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Blog Post | January 16, 2019

One Trump Appointee, Two Jobs, Too Many Causes for Concern

Congressional OversightEthics in GovernmentFinancial Regulation

You have likely not heard of Joseph Otting, as he has generated comparatively little attention amidst the circus that is President Trump’s executive branch. However, he is a deeply problematic official who has quietly amassed power in critical agencies that receive far too little attention given their impact on the economy and housing.

Amazingly, Otting seems to be using these agencies to act upon resentments he developed as a “controversial,” at best, banking executive, making him a perfect representative of why we are concerned by the revolving door problem in our federal government.

Who is Joseph Otting?

  • Otting has been serving as Comptroller of the Currency since November 27, 2017.
  • On December 20, 2018, President Trump announced that Otting would also serve as acting director of the Federal Housing Finance Agency (FHFA) at the expiration of Mel Watt’s term.
  • Otting began his second job on January 7th, 2019 and will continue running the agency until the administration’s nominee, Mark Calabria, is confirmed.
  • Before joining future Treasury Secretary Steven Mnuchin at OneWest, Otting “managed the Commercial Banking Group” at U.S. Bancorp, where he “served on the Bancorp’s executive management committee.” U.S. Bancorp received more than $6.5 billion in bailout funds from the US Treasury while Otting was one of the bank’s senior leaders.
  • In his last jobs prior to working in government, Otting was president of CIT Bank and co-president of CIT Group. From 2010 to 2015 he was CEO, president, and a board member of OneWest Bank. In December of 2015, Otting was fired by CIT Group.

The OCC and the FHFA

  • As part of the Treasury Department, the Office of the Comptroller of the Currency (OCC) supervises and regulates (in part or whole) national banks, such as JP Morgan Chase, Bank of America, Wells Fargo, and Citigroup, as well as the federal branches and agencies of foreign banks. The OCC’s regulatory reach and importance in keeping banks in the United States on a prudential path is immense.
  • The Federal Housing Finance Agency (FHFA) was established in 2008 to supervise and regulate the government-sponsored enterprises Fannie Mae and Freddie Mac and members of the Federal Home Bank System. Racing to catch up to private sector irresponsibility in the subprime lending market crisis brought them to the brink of collapse. Following a bailout for both Fannie and Freddie, the FHFA took control of the mortgage financiers to help stabilize the housing market and prevent further bad decision-making.

What you need to know from Otting’s past

  1. Foreclosure Machine: OneWest’s foreclosure practices before and during Otting’s tenure as CEO came under scrutiny from federal regulators. Allegations against the bank included that it failed to offer mortgage modifications to homeowners facing foreclosure. The bank was also accused of mishandling paperwork and falsifying records during the foreclosure process. In 2011, the Office of Thrift Supervision (which is now a part of the OCC) ordered that OneWest hire an independent auditor to review its foreclosure procedures. By 2014 this audit had identified 10,781 borrowers whom OneWest had harmed as a result of its foreclosure practice. The auditor determined that the bank owed these individuals a total of $8,520,105.
  2. Accused of Redlining: Redlining is a discriminatory and illegal real estate practice that customarily involves bank lenders refusing to lend money or extend credit to borrowers in certain areas of a town or city. In some instances, realtors will refuse to show properties to individuals solely based on their race, color, or socioeconomic background. The California Reinvestment Coalition (CRC) filed a complaint with the Department of Housing and Urban Development alleging redlining by OneWest in its lending practices. For instance, the California Reinvestment Coalition contended “that none of the home loans it made in Los Angeles in 2012 and 2013 went to black borrowers, while just 0.1 percent went to Latino ones.” Additionally, CRC alleged that “OneWest bank was about 9 times as likely to foreclose on a homeowner in a community of color in California as it was to originate a mortgage in a community of color in California” and that in “2014 and 2015, OneWest originated two mortgage loans to African American borrowers in its assessment area.”
  3. Reverse Mortgages: A former subsidiary of OneWest Bank, the reverse mortgage firm Financial Freedom, was the subject of a federal government investigation for wrongfully seeking payments from a federally insured reverse mortgage program between 2011 and 2016. The California Reinvestment Coalition (CRC) utilized a FOIA request of HUD to determine “that Financial Freedom/CIT Group’s share of reverse mortgage foreclosures since April 2009 is more than twice as much as the company’s market share.” Otting’s former company reached a settlement with the federal government in 2017, agreeing to pay $89 million.
  4. Astroturf Campaign: The Intercept has raised questions about Otting’s involvement in a fraudulent comment campaign that was orchestrated in support of OneWest Bank’s merger with CIT. During federal regulators’ standard public comment period, housing rights advocates raised concerns over OneWest’s questionable foreclosure practices and racially discriminatory lending record. Otting reached out to banking industry connections, inviting them to comment in support of the merger. Soon afterwards a wave of supportive comments were posted on the site. However, these were clearly not messages from different people but rather, the Federal Reserve determined,  “substantially identical form letters” received from similar email addresses in the middle of the night. While we cannot know what part Otting had in the fraud, as the CEO amidst a merger, it would be damning if he had no knowledge of his company’s efforts — as well as damning if he did.

Otting at the OCC and FHFA

  1. Community Reinvestment Act: On August 2018, the OCC released an Advance Notice of Proposed Rulemaking (ANPR), seeking to “modernize” the Community Reinvestment Act (CRA). Enacted in 1977, this law requires federal banking regulators such as the Federal Reserve Board, the FDIC and the OCC to help meet the credit needs of the communities in which they do business, especially low- and moderate-income neighborhoods. A primary goal of the CRA is to stop neighborhood level lending bias that is not targeted at individual borrowers, but instead discriminates against entire communities by denying them credit. Otting’s ANPR, however, focuses on easing the compliance for lenders rather than strengthening the CRA and the people who benefit from it. Otting referenced his experience as the CEO of OneWest Bank when describing how difficult it is to comply with the CRA. However, according to the CRC, OneWest had one of the weakest CRA track records among all the banks in California for reinvesting in low-income communities.
  2. Willfully Blind to Racism?: Undercutting Otting’s credibility when denying having practiced redlining or in his efforts to “reform” the Community Reinvestment Act are his views on the existence of discrimination in America. Otting was asked during a House Financial Services Committee hearing whether he believed “discrimination exists in America today,” Otting replied, “I have personally never observed it, but many of my friends from the inner city across America will tell me that it is evident today.”Otting was given a chance to clean up that outlandish statement. “Capuano pressed Otting, asking, ‘Do you believe that it exists?’”“People have told me it exists, and so I trust those people when they tell me that,” the comptroller responded.

    Fannie Mae is currently being sued for allegedly failing to maintain properties in minority neighborhoods. Otting, who has stated that he has “personally never observed racism,” and who led OneWest Bank during a period of time in which it has been accused of racially discriminatory practices, hardly seems like the best choice to address complex issues with potentially disparate impact on communities of color.

  3. Otting Claims that the FHFA He is Currently Running is Unconstitutional: The FHFA is currently facing a lawsuit attacking the constitutionality of its leadership structure. The plaintiffs argue that the provision preventing the President from removing the FHFA’s head except “for cause” is an unacceptable limit on executive power. This suit is not new, but the FHFA’s position on it is; since Otting took control of the agency a little over a week ago it has decided not to defend its own constitutionality. Ironically, there are very real questions about the legality of Otting holding his second job even as he tries to argue that the his second job is itself unconstitutional.
  4. FINANCIAL CRISIS 2.0? Despite being tasked with preventing the next financial crisis, OCC is potentially leading the way in creating what could be the next generation of risks by giving Silicon Valley the opportunity to “innovate” in “fintech.” Nothing could ever go wrong with “financial innovation, right?

Although Otting has received relatively little attention, he is a quintessential revolving door official who is quickly amassing power within the Trump administration. While the agencies that he leads do not regularly feature in the headlines, they are an important check on corporate power that help to protect Americans from abuse. Otting, however, clearly has no intention to work in the public interest. As a regulator he is working to dismantle key protections for banking consumers, especially people of color, that once hindered his ability to do business as he pleased, no matter the consequences.

Now that House Financial Services Democrats have the power to conduct oversight, including the issuance of subpoenas, Otting’s past and present dealings should be a prime specimen under their microscope.

Congressional OversightEthics in GovernmentFinancial Regulation

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