If ever there were a poster child for the importance of regulators enforcing the Community Reinvestment Act, it was the merger of CIT Group and OneWest Bank. Both banks had troubled histories and their proposed merger was the first time a "systemically important financial institution" would be created by a bank merger. However, in reality, the role the regulators have played has been deeply disappointing.
In May, the Office of the Comptroller of the Currency gave its final stamp of approval to the merger by not objecting to the bank's "updated" CRA plan — a plan that had few significant improvements despite the fact the OCC had ordered the bank to improve its original plan as a condition of the merger approval. Ultimately, the regulators' handling of the merger represents only baby steps forward and a giant step backward for CRA and its enforcement.
Sure, the Federal Reserve and the OCC hosted a rare public hearing, marking one of the small steps forward in this merger process. In granting its approval, the Fed noted it expected a CRA plan "commensurate" with the size of the new SIFI, while the OCC explicitly conditioned its approval on the bank improving its CRA plan — also raising hopes. Another small win for communities is that, in the new plan, CRA-reportable lending is now a larger percentage of the bank's overall CRA commitment.
Yet, there are unique and troubling aspects of this new plan the OCC approved. For example, it now includes home lending to middle- and upper-income borrowers located in middle- and upper-income neighborhoods. The bank now counts that lending toward fulfilling CRA obligations. But that runs counter to the law's intent and the purpose of CRA plans.
This allowance is especially problematic given concerns raised about banks possibly getting CRA credit for loans made in lower-income areas to investors who buy up rent-controlled properties and then evict the tenants living there — displacing the low- and moderate-income residents that CRA was meant to help. Adding to our concerns is recent analysis in The Wall Street Journal that suggests the nation's ten largest banks are focusing their home mortgage lending on jumbo loans, increasing such loans to wealthy homeowners while mostly decreasing their lending to lower-income homeowners.
Further, the CIT plan also maintains a paltry commitment of $5 billion in CRA activities over the next four years, representing only about 4% of CIT Group's deposits annually. Again, this low figure is inflated in that it inappropriately includes non-LMI lending.
And, ironically, this commitment is almost equivalent to the corporate subsidy that taxpayers and the Federal Deposit Insurance Corp. have contributed or expect to contribute to CIT Group. This includes a $2.3 billion Troubled Asset Relief Program capital infusion that ended up being essentially a gift to the bank when CIT filed for bankruptcy protection in 2009, and a $2.4 billion expected payout from shared-loss agreements with the FDIC
In comparison, California advocacy groups negotiated with institutions like Banc of California and City National Bank — companies that either didn't take Tarp funds or paid the money back — that have committed to CRA plans calling for 20% and 15% of deposits, respectively, to be put to use for CRA activities on an annual basis.
The regulators' blessing of the CIT-OneWest merger and weak CRA plan is even more concerning given OneWest's troubled CRA record. Research and analysis by the National Community Reinvestment Coalition, the California Reinvestment Coalition and the Urban Strategies Council (which was shared with regulators) flagged important fair housing and lending issues. For example, OneWest's foreclosures — over 36,000 in California and counting — disproportionately take place in California's communities of color, with 68% of them occurring in majority-minority ZIP codes.
In examining maps of Los Angeles, and OneWest branches and mortgage lending, it is impossible to miss the infamous "donut hole," which suggests fair lending violations. Recent data from the U.S. Department of Housing and Urban Development also confirms that OneWest has played an unusually large role — nearly two times greater than one would expect based on its market share — in foreclosing on seniors and their families who have reverse mortgages. OneWest has also been notably absent in providing capital to small-business owners in its assessment areas.
In analyzing and making decisions on bank mergers, the OCC, Fed and the FDIC are charged with ensuring there is a public benefit in deals, including access to safe credit with a particular focus on low-income communities. And yet, the approval of this merger exacerbates concerns from community groups and the public that regulators have never met a merger that they did not like. The benefits from this merger thus far have gone mostly to departing executives, golden parachutes in hand.
From the looks of things, it appears the regulators held their noses, granted the approval and hoped advocates like us would go away. We have to wonder if CIT Group will be the next Hudson Bank. The Office of Thrift Supervision gave its stamp of approval to Hudson via a "satisfactory" CRA grade in 2011, only to have the bank later settle with the Consumer Financial Protection Bureau and the U.S. Department of Justice for redlining problems that happened during the same time the bank "earned" a satisfactory CRA grade.
The regulators' handling of this merger ultimately fails to live up to the stated goals and spirit of the Community Reinvestment Act, and damages the trust communities and advocates have in the regulators who are supposed to enforce it.
Paulina Gonzalez is executive director for the California Reinvestment Coalition. John Taylor is the president and chief executive of the National Community Reinvestment Coalition.