,

_________________
Matthew Lee, Esq.
Executive Director
Inner City Press / Community on the Move

cc: Mr. William J. Sweet, Jr.
Skadden, Arps, Slate, Meagher & Flom LLP
Counsel to Schwab

* * *

April 17, 2000

New York State Banking Department
Attn: Acting Superintendent Elizabeth McCaul, et al.
Two Rector Street
New York, NY 10006

RE: TIMELY SUPPLEMENTAL COMMENT IN OPPOSITION

Dear Acting Superintendent McCaul, et al.:

On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, “ICP”), this is a timely supplemental comment opposing the above-captioned Applications of The Charles Schwab Corporation (“Schwab”) U.S. Trust Corporation and its bank- and nonbank-subsidiaries (“U.S. Trust”).

Since ICP’s March 18 and April 3, 2000 submissions to the New York State Banking Department (“NYSBD”), ICP has received Schwab’s Response to the NYSBD, dated April 7, 2000 (hereinbelow, the Resp.), as well as Schwab’s April 10, 2000 response (hereinbelow, the “Letter”) to an NYSBD letter of March 28, 2000.

ICP has not received a copy of the NYSBD’s March 28 information request to Schwab. According to Schwab’s Letter, the NYSBD asked Schwab “to describe the process by which U.S. Trust Corporation originates residential mortgage loans and sells them to its affiliate(s), including an explanation of which entity is responsible for making the credit decision and how responsibility for reporting such mortgage applications and originations pursuant to the Home Mortgage Disclosure Act is handled.”

Schwab’s Letter begins by claiming that “[e]ach of the bank subsidiaries of U.S. Trust originates residential mortgage loans substantially as an accommodation to its clients.” Emphasis added. Schwab makes this vague (i.e., “substantially”) statement in support of its claim that it should be viewed as a wholesale bank. ICP disputes this.

The NYSBD should inquire into what percentage of USTCNY’s mortgage and consumer loans are made to existing customers (therefore, at least arguably, on a case-by-case basis, as an “accommodation”) and what percentage to members of the general public, to entice them to become U.S. Trust customers (as good a definition of “retail” as any). In 1995, fully 30% of USTCNY’s 255 mortgage borrowers were new customers. USTCNY’s volume of mortgage lending as continued to climb (see the 1999 LAR, previously submitted and analyzed); Schwab’s April 10, 2000 use of the statement “substantially to accommodate” should be inquired into. Also note that in 1995, 14% of USTCNY’s consumer loan borrowers were new clients. What was USTCNY’s volume (and percentage) in 1999? The NYSBD should inquire...

* * *

As demonstrated above, and in ICP’s previous submissions, USTCNY is a bank that is no longer “wholesale,” in any meaningful sense of the word -- a bank that excludes low and moderate income people, and even within the upper income demographic, people of color. Schwab, proposing to acquire this bank, “addresses” these issues by claiming that the NYSBD is bound by previous (and outdated) determinations by non-NYS regulators (such as the FRBNY’s erroneous designation of USTCNY as a wholesale bank) (Resp. at 3), and by claiming that the NYSBD/BB cannot consider CRA on these applications (Resp. at 8), despite the NYSBD/BB’s practice of doing such this, on other applications under N.Y. Banking Law Section 143 (for example, on Travelers application to acquire Citicorp). California-based Schwab’s attempts to limit the NYSBD’s discretion and jurisdiction lead ICP to further question what benefit, if any, this proposal would have for NYS consumers, much less residents of low- and moderate-income neighborhoods in NYS.

On numerous applications under Section 143, NYSBD staff have made extensive presentations to the NYSBB on the CRA and fair lending issues involved in the applications. Ironically, Schwab’s outside counsel has represented many of these applicants (including Travelers - Citicorp), yet to ICP’s knowledge never made this “NYS CRA does not apply” argument. Is this new approach a product of California-based Schwab’s position on NYS CRA, and NYS communities?

In light of the principles of the dual banking system, it is ludicrous to argue, as Schwab does (Resp. at 3) that the NYSBD is bound to follow the lead of federal agencies, regardless of the facts, regardless of how outdated determinations like, here, “wholesale bank” status are. Schwab is urging the NYSBD/BB to allow a New York State chartered bank, subject to NYS CRA, to make hundreds of mortgage loans, virtually only to affluent whites, and excluding whole counties in its assessment area, yet receive “expedit[ed]” (Resp. at 9) approval of acquisition applications that the NYSBD/BB historically subjects to CRA review. On the current record, this Application should be denied.

Respectfully submitted,

_________________
Matthew Lee
Executive Director
Inner City Press / Community on the Move

cc: Mr. William J. Sweet, Jr.
Skadden, Arps, Slate, Meagher & Flom LLP
Counsel to Schwab

* * *

ICP's supplemental comment of April 7, to the Federal Reserve Board, is also summarized below. But perhaps most telling about the process is a response to a Freedom of Information Act (FOIA) request that Inner City Press got from the Fed on April 4. ICP had asked for all records reflecting Schwab’s or U.S. Trust’s communications with the Fed. In response, the Fed provided a redacted copy of a 36 page memo, dated January 10 -- three days before the deal was publicly announced. The memo, entitled “Federal Reserve Meeting,” begins:

“Socrates and Patriot have been engaged in discussions regarding the possibility of a business combination... Our objective is to familiarize you with Socrates, Patriot, and our perspective on the combination.”

So the Fed met with Schwab's and U.S. Trust's lawyers even before the companies announced the deal. The Fed has refused to provide any of the documents that would should what the Fed staffers told the companies in these meetings. Do all banks, and all bank lawyers, have this kind of access to the regulators? No. ICP has recently spoken with another bank lawyer, for smaller clients, who cannot even get the regulators to return his calls. Perhaps the Fed’s criterion is the size of the applicant. But it’s worth noting that when Citicorp and Travelers wanted to get the Fed’s (including Chairman Greenspan’s, and Fed General Counsel Mattingly’s) view of their proposed merger, prior to finalizing and announcing it, they used the same outside counsel.

It is, in ICP’s view, the FED’s conduct, and willingness to hold secret pre-announcement meetings with certain parties, that’s called into question. Regulated entities, and law firms who represent them, have a understandable motive to desire access. It’s the government’s job to run a fair process.

The Fed provided the above described memo, but has withheld “one and a half linear inches” of other documents, and all of the documents that would should what the Fed told Mr. Sweet and Schwab, in this Jan. 10 meeting. The questions raised can only be answered by referring to the documents that the Fed has, in its initial FOIA response, withheld. ICP has appealed, under FOIA -- developing...

April 7, 2000

Board of Governors of the Federal Reserve System
Attn: Secretary Jennifer J. Johnson
20th Street and Constitution Avenue
Washington, D.C. 20551

Re: TIMELY SUPPLEMENTAL COMMENT BY INNER CITY PRESS / COMMUNITY ON THE MOVE AND THE INNER CITY PUBLIC INTEREST LAW CENTER IN OPPOSITION TO THE APPLICATIONS AND NOTICES OF THE CHARLES SCHWAB CORP. TO ACQUIRE U.S. TRUST CORPORATION AND ITS SUBSIDIARIES

Dear Secretary Johnson, Mr. Bernstein, et al.:

On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, “ICP”), this is a second timely supplemental comment opposing and requesting an extension of the comment period, and an evidentiary hearing on the Applications and notices of The Charles Schwab Corporation (“Schwab”) to acquire U.S. Trust Corporation and its bank- and nonbank-subsidiaries (“U.S. Trust”).

ICP’s below-discussed Freedom of Information Act (“FOIA”) appeal of April 5, 2000, made clear why the comment period must be extended. ICP wishes to re-emphasize that it has not received a copy of any FRS request for information on the Community Reinvestment Act (“CRA”) issues that have been raised. It should be clear that, having solicited over 700 mortgage loan applications in 1999, U.S. Trust’s lead bank, USTCNY, cannot legitimately be considered a “wholesale bank” for CRA purposes. U.S. Trust does not only offer mortgages as an “accommodation” -- U.S. Trust offers mortgages to the general public, to attract new customers. But, contrary to the CRA, it entirely excludes low and moderate income neighborhoods and individuals, and protected classes under the fair lending laws.

In further support of ICP’s contention that U.S. Trust’s banks are not, in fact, entitled to “wholesale bank” status for CRA purposes, ICP is annexing hereto the “Community Reinvestment Plan” that U.S. Trust filed with the Connecticut Department of Banking on March 10, 2000 (the “UST-CT CRA Plan”). On page 4, this recent document states that “the Company intends to continue to offer the following credit services: 1) secured and unsecured demand and time loans; 2) secured and unsecured lines of credit; 3) residential mortgages and refinancings; and 4) loans to small professional firms (e.g., law firms, money management firms.” Emphasis added. The Company also describes its offices as “easily accessible from all parts of town... using either private or public transportation.” U.S. Trust’s banks, which “offer... residential mortgages” and business loans (self-limited to such entities as law firms and money-management firms), and which seek credit for the “assess[ibility]” of their offices to the general public -- are NOT legitimately “wholesale banks” for CRA purposes. They are non-wholesale banks, which lend only to the affluent, and even within that income demographic, disproportionately exclude people of color. For example, U.S. Trust’s Connecticut bank, UST-CT, in 1999 reported (on its Loan Application Register [“LAR’]) receiving 51 mortgage loans applications -- not a single one from an African American or a Latino. U.S. Trust’s New York-based bank, U.S. Trust Company of New York (“USTCNY”) reported receiving 76 mortgage applications from Connecticut -- again, not a single one from an African American or a Latino. USTCNY’s record in New York is even worse -- a higher volume of mortgage applications (rendering the bank ineligible for wholesale bank status); near-total exclusion of people of color, no loans whatsoever in, for example, Bronx County, the lowest income and most predominantly minority county in USTCNY’s CRA assessment area. On the current record, the Application should be denied. And, beyond the FOIA issues set forth below, because the FRS has apparently not even attempted to develop the record on these issues, the comment period should not yet close.

The Gramm-Leach-Bliley Act explicitly retained (and in no way repealed) the CRA. The FRS’ failure to even seek to develop the record on this application, on these CRA issues, raises questions about the FRS’ compliance with its duties under the CRA, the BHCA, and under the Administrative Procedure Act more generally. On the current record, these applications could not legitimately be approved....

* * *

On March 28, Schwab's outside counsel, Skadden Arps, filed an 11-page response to ICP's protest. On the same day, U.S. Trust provided ICP with its 1999 Home Mortgage Disclosure Act Loan Application Register. ICP's comments on both of these, filed with the Fed on April 3, 2000, are set forth below. On March 18, ICP filed a protest similar to the one below with the New York State Banking Department. On April 3, ICP filed a similar protest with the Connecticut Department of Banking, which must also review the deal. For or with more information, contact us.

April 3, 2000

Board of Governors of the Federal Reserve System
Attn: Secretary Jennifer J. Johnson
20th Street and Constitution Avenue
Washington, D.C. 20551

Dear Secretary Johnson, Mr. Bernstein, et al.:

On behalf of Inner City Press/Community on the Move and its members and affiliates (collectively, “ICP”), this is a timely supplemental comment opposing and requesting an evidentiary hearing on the applications and notices of The Charles Schwab Corporation (“Schwab”) to acquire U.S. Trust Corporation and its bank- and nonbank-subsidiaries (“U.S. Trust”).

Since ICP’s March 13, 2000 submission, ICP has received Schwab’s Response, dated March 28, 2000 (the Resp.), as well as U.S. Trust’s 1999 Loan Application Registers (“LARs”). Hereinbelow, ICP comments on both.

ICP’s contentions that U.S. Trust’s insured depository institutions exclude low- and moderate-income communities, and people of color, and that its banks are not entitled to “wholesale bank” status under the Community Reinvestment Act (“CRA”) are given further support, and are proved, by U.S. Trust’s 1999 LARs.

U.S. Trust Company of New York (“USTCNY”) for 1999 has reported receiving over 750 mortgage loan applications. It is simply ludicrous to claim, as Schwab’s Resp. does, at 7, that U.S. Trust is “not in the business of making loans to the general public.” USTCNY cannot legitimately be deemed a “wholesale bank;” and, viewed under the appropriate and applicable CRA standard, USTCNY has a record of substantial non-compliance with the CRA, militating for the denial of this Application.

Over 340 of the mortgage loan applications that USTCNY reported in 1999 were in the New York City Metropolitan Statistical Area (“MSA”). Significantly, NOT A SINGLE ONE of these applications or loans was in Bronx County, the lowest income and most predominantly minority county in the NYC MSA, a county with a population of over one million people, and one that USTCNY has a duty to serve.

Note also that Schwab has 11 branches in New York City: nine in Manhattan (all below 96th Street), and two in Queens; none in The Bronx, or even Brooklyn.

The Federal Reserve System (the “FRS”) should request from Schwab or U.S. Trust a copy of U.S. Trust’s 1999 LARs. Based on the LARs that U.S. Trust has provided to ICP, ICP has found that:

U.S. Trust Company of Connecticut in 1999 reported 51 loan applications -- not a single one from an African American or a Latino.

U.S. Trust Company of Florida Savings Bank reported 45 loan applications -- all from whites.

U.S. Trust Company, N.A. (California) reported 116 loan applications -- none from African Americans or Latinos.

U.S. Trust Company of Texas, N.A. reported 62 loan applications -- none from an African American.

U.S. Trust Company of New Jersey reported 19 loan applications -- none from an African American or a Latino.

U.S. Trust’s banks reported over ONE THOUSAND mortgage loan applications in 1999, entirely disproving Schwab’s claim U.S. Trust is “not in the business of making loans to the general public.” See supra. Also eviscerating USTCNY’s claim for “wholesale bank” status under the CRA, ICP’s further research has revealed that in 1998, USTCNY reported small business loans in seven states: New York, New Jersey, Connecticut, California, Idaho, Massachusetts and Pennsylvania.

In light of the above, Schwab’s March 28 purportedly response, claiming that U.S. Trust’s banks “are not in the business of making loans to the general public” is untenable. Similarly, while Schwab’s Resp. claims that the text from U.S. Trust’s Web site that ICP has previously put into the record is not inconsistent with CRA or “wholesale bank” status, and (implicitly) that it does not signify doing business with the general public, ICP notes that U.S. Trust’s home page states “For you and your family, we offer a host of services, including... private banking.” Glaringly, Schwab’s response does not even attempt to answer why USTCNY reported no HMDA data in 1998, but then in 1999 reported over 750 loan applications. ICP contends that USTCNY violated HMDA in 1998; and that the high percentage of “race not reported” responses in its 1999 HMDA data makes out another persumptive HMDA violation, of the requirement that institutions request, record and report such information for mortgage loans, so that the fair lending laws can be enforced.

ICP also notes (and enters into the record) that Schwab spokesman Glen Mathison has been quoted that “U.S. Trust should and will maintain its wholesale institution status.” Community Group Protests Schwab-U.S. Trust Merger,” Dow Jones News Service, Fed Filings, March 15, 2000, emphasis added. The same article quoted a Federal Reserve Board senior attorney that “we certainly have the discretion to change the [CRA] classification from ‘wholesale’ to ‘non-wholesale.” Which is precisely that the FRB should do, forthwith. Under the appropriate and applicable CRA test, U.S. Trust’s bank have records of substantial non-compliance with the CRA, and these Application should be denied.

Respectfully submitted,

_________________
Matthew Lee, Esq.
Executive Director
Inner City Press / Community on the Move

cc: Mr. William J. Sweet, Jr.
Skadden, Arps, Slate, Meagher & Flom LLP
Counsel to Schwab

* * *

PETITION TO DENY AND HEARING REQUEST BY INNER CITY PRESS / COMMUNITY ON THE MOVE AND THE INNER CITY PUBLIC INTEREST LAW CENTER IN OPPOSITION TO THE APPLICATIONS AND NOTICES OF THE CHARLES SCHWAB CORP. TO ACQUIRE U.S. TRUST CORP. AND ITS SUBSIDIARIES

MARCH 13, 2000

On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, “ICP”), this is a timely initial comment opposing and requesting hearings on the applications and notices of The Charles Schwab Corporation (“Schwab”) to acquire U.S. Trust Corporation and its bank- and nonbank-subsidiaries (“U.S. Trust”).

Schwab and U.S. Trust propose to form a banking and brokerage conglomerate, the first under the Gramm-Leach-Bliley Act of 1999 (the “GLBA”), which will avail itself of federal deposit insurance, but will apparently exclude and ignore low- and moderate-income communities, in contravention of the spirit (and, as set forth below, of the letter) of the Community Reinvestment Act (the “CRA”).

The CRA mandates that insured depository institutions must serve the convenience and needs, including credit needs, of their entire communities, including low- and moderate-income neighborhoods. U.S. Trust Corporation owns six insured depository institutions, headquartered, respectively, in New York, Florida, California, Texas, New Jersey and Connecticut. As demonstrated below, U.S. Trust’s banks have weak CRA and fair lending records. But it is important, first, to note how U.S. Trust portrays and perhaps even conceives of itself, as reflected by its Web site, <www.ustrust.com>.

There, U.S. Trust states that it is “an investment management company headquartered in New York that manages over $86 billion in assets for clients throughout the country. In addition, we offer a broad array of financial services, including private banking, fiduciary services, and tax, estate and financial planning, for affluent individuals and their families.” The following page, <ustrust.com/ser-indv.htm>, states that “U.S. Trust offers a unique array of services for affluent individuals and their families.” This continues on <ustrust.com/newyork.htm>: “For generations, affluent New Yorkers have relied on us to help them manage their wealth. Although our business is now national in scope, our commitment to personal service and understanding the needs of our clients keeps us focused on our local community.” (All emphases added).

U.S. Trust owns six banks, is subject to the CRA, avails itself of FDIC insurance - and yet neither presents nor conceives of itself as a bank. Despite CRA’s clear mandate that banks serve the convenience and needs, including credit needs, of low- and moderate-income neighborhoods, U.S. Trust’s self-presentation to the public not only does not mention low income communities or consumers once -- it repeatedly emphasizes that it is focused on “affluent individuals and their families.”

That this would be the exclusive focus of the banking arm of the first GLBA-allowed conglomerate is troubling. ICP is not speculating as to this focus: the financial press recognized and confirmed it. See, e.g., “Discount Broker to Pay $2.9 Billion In Bid to Attract Upscale Clients,” by Walter Hamilton, Los Angeles Times, Jan. 14, 2000, pg. C1; “Schwab Makes Grand Play for the Rich,” by Amy Kover, Fortune, Feb. 7, 2000, pg. 32. Congress, after debate, explicitly retained the CRA (and its mandate that banks serve low and moderate income communities) in enacting the GLBA. How is this first post-GLBA proposed combination consistent with the CRA? As set forth below, it is not.

What is the record of U.S. Trust’s banks “meeting the credit needs of... low- and moderate-income neighborhoods”? 12 U.S.C. �2903(2). As set forth above, U.S. Trust’s public marketing and offering of credit is explicitly directed and limited to “affluent individuals and their families.” By race and national origin, U.S. Trust’s record is abysmal. U.S. Trust Company of Texas, N.A., for the year of 1998 reported making 27 conventional home purchase mortgage loans, all in the Dallas Metropolitan Statistical Area (“MSA”). Despite the diverse demographics of the Dallas MSA, ALL of these U.S. Trust loans were to white consumers.

U.S. Trust Company, N.A. (California) reported in 1998 making conventional home purchase mortgages in three California MSAs. In Los Angeles, all 16 of its race-specified loans were to whites (four applications were listed as “race not reported”). In San Francisco, U.S. Trust made five loans to whites, one to an Asian household, and, again, NONE to African Americans or Latinos. In the Orange County MSA, U.S. Trust made nine such loans, all to whites.

U.S. Trust Company of Florida Savings Bank has on its record a rare “Needs to Improve” CRA rating - a rating given to less than five percent of the banks in the United States. While, by such questionably-substantive actions as buying seven loans from a BankAmerica predecessor, U.S. Trust Company of Florida Savings Bank managed to have its CRA rating updated to the “gentleman’s B,” Satisfactory, its substantive performance in low and moderate income communities remains weak, as set forth below.

U.S. Trust’s lead bank, U.S. Trust Company of New York (“USTCNY”), is perhaps the most interesting of U.S. Trust’s banks, in the way it has sought to avoid meaningful application of the CRA. USTCNY used to make and report mortgage loans (though they were virtually all either to whites, or listed as “race not reported”). According to the New York State Banking Department (the “NYSBD,” publication of May 26, 1998):

On July 15, 1996, [USTCNY] sold the bulk of its mortgage portfolio to a newly formed, wholly-owned operating subsidiary, U.S. Trust Mortgage Services Company located in Boca Raton, Florida. U.S. Trust sells the mortgage that it originates to the mortgage services company on an intra-day basis... [O]n October 30, 1996, the Federal Reserve Bank granted the bank designation as a wholesale institution for purposes of its evaluation under the CRA.

The timing was no accident: USTCNY moved “the mortgages that it originates” to a “newly formed, wholly-owned subsidiary” so that, while still offering mortgages (but only to affluent customers), and while offering such retail services as ATM cards, it could seek CRA designation as a non-retail, “wholesale” institution. That the Federal Reserve System in 1996 accepted (or perhaps even suggested and/or encouraged) this shell game, so that this bank could continue to contravene CRA, by offering mortgages, ATM cards, etc., only to affluent customers -- exemplifies the FRS’ own resistance to, and failure to enforce, the CRA. ICP contests this dubious designation of USTCNY as a non-retail bank (given its product offerings), and demands that the FRS closely consider this question, in connection with this, the first convergence / cross-industry proposal under the GLBA.

Returning to the NYSBD’s above-quoted description of the shell game: the NYSBD used the present tense (“U.S. Trust sells the mortgages that it originates to the mortgage services company on an intra-day basis”). Emphasis added. USTCNY is presented as the originator. Under the terms of the Home Mortgage Disclosure Act (“HMDA”), USTCNY should be reporting these mortgage applications and origination. However, a search of the FFIEC’s HMDA data base, by “U.S. Trust” and “United States Trust” (and even, as the FRS confusingly lists it, in its CRA database, “United State TC”) reveals no HMDA data for USTCNY.

If, as the NYSBD states, USTCNY is the “originat[or],” then USTCNY should be reporting HMDA data. The only motive for not doing so would appear to be to further the bogus (see above) “wholesale bank” designation for CRA (evasion) purposes.

Interestingly, in light of the NYSBD’s above-quoted presentation of USTCNY, the searches set forth above in the FFIEC data base to not reveal any HMDA data for “U.S. Trust Mortgage Services Company,” either. The above-quoted NYSBD presentation goes on to state that “[i]n addition, in December 1998, a wholly-owned subsidiary of Mortgage Services Company, Co-op Holdings, Inc., a Nevada company, was formed to purchase all cooperative mortgages owned by Mortgage Services Company.” The CRA-evading shell game continues. ICP has requested from U.S. Trust Corp. its 1999 Loan Application Registers for each of these entities, and will be submitting further comments upon receipt.

In the interim, even on the 1998 HMDA data record, other of U.S. Trust’s wholesale bank designations should be revoked. As recounted above, U.S. Trust Company of Texas, N.A., for the year of 1998 reported making 27 conventional home purchase mortgage loans. But the Office of the Comptroller of the Currency’s most recent CRA exam of this institution, dated June 25, 1997, states that “[o]n October 4, 1996, U.S. Trust Company of Texas received approval for designation as a wholesale institution.” This designation no longer holds. Furthermore, the OCC’s three page CRA exam of the institution is now 32 months out of date. The current record does not support any approval of this Application.

The FRB’s May 26, 1998 CRA exam of USTCNY, while seemingly longer than the OCC’s exam, reveals just how little even U.S. Trust’s lead bank does. For example, at BB7, the FRB exam states that “Direct lending initiatives accounted for $3.2 million... This total included $360 thousand in loans and lines and credit and $2.9 million in standby lines of credit.” That is to say, 90% of the “direct lending” that the FRB gave USTCNY CRA credit for was nothing more than “standby letters of credit.” The FRB exam acknowledges that “[t]here was no community development lending in MSA 5380 (Nassau-Suffolk, NY).” Id.

As to U.S. Trust’s supposedly “Qualified Investments,” the FRB exam states that “[m]ost investments are through financial intermediaries and can be routinely provided by other investors.” The FRB gives U.S. Trust credit for the fact that “an advisor to the bank’s CRA Committee serves on the Board of Managers of the New York City Investment Company, LLC...[and] serves on the advisory board of Pace University’s” SBDC. And the FRB exam gives U.S. Trust CRA credit, under the heading “Services Targeted to LMI Individuals,” for “advisory and trustee activities for... the American Red Cross of Greater New York.” While the Red Cross is, to be sure, laudable, there is little basis for characterizing it as “targeted at LMI individuals,” not for giving U.S. Trust CRA credit for trustee activities for it. U.S. Trust’s CRA programs are laughable, as are the FRS’ most recent efforts to find things for which to give U.S. Trust CRA credit. For purposes of this Comment, the record reflects a CRA program entirely insufficient for a conglomerate of the size here proposed.

ICP also wishes to note for the record that, while these Applications were listed in the FRB’s H2A Update of March 8, 2000, and while ICP on March 9 faxed letters both to the Board and to the Federal Reserve Bank of New York (the “FRBNY”), ICP on March 10 received a phone message from the FRBNY stating that the Application were “not available yet.” The FRB’s comment period on this important (first post-GLBA) Application should not run from a date on which the Application was not available for review.

ICP also notes, again for the record, the following account from the American Banker newspaper of March 10, 2000 (“Fed to Approve 100 ‘Holding Company’ Applications,” by Dean Anason): “More than 100 companies, including Citigroup Inc., Charles Schwab Corp., and J.P. Morgan are expected to usher in a new era in financial services today by qualifying as financial holding companies... [The FRB] refused Thursday to divulge which companies had applied or even how many applications it has received. But a spokesman confirmed the central bank’s governors plan to meet in closed session today to approve ‘somewhat over 100’ applications...”.

Under the terms of the GLBA and otherwise (including in light of the issues raised herein), ICP formally requests that Schwab’s application to be designated a “financial holding company” be consolidated with its applications and notices to become a Bank Holding Company, by acquiring U.S. Trust and its banks. Also, ICP’s March 9 request for a copy of all related applications includes a request for Schwab’s application to be become a financial holding company.

What makes this proposal most clearly an evasion of the CRA is that retail, including “brick and mortar,” quality of Schwab. Schwab has over 300 retail offices, throughout the country. Schwab is already engaged in the (CRA-relevant) extension of credit -- not only credit for customers to buy securities on margin, but see also Thomson’s Financial News Net of November 15, 1999, “Schwab Eyes Joint Venture With Online Mortgage Lender.” Schwab is quite open about both its retail, bank-like offerings, and its (U.S. Trust-like) focus on the affluent. See, e.g., Schwab’s May 26, 1999 press release, on PR Newswire: “Schwab Offers New ATM Benefits to High Net Worth and Active Trader Customers; Worldwide ATM Use for Schwab Access Accountholders At No Additional Charge.” “About 10% of Schwab’s clients are eligible. The brokerage has six million accounts, with $542 billion of assets.” Katharine Fraser, “Brokers Rebating ATM Fees for High-Net-Worth Clients,” American Banker, June 4, 1999. A more recent description of Schwab’s policy on ATM fees finds that Schwab “offers rebates of those ATM fees with its Access account, a super-checking account that is only available to customers with $100,000 in assets or 12 commission-paying trades a year.” Seattle Post-Intelligencer, February 28, 2000, at C7.

The FRB should also consider, before granting bank (or financial) holding company status on Schwab, the company’s recent purchase of “day trading firm” CyBerCorp Inc., for $487 million. See, e.g., U.S. News & World Report of February 14, 2000, “Day Traders Are Now Welcomed at Schwab:” “CyBerCorp’s heavy traders each generate more than $19,000 a year in commissions...”.

On this proposal, the FRB must inquire into and act on such issues as U.S. Trust’s banks’ glaring exclusion of minorities (protected classes under the Fair Housing Act and ECOA, both of which apply to U.S. Trust); USTCNY’s dubious designation as a “non-retail,” wholesale institution, despite the fact, as reported by the NYSBD, that USTCNY “originates” mortgages; USTCNY’s and its affiliates’ presumptive and continuing violation of HMDA, etc..

There is a larger problem, however, with these applications. The underlying proposal is to merge a retail, 300-branch, credit-extending institution with an exclusionary, dubiously “wholesale” holding company of banks, which, contrary to the CRA, explicitly pitches itself only to “affluent individuals and their families.” ICP reiterates: the CRA mandates service of the convenience and needs, including credit needs, of their entire communities, including low- and moderate-income neighborhoods. Congress, after debate, explicitly retained the CRA (and its mandate of service to low and moderate income communities) in enacting the GLBA. How is this first post-GLBA proposed combination consistent with the CRA? As set forth above, it is not. ICP requests an evidentiary hearing on the proposal and all related applications; on the current record, the Applications must be denied.

Respectfully submitted,

_________________
Matthew Lee, Esq.
Executive Director
Inner City Press/Community on the Move
1919 Washington Avenue
Bronx, NY 10457
Tel: (718) 716-3540
Fax: (718) 716-3161

NOTE: For or with more information, contact us. This will be updated; stay tuned...

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