Tag Archives: OneWest

Cutting Back on Community Reinvestment

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Bloomberg Law quoted me in Banks Look to Narrow Exams Under Community Reinvestment Act. It opens,

Banks see an opening to limit the types of violations that could lead to a Community Reinvestment Act downgrade as federal regulators begin rewriting rules under the 1977 law.

Banks say regulators have improperly used consumer fair lending and other violations involving credit cards or other financial products to evaluate compliance with the law meant to increase lending and investment to lower-income communities.

“When a bank violates a consumer protection law, there is no shortage of enforcement agencies and legal regimes available to seek redress and punishment. Adding the CRA to that long list thus has little marginal benefit, and risks diluting and undermining the CRA’s core purpose of promoting community reinvestment,” the Bank Policy Institute, a leading bank lobbying group, said in a Nov. 19 comment letter to the Office of the Comptroller of the Currency.

The OCC set the stage for a CRA rewrite in August by releasing an advanced notice of proposed rulemaking. The Federal Reserve and Federal Deposit Insurance Corp. have signaled a desire to sign on to a joint proposal.

With that momentum building, banks are taking their shot to limit the types of enforcement actions included in CRA reviews. They want CRA reviews to focus on mortgages, small business and other community development investments.

The question of how non-CRA-related violations apply to banks’ community lending reviews is not merely a theoretical exercise.

Wells Fargo & Co. saw its CRA grade downgraded two levels to “needs to improve”in March 2017 following the revelation of the fake accounts it generated for consumers. Several states and municipalities cut off business with the bank in response.

CRA exam cycles run three years for large national banks and can run longer for smaller banks that perform well. Banks receive one of four grades—outstanding, satisfactory, needs to improve or substantial noncompliance—and a poor grade can restrict their merger and branch expansion plans.

OCC, Treasury Leading Push

The Trump administration, led by Treasury Secretary Steven Mnuchin and Comptroller of the Currency Joseph Otting, has been pushing for the latest CRA revision.

Both of those officials ran into CRA trouble when they tried to sell OneWest Bank to CIT Group Inc. Mnuchin was OneWest’s chairman and Otting its chief executive.

The Treasury Department released a report on “modernizing the CRA” in April. Included in that report is a call to not allow fair lending enforcement investigations from the Consumer Financial Protection Bureau and other regulators to slow down CRA reviews.

Otting went farther, issuing a bulletin on Aug. 15 highlighting that his agency’s examiners will no longer take into account non-CRA lending violations when assessing a bank’s CRA compliance.

The FDIC and the Fed have not yet followed suit. But banks want the three agencies to set a common policy on dealing with non-CRA related enforcement actions in their community lending reviews.

“Regulators should develop consistent policies clarifying that CRA will not be used as a general enforcement tool,” the American Bankers Association said in a Nov. 15 comment letter.

There is some merit to the idea, according to David Reiss, a professor at Brooklyn Law School and the research director at the Center for Urban Business Entrepreneurship.

“It’s delinking fair lending concerns, which are regulated elsewhere, from CRA concerns. From an industry perspective that may make a lot of sense,” he said in a Nov. 30 phone interview.

The proposal, taken in a vacuum, may be reasonable. But in the context of broader attempts to weaken the CRA, it should be viewed more skeptically.

“Modernizing” the Community Reinvestment Act

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President Carter signs the Housing and Community Development Act of 1977, which contains the Community Reinvestment Act

The Trump Administration has been signaling its intent to do a makeover of the Community Reinvestment Act of 1977 (CRA) for quite a while, describing it as a much needed update.  Last June, Treasury stated in its Banks and Credit Unions report (one of a series of reports on A Financial System That Creates Economic Opportunities which I discuss here),

The CRA statute is in need of modernization, regulatory oversight must be harmonized, and greater clarity in remediating deficiencies is called for. It is very important to better align the benefits arising from banks’ CRA investments with the interest and needs of the communities that they serve and to improve the current supervisory and regulatory framework for CRA. . . . Aligning the regulatory oversight of CRA activities with a heightened focus on community investments is a high priority for the Secretary. (9)

Well, the modernization effort has now taken off with a Treasury Memorandum for The Office of The Comptroller of the Currency, The Board of Governors of The Federal Reserve System, The Federal Deposit Insurance Corporation. By way of background, the memorandum notes that

The Community Reinvestment Act (CRA) of 1977 was enacted to encourage banks to meet the credit and deposit needs of communities that they serve, including low- and moderate-income (LMI) communities, consistent with safe and sound operations. Banks are periodically assigned a CRA rating by one of the primary regulators – the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), and the Federal Deposit Insurance Corporation (FDIC), collectively the CRA regulators – based on the bank’s performance under the appropriate CRA tests or approved Strategic Plan. CRA was enacted in response to concerns about disinvestment and redlining as well as a desire to have financial institutions “play the leading role” in providing the “capital required for local housing and economic development needs.”

The U.S. banking industry has experienced substantial organizational and technological changes; however, the regulatory and performance expectations under CRA have not kept pace. Interstate banking, mortgage securitization, and internet and mobile banking are just a few of the major changes that have come about in the past four decades. In this evolving banking environment, changes should be made to the administration of CRA in order for it to achieve its intended purpose. (1, footnotes omitted)

The bank that Treasury Secretary Mnuchin used to head up, OneWest, had its own run-ins with CRA compliance. As a result, we should look carefully at how Treasury seeks to “modernize” the CRA. The Treasury memo has four recommendations:

  • Assessment Areas. The concept of assessment areas originated within the banking environment that existed in 1977, when there was no interstate banking and deposits almost always came from the community surrounding a branch. Treasury offers recommendations for updating the definitions of geographic assessment areas to reflect the changing nature of banking arising from changing technology, customer behavior, and other factors.
  • Examination Clarity and Flexibility. Both banks and communities would benefit from additional flexibility in the CRA performance evaluation process, including increasing clarity in the examination guidance. Treasury recommends improvements that could be made to CRA performance evaluation criteria that would increase the transparency and effectiveness of CRA rating determinations.
  • Examination Process. Certain aspects of the examination process need to be addressed in order to improve the timeliness of performance evaluations and to allow banks to be more accountable in planning their CRA activity. Treasury recommends improvements that could be made with respect to the timing of CRA examinations and issuance of performance evaluations, and to the consistent use of census data throughout an assessment period.
  • Performance. The purpose of CRA is to encourage banks to meet the credit and deposit needs of their entire community. The law does not have explicit penalties for nonperformance. However, performance is incentivized as regulators must consider CRA ratings as a part of various bank application processes and performance evaluation reports are made available to the public. Treasury offers recommendations as to how the current regulatory approach to downgrades for violations of consumer protection laws and various applications from banks with less than a Satisfactory rating could be improved to incentivize CRA performance. (2, footnotes omitted)

While there is lot to chew on here, I think a key issue will be the scope of the Assessment Areas. As banks move from straight ‘bricks and mortar’ to ‘bricks and clicks’ or even to pure clicks, it is harder to identify the community each bank serves.

While the memo does not offer a new definition for Assessment Areas, one could imagine alternative definitions that are either loose or stringent as far as CRA compliance is concerned. Because the CRA was intended to ensure that low and moderate-income communities had access to mortgage credit after years of redlining, any new definition of Assessment Areas should be designed to support that goal. We’ll have to see how the Trump Administration proceeds in this regard, but given its attitudes toward fair housing enforcement, I am not hopeful that the Administration will take the CRA’s goals seriously.

Treasury’s Trojan Horse for The CFPB

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The Procession of the Trojan Horse in Troy by Giovanni Domenico Tiepolo

The Hill posted my latest column, Americans Are Better off with Consumer Protection in Place. It opens,

This month, the Treasury Department issued a report to President Trump in response to his executive order on regulation of the U.S. financial system. While the report does not seek to do as much damage to consumer protection as the House’s Financial Choice Act, it proposes a dramatic weakening of the federal government’s role in the consumer financial services market. In particular, the report advocates that the Consumer Financial Protection Bureau’s mandate be radically constrained.

Republicans have been seeking to weaken the CFPB since it was created as part of the Dodd-Frank Act. The bureau took over responsibility for consumer protection regulation from seven federal agencies. Republicans have been far more antagonistic to the bureau than many of the lenders it regulates. Lenders have seen the value in consolidating much of their regulatory compliance into one agency.

To keep reading, click here.

Fox in The CRA Henhouse

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Law360 quoted me in Treasury’s Fair Lending Review Worries Advocates (behind a paywall). It reads, in part,

President Donald Trump’s Treasury Department said Monday that revisiting a 1977 law aimed at boosting bank lending and branches in poor neighborhoods was a “high priority,” but backers of the Community Reinvestment Act fear that any move by this administration would be aimed at weakening, not modernizing, the law.

Critics and some backers of the Community Reinvestment Act say that the law does not take into account mobile banking and the decline of branch networks among a host of other updates needed to meet the realities of banking in 2017.

While there is some agreement on policy, the politics of reworking the CRA are always difficult. Those politics will be even more difficult with the Trump administration and Treasury Secretary Steven Mnuchin, who ran into problems with the CRA when he was the chairman of OneWest Bank, leading the review, said David Reiss, a professor at Brooklyn Law School.

“A team at Treasury led by the OneWest leadership should give consumer advocates pause,” he said.

*   *   *

Across the administration, from the U.S. Department of Education to the Department of Justice, civil rights enforcement has taken a back seat to other concerns. And Mnuchin is in the process of populating the Treasury Department with former colleagues from OneWest.

Trump nominated former OneWest CEO Joseph Otting to be comptroller of the currency earlier this month and is reportedly close to nominating former OneWest Vice Chairman and Chief Legal Officer Brian Brooks as deputy Treasury secretary. Brooks is currently the general counsel at Fannie Mae.

Activists who fought the CIT-OneWest merger on CRA grounds say that the placement of those former OneWest executives in positions of authority over the law should raise alarms.

“[Mnuchin’s] bank, OneWest, also had one of the worst community reinvestment records of all the banks that CRC analyzes in California, which raises questions about his motivation in ‘reforming’ the Community Reinvestment Act. Is he interested in reforming it to help communities, or to help the industry do even less?” said Paulina Gonzalez of the California Reinvestment Coalition.

The Treasury secretary has defended his bank’s foreclosure practices and others that drew fair lending advocates’ ire, saying that most of the problems at OneWest were holdovers from IndyMac, the failed subprime lender OneWest’s investors purchased after it failed.

Discussing reforms to the CRA under any administration, particularly a typical Republican administration, would be difficult on its own for lawmakers and inside regulatory agencies, Schaberg said.

“Anybody down in the middle-management tier of any of the banking agencies, they’re not going to touch this because it’s so politically charged,” he said.

The added distrust of the Trump administration and Mnuchin among fair housing advocates makes the prospect of any legislation to reshape even harder to imagine. Even without legislation, new leadership at the regulatory agencies that monitor for CRA compliance could take a lighter touch. And that has fair housing backers on edge.

“In my mind, there’s a fox-in-the-henhouse mentality,” Reiss said.

Mnuchin, When No One Is Watching

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Alexander Hamilton

My latest column for The Hill is Hamilton Acted in Good Faith. Will Steven Mnuchin Do The Same? It reads:

UCLA’s legendary basketball coach John Wooden famously said, “The true test of a man’s character is what he does when no one is watching.”

Steven Mnuchin, another leading citizen of Los Angeles, is now in the spotlight as President-elect Donald Trump’s nominee to lead the U.S. Department of the Treasury.

Running the Treasury Department requires financial know-how, which this former Goldman Sachs banker has in spades. But it also requires character, as a large part of the Treasury secretary’s job is to embody the good faith that the American people want the rest of the world to have in us.

In Alexander Hamilton’s Report Relative to a Provision for the Support of Public Credit, written just after he became the first U.S. Treasury secretary, he notes that the government must maintain public credit “by good faith, by a punctual performance of contracts. States, like individuals, who observe their engagements, are respected and trusted, while the reverse is the fate of those, who pursue an opposite conduct.”

OneWest’s actions during Mnuchin’s tenure as chief executive officer raise questions about whether Mnuchin has demonstrated the character necessary to be a worthy successor to Hamilton.

A recently disclosed memo by lawyers at California’s Office of the Attorney General documents a pattern of bad faith toward homeowners with OneWest mortgages. The memo documents evidence of widespread wrongdoing that helped the bank and hurt the homeowners. The evidence includes the backdating of notarized and recorded documents in 99.6 percent of the examined mortgage files and unlawful credit bids and substitutions of trustees in 16.0 percent of those files.

These are not merely technical violations. They shortened the time that homeowners had to get their mortgages back in good standing and they violated a number of procedural protections for homeowners facing non-judicial foreclosures.

Non-judicial foreclosures give lenders the ability to bypass the courts so long as they strictly abide by the procedural protections set forth by statute. Non-judicial foreclosures can only maintain their legitimacy if lenders respect those procedural protections. This is because there is no judge to make sure that the procedural protections are being adhered to. Without them, a homeowner can be no more than a sheep being led to the financial slaughterhouse of an improper foreclosure.

Some bankers have argued that focusing on violations of mortgage terms is overly legalistic, and beside the point given the widespread defaults during the financial crisis. It isn’t. The violations documented in the memo benefited the bank and harmed homeowners by allowing foreclosures to occur faster than they would if the formalities were followed.

They also allowed the bank to avoid paying various taxes relating to the sale of foreclosed properties. Some of the violations documented in the memo can result in felony convictions, which shows just how seriously California views the procedural requirements relating to non-judicial foreclosures. Ultimately, California’s then-Attorney General (and now U.S. Senator) Kamala Harris, chose not to file this complex lawsuit, but the memo’s findings are disturbing nonetheless.

As Hamilton knew, acting in good faith, performing agreements as they are written and keeping promises lead to respect and trust, “while the reverse is the fate of those, who pursue an opposite conduct.” The American people deserve a leader at Treasury with those traits, one who cherishes the rule of law as the basis of a both a healthy market economy and a well-functioning democratic government.

Other nations expect that we meet this standard, too. If they see us as just another bully on the world stage, we will lose our ability to lead by example. Members of the Senate Finance Committee should ask Mnuchin whether his actions at OneWest met the standard set forth by Hamilton.

We won’t be in the rooms where important decisions happen, so we need to have confidence in how Mnuchin will act when he thinks that no one is watching.

Mnuchin and Housing Finance Reform

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photo by MohitSingh

Sabri Ben-Achour of Marketplace interviewed me in Choice of Mnuchin Troubles Housing Activists. (The audio is available at the link at the top of the linked page.)  The summary of the story reads as follows:

Donald Trump has tapped financier, Hollywood producer and hedge fund manager Steven Mnuchin as Treasury Secretary. In that role, Mnuchin would have quite a lot to say about housing, finance and policies related to mortgage lending. Mnuchin has been involved in lending before, and it didn’t go well for many homeowners.

At issue specifically is his an investment in a failing mortgage lender in 2009 called IndyMac in California. Mnuchin and other investors renamed it OneWest, and it proceeded to foreclose on tens of thousands of homes nationwide. Critics say the company could have kept some portion of those people in their homes.

The story reads in part,

“I think the really big place where the Treasury Secretary can have an impact is on housing finance reform and, really, what we should do with Fannie and Freddie.”  David Reiss is a Professor of Law at Brooklyn Law School.