American Banker
Barbara A. Rehm
April 27, 2006 

WASHINGTON – Large financial companies with operations in Illinois – including Citigroup Inc., HSBC Holdings PLC, JPMorgan Chase & Co., and Wells Fargo & Co. – are under political fire at the dicey intersection of preemption and predatory lending.

Rep. Michael J. Madigan, speaker of the Illinois House of Representatives, has asked 50 state agencies, pension funds, and universities to stop doing business with nationally chartered financial institutions unless they agree to comply in writing with a state law designed to prevent abusive lending.

“Unfortunately, nationally chartered institutions have resisted our efforts by seeking refuge under federal laws that they contend preempt our state legislation,” Rep. Madigan wrote to the organizations. “Fortunately, the State of Illinois has another means of promoting the consumer protection policies we have advocated.”

Steve Brown, a spokesman for Rep. Madigan, said Wednesday that 34 of the 50 agencies, including the huge Illinois State Board of Investment, have said they would comply with the speaker’s request. Mr. Brown could not estimate how much money these agencies control.

Lenders are loath to discuss this issue publicly, for fear of angering the powerful state official, whose daughter Lisa is the state’s attorney general. Rep. Madigan has been in the House since 1971 and has been its speaker for more than 10 years. He is also the chairman of the Illinois Democratic Party.

“He runs Illinois,” one financial services company official said. “These agencies are caught between a rock and a hard place: fulfilling their fiduciary duty versus getting knifed by Madigan. They are probably in more agony than we are.”

State officials also declined to speak on the record.

“We are not going to be quoted on anything to do with Speaker Madigan’s efforts,” one said.

Rep. Madigan is frustrated that federal preemption allows national banks to ignore state laws such as the High Risk Home Loan Act, which took effect Jan. 1, 2004.

Of Illinois’ 707 banks with $377 billion of assets, 147 of them, with $168.8 billion of assets, hold national charters.

But state banks may not benefit should state funds shift out of national banks. The business would likely gravitate to major investment banks that do not make mortgages in the state.

Rep. Madigan has asked a set of diverse groups from the pension funds for Illinois policemen, teachers, and park employees to a slew of schools such as the University of Illinois system to respond to his request by April 30.

“I am writing to ask that you join in our efforts by adopting a policy of not investing or depositing public funds with financial institutions (or their affiliates) unless they certify in writing that they do not engage in such predatory lending practices,” he wrote in a Feb. 16 letter.

Rep. Madigan followed that letter up with one dated April 4 that provided these 50 groups with a sample form a lender could use to certify it was in compliance with the state anti-predatory-lending law.

The sample states a lender “shall not make, invest in, or service” high-risk loans, which are defined as those with rates more than 6 percentage points above Treasury bonds with similar maturities for first mortgages, or 8 percentage points for a second mortgages, or those with points and fees exceeding $800 or 5% of the loan amount, whichever is greater.

The sample also covers loans containing any one of a dozen “prohibited terms” such as certain limits on late payments or the financing of fees.

National lenders insisted their companies voluntarily comply with the state law but will not sign anything that could set a precedent for other states that oppose the Office of the Comptroller of the Currency’s preemption efforts.

The preemption debate has been raging for years, and the OCC has repeatedly beat its critics in court. The agency is, however, frequently criticized by federal lawmakers, as well as state attorneys general, who say the preemptions leave consumers unprotected.

Robert M. Garsson, an OCC spokesman, would not discuss the matter for this story Wednesday.

Community advocates enlisted by Rep. Madigan to help state agencies understand the issue said many are still weighing what to do.

“Pension boards are in the process of trying to understand the issue, understand their responsibilities,” said Malcolm Bush, the president of the Woodstock Institute in Chicago.

“I think people are still in the asking questions stage,” said Michele R. Taylor, the national community reinvestment organizer at the National Training and Information Center in Chicago. “A lot of the pension boards are calling to request a list of predatory lenders. There is no list.”

To date, it is not clear that any national lender has agreed to sign the form.

Spokespeople for HSBC and JPMorgan Chase on Wednesday said their companies do not make or purchase high-cost or high-risk mortgage loans in the state.

“The written certification would primarily impact large responsible mortgage lenders with extensive fair lending programs already in place so thus they aren’t the cause of the problem,” the JPMorgan Chase spokesman said. “We believe we will retain all of our investment business because we do a good job of managing our customers money.”

A Wells Fargo representative declined to comment while a Citigroup spokesman did not return a call seeking comment.

Linda Koch, the president and chief executive officer of the Illinois Bankers Association, said that big dollars are at stake, and that the issue also affects smaller national banks. When asked how the issue is likely to play out, she predicted banks will sign the form or find some other way to prove to customers that they are in compliance with the state law.

“The vast, vast majority of national banks in Illinois are certainly complying with predatory-lending laws, notwithstanding federal preemption authority,” she said. “We believe that national banks will continue working with their public agency customers.”

*These clippings are provided for “fair use” not-for-profit,
educational purposes (and other related purposes). If you wish to use
this copyrighted material for purposes of your own that go beyond “fair
use,” you must obtain permission from the copyright owner. Please
contact Woodstock Institute for more information.