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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
In , the four bank regulators issued new guidance to strengthen appraisals.
They recommended that an originator’s loan production staff not select appraisers.
That led Washington Mutual to use an “appraisal management company,” First
American Corporation, to choose appraisers. Nevertheless, in the New York
State attorney general sued First American: relying on internal company documents,
the complaint alleged the corporation improperly let Washington Mutual’s loan pro-
duction staff “hand-pick appraisers who bring in appraisal values high enough to
permit WaMu’s loans to close, and improperly permit[ted] WaMu to pressure . . .
appraisers to change appraisal values that are too low to permit loans to close.”
CITIGROUP: “INVITED REGULATORY SCRUTINY”
As subprime originations grew, Citigroup decided to expand, with troubling conse-
quences. Barely a year after the Gramm-Leach-Bliley Act validated its merger
with Travelers, Citigroup made its next big move. In September , it paid bil-
lion for Associates First, then the second-largest subprime lender in the country (af-
ter Household Finance.). Such a merger would usually have required approval from
the Federal Reserve and the other bank regulators, because Associates First owned
three small banks (in Utah, Delaware, and South Dakota). But because these banks
were specialized, a provision tucked away in Gramm-Leach-Bliley kept the Fed out of
the mix. The OCC, FDIC, and New York State banking regulators reviewed the deal.
Consumer groups fought it, citing a long record of alleged lending abuses by Associ-
ates First, including high prepayment penalties, excessive fees, and other opaque
charges in loan documents—all targeting unsophisticated borrowers who typically
could not evaluate the forms. “It’s simply unacceptable to have the largest bank in
America take over the icon of predatory lending,” said Martin Eakes, founder of a
nonprofit community lender in North Carolina.
Advocates for the merger argued that a large bank under a rigorous regulator
could reform the company, and Citigroup promised to take strong actions. Regula-
tors approved the merger in November , and by the next summer Citigroup had
started suspending mortgage purchases from close to two-thirds of the brokers and
half the banks that had sold loans to Associates First. “We were aware that brokers
were at the heart of that public discussion and were at the heart of a lot of the [con-
troversial] cases,” said Pam Flaherty, a Citigroup senior vice president for community
relations and outreach.
The merger exposed Citigroup to enhanced regulatory scrutiny. In , the Fed-
eral Trade Commission, which regulates independent mortgage companies’ compli-
ance with consumer protection laws, launched an investigation into Associates First’s
premerger business and found that the company had pressured borrowers to refi-
nance into expensive mortgages and to buy expensive mortgage insurance. In ,
Citigroup reached a record million civil settlement with the FTC over Associ-
ates’ “systematic and widespread deceptive and abusive lending practices.”
In , the New York Fed used the occasion of Citigroup’s next proposed acqui-
sition—European American Bank on Long Island, New York—to launch its own in-
