By PAUL SPERRY, FOR INVESTOR'S BUSINESS DAILY
Bank of America (BAC) must turn over excess funds from a record $335 million discrimination fine to community organizing groups. Critics say it's a "political backdoor" to subsidize Democrat-tied Acorn "clones."
The unusual mandate is buried in a Justice Department filing last month detailing settlement terms with the nation's largest bank. Prosecutors had alleged BofA's Countrywide Financial mortgage unit discriminated against minority homebuyers in the years leading up to the financial crisis.
Funds not passed out to alleged victims after two years will be handed out to "qualified" groups unconnected to the case that provide credit and housing counseling and similar services to blacks and Hispanics in areas where the discrimination allegedly occurred.
Prosecutors say the more than 200,000 alleged victims of Countrywide subprime loans reside chiefly in Chicago, Detroit, Los Angeles, Phoenix, Las Vegas, Denver, Houston, Dallas, Atlanta and Washington, D.C. Community organizing groups have large operations in these cities.
The order further states that recipients of such funds can't be tied to Bank of America. But they can include nonprofits that offer financial education, counseling and other aid related to mortgage programs to which BofA has "furnished substantial support."
In 2008, BofA donated $2 million to Acorn Housing Corp. of Chicago. It also gave $500,000 to the National Community Reinvestment Coalition of Washington and $300,000 to the National Urban League of New York.
The government must OK the selection of nonprofit groups benefiting from money left over from the $335 million interest-bearing escrow fund ‹ the largest U.S. residential fair-lending settlement ever.
Millions of dollars could end up at housing-rights groups that pressure banks to lower underwriting standards for uncreditworthy borrowers, critics say.
Justice is improperly using banks to subsidize Democratic-aligned groups, Heritage Foundation fellow Ernest Istook says.
"It's a shakedown," the former GOP Oklahoma congressman told IBD. "This is another political backdoor to use the government to channel money to your friends."
Under the settlement, BofA can not discuss details of the case. But in court papers, it denied all the discrimination charges and argued that it had pledged "substantial" sums to such community organizers before the crisis.
Countrywide's Other Bill
When BofA bought Countrywide in 2008, it committed a record $1.5 trillion to minority lending and urban reinvestment. The 10-year accord replaced the bank's half-finished $750 billion goal set in 2004, when it acquired Fleet Bank.
A key recipient of that earlier deal was Boston-based Neighborhood Assistance Corporation of America, certified by HUD to counsel delinquent borrowers.
NACA founder Bruce Marks has called mortgage standards requiring down payments and good credit "patronizing and racist." He has also demanded banks stop foreclosures on subprime homes.
In 2004, Marks threatened to blow up the BofA-Fleet deal by complaining to regulators that the banks were not making enough loans to minorities under the Community Reinvestment Act. The banks, in turn, pledged to make $6 billion in mortgages for borrowers with weak credit, along with other funding.
That year, U.S. banks promised a record $1.6 trillion in loan commitments to CRA lobbyists ‹ who, all told, have wrung $6.1 trillion in CRA agreements and commitments since the anti-redlining law was enacted in 1977.
Such accords also often include pledges to provide flexible terms, including lower down payments with a waiver of higher interest rates and fees to cover the added default risk. Also, banks typically agree to a second review of minority applicants with marginal credit scores.
Bank mergers had become "a major point of leverage ‹ and source of funding ‹ for community activist groups," said Competitive Enterprise Institute analyst Michelle Minton.
Nonprofits Exact Bank M&A Fees
Federal regulators must consider complaints from such groups in issuing CRA ratings and ruling on merger deals, giving banks a strong incentive to bow to their demands.
In the 1990s and early 2000s, one in five financial institutions were acquired in a merger or acquisition. But banking M&A has slowed, and so have banks' loan pledges to these nonprofits, from 2004's peak $1.6 trillion to just $12 billion in 2007. (Analysts say BofA-Countrywide's 2008 commitment of $1.5 trillion was an exception.)
BofA and Wells Fargo (WFC) are close to the 10% deposit cap. Each owns about 10% of U.S. deposits, which means they can't legally acquire other banks without divesting branches.
CRA lobbyists have expressed frustration with the lack of opportunities to hold banks "accountable."
"A dwindling number of mergers and acquisitions deflates the opportunity for consumers to comment on CRA ratings ," Greenlining Institute executive director Orson Aguilar recently testified.
Istook believes Attorney General Eric Holder is stepping in on their behalf to "extort" money from banks.
"They are creating a grant program, unsupervised by Congress, unconstrained by any government safeguards or accountability and with no guidelines to control or restrict the Department of Justice in giving or withholding approval of who gets the money," he said.
Last year, Justice ordered two AIG bank subsidiaries to finance such organizations as part of their punishment for allegedly discriminating against black borrowers. Under a March 2010 consent decree, Federal Savings Bank of Delaware and Wilmington Finance of Pennsylvania must pay a minimum of $1 million to "qualified organizations" that help "African-American borrowers."
While Justice would not provide a complete list of approved nonprofits, a spokeswoman told IBD that the National Urban League and Operation Hope are eligible for AIG settlement funding.
The National Urban League has aggressively opposed stricter credit standards. It argues that requiring 20% down payments "stifles homeownership for communities of color."
Operation Hope's founder, John Bryant, is a CRA activist and major Democratic donor who serves on President Obama's financial advisory council.
At least some of the Obama administration's record number of bank discrimination cases seem to be coming from the same types of community activists that Justice is ordering banks to financially support.
Justice last year sued Midwest BankCentre of St. Louis for failing to offer enough credit to the city's poor and African-American residents after the St. Louis Equal Housing and Community Reinvestment Alliance began writing complaints to federal regulators.
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