Mortgage lending face-off

Jenny Strasburg, San Francisco Chronicle Staff Writer
Thursday, June 30, 2005

Wells Fargo -- the largest Bay Area financial services firm and a leading U.S. mortgage lender -- has sent New York Attorney General Eliot Spitzer a message that, absent niceties, can be summed up in four words.

Mind your own business.

Spitzer, the crusading state official who took on mutual funds, Wall Street securities firms and the insurance industry, now has trained his spotlight on banks' mortgage practices.

He wants to know whether Hispanic, African American and other minorities are unfairly charged higher home-mortgage rates than white customers and has requested proprietary lending records from banks so that his office can investigate possible discrimination.

San Francisco's Wells Fargo and other large national banks, including Citibank, JPMorgan Chase and HSBC -- all of which are on Spitzer's inquiry list, according to court filings -- argue that federal bank regulators alone have jurisdiction over their business practices, including civil-rights matters. The U.S. Office of the Comptroller of the Currency, the lead agency regulating federally chartered banks, is weighing in on their side. For Wells and its chairman and chief executive officer, Richard Kovacevich, the coast-to- coast feud covers some familiar ground.

Wells and rival Bank of America used a similar argument in their successful fight against laws adopted by San Francisco and Santa Monica in 1999 that limited ATM fees charged to users who weren't customers of the banks.

In 2002, a federal appeals court in San Francisco tossed out the municipal bans, siding with the banks' view that federal regulations trump local law.

And in 2003, Wells Fargo's mortgage unit parried an attempt by the California Department of Corporations to limit interest charged on new loans.

The state, backed by state Attorney General Bill Lockyer, tried to shut down Wells' mortgage-lending operations in California, alleging that the bank's method of calculating interest rates broke state law. Wells argued that the state had no jurisdiction, and a federal judge agreed.

The latest dispute flared into public view on June 16 when the Clearing House Association, an industry group representing Wells and other major national banks, sued to stop Spitzer's probe. The same day, the comptroller's office filed its own lawsuit challenging Spitzer. Hearings are scheduled in July in U.S. District Court in Manhattan.

Kevin Stein, associate director of the California Reinvestment Coalition, a critic of banks' mortgage-lending practices, said Wells' prominence in the home-loan market and its big role in providing credit to the lower-income subprime market obligate it to share information more fully than it has.

"They're active in this lawsuit and were the main catalyst in the California dispute (over mortgage interest) a few years ago. It does seem that they're aggressive in trying to limit their obligations to the state of California," Stein said.

Wells, for its part, says its position is solid.

"We look forward to having the courts -- as they've done time and again -- uphold federal banking law, which gives the OCC exclusive enforcement responsibility over national bank consumer-lending practices," Wells said in a statement. The bank emphasized that it bases mortgage rates on risk factors such as credit scores and debt levels, not race.

The bank intends to "vigorously defend its reputation as a fair and responsible lender," said spokesman Chris Hammond, who cast the dispute with Spitzer as a matter of principle, not self-interest.

"We adamantly believe consumers and the industry are well served with a national standard," he said.

Wells' unwavering stance is in part a reflection of the forceful personality of Kovacevich, 61, who in leading one of the nation's largest and most profitable financial services firms has been a vocal defender of its lending practices.

He previously was chief executive officer of Norwest Bank of Minneapolis, keeping the top job in 1998 when Norwest took over the old Wells Fargo, adopted its name and moved its headquarters to San Francisco, creating the sprawling company that exists today.

"Talking to investors, the sense is that Kovacevich is a little more outspoken about these things" compared with top executives at other banks, RBC Capital Markets banking analyst Joe Morford said. "He's not willing to back down on some of these issues if he feels the bank is right."

Fair-lending activists chose different words.

"Kovacevich has said, mantra-like, 'We don't make predatory loans.' There's this sense of denial that starts at the top and works its way through the organization," said Scott Klinger, co-director of Responsible Wealth, a project of Boston nonprofit group United for a Fair Economy. "Wells is still at the point where they say, 'We're the leaders. We don't have a problem.' "

At issue, Spitzer and others say, is whether the comptroller's office is monitoring fair lending as effectively as it carries out its top priority -- regulating banks' financial soundness. Some critics of the comptroller's office argue that the agency's authority as the lead bank regulator should not prevent states from enforcing consumer and civil-rights laws.

"There's a big question whether they have enough resources. Are they big enough to do the whole job at all? They've put most of their resources into safety and soundness," said Gail Hillebrand, senior attorney for Consumers Union's West Coast region.

Spitzer argues that the comptroller's office is too cozy with the banks it regulates.

"My office is committed to enforcing laws that protect (New Yorkers) from racial discrimination in lending and will strongly resist attempts to limit our long-standing authority to do so," he said in response to the Office of the Comptroller of the Currency's lawsuit to bar his probe.

Banking experts note that the comptroller's office has repeatedly intervened in court cases to defend its turf.

"The OCC for a hundred years has very fiercely, jealously guarded its exclusive authority to be the regulator of national banks," said UC Berkeley banking expert James Wilcox, who was the agency's chief economist from 1999 to 2001. When challenged, he said, "the OCC's batting average has been high."

Meanwhile, Spitzer spokeswoman Juanita Scarlett said of the New York inquiry, "Our probe is moving forward."

The American Bankers Association, while not a party to the lawsuits, is prepared to defend the Office of the Comptroller of the Currency's exclusive authority to regulate federally chartered banks.

"You will not find an industry subject to more regulation and statutory requirements, bar none," said Dawn Causey, general counsel for the industry group.

"The OCC is expert in banks and banking transactions," unlike state attorneys general, who police a wide range of industries, Causey added. "Congress sets jurisdictions when Congress sees fit. And Congress has been very clear."

The high-profile battle between Spitzer and the banks is spurring legislation to curb the Office of the Comptroller of the Currency's powers to pre-empt state inquiries into banks.

"It's clear to me now that only Congress can sort this out," Rep. Barney Frank of Massachusetts, the ranking Democrat on the House Financial Services Committee, told The Chronicle on Wednesday. He said Democrats will introduce a bill next month aimed at limiting the Office of the Comptroller of the Currency's power to pre-empt state authority over certain banking practices. The current political climate could make support for a challenge to the comptroller's office difficult to muster.