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April 24, 2015 - by Robert W. Welkos - For months, John A. Thain, the chief executive of CIT Group, has confidently predicted that his company’s $3.4 billion merger plan with California-based OneWest Bank will be completed by mid-year.
But considering that the merger is still being scrutinized by the Federal Reserve Board, Thain’s remarks have raised concern among opponents of the merger that perhaps the Fed has already signaled to CIT that the transaction is on track for approval. “I think it means something when the CEO of a bank is telling investors when he thinks a merger will be approved,” Kevin Stein, associate director of the California Reinvestment Coalition (CRC), a San Francisco-based consumer advocacy group that opposes the merger, told CTFinancialNews.
“Investors don’t like surprises,” he added. “If investors are being told the merger is going to be approved by the middle of the year, they don’t want to learn the timeline is not going to be met. I think Mr. Thain knows that. He may have some reason to put that timeline out there. Our point is that we hope that the regulators are not operating on his timeline.”
So when attorneys for the Fed’s Board of Governors sent the banks a March 17 letter requesting detailed answers to complaints about OneWest’s foreclosures and the closing of bank branches in minority neighborhoods, it seemed like a sign that bank regulators were taking the allegations seriously. Still, Stein does not think the letter means the deal is in regulatory trouble.
“You could look at this letter from the Fed as being a final step in due diligence before they approve (the merger),” Stein said. “It could mean that approval is coming soon.” For one thing, why did it take public complaints for the Fed to request answers from CIT and OneWest about foreclosures and mortgage loan servicing practices? And, why didn’t the Fed already have those answers in the first place?
So far, the Fed’s letter is the only indication that the deal might be facing headwinds — but even opponents of the merger concede that it is impossible to judge if the banks’ answers will make any difference. After all, it was not until CRC delivered 21,000 signatures on petitions that the Fed took the rare step of scheduling a public hearing. Opponents say that if the merger were approved, it would create a bank that is “too big to fail.”
Furthermore, Stein points out, CIT was the recipient of a taxpayer bailout of $2.3 billion under the TARP program during the 2008-09 economic crisis and ended up filing bankruptcy. What happens to the $2.3 billion it owes taxpayers, Stein asks?
As for OneWest, it was created out of the collapse of IndyMack Bank — the third largest bank failure ever, costing the FDIC’s Deposit Insurance Fund $13 billion. In the ensuing years, CRA estimates, OneWest foreclosed on 35,000 Californians.
In their April 14 response to the Fed, attorneys for CIT stated that while the banks “sympathize with homeowners and their families who may be facing foreclosure or who have gone through that process,” and while the banks also admit that “any process like this will have some degree of human error, however well-controlled the operation,” the banks insist that OneWest has worked to enhance its servicing practices, internal controls, and compliance program. Furthermore, the attorneys noted, an independent evaluation of over 190,000 loans serviced by OneWest showed that the bank’s error rate was low.
But Stein countered: “Ask loan counselors, ‘Who are the worst servicers over a period of time?’ and OneWest is always one of the worst. We know there were a large number of foreclosures.” He added, “On foreclosures, we understand OneWest completed over 35,000 foreclosures in California alone, and its reverse mortgage servicer Financial Freedom foreclosed on over 2,000 seniors and their families in California alone. We have asked the bank and the regulators to provide precise numbers, since that data is not public, but the bank has refused to do so.”
More specifically, he pointed out, the banks noted that only 1/100th of the time did a foreclosure proceed with the borrower not in default. “That sure sounds like a very low number of violations of the kind they are talking about,” Stein said, “but they are talking about foreclosures where the borrower was not even in default. People who are not in default should generally never be in foreclosure. So, the expected number of violations here should be zero.”
CIT’s attorneys informed the Fed that from October, 2013, to February, 2015, OneWest had received a total of 812 complaints by mortgage borrowers and added that of this number, 695 was likely a more accurate figure since some borrowers make repeat complaints about the same or other issues.
Stein said a similar dynamic is at play in complaints as it was in foreclosures. OneWest cited complaints that came after the bank had sold its mortgage servicing rights to Atlanta-based Ocwen Financial Corp. for $2.53 billion in 2013. At the time, according to Reuters news service, Ocwen agreed to purchase about $78 billion in unpaid principal balances of mortgage servicing rights through a combination of cash and available credit.
“OneWest selected October 2013 because that was the first month after it sold a substantial part of its mortgage serving rights to Ocwen,” Stein told CTFinancialNews. “…They should be reporting on the number of complaints received since 2009 when OneWest took over IndyMac and started servicing a large number of loans. The numbers would probably be substantially higher, perhaps shockingly so.”
The Fed also asked CIT’s attorneys how many branches OneWest had closed in minority neighborhoods. OneWest said that since its inception, it has not made any branch closures in “majority-minority census tracts without consolidation and has consolidated 12 branches. Seven of these branches were in non-majority-minority census tracts…The remaining five branches were in majority-minority census tracts. Of these 5 branch consolidations, the receiving branches were all located in majority-minority census tracts.”
“They talk about 12 branches that they say they didn’t close but that they consolidated,” Stein said. “I think consolidation is closure. They’re playing a semantics game. They close the branch and just transfer accounts to another branch…. Of the 12 they closed, five were in minority neighborhoods.”
Another question put to the banks by regulators had to do with complaints that OneWest foreclosed on homes occupied by spouses of deceased borrowers. The bank put the blame on the U.S. Department of Housing and Urban Development, explaining that prior to June 25, 2014, HUD’s regulations “effectively required reverse mortgage servicers to foreclose on homes occupied by surviving non-borrowing spouses, unless they were to pay off the mortgage loan in full (or pay 95 percent of the appraised value if the loan amount were greater than the value of the home).”
But Stein countered: “It’s not correct to say ‘there’s nothing we can do. Our hands are tied.’ Why aren’t they trying to seek solutions to keep people in their homes?” It could be that the Fed is seeking answers so that it can craft stipulations that the banks must follow as part of any approval.
One of the questions posed by the Fed has to do with public complaints that OneWest and CIT Bank have not met their obligations under the Community Reinvestment Act because their levels of qualified community investments and community development loans and services are not fully commensurate with the institution. The banks said the allegations are unsupported and, to the contrary, their performance evaluations on this issue indicate that both CIT and OneWest “are in compliance with, and have excellent records” under the Community Rinvestment Act.
Indeed, OneWest has said that it intends to invest $5 billion over the next four years on community-related activities, and maintain 15 per cent of its branches in low and moderate income neighborhoods. But Stein contends that even if that were true, it would keep OneWest towards the bottom of banks with regard to community reinvestment, and would fall far short of the 30 percent of branches in these neighborhoods, which is the average for all California banks. “Their promise is to keep it at half the industry average,” he said.
This week, the consumer advocacy group announced that it had successfully negotiated a new $11 billion community reinvestment plan that will be implemented over the next five years as part of City National Bank's merger with Royal Bank of Canada and noted that this commitment is more than double what OneWest has proposed as part of its merger with CIT. The group urged the Fed to compare the two plans when reviewing the CIT-OneWest merger.
Stein also noted that one question the Fed does not ask, but should, is how this merger would be in the public interest? “All this talk of servicing and foreclosure prevention practices,” he said, “but nowhere do they acknowledge how many foreclosures they processed since OneWest took over … and they say they are complying with the California Homeowner Bill of Rights, but why then do they continue to argue they are not subject to it?“
Aside from mortgage servicing complaints, the Fed wanted to know about any litigation arising from such complaints. Attorneys for CIT replied that OneWest, “like all mortgage loan servicers, is a party to litigation related to foreclosures.” Adding that since 2009, when OneWest acquired its servicing portfolio from the FDIC as receiver for IndyMac, “borrowers have prevailed extremely rarely in their claims.”
OneWest said that among the pending litigation matters over its mortgage servicing practices, 31 involve allegations of “dual tracking,” six involve allegations of failure to provide a single point of contact to assist borrowers, 52 involve allegations over the foreclosure of homes occupied by spouses of deceased borrowers, 56 involve allegations for failing to keep accurate records and paperwork relating to mortgage loans, and 11 involve allegations of advising borrowers to default on their loans in order to qualify for a modification and subsequently foreclosing on the defaulted loans.
But, again, these are only figures for currently pending litigation. “It looks like they identify over 150 claims filed against OneWest in court that mirror issues raised at the public hearing,” Stein said. “It is not clear on how many cases have been brought that challenge their foreclosure practices.” He said 150 seems like a fairly larger number and they maintain that borrowers prevail extremely rarely in these suits, “though they don’t elaborate on what that means.”
Each bank currently holds a “satisfactory” rating from the FDIC and the chief executives of each bank have expressed that their goal is to win an “outstanding” rating if the merger is approved. In OneWest’s case, in 2012 it received “high satisfactory” ratings in both its lending and service tests but only a “low satisfactory” rating in its investment test.
Still another question put to the banks by the Fed was this one: “Given the distinct business and operational profiles of CIT and OneWest, with CIT mainly lending to small and medium size businesses and OneWest primarily engaging in retail banking and residential mortgage lending, please explain how the combined organization will integrate these two distinct business operations, management teams, and cultures.” Attorneys for CIT responded that although there are differences, the banks believe their businesses are complementary. As for the distinct cultures of the banks, the attorneys said that CIT’s and OneWest’s respective management teams “have common beliefs in the importance of strong credit underwriting, risk management, regulatory relations and compliance.”
OneWest, they noted, is a “relatively new institution that has always been privately owned by a small group of institutional private equity owners. … It was founded in 2009 following the completion of the acquisition of the banking operations of IndyMac from the FDIC as receiver.” In contrast, CIT and its subsidiaries have served customers since 1908. CIT is publicly–owned and has a more diversified funding base, which includes Internet and brokered deposits.
Stein said that the banks have promised their investors that they will be able to reduce their federal tax liability because of this pending merger, thus, making the combined bank more profitable. “What CIT has is this big loss from prior years that they have not been able to take advantage of from before the merger,” Stein told CTFinancialNews. “Not only is it pretty clear that they will not pay back TARP, but they are planning to use the losses from that period to offset the tax liability they would otherwise have flowing from expected profits from the merger.”
Stein added that he does not know what CIT’s tax liability amounts to, but added, “We just know that Mr. Thain is quoted as saying to investors that this merger, once it goes through, will generate profits for us so we can offset those losses against their expected profits.”
Another lingering issue Stein questions is why CIT should be able to take over the benefits of the loss share agreement entered into by the FDIC and OneWest. In inducing OneWest, and other investors, to buy IndyMac, Stein noted that the FDIC agreed to cover certain future losses. These FDIC funds were meant to protect the entire system, he noted.
“While people may disagree about the wisdom of the FDIC entering into these loss share agreements during the financial crisis when it had failed institutions on its books, it is much harder to see the rationale for, and the public purpose served, by allowing CIT to take over the loss share agreement years after the crisis and after the FDIC successfully sold IndyMac to OneWest billionaires,” he said.
“There is an estimated $1.4 billion left to be paid under the loss share agreement. If the agreement is transferred to CIT, we view that as a $1.4 billion subsidy from FDIC to CIT that does not serve a public purpose.”
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