WASHINGTON - Community groups attempting to block Citigroup Inc.'s purchase of the subprime lender Associates First Capital Corp. may be barking up the wrong tree.

Indeed, the watchdogs may have no tree to bark up at all.

Activists around the country have objected to the deal since it was announced in September. They say Associates' prepayment penalties are high and accuse it of hiding some costs and fees and engaging in other predatory practices.

But a close look at the law shows regulators are primarily confined to reviewing the deal's impact on the buyer, in this case Citigroup. The regulators cannot take into account the Community Reinvestment Act record of either institution, so activists are denied their best weapon in most merger protests.

Experts also say that provisions in the Gramm-Leach-Bliley Act of 1999 to streamline mergers eliminated the protestors' opportunity to appeal to the Federal Reserve Board.

"Community groups may not like that they don't have a shot at this - but they don't," said a lawyer familiar with the acquisition who asked not to be named.

While the approval process for a typical bank-to-bank merger would include a look at the CRA record of both institutions, the Citi-Associates deal is different.

Because Associates, of Irving, Tex., owns three limited-purpose banks, technically it is not considered a bank holding company. That means those banks only have to file a notification under the Change in Bank Control Act of 1978 to their regulators.The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., the primary regulators of Associates' three banks, have the authority to object to the deal.

Their grounds for objection are limited, however.

Under notification rules, the regulators can object to the deal if it creates a monopoly or otherwise lessens competition; threatens the safety and soundness of the acquiring bank; endangers the deposit insurance funds; if the buyer is poorly managed; or if the buyer withholds information from regulators.

While regulators may look at the "competence, experience, or integrity" of the acquiring bank, the law makes no mention of the condition or activities of the entity that is being purchased.

Citigroup has asserted that under those tests, its notification will be approved.

"We are confident that we significantly exceed all specified requirements, and we are on track to close by yearend," Citigroup spokeswoman Leah Johnson said.

Unlike with a bank-to-bank merger, federal regulators may not impose conditions on the Citi-Associates deal. They can either object or let the acquisition proceed.

Some activists have pinned their hopes on state regulators, who have more leeway to intervene.

The New York State Banking Department - which is reviewing change in control notices for Associates' mortgage lending and other nonbank units and held hearings about the deal on Nov. 10 - could impose conditions on any approval, a department spokesman said. However, he cautioned any strictures would be applicable only in New York.

Besides these long-standing impediments, activists are frustrated by changes in federal law last year that have hamstrung them more.

Before enactment of Gramm-Leach-Bliley, the Citi-Associates deal would have required Fed approval, and would have been subject to public hearings and a comment period. Under those rules, Citigroup would have had to prove that the public benefits of the deal outweighed any adverse effects.

But under the financial reform law, a nonbank acquisition no longer needs Fed approval. The central bank is allowed to intervene only if it determines the deal would seriously threaten Citigroup's safety and soundness.

That change has consumer groups miffed.

"We are frustrated at the financial modernization act, because it reduced our ability to advocate for corporate responsibility for financial institutions," said Peter Skillern, executive director with the Community Reinvestment Association of North Carolina. Before the law was passed "we would have been able to appeal to the Federal Reserve and request a hearing."

Knowing that the regulators are required to focus on the acquiring bank, consumer groups have shifted their complaints to Citigroup's subprime lending group, CitiFinancial, which they claim engages in abusive practices.

"The framework for the analysis has led us to question the integrity of CitiFinancial's practices," Mr. Skillern said. "We began looking at CitiFinancial, and there are some similarities to Associates which are predatory and unfair."

CitiFinancial charges excessive prepayment penalties, inadequately monitors its mortgage brokers, charges excessive points, requires mandatory arbitration clauses, and targets minority and low-income communities, he said.

Activists argue that though the OCC and the FDIC cannot technically impose conditions on the deal, they have found ways to negotiate tougher requirements on similar deals before.

Matthew Lee, executive director of Inner City Press/Community on the Move, cited the OCC's approval two years ago of First Union Corp.'s purchase of Money Store, when the agency faced similar limits on its authority. The agency's decision noted that First Union had agreed to offer prime rate products at the subprime lending unit.

Activists urged regulators to take similar initiative with the Citi-Associates deal.

Sarah Ludwig, executive director of the Neighborhood Economic Development Advocacy Project, said regulators "have a lot of discretion" in the way they handle the deal. "I hope they would prove that they are serious about ending predatory lending, like they've pronounced that they are. Here is another opportunity to send a very strong message that they will not countenance predatory lending."

Activists argued that ignoring Associates' track record defies common sense.

"What if a bank tries to buy the Medellin drug cartel to sell mutual funds, or to expand its private banking business?" Mr. Lee said. "The argument that a bank could buy anything because it is just their own integrity and not that of the acquiree that matters - that's ludicrous."

Regulators, however, have shown few signs of testing the limits of their authority in this case.

The OCC and FDIC extended the public-comment period by a month, to Dec. 16. They also sent the companies letters two weeks ago asking them to clarify how their offices would offer prime as well as subprime products; describe their disclosures in connection with the sale of single-premium credit life insurance; clarify the limitations on points for refinanced and broker-sourced loans; and identify and fix predatory loan features.

But observers said the agencies are just going through the motions.

Indeed, an OCC spokesman emphasized that the agency is looking only "at issues involving management, experience, and competence, rather than CRA-type considerations." The FDIC refused to comment on the deal.

Most analysts expect the deal to go forward, but said Citigroup may initiate compromises for public relations purposes.

Diana Yates, a financial services analyst with A.G. Edwards & Sons Inc., said she "can't believe the deal won't go through, but I think there is always some room for compromise."

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