Banker Described As Predatory May Join Federal Reserve, a Test for Senators

Byline: Matthew Lee of Inner City Press

NEW YORK, May 20 -- The newest nominee to the U.S. Federal Reserve Board, which is under fire for inaction leading to the subprime lending and foreclosure crisis, comes from a notorious subprime lender, Capital One.

    Larry Allan Klane, whose nomination was announced on May 15, before that worked at Deutsche Bank, an institution whose involvement with lenders sued for predatory lending such as New York's Delta Funding has, like Capital One's record, been an issue considered but not acted on by the Fed.

   With Fed chairman Ben Bernanke alternately promising greater scrutiny of and calling for restraint in restricting the subprime lending field, there are serious questions raised by the nomination of a longtime subprime lender to the Board. Whether these questions will arise in or even derail Klane's consideration by the U.S. Senate remains to be seen.

            The May 15 personnel announcement stated that "Mr. Klane currently serves as President of Global Financial Services of Capital One Financial Corporation.  Prior to this, he served as Managing Director of Corporate Trust and Agency Services at Deutsche Bank / Bankers Trust."

    The connection to Capital One, but not Deutsche Bank, was reported without comment in the Washington Post and financial news wire services. Even casual television watchers associate Capital One with advertisements featuring Nordic or medieval rampaging hordes along with the promise of no- to low-fee loans from Capital One, regardless of one's credit history.

            Capital One has been sued for these ads, and for the underlying business practices, by the state attorneys general in at least West Virginia and Minnesota. According to staff involved in these cases, Capital One has managed to get records of other enforcement actions against it sealed, as if the cases had never existed.

Predator to Federal Reserve: money to burn?  And see, "Banks Prone to Sell Minorities Pricy Loans"

            Sometimes the traces of Capital One's cover-ups are still available. A filing obtained by Inner City Press from the West Virginia Supreme Court of Appeals, for example, recites that "on June 8, 2005, Capital One Bank filed an action... to seal all records, pleadings and matters in Civil Action Nos. 05-C-71 and 05-C-72 and to enjoin the Attorney General from issuing press releases or public disclosures regarding any matter relating to its litigation against Capital One Bank."

            In fact, in March 2005 when Capital One announced a proposal to buy Hibernia National Bank in (pre-Katrina) New Orleans, public records of state anti-predatory lending enforcement actions against Capital One were raised, regarding West Virginia and elsewhere. Associated Press on March 10, 2005 reported that

"Capital One's troubling practices were reflected most recently in Minnesota Attorney General Mike Hatch's lawsuit against the company. In the suit, filed in December, Hatch said Capital One's ads indicate that interest rates on its 'No Hassle' credit cards would remain at 4.99 percent. However, he says many consumers wind up paying higher rates, and those who miss payments or exceed credit limits could see rates in excess of 25 percent. Capital One said it continues to work with Hatch's office."

            A Louisiana business publication noted Capital One's same-day public relations action:

"Spokeswoman Tatiana Stead emailed an additional statement this afternoon in response to the Minnesota lawsuit against the company: 'Capital One has cooperated fully with the Attorney General’s investigation, and believes it has acted properly and in full compliance with the law. Capital One regrets that the Attorney General has chosen to proceed with this lawsuit, but intends to continue to work with the Attorney General’s office to address the issues raised.'"

            Whether because of this "work with Hatch's office" or not, comment has not been able to be obtained from office since Klane's nomination. The West Virginia attorney general's office, however, has indicated shock that an executive vice president from Capital One would be nominated to a seat on the Federal Reserve Board, which along with setting interest rates is charged with consumer protection.  From another state, a regulator explicitly concerned about retaliation called this a nomination of a fox to serve as a hen-house's overseer.

The Federal Reserve has said that

"black and Hispanic borrowers taken together are much more likely than non-Hispanic white borrowers to obtain credit from institutions that report a higher incidence of higher-priced loans. On the one hand, this pattern may be benign and reflect a sorting of individuals into different market segments by their credit characteristics. On the other hand, it may be symptomatic of a more serious issue. Lenders that report a lower incidence of higher-priced products may be either less willing or less able to serve minority neighborhoods. More troubling, these patterns may stem, at least in part, from borrowers being steered to lenders or to loans that offer higher prices than the credit characteristics of these borrowers warrant. Reaching accurate determinations among these alternative possible outcomes is one goal of the supervision system."

   Despite this Greenspan-like statement, the Federal Reserve  generally missed the foreseeable crisis in the subprime lending industry. Putting a representative of a much-sued subprime lender on the Board makes independent action going forward even less likely.

            Mr. Klane involvement with Capital One has extended beyond high-rate credit cards. He was a point-name when Capital One in 2005 bought the subprime mortgage lender eSmartloan. See, e.g., Card Line of Dec. 17, 2004.

   A review of the last publicly-available Home Mortgage Disclosure Act (HMDA) data including eSmartloan's information found 144 super high cost loans subject to the Fed-implemented Home Ownership and Equity Protection Act -- loans at rates more than eight percent higher than prime -- and  2193 loans over the Fed-defined subprime rate spread, of three percent over prime.  While a purpose of HMDA is to allow for fair lending assessment by including racial and ethnic data, these eSmart (now Capital One) subprime loans were all were reported, as to race, "Information Not Provided." 

    The same might be said of the announcement and reporting of Mr. Klane's nomination: relevant "information not provided." The seriousness of Senators' and the financial press' recently claimed concern about the subprime lending crisis will be tested during the consideration of Mr. Klane's qualifications for serving on the Federal Reserve Board.

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