CRA Lending, Foreclosures at Center of Fight Over Bank Merger

Mortgage & Real Estate









When weighing the controversy over the CIT Group-OneWest Bank merger, set aside details like their performance and promises for the future, and just consider the players behind the $3.4 billion deal.

Some of them, like CIT chief John Thain, have been lightning rods for controversy since the financial crisis, and their companies are saddled with complex histories. It is unsurprising, then, that the deal has drawn the ire of community groups that will be aired during a public hearing.

The Federal Reserve and the Office of the Comptroller of the Currency announced Friday they would hold a public hearing later this month in Los Angeles to get input on its potential public impact.

The merger’s fate has broad implications for many reasons, not least of which is the size of the deal and the fact that it would create another systemically important financial institution. Many industry players are hopeful that an approval in this case could give way to more multibillion-dollar deals. The CIT-OneWest transaction will likely go through, but additional hoops like a public hearing increase the chance of delays.

The threat of delays raise uncertainty, create the risk that key talent will leave or opportunities will be missed amid a period of rapid economic change, and — more generally speaking — the fear of such delays could deter other potential buyers and sellers from making the leap.

After all, proponents of big MA are seeking a more hopeful sign than MT Bank’s bid to buy Hudson City Bancorp, which has dragged on for more than two years mainly because of compliance issues.

The architects of the CIT-OneWest deal left themselves some wiggle room, setting the merger deadline for mid-2015, or just a few weeks shy of a year after it was announced.

Thain said during the company’s fourth-quarter earnings call last month that the companies had anticipated the blowback from the community groups.

“We continue to believe the transaction is on track to close in the first half of this year,” Thain said. “We and OneWest remain committed to substantial investments of both time and money in our communities.”

Complicated History

Even deals of broad significance usually have unique characteristics, and this deal is no exception.

The buyer, the $48 billion-asset CIT, is a specialty finance company that received $2.3 billion from the Treasury Department’s Troubled Asset Relief Program. The investment was not enough to prop up the ailing New York company and the taxpayers were wiped out when the company sought bankruptcy reorganization in 2009. Thain became the poster child for corporate excess because of reports of a lavish renovation of his office at Merrill Lynch in 2008.

The $23 billion-asset OneWest is the bank that, with the backing of private-equity titans George Soros and John Paulson, bought the operations of the failed IndyMac. OneWest received one of the most attractive loss-sharing arrangements provided by the Federal Deposit Insurance Corp., including the right to transfer the loss-share coverage to a new owner without FDIC approval.

Subsequent agreements typically required FDIC approval to be transferred. In fact, the Pasadena, Calif.-based OneWest has two other loss-sharing agreements for other fail banks it acquired later, and the FDIC said in a letter to the California Reinvestment Coalition that since the sale to CIT is structured with OneWest emerging as the surviving bank, the agency’s approval is not needed on the transfer of any of the three agreements.

The history of the two organizations is a key part of the complaints by California Reinvestment; Kevin Stein, associate director of the group, has repeatedly said that the deal has significant public subsidy without much public benefit, while pointing to the Tarp wipeout and the loss-share agreements.

Cornelius Hurley, director of the Boston University Center for Finance, Law Policy, calls the deal “lawful but awful” and said transactions like this are the reason “people are cynical and outraged with our financial system.”

“It takes a great deal of chutzpah and many lawyers to feed at the taxpayer trough this voraciously,” Hurley said. “The value of the loss share is high because there were not many bidders for IndyMac and it was an inducement to bid on the franchise. It was a sweetheart deal, but for it to be an incentive for the merger now is like sticking your thumb in the eye of the taxpayer again.”

Analysts, however, say CIT should not be judged on the organization that it was when it went into bankruptcy. In the subsequent years, and under Thain’s leadership, the company has sought to remake itself into a sturdier company and acquiring OneWest would further that.

“A lot of the things [about CIT] that have been brought up I feel have been unfairly raised,” said Sameer Gokhale, an analyst at Janney Capital Markets. “It is a different company, they’ve grown their deposit base, they’re less exposed to the capital markets, and they’ve been through the wringer with the regulators.”

Both banks received a “satisfactory” rating on individual most recent Community Reinvestment Act exams, according to the Federal Financial Institutions Examination Council website. The companies have said they’ve set an objective to receive an “outstanding” rating.

The most recent CRA plan, filed on Thursday with the OCC, sets a $5 billion target over four years for total community activities, with $3.8 billion in CRA-reportable lending.

“Following the combination, CIT will significantly expand the scope and increase the amount of community reinvestment that OneWest Bank will provide to its communities,” Curt Ritter, a spokesman for CIT, said in an email. “We will also establish a community advisory board that will support the bank in developing and refining our community programs and annual community benefits plan.”

Stein of California Reinvestment said that the plan falls short of what his organization thinks is appropriate. In his estimation, the commitment puts about community lending at about four to five percent of the bank’s deposits.

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