The Bank of Jim Crow

Even then, activists' power lies mostly in the ability to delay, not halt approval. A merger has never been stopped because of activists' concerns, and only a small percentage of banks ever receive CRA ratings below satisfactory. Clevenger says that means banks are doing their part. "If they're making credit available, there's no reason not to give a bank a satisfactory rating. We don't grade on a curve."

Activists disagree. "There really is no standard," says Matthew Lee, Inner City Press's executive director. "If nobody like us comments, that means there are no problems."

Lee's group got involved in the Charter One-Albank merger because of Albank's miserable record. In 1997, the company agreed to set aside $9 million for discounted loans after the federal government accused it of carving out minority enclaves and refusing to make mortgage loans there. The bank never admitted wrongdoing, but the Justice Department considered the agreement a victory.

Lee's group had concerns about Charter One as well. The bank's record of serving minorities seemed weak. And although Equity One was too new for federal regulators to have data on it, Lee knew enough about subprime lenders to be worried.

Vice President Koch flew to New York to meet with the group, Lee says. The summit ended in a deal that Lee still praises as "groundbreaking." Charter One agreed to provide $1 billion in conventional interest loans to low- and moderate-income borrowers over the next three years. Perhaps more important, the bank also promised to develop a plan to send qualified Equity One applicants to Charter One for prime loans.

"They agreed to things the law doesn't require," says Lee. "I don't want to say Charter One is excellent -- it's by no means great. But if you look at CitiGroup or EquiCredit, those two are doing a lot worse."

Armed with the agreement, Lee's group dropped its opposition. The merger went through.

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Charter One's subprime affiliate is no longer new. The division, Charter One Credit, has filed reports that didn't exist when Lee first examined the company.

Bellamy, executive director of the Lorain County Reinvestment Coalition, believes that record paints a troubling picture. Foreclosure documents show that the subprime division's rates have soared as high as 12 percent for A- and B borrowers -- a red flag to activists and analysts, who say the rate likely does not match an A- or B credit risk.

Keith T. Gumbinger, vice president at financial publisher HSH Associates in Butler, New Jersey, says there's no exact formula. "A working rule of thumb is that, for each drop in credit grade, add about 2 percent to the interest rate." That means an A- borrower would get an 8 percent rate; a B borrower, about 9 percent, though occasionally as high as 10.

Of 11 Charter One Credit foreclosures Scene surveyed in Lorain and Cuyahoga counties, nine had interest rates of 10.7 or higher. One was as high as 12 percent. "That discrepancy between risk and price is what's causing the subprime industry to explode at the phenomenal rate that it is," Bellamy says. "We're talking a huge profit."

He and Bromley both belong to the Ohio Community Reinvestment Project. The group contacted Charter One in March, soon after the announcement of its proposed merger with Alliance Bancorp of Illinois. Members hoped to use the threat of a merger delay to challenge Charter One's record and push for a commitment to do better.

The group fired off a letter April 13 to the Office of Thrift Supervision detailing Charter One's record with charts, maps, and statistics. Three days later, Bromley faxed over his analogy to the Chevy Chase case.

Charter One responded with a rebuttal. "While there is always room for improvement in any undertaking no matter how successful the results, Charter One is proud of its record of and commitment to fair lending and its successful role in designing and providing lending and other products and services meeting the needs of its delineated communities -- including low- and moderate-income and minority individuals, organizations and neighborhoods," Senior Vice President Richard Powers wrote. Powers cited the bank's "Second Look" program, which refers minority and low- and moderate-income applications for review after denial.

At a meeting with bank officials, Bellamy asked Charter One to shut down the "Jim Crow" affiliate and handle A- and B customers at the bank without broker premiums. Even Bellamy's cohorts thought he was asking too much. Bill Faith, executive director of the coalition, believes the focus should be on cleaning up, not eliminating, the division. No one was surprised when Charter One said no.

Soon after the meeting, Bellamy sent a letter with 14 questions about Charter One Credit. In his response, Vice President Koch confirmed one of Bellamy's suspicions -- that Charter One Credit purchases loans that contain brokers' fees, though the bank doesn't accept fees of more than 2 percent. "This limitation mirrors what is considered best practices in the industry," Koch wrote.