The Community Reinvestment Act (CRA) is a piece of 1977 legislation that requires banks to reinvest in their communities. The Republicans have been gunning for it, and now proposed regulations would weaken it in several key respects.
At the heart of this story is the federal regulator of national banks, whose title is U.S. Comptroller of the Currency, a man named Joseph Otting. Conflicts of interest and revolving doors in the Trump administration are such a common story that they barely make news, but this one is worth telling.
In his previous job, the CRA nearly cost Otting a $24 million payday.
Congress approved the Community Reinvestment Act in 1977 to combat redlining and other forms of discriminatory lending. Senator William Proxmire, then chair of the Senate Banking Committee, authored the measure amidst widespread evidence that many banks failed to serve low-income and minority residents in the communities where they operated. Banks collected deposits, including from low-income clients, but rejected mortgage loan applications from them. In some cases, the banks had drawn red lines around certain neighborhoods. Banks simply rejected mortgage applications from addresses within these red lines.
The CRA calls on banks to serve their entire communities. The statute declares: “Regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business.” This means “credit services as well as deposit services.” And if the banks fail in this mandate, Washington regulators will “take such record into account in its evaluation of an application for a deposit facility by such institution.” In other words, a bad CRA record could prevent a bank from buying or merging with another bank. Bankers wish to purchase smaller banks to grow. Smaller bankers seek to sell to cash out for a profit. As such, the CRA has become foundational in the nation’s effort to promote fair lending.
That quiet enforcement mechanism—a potential stop sign for growth and profit—became a powerful tool to promote a robust effort by American banks to build a laudable CRA record. Banks often partner with low-income advocacy groups, offer grants to develop ways to increase financial literacy and explore ways to promote development in certain disadvantaged communities. The National Community Reinvestment Coalition says the CRA has led to trillions of dollars in credit to communities that otherwise might be ignored by the banking sector. Many banks employ CRA managers, both to facilitate this credit and to ensure that their record of community services is well documented for regulators that decide on whether to approve a merger.
Otting encountered the CRA as the CEO of OneWest. Otting assumed this job in October 2010, nearly two years after Dune Capital hedge fund manager Steven Mnuchin (now U.S. Treasury secretary) purchased the failed IndyMac Bank from the government. Mnuchin renamed it OneWest.
Instead of fulfilling the promise of the CRA, Otting managed OneWest in the opposite direction, according to the California Reinvestment Coalition. Instead of “reinvesting,” Otting oversaw tens of thousands of foreclosures, including 35,000 in California alone. Victims were concentrated in minority communities. Staff at the California Attorney General’s office prepared a litigation memo summarizing their accusations of “widespread misconduct.” According to a media summary, OneWest “rushed delinquent homeowners out of their homes by violating notice and waiting period statutes, illegally backdated key documents, and effectively gamed foreclosure auctions.”
In the reverse mortgage business, the OneWest-controlled firm Financial Freedom engaged in practices that led to more than 16,000 foreclosures, a far greater number than would be expected based on the company’s market share. Elderly individuals who had recently suffered the death of a spouse were victimized. In one case, Financial Freedom attempted to evict a 90-year-old woman from her home over a 27-cent error on an insurance payment. In another case, a New York State Supreme Court judge called OneWest’s foreclosure practices “harsh, repugnant, shocking, and repulsive.”
Over Otting’s signature, OneWest Bank signed a consent order with the Office of Thrift Supervision for “certain deficiencies and unsafe or unsound practices in the Association’s residential mortgage servicing and in the Association’s initiation and handling of foreclosure proceedings.”
OneWest affiliate Financial Freedom paid $89 million following allegations that it violated the False Claims Act. This involved a five-year pattern from 2011 to 2016 where Financial Freedom claimed government fees that the U.S. Justice Department said “they were not entitled to receive.”
What was certainly devastating for OneWest’s borrowers was attractive to investors looking for a franchise in southern California, where OneWest concentrated its business. Mnuchin shopped OneWest soon after Dune Capital acquired it and found interest from Salt Lake City-based CIT Group. CIT proposed paying more than double the $1.5 billion that Mnuchin raised to buy IndyMac from the government. And completion of this deal promised a substantial payday for Otting.
How much Mnuchin paid Otting to run OneWest isn’t public because Dune Capital purchased IndyMac with private funds. (A publicly traded company publishes the compensation of senior executives; a private company does not.) The year before it failed, IndyMac CEO Michael Perry received $1.4 million in total compensation. It is possible that Otting received a similar compensation package.
Otting had not led a company before Mnuchin retained him at OneWest. The University of Northern Iowa graduate held a succession of mid-level management positions at Bank of America, Union Bank and then US Bank, helping it expand into California. (The White House announcement of his appointment as Comptroller listed him as a graduate of the “School of Credit and Financial Management at Dartmouth College.” This program is not Dartmouth sponsored, but rents space to a program that offers four-week courses.) In other words, Otting was not a high profile CEO that Mnuchin needed to lure with a major compensation contract.
What is clear is how much Otting stood to gain from a successful sale of OneWest to CIT Group: $24 million. According to CIT’s public filing, “Pursuant to the agreement to acquire OneWest, CIT entered into an offer letter with Mr. Otting, which provides for a total target annual compensation opportunity (including base salary and annual and long-term incentives) for each of 2015, 2016 and 2017 in the amount of $4.5 million. In the event of Mr. Otting’s termination of employment without cause or for good reason prior to the third anniversary of the closing of the acquisition, subject to the execution of a release of claims, Mr. Otting would be entitled to a lump sum severance payment approximately equal to the remaining total target annual compensation.” A CIT’s disclosure itemized his entire promised payday at $24 million.
A sealed merger would make Otting rich. But CRA stood in the way.
The California Reinvestment Coalition contested the merger on CRA grounds. The advocacy group asked for a public hearing. In response, Otting fought the request. He recruited business friends to send comment letters to the regulators, asking them to support the merger and oppose a public hearing. He provided a form letter, and allies duly relayed this. The email campaign also included some irregularities. One petition was composed of 593 individuals purportedly supporting the merger with Yahoo email accounts. (Yahoo has a 3 percent market share for email.) A large number of these emails are time stamped as 2 a.m., February 13, 2015. Yahoo had suffered a security breach before this period. Other emails came from persons who, after they received receipt confirmation from the Washington regulator, denied they had originated them and theorized their email had been hacked.
It is uncommon for Washington regulators to call for a hearing. There have been thousands of bank mergers in the last two decades, but there have been less than 10 hearings about CRA compliance. From 2004 to 2008, there were no CRA hearings on mergers. Nevertheless, Washington agreed to the hearings in the OneWest-CIT deal. CRA, then, meant a real threat to Otting’s payday.
After the hearing, OneWest agreed to a number of improvements. And following this, Washington approved the deal, and CIT Group consummated the merger. CIT retained Otting in August 2015. By December, CIT terminated him. No matter; a consummated merger promised him $24 million, whether or not he showed up at work for three years.
Comptroller Otting and CRA
As the nation’s chief regulator of national banks, Otting bears responsibility to ensure that this sector operates safely and soundly. Ten years ago, national banks crashed the economy through reckless lending and speculation in the mortgage securitization sector. Citigroup and Bank of America, both major banks under Comptroller supervision, received massive taxpayer bailouts. Surely, ensuring the safety would be a high priority for any Comptroller.
But his first priority, Otting told reporters after his swearing-in ceremony in December 2017: changing the CRA. As Comptroller, Otting has since reiterated his goal to refashion CRA. At a banking conference in April, Otting explained, “I went through a very difficult period with some community groups that … tried to change the direction of our merger. And so I have very strong viewpoints.” His agency published what’s termed an “advanced notice of proposed rulemaking,” inviting comments about ways to change the CRA. The Comment period closed November 17.Perhaps most troubling is a proposal for a single ratio at a major bank, where the bank could count all its CRA investments divided by the bank’s assets. This would allow it to ignore certain individual communities, including low income and minority communities, provided it made CRA investments elsewhere.
The CRA isn’t perfect. Lending discrimination persists. A recent study showed white borrowers won lower interest rates than minority applicants for auto loans. The gap in home ownership between whites and African Americans is wider than before the era of Jim Crow, according to a study by the Center for Investigative Reporting.Yet regulators routinely award most banks high marks for CRA compliance, with a “pass” rate of 98 percent. CRA hearings for mergers remain rare. The CRA should be strengthened. Banks shouldn’t be awarded high marks given the persistence of discriminatory lending. Regulators should hold more hearings before approving mergers.
Defenders of CRA, including members of Congress, have expressed alarms that Otting won’t be the agent of strengthening the CRA, but of weakening it. At one hearing before the U.S. House Financial Services Committee, Representative Mike Capuano, opened his line of questioning with Otting by attempting to establish a shared baseline that discrimination remains a serious problem. He asked Otting if he’d suffered or witnessed discrimination. “I have never personally observed discrimination,” Otting responded. A perplexed Capuano asked the question again, and Otting repeated the answer. Otting’s surprising response baffled other members of Congress at the hearing. Representative Emanuel Cleaver asked if Otting was familiar with the white racist rally in Charlottesville, Virginia. Otting responded that he didn’t watch television. Had he read about in newspapers, Cleaver asked? “I don’t read a newspaper.”
At best, Otting’s powers of observation are limited. At best, Otting fails to keep himself informed about current events, including tragic episodes of racial conflict, a discipline that should be routine for any senior government official, especially the nation’s top national bank cop.
At worst, Otting may believe that discrimination doesn‘t exist, that the CRA has no role in banking. In either case, Otting lacks the basic skills to consider changes to the CRA.
But Otting’s personal experience with CRA must disqualify him altogether. Given that he brings a visceral antipathy to CRA, given that CRA challenged his chance at wealth, Otting should play no role in shaping CRA. Public Citizen opposed Otting’s nomination, based on the misconduct at OneWest under his stewardship. We now believe he must recuse himself from engagement with any rulemaking on CRA.