Bankers Trust Corp. has denied that it severed ties with Delta Financial Corp., a longtime client that has been accused of predatory lending.
Community activists have said the New York banking company agreed to suspend business with Delta, a Woodbury, N.Y., lender that has used the bank as a trustee for its securitizations.
But in an interview last week, a Bankers Trust spokesman said the company would "continue to serve as trustee on Delta's existing securities" and would consider other deals on a case-by-case basis. He acknowledged that the company had not acted as trustee for Delta's most recent securitization.
Delta was depicted in a December lawsuit and in a New York Times article as targeting elderly and minority borrowers for high-interest loans, with the intention of foreclosing on their homes. The company has called the allegations unfounded and said it does not make a profit when it forecloses.
In recent years banks have increased their business with borrowers that have less-than-perfect credit, through acquisitions and strategic alliances. But reports of abusive lending practices at subprime lenders have spawned a string of federal investigations and most recently prompted cautionary guidelines from bank regulators.
Trustees generally serve as toll takers, recording profits and distributing payments to investors. The controversy over Delta's practices has raised questions about a bank's role as trustee.
"Generally a trustee doesn't have any responsibility for what goes into" the securitization, said Michael J. Frueh, a manager in PriceWaterhouseCoopers' asset securitization group.
But on March 15 the Federal Reserve Board, which is considering Deutsche Bank's proposal to buy Bankers Trust for $10.1 billion, asked the two banks to describe any policies they have adopted to prevent discrimination in pools of loans for which they serve as trustee.
No one expects the central bank to shoot down the sale of Bankers Trust over the trustee issue. But it could pressure the company to improve due diligence when it acts as a trustee.
The situation arises at a sensitive time for banks involved with subprime lending, Bankers Trust in particular.
Lawyers for Bankers Trust and Deutsche Bank said in a March 19 reply to the Fed that "as trustee, Bankers Trust has not been contractually obligated to conduct any due diligence on the loans."
Delta chief executive Hugh Miller said that his company has "always rotated trustees" and that the company did not even approach Banker's Trust to serve as trustee for its first-quarter securitization.
Mr. Miller pointed to Delta's two new warehouse facilities as signs of the company's solid reputation among commercial and investment banks. The company said last Tuesday that it had secured another $250 million of warehouse financing.
The Bankers Trust-Deutsche Bank deal, announced in November, is expected to close next month.
Community activists said the deal has helped them call attention to the issue of trustee responsibility.
"It's not lost upon us that there's a merger going on and much of our leverage comes from that," said Sarah Ludwig, executive director of the Neighborhood Economic Development Advocacy Project.