When Congress repealed the Glass-Steagall Act last fall, proponents of this deregulation said that the conglomerates that would be created would be “functionally regulated.”

Application requirements, and public input, might be reduced, but nothing would fall through the cracks, they said.

Well, on Sept. 6, Citigroup Inc. announced its intention to buy a controversial subprime lender, Associates First Capital Corp. Even though Associates owns three credit card banks — one of which has a rare “needs to improve” rating under the Community Reinvestment Act — Citigroup’s proposal triggers no requirement for Federal Reserve Board approval because of the Gramm-Leach-Bliley Act.

At the federal level there are only changes in Bank Control Act “notices” to the OCC and the FDIC.

The Inner City Public Interest Law Center of Bronx, N.Y., opposes Citigroup’s proposal, in part because it would legitimate some of the most troubling practices in subprime lending, such as single premium credit life insurance. We have been commenting on the overall deal to state regulatory agencies, whose approvals are required.

On Oct. 10, I appeared at a hearing of the South Dakota Banking Commission with a right to cross-examine witnesses. I asked Citigroup’s witnesses if and how they intended to improve Associates’ practices.

“We stand on our written submissions,” they said.

I asked the chairman of the South Dakota Banking Commission to direct Citi’s witnesses to respond. “We don’t gun,” he said. “We can’t make them answer.”

A week later the South Dakota Banking Commission approved Citigroup’s application to acquire Associates’ high-interest credit card lender, Hurley State Bank.

The next stop was Jefferson City, Mo., for the Missouri Department of Insurance’s hearing on Citigroup’s application to acquire Associates’ Northfield Insurance Co. Over Citigroup’s opposition, the Missouri agency granted Inner City standing and a right to discovery. But Citigroup refused to answer our questions. Instead it directed its St. Louis law firm, Bryan Cave, to submit 41 pages of oppositions to our standing.

At the Oct. 18 hearing Citigroup’s witnesses confided that its due diligence on Associates had all been done over the Labor Day weekend, and that they wouldn’t know what to “fix” at the company until after they acquired it.

The next battles loom at the Nevada, Texas, and Tennessee insurance departments. In each state Citigroup has had its local counsel oppose Inner City’s requests to participate in hearings. Citi has even developed a boilerplate indictment, a two-page presentation called “Inner City’s Agenda.”

The name-calling obscures the fact that Citigroup has the burden of proving that the acquisition will serve the public interest.

The states’ insurance holding company laws are based on a model statute put out by the National Association of Insurance Commissioners. But there’s little consistency in the way the states implement this law.

Minnesota, for example, has a regulation saying that hearings are not mandatory. We’ve been told by Minnesota regulators that they only hold hearings when they “intend” to deny an application. The public’s views, and evidence, apparently play no role in their process.

Under exactly the same statutory language, Inner City was found to have standing in Missouri but not in Indiana.

The Indiana Insurance Department, nevertheless, ordered Citigroup to answer some of Inner City’s written questions. But Citigroup objected to the questions, and got its objections upheld, in a hearing in Indianapolis that neither Inner City nor any other member of the public was allowed to participate in as a party.

The Delaware Insurance Department claims that all portions of Citigroup’s application to acquire Associates’ Delaware-domiciled insurer are confidential until after they hold their hearing. What, then, could people testify about?

From all of this, it now appears that “functional regulation” may just be a code-word for “rubber-stamp.”

The OCC and the FDIC, while granting a brief two-week extension of their comment periods, have refused to schedule a public meeting on the deal, despite receiving 150 comments opposing it.

The New York Banking Department has decided to hold a hearing today, but has jurisdiction only over Citigroup’s and Associates’ practices in that state — yet another twist on functional regulation.

Three days before the hearing Citigroup released a copy of a letter it has sent to its regulators, committing to certain reforms: pilot programs in Maryland, New York, Illinois, Missouri, and Virginia, creating a new monthly premium credit life insurance product (while still offering financed, “single-premium” insurance, which is rolled into the loan), maintaining prepayment penalties and mandatory arbitration clauses, and lowering fees on brokered loans from 10% to 8% (still higher than most other subprime lenders).

Only in this light can we understand the comment of Citigroup’s chief administrative officer, at the Nov. 7 press conference, that Citigroup is and will be doing “well beyond what anyone is doing.”

In the one pro-CRA provision of Gramm-Leach-Bliley, a financial holding company that owns a bank with a less-than-satisfactory CRA rating is supposed to lose its new powers under the act. Yet the Fed, which fought to expand its turf in the deregulation bill, is nowhere to be seen as the largest bank acquires one of the most troubled subprime lenders.

The law’s “regulatory streamlining,” in this case, threatens to turn a recapitalized predatory lender loose in our low-income communities. The law should be revised.

Mr. Lee is executive director of the Inner City Public Interest Law Center.

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