GonzoBankers, have you been following the comical Eliot Spitzer/OCC/Clearing House Association (CHA) lawsuit-a-thon? I know you’ve been sore and winded from the quarter-end dance, so let me give you a quick update. Eliot Spitzer, New York’s high profile and politically ambitious Attorney General, got ahold of some national banks’ HMDA data and became concerned over apparent discrepancies in these banks’ minority mortgage lending practices.
So, Spitzer announced that he is going to subpoena data on racial lending patterns and open his own investigation on some big name national bank members of the CHA. While Spitzer understands OCC’s preemption rights/rules, he apparently disagrees with them and contends that the national banks’ regulator is failing to protect the civil rights of his state’s consumers. Oofah, just what the OCC and those banks needed – big, burly Eliot Spitzer playing the civil rights card.
Eight members of the CHA (Wells Fargo, JP Morgan Chase, HSBC, Citigroup, Wachovia, B of A, LaSalle Bank and U.S. Bancorp) responded with a lawsuit saying, “Hey, Spitzer, just in case you didn’t get the Memo, we’re national banks! That means only the OCC can examine us. Go give a speech or harass an investment banker!” And the OCC also filed suit, saying, “Eli, dude, are you high? By divine order, national banks are our turf and you know it. Go sell your civil rights song and dance on another street corner, Chachi.”
Big time My Stick is Bigger Than Yours going on here, Fair Readers.
“She knows nothing at all about life.
She knows everything about living.”
All three groups are missing the big picture and wallowing in the details.
First, Spitzer and crew. I haven’t seen the HMDA data in question, but even a snot-nosed consultant like me knows that anyone can find anything in HMDA data. I have no doubt that there could be numbers showing that minorities are receiving higher denial rates or paying higher fees and rates than non-minorities. I also suspect this fact is a symptom of a much bigger problem, not the problem itself.
HMDA data is one-sided. It highlights a bank’s lending decisions, but it lacks the creditworthiness information that led to those lending decisions. The real question is, Are minorities at the Spitzer target banks getting a square deal compared to non-minorities with similar creditworthiness? The data that will fill in the creditworthiness blanks is what Spitzer is trying to subpoena.
What will we see when the dust clears from Spitzer’s (potential) investigation? Will there be evidence that suggests that minorities on average have worse creditworthiness than non-minorities? And do they have to pay for that in their loan terms? Very sadly, I bet so. That’s a deeply troubling issue in our society that, though we have done precious little to correct it, has little to do with the guidelines under which bankers price loans.
First, I have too much faith in bankers and their almost forced equitable treatment of their communities to think that any bank really has a system that doles out either intentional or unintentional bigotry. Lawsuit-averse big banks would catch it and squash it early, and small banks’ success is just too dependent on serving ALL of their community for an evil systematic bias to go unnoticed or unpunished.
Second, we’re mainly talking about possible discrepancies in mortgage lending, easily the most scrutinized, documented and regulated form of lending on Earth. Mortgage is not the area that banks would choose to systematically run a minority skewering.
I understand that there are indeed some moron lenders out there with a prejudiced ax to grind. In my admittedly brief and uncelebrated career as a national bank examiner, I once saw a stack of women’s car loan applications, each marked with the inscription, “Deny – DIVORCED.” I even had a particularly backwards dullard of a bank president tell me that his bank made very few mortgage loans because “there is too much paper to hang me with. I don’t deny [minorities’] loans. I don’t have to because they know better than to apply for a loan here.” I’m not too starry eyed to acknowledge the existence of the occasional idiot in our industry. I think, though, that in practice they are few and far between. And even the bottom feeders mentioned above had the sense to keep their dirty work far afield of mortgage lending – the key area of Spitzer’s investigation.
Third, our market is just too competitive for lenders to let anything – distance, hangovers, minority biases….anything – get between them and their sales goals. Lenders fight like starved rats for loan volume. Hell, mortgage lenders who are friends of mine would make a loan to a sack full of hammers if it had a valid social security number and its ratios worked. We have constructed loan growth expectations that hit lenders squarely in the wallet every quarter. If there is anything that would make a prejudiced lender forget about a borrower’s minority status, it’s the quarterly bonus check.
Let’s look at this from the national banks’ point of view. Sure, dealing with Spitzer will be a major league pain in the glutes. I tend to support and respect the work Spitzer’s office has done in other areas of financial services, but I can’t say I’d want his team of legal geeks sitting at card tables and sullying my bank’s loan files. Whether Spitzer’s allegations and motivations are right or wrong, his team WILL find fire where they smell smoke. So, yes, the huge banks in question will have to endure some joint if not duplicate Fair Lending exams, but c’mon now, the cost of this duplication will easily be lost in the rounding. Joint exams happen all the time; the effort will not be material from a big bank perspective.
Think of two points we know about Eliot Spitzer:
If there is nothing systematically shady going on in national banks’ mortgage lending programs, as the banks say and as most industry observers think, can you think of a better way to prove it than to invite a media darling, badass prosecutor with a rep for crushing consumer fraud into your bank? With the OCC, high profile banks and nosy media looking over his shoulder, Spitzer won’t be able to just Conjure Up cases of impropriety or quietly slink off if he finds none. No, if Spitzer does manage to gain access to these banks, he will find himself under the microscope of some seriously informed experts. If they can clear Spitzer’s ambitious hurdle, banks will go a long way to deepening the level of trust they have amassed with their customers and their communities in general. These banks should be welcoming Spitzer and Company into their lobbies and back offices.
Possibly the most ridiculous party in this whole situation is the OCC. Forget preemption. We can argue the OCC’s right to unitarily regulate national banks all day. Only Congress will decide that, maybe. The truth is, it just looks awful for the OCC to even have the slightest appearance of backing banks that it regulates in an effort to halt a civil rights investigation, regardless of who’s doing the investigating.
It looks freaking Dreadful. This is an agency already awash in allegations that it lets its largest supervisees (read: payers of the highest assessments) slip under the wire at the expense of mid-size and community banks. This is poor timing for an agency that slaps small banks with C&D orders for BSA noncompliance only to allegedly let Wells Fargo slide with an “informal action” for the same if not much larger scale BSA failings. American Banker has done a great job of covering the Wells and Spitzer situations and their potential impact on the industry. Check out their articles titled “OCC-Spitzer: Anticipating Consequences” (Hannah Bergman, June 23, 2005) and “BSA & Lapses at Wells Net ‘Informal’ OCC Action” (Rob Blackwell, June 22, 2005.)
Sure, you have to protect your turf. But, man, does the OCC really want to screw with Eliot Spitzer…now….while he’s running for Governor and could use another couple hundred “Spitzer …..” headlines? Is going mano a mano in a civil rights battle with a surgically effective puncher like Spitzer where you want to take your stand?
At best the OCC will end up appearing just as self-serving as Spitzer himself. At worst, allegations of cover-ups and gross partiality will rear their ugly heads. I always cynically snickered when I read the quotes from acting Comptroller Julie Williams saying that she is not a politician. Maybe I should give her more credit for being a straight shooter.
I absolutely cannot wait to see what happens here. My prediction: It’s going to look real bad for any judge who gets between Eliot Spitzer and a civil rights case. One way or another, I predict a judge will provide Spitzer with access to the data he wants. He’ll find next to nothing with any teeth and exaggerate what he does find. The public will see Spitzer’s grandstanding for what it is, and the problem for the big banks will blow over. But sub-$5 billion bankers who are supervised by the OCC better brush off their Fair Lending manuals and start getting more intimate with their HMDA data than they are with their spouses. SOMEBODY is going to have to feel the brunt of what will surely be a beefed up Fair Lending campaign by the criticized OCC. Look what happened to BSA enforcement when the boys at FinCEN criticized regulators in that area. My bet is that it won’t be the big banks feeling the heat.