For example, when Citigroup applied to acquire the controversial subprime lender Associates First Capital Corp. last fall, the Fed required applications from Citigroup only for Associates' two overseas banks, in Hong Kong and the United Kingdom. It claimed it had no jurisdiction to review Associates' practices in this country.

Some were surprised by the Fed's attempt to limit its own powers — especially because the Fed does have jurisdiction over Citigroup's subprime lending unit, CitiFinancial, into which Associates was being merged. On March 6, 2001, it was the Federal Trade Commission, and not the Fed, which sued Citigroup and Associates for predatory lending.

Why would the Fed, which lobbied so hard for expanded jurisdiction during passage of the Gramm-Leach-Bliley Act in 1999, now adopt a hands-off approach to compliance problems in the subprime lending sector of the nation's largest financial holding company?

It is Citigroup's very size and prominence that may explain the Fed's inaction. The Fed focuses its regulatory stick on small institutions. Its most recent denial of an application on antitrust grounds was to block the combination of two banks in Georgia, each with deposits of less than $70 million. The Fed's most recent denial of an application on Community Reinvestment Act (CRA) grounds was directed at tiny TotalBank of Florida, with $171 million in deposits. The largest banks have the Fed's ear—the most graphic example was the Fed's 1998 approval of the arguably illegal Citicorp/Travelers merger. The Gramm-Leach-Bliley Act of 1999 legalized this merger after the fact, and, among other things, provided that holding companies with banks with less than satisfactory CRA ratings are prohibited from further expansion.

Well, along with Associates, Citigroup acquired a bank with a "Needs to Improve" CRA rating: Associates National Bank of Delaware. Rather than enforce this provision of the GLB, the Fed simply issued a new (and final) regulation, on Dec. 21, 2000, interpreting the will of Congress to allow Citigroup to continue to expand.

And expand it has: on Feb. 12, 2001, Citigroup announced that it would acquire EAB and its 97 branches on New York's Long Island.

What of the other federal bank regulatory agencies? Last fall, Citigroup also applied to the Office of the Comptroller of the Currency and the FDIC for Associates' credit card banks. But the OCC and the FDIC said they couldn't address the predatory lending allegations against The Associates because Citigroup's applications were under the Change in Bank Control Act, which is focused, these agencies claimed, solely on the identity of the acquirer. These regulators, however, argued that the deal would have a positive effect, bringing a heretofore lightly regulated finance company into the world of bank supervision.

This has not proved to be the case. It has also become clear that the Fed, which as noted above has jurisdiction over CitiFinancial/Associates, is not going to perform any on-site examination of the company.

In 1999, the General Accounting Office issued a report, "Large Bank Mergers: Fair Lending Review Could Be Enhanced With Better Coordination," which recommended that the Fed begin conducting fair lending exams at bank holding company subsidiaries, particularly those involved in subprime lending (like CitiFinancial). Greenspan responded in a Sept. 20, 1999, letter, that "the matter is one that we recently studied at length." The GAO report stated that "according to FRB officials, a long-standing FRB policy of not routinely conducting consumer compliance examinations of nonbank subsidiaries was formally adopted in January 1998."

Since 1998, community and civil rights groups have repeatedly asked the Fed to reconsider this policy. Last January, I was on a panel with the Fed's fair lending specialist, Robert Cook, and asked him, before an audience of dozens of Fed bank examiners, when the Fed would begin such examinations. "Governor Gramlich has indicated that the System is considering it," Mr. Cook replied, directing me to a speech Gramlich had given eight months previous. Two months later—and 10 months after Gov. Gramlich's speech, I was on a panel about predatory lending with the Fed's staffer in charge of community and consumer affairs, Glenn Loney. In response to the same question, Mr. Loney said that the Board is considering changing this policy, that "it's not up to [him]." That was on March 5, 2001. On March 23, Gov. Gramlich gave yet another speech on predatory lending. Afterwards, a reporter asked him whether the Fed will examine CitiFinancial. "There is a bit of a hole there," Gov. Gramlich replied, adding: "The question of compliance exams is a different issue and it's not in anything we've done."

The next day, the Federal Trade Commission sued Citigroup, CitiFinancial and Associates, for systemic predatory lending. Citigroup issued a press release, calling the FTC's suit "counterproductive," and claimed it is implementing reforms in its subprime lending. But if the Fed will not even examine CitiFinancial and Associates, it seems likely that these issues—allegations, carefully-spun responses from Citigroup, and ongoing harm to consumers, will continue ad infinitum. On March 22, the American Bankers Association issued a report on predatory lending issues, crafted for them by Robert Litan of the Brookings Institution. The ABA report advocates against any anti-predatory lending safeguards at the state or local level, and for a moratorium on federal legislation, for at least the next two years.

The ABA's proposed solution? More funding for the "enforcement agencies." But if the agency with jurisdiction (here, the Fed) is unwilling to conduct onsite examinations, an increased budget is not the solution. When will this end? Only when the Fed determines, balancing its desire to be hands-off with its own reputation and credibility, in light of consumer and investigative scrutiny and outcry, that it cannot continue to shut its eyes, to what (some of) its banks are doing. Until then, consumers, and the reputation and perhaps even stability of the U.S. banking system, will continue to suffer.


Matthew Lee is the executive director of Inner City Press / Community on the Move, a community and consumers' group headquartered in the South Bronx of New York City, and of a new, related project, the Fair Finance Watch.


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