By Rachel Louise Ensign and Ryan Tracy
When Steven Mnuchin looked to sell his OneWest Bank for $3.4
billion in 2014, a community group with an $800,000 budget tried to
block the deal. That led to a nine-hour public hearing where
speakers compared the bank's executives to the ebola virus and
called for their imprisonment. Others voiced support.
Afterward, Paulina Gonzalez, the head of the community group
leading the charge, approached Mr. Mnuchin seeking a truce that
included the bank setting aside billions of dollars more for
lower-income communities, under a law called the Community
Reinvestment Act, or CRA. "I hope we can figure this out," she
said.
"No. We're done," Ms. Gonzalez recalls Mr. Mnuchin telling her
before walking away. A spokeswoman for Mr. Mnuchin says he disputes
saying that.
Four years later, Mr. Mnuchin is the Treasury secretary and his
fellow executive at the bank, Joseph Otting, is now comptroller of
the currency. And one of their big agenda items is an overhaul of
the CRA, a law passed in 1977 to combat redlining, a practice where
banks wouldn't lend in lower-income communities.
In the years since the law's passage, such lending grew, but so
too did a thicket of rules and regulations related to the law. In
the process, the CRA became a weapon for community groups looking
to force banks to commit even more funds to poorer areas. Banks
grumbled, but they usually paid up, sometimes giving money to the
community groups themselves. Messrs. Mnuchin and Otting were the
rare bankers to fight back.
Community groups agree the regulations need to be updated, but
worry changes could mean lower-income borrowers would have less
access to loans and banking services. Ms. Gonzalez, executive
director of the California Reinvestment Coalition, says the plans
are driven by the two officials' personal experience.
"It's very much done through the lens of two bankers who came
out of California and a battle with communities in which they
always put their needs last," she says.
Bankers view the CRA as outdated and overly subjective, and
support the proposed revamp, which is expected to include changes
to many aspects of the rules. Mr. Otting cites his personal
experience in his drive to change the law and says that will help
him develop changes that make the rules work "better, both for
banks and those nonprofits."
"I went through a very difficult period with some community
groups that didn't support our community, who came in at the bottom
of the ninth inning, that tried to change the direction of our
merger," he said at a banking conference in April. "And so I have
very strong viewpoints."
Part of their plan, Mr. Otting said earlier this year, would
make it harder for community groups to "pole vault in and hold
[bankers] hostage" when deals are up for regulatory approval.
At a congressional hearing in July, Mr. Mnuchin said his time
running a bank motivated him to revise CRA rules. He said the
effort wasn't "about weakening CRA in any way," but about "making
it more effective for communities."
The changes being outlined by Messrs. Mnuchin and Otting have
both sides girding for battle.
Late last month, Mr. Otting, who runs the Office of the
Comptroller of the Currency, started the process of changing the
rules on his own without fellow regulators the Federal Reserve or
Federal Deposit Insurance Corp. It is unusual for one regulator to
alter CRA rules unilaterally, although the Fed and FDIC could join
the OCC effort at a later date.
Regulators conducting CRA exams evaluate dozens of variables,
including the percentage of mortgages a bank makes to lower-income
borrowers -- those earning less than 80% of the area's median
income -- whether it invests in affordable-housing vehicles and if
it has branches in poorer neighborhoods. Each exam results in a
final grade ranging from "substantial noncompliance" to
"outstanding."
Banks developed methods for fulfilling huge CRA promises and
ticking the boxes on the law's requirements. They counted loans
they would have made anyway toward their CRA goals, such as
mortgages to affluent home buyers in gentrifying areas. They bought
loans from other lenders. They put branches in areas deemed
lower-income by regulators that don't outwardly appear as such,
including a portion of Midtown Manhattan with a Ferrari
showroom.
Because the exams are administered infrequently, the grades are
often years out of date. If a bank wants to do a deal, though,
regulators must evaluate compliance at that moment and the bank's
promises for the future.
Members of a community are invited to weigh in on the CRA
performance of banks pursuing a merger. That provides community
groups with an opportunity to step in with demands, no matter the
bank's earlier exam grade. If banks don't accede to the demands,
the community groups, many operating on shoestring budgets,
circulate petitions and mount protests outside bank headquarters
that garner publicity.
In the years before the regulations became more stringent, says
CRA consultant Ken Thomas, if you were doing a deal, "you'd call
your investment banker and the Federal Reserve. Now, the first
thing you do is call the community groups to see how much this will
cost you. It has almost become an unwritten law."
Ms. Gonzalez was at the center of Messrs. Otting and Mnuchin's
standoff with community groups in 2014 and 2015 over the sale of
OneWest.
OneWest was born of the financial crisis, after shoddy mortgages
led to a run on California lender IndyMac Bank in the summer of
2008. The FDIC seized it in one of the biggest bank failures ever.
Sensing opportunity, Mr. Mnuchin put together a group of investors,
including George Soros and hedge-fund manager John Paulson, and
bought IndyMac for $1.5 billion. Their goal was to rebuild the
bank, then sell it or take it public.
Mr. Mnuchin, who had worked at Goldman Sachs Group Inc., hired
Mr. Otting, an affable Iowa native who became the public face of
the bank they renamed OneWest.
The two tried to turn the bank into a business lender that made
few mortgages. But it still handled thousands of troubled IndyMac
mortgages. In 2011, demonstrators gathered outside Mr. Mnuchin's
Bel-Air mansion to protest foreclosures.
In 2014, Mr. Mnuchin's former Goldman colleague John Thain, who
was running CIT Group Inc., offered to buy OneWest for $3.4
billion. OneWest investors would turn a profit of more than $3
billion, including dividends.
That's when Ms. Gonzalez and the California Reinvestment
Coalition, or CRC, got involved. In a recent interview, Ms.
Gonzalez, the daughter of a garment worker who unsuccessfully tried
to unionize his colleagues, said she viewed the pending merger as
an opportunity to get the bank to give more to poor
Californians.
OneWest thought it was doing enough. Mr. Otting met with local
religious leaders and groups representing minorities.
The bank also opened its checkbook. In a 2012 CRA evaluation,
regulators said OneWest committed $1.4 million to Los Angeles-area
groups providing affordable housing and other services. OneWest
received a grade of "satisfactory."
CRC, one of the most prominent of the groups that negotiate
around bank mergers, said OneWest was spending less money on CRA
than peers.
The ability of community groups to use the CRA that way reflects
how the law evolved. In the 1990s, CRA regulations became tougher,
requiring the extensive, public exam with an overall grade. A bad
grade effectively prohibits mergers.
Around that time, a rollback of laws prohibiting banking across
state lines led to a wave of mergers, making good CRA grades
especially important. Each deal needed regulatory approval.
Community groups had clout, and it became the norm for banks to
negotiate with them in exchange for support for deals -- or at
least dropping noisy opposition.
Former Senate Banking Committee chairman Phil Gramm called the
community groups' tactics "extortion" and, in 1999, tried to limit
their influence. After the financial crisis, some conservatives
also blamed CRA for the shoddy lending behind the mortgage
meltdown, though Fed economists dispute this.
Since 1977, banks have made about $6 trillion in CRA
commitments, according to the National Community Reinvestment
Coalition, an umbrella organization.
Most of the money promised in the agreements is for profitable
loans and investments, generally benefiting lower-income people or
areas. Regulators require the loans to be low-risk, but they
wouldn't necessarily all be made otherwise. According to a 2000
study from the Harvard Joint Center for Housing Studies, growth of
loans to lower-income communities would be 20% lower if it weren't
for CRA. Donations are often a part of the agreements, though
generally a small one.
Sometimes, the agreements can lead to money going to groups
connected to the organizations who lobbied for them. In August
2014, for instance, when Banc of California Inc. wanted to buy 20
Popular Community Bank branches, CRC got the acquirer to commit 20%
of deposits to CRA activities. That included a $500,000 investment
in NeighborWorks Orange County, a CRC member. CRC says it is up to
banks to decide where to put their CRA funds.
OneWest and CIT realized early on that their merger -- one of
the largest since the crisis -- could run into CRA problems. They
invited groups including CRC to an event in California to discuss
the deal. OneWest also brought along children it said had benefited
from its philanthropy.
OneWest executives gave PowerPoint presentations on the bank's
mortgage modifications. They didn't make any specific CRA
commitments for the combined bank.
In the following weeks, the bankers held more meetings. At one
meeting with the Greenlining Institute, another anti-redlining
organization, Mr. Otting said groups opposing the merger couldn't
expect any donations from the bank, Greenlining's director says.
The group sent a public letter to then-Federal Reserve chief Janet
Yellen and other top Fed officials urging them to "investigate and
verify Mr. Otting's threat." Mr. Otting declined to comment.
Ms. Gonzalez's group met with OneWest. CRC wanted the bank to
commit more than 25% of its California deposits to CRA loans,
investments and grants, or about $3.6 billion annually. It
eventually cut its request to around 20% of deposits -- in line
with what some other banks planning mergers had committed after
discussions with CRC.
Mr. Otting told the activists there was no way the bank could
commit that much. OneWest executives felt they couldn't ramp up
lending volume that quickly. With no deal in sight, CRC decided to
fight.
It led a group of protesters to the bank's headquarters. CRC and
other groups started petitions against the merger that got more
than 22,000 signatures. Regulators started asking questions about
the activists' allegations.
Mr. Otting set up a website for people to send a form letter to
bank regulators supporting the merger. About 2,100 were sent,
including one from Mr. Otting's mother.
CRC pushed regulators for a public hearing. A few weeks before
it was held, the banks released a new plan promising to make $5
billion in CRA loans, investments and grants at the combined bank
over four years. It was less than what the activists wanted.
Regulators eventually approved the merger on the condition the
bank submit a revised CRA plan that gave more detail about how the
merged operation would provide the $5 billion in funding over four
years.
Later, when President Trump nominated Messrs. Mnuchin and Otting
to their current government positions, CRC protested. It tagged Mr.
Mnuchin the "foreclosure king" and brought borrowers to speak on a
panel with Sen. Elizabeth Warren (D., Mass.).
After Mr. Mnuchin became Treasury secretary, his staff started
drafting a report to set the Trump administration's agenda for bank
regulation. It initially focused on rolling back parts of the 2010
Dodd-Frank Act, people familiar with the matter say.
Mr. Mnuchin instructed staff to add a section on updating CRA
rules, these people say. A later Treasury report on CRA ordered up
by Mr. Mnuchin suggested changes that, among other things, could
strip community groups of their leverage around deals.
Community groups and banks alike want the CRA updated, but they
disagree on what the changes should be.
In public remarks and in the August document that formally began
the rule-change process, Mr. Otting has outlined plans for
standardized CRA scores. They would be reported regularly like
other metrics, such as loans and deposits. If the scores are above
a certain level, banks would be considered compliant. That could
deprive community groups leverage to extract concessions.
The OCC also floated ideas for expanding the activities that
qualify for CRA credit and changing the geographic scope of the
tests. Such changes could transform the way banks make loans,
investments and donations in lower-income areas.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com and Ryan
Tracy at ryan.tracy@wsj.com
(END) Dow Jones Newswires
September 25, 2018 10:44 ET (14:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.