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Letter to the Federal Reserve Chairman Greenspan regarding application of merger

CU opposes the approval of the application filed by Travelers Group Inc. to merge with Citicorp

June 25, 1998

Mr. Allen Greenspan
Board of Governors
Federal Reserve System
Washington, D.C. 20551

Ms. Jennifer Johnson
Board of Governors
Federal Reserve System
Washington, D.C. 20551

Re: Application of Travelers Group Inc. Seeking Approval of Merger with Citicorp

Dear Chairman Greenspan and Secretary Johnson:

We are writing to provide comments to the Federal Reserve Board ["the Board"] in opposition to the approval of the application filed by Travelers Group Inc. to merge with Citicorp. We oppose the merger request because the Bank Holding Company Act of 1956 ["BHCA"] and the Glass-Steagall Act do not permit bank holding companies or banks to engage in, or merge with companies engaged in, the type and size of activities of Travelers Group. For reasons set out below, we submit that the Board should not use section 4(a)(2) of the BHCA to support the approval of the merger.

In the event the Board decides to approve this merger, we request that the merger be conditioned on:

  • submission of a divestiture plan outlining how the companies will divest, within two years, their insurance underwriting activities and securities and insurance sales activities to the extent they are impermissible under the BHCA and the Glass-Steagall Act. We request that the Board extend the comment period for the public portions of the divestiture plan;
  • moratorium on cross-marketing of financial products of the various affiliates or data sharing among affiliates until divestiture completed;
  • specific commitments to consumers, including no increase in fees and low-cost, basic banking to their customers; compliance with safeguards to protect against confusion, coercion and invasions of privacy; and the dedication of a significant portion of any projected cost savings for the first five years to increase access to banking, credit, insurance and other services for low-income consumers;
  • commitment to reach an agreement with community groups and Community Reinvestment Coalitions in every affected state on future commitments to the communities by all affiliates and that such commitment be made part of the application approval process to ensure the Board has ongoing oversight and regulatory authority to ensure compliance with such commitments; and
  • commitment by all bank and other affiliates to comply with all state consumer laws, rules and regulations in the state where a bank or other affiliate operates and commitment to be subject to full and complete functional regulation under the securities laws and insurance laws, including licensing and consumer and investor protection laws, for all insurance and securities activities conducted by the depository institutions.



The Application should not be Approved because:

  • the Bank Holding Company Act prohibits bank holding companies from owning companies engaged in activities other than banking or those closely related to or incidental to banking;
  • the Glass-Steagall Act prohibits bank holding companies from affiliating with companies "engaged principally" in securities activities;
  • the intent of Travelers/Citicorp is not to divest its impermissible activities within two years, as required under the law, and therefore it should not be permitted to use section 4(a)(2) of the BHCA; and
  • Congress is the appropriate forum to change the law as it relates to the structure and regulation of our financial services industry.

Current law, for the most part, does not permit bank holding companies to own voting shares of any company that is not a bank. See generally Bank Holding Company Act of 1956 ["BHCA"], section 4. The reason is to help shield our taxpayer-backed banking system from the risks associated with non-banking business, risks over which bank regulators would have little or no control.

The general exception to this rule is if the company’s activities are closely related or incidental to banking. While the scope of the "closely related" or "incidental" to banking standard is subject to much debate, under section 4(c)(8) of the BHCA, Congress specified that it is not closely related to banking to provide insurance as a principal or agent. This Act, as well as provisions in laws that apply to national banks, provides limited and explicit exceptions to this rule. Insurance underwriting, except for credit insurance, and sales activities in towns with populations exceeding 5,000 are explicitly prohibited.

In addition to the BHCA’s prohibition against engaging in any activity that is not closely related or incidental to banking, section 20 of the Glass-Steagall Act prohibits banks from affiliating with any company that is "engaged principally" in the underwriting, sale, or distribution of bank-ineligible securities. 12 U.S.C. § 377. The Board has interpreted this language to permit bank holding companies to establish subsidiaries engaged in securities underwriting and dealing so long as the subsidiary generates no more than 25% (previously 10%) of its gross revenues from the activity. 12 C.F.R. §225 et seq.

As stated in a GAO report, the "act separates commercial and investment banking in an effort to enhance the safety and soundness of commercial banking and protect bank customers from potential conflict-of-interest abuses and other inequities. Unlike previous approvals of section 20 subsidiaries by the Board, the Travelers/Citicorp merger would result in one of the largest securities firms in the country. We doubt Congress had any intent when it enacted Glass-Steagall to permit banks to affiliate with a securities firm of this size. See, e.g., Securities Industry Ass’n v. Federal Reserve System, 839 F.2d 47, 65 (2d Cir. 1988), cert. denied, 486 U.S. 1059 (1988)(Referring to whether a bank would be permitted to merge with the largest investment firms such as Merrill Lynch, the court stated "It cannot be supposed that the Congress that enacted Glass-Steagall would have intended that §20 not prohibit such affiliations.")

Due to the size of the securities firm that would result from the merger, we request that the Board assess the size of the combined securities activities and make a determination as to whether such a merger violates the Glass-Steagall Act’s prohibition against banks merging with companies "engaged principally" in securities activities. We believe that such a merger should not be permitted and that the 25% revenue rule should not be used to circumvent the clear language and intent of the Act. (Note: At the time of the SIA case cited above, the Board was using a 5% rule.) Even under the 25% rule, the companies acknowledge that at least one of their securities subsidiaries is out of compliance. App. at p. 128. At a minimum, the Board should require divestiture of the activities that violate the 25% rule as a condition of approval.

In the application, the companies admit that their insurance underwriting and some of their sales activities violate the specific prohibitions in the BHCA. App. at p. 11. The companies assert that the Board need not subject these impermissible activities to the approval process because section 4(a)(2) of the BHCA permits them to engage in such activities for up to five years before they have to divest. The applicants appear to interpret section 4(a)(2) as giving them a right to engage in these activities. We disagree with the company’s interpretation of section 4(a)(2). The subsection requires divestiture, it does not specifically authorize the impermissible activities. As made clear by Congress when the bill was enacted:

…bank holding companies should confine their activities to the control and management of banks and activities closely related to banking. … The divestment requirements in this bill are designed to remove the danger that a bank holding company might misuse or abuse the resources of a bank it controls in order to gain an advantage in the operation of the nonbanking activities it controls. Sen.Rep. 1095, at p. 2495 (1956).

In keeping with the purposes of the Act, the Board’s decision as to whether to permit this merger should be predicated on a determination of whether it is the intent of the companies to divest within two years. In order for the companies to use this loophole, at a minimum the Board should require clear evidence of an intent to divest within two years.

In the letter from companies’ counsel to the general counsel of the Board prior to the merger, the companies state that the BHCA "may require the divestiture of Red’s [Travelers] insurance companies … in two years, with the possibility of three one-year extensions." Letter dated March 30, 1998 at p. 1. In addition, statements made before Congress and the public indicate their intent is to wait five years before divesting to see whether Congress will act. Based on these assertions, and the fact that there is nothing in the application indicating the initiation of divestiture, we submit that the clear intent of the companies is not to divest. Rather than providing evidence of an intent and commitment to divest, the companies appear commited to playing a waiting game with Congress. The Board should deny this merger.

The Federal banking agencies have, over the past few years, stretched the law’s language and intent to permit banks to engage in a host of securities and insurance activities. But this merger represents the largest business merger on record, a transaction valued at over $140 billion according to the companies. To stretch the law to accommodate a merger of this size is essentially to ignore the law. Although financial services firms and the agencies may be frustrated that Congress has not yet acted, power to enact laws remains squarely with the legislative branch under our Constitution.

It is Congress, not the agencies, that should be implementing changes in the law, changes that accommodate all interests, not just the interests of companies wanting to consolidate and increase their bottom line. The fact that Congress has failed to act is not a reason for agencies to allow financial services firms to exploit loopholes in the law. And, if the Board permits this merger, there may be less incentive for Congress to act and establish a regulatory and structural framework, including consumer and investor protections.

If the Merger is Approved, it Must be Conditioned on:

  • divestiture of all impermissible activities before the transaction completed;
  • if permitted to go forward without divestiture, submission of a plan of divestiture with commitments to time-specific progress reports to the Board;
  • moratorium on cross-marketing and data sharing during divestiture period; and
  • extension of comment period for public portions of divestiture plan.

We urge the Board to require divestiture as a condition of approval and that such divestiture take place before the completion of the transaction. This will ensure compliance with the intent of our current banking laws — to separate the banking system from risks associated with other activities. Such divestiture prior to the consummation has occurred in other, smaller mergers and is therefore not unprecedented. See BankAmerica Corporation, Fed. Res. Bull., Sept. 1992 at p. 707 (fn 3)(BAC committed to terminate all impermissible insurance activities of HonFed and its subsidiaries on or before consummation of the proposed acquisition.)

If the Board does not require actual divestiture, it should only approve the merger if the companies commit to divest their impermissible activities within a specified period of time. In order to ensure such action, the Board should require a very clear plan of divestiture with time goals, etc. as a condition of the merger approval. Such a requirement would be consistent with the importance the Board has placed on divestiture of nonbanking activities within the specified time periods as evidenced in the Board’s Statement of Policy on divestiture. The policy states that "[w]here a specific time period has been fixed … the affected company should endeavor and should be encouraged to complete the divestiture as early as possible during the specific period." 12 CFR §225.138(b)(1) The Board also requires that a bank holding company "be asked to submit a divestiture plan promptly for review and approval" and "should generally be required to submit regular periodic reports detailing the steps it has taken to effect divestiture."12 C.F.R.§225.138(b)(2).

The policy makes clear that time is of the essence and that generally there are advantages to accomplish divestitures well before the end of the specified period. While the companies rely on the three year long extensions provided under section 4(a)(2). The Board has made clear that "[w]here extensions of specified divestiture periods are permitted by law, extensions should not be granted except under compelling circumstances." 12 C.F.R. 225.138(b)(4) Waiting to see if Congress acts should not be not considered a compelling reason for an extension.

The Board should secure clear and specific commitments for divestiture not only because it is good policy and consistent with the clear intent of the law but also to send a strong signal to other financial firms that the loophole cannot be used as a waiting room for impermissible activities until Congress acts. In addition, the Board should extend the comment period so the public can assess and have an opportunity to comment on public portions of the divestiture plan.

According to the application and statements made by company representatives to the press, one of the key reasons for this merger is to take advantage of cross-marketing. While the companies acknowledge cross-marketing arrangements can already be made under current law, they state that "the complementary nature of the two companies’ securities, banking and insurance products will increase the opportunities for cross-marketing." App., p. 155.

Despite all the benefits the companies promise from cross-marketing, they state in the application: "[a]t this time, there is no plan or set of products issued by one company that have been identified to be sold by affiliates." App. at p. 156. And, in their response to the Board’s request for more detailed information about their cross-marketing, the companies reiterate "presently, there are no detailed cross-marketing plans." June 8 letter, at p. 45.

We are intrigued by this assertion in light of statements made by counsel for the companies in letters to Mr. Mattingly of the Board prior to the announcement of the merger. Letters dated March 30 and March 31, 1998 from Mssrs. Sabel and Sweet. Counsel made very clear that the companies intend to develop a bundled package of products with common identities or wrappers that would identify a range of products sold by the company, as the companies mention in the application. They went on to say:"These brands would be the property of the Company and would be retained even if the Insurance Companies were divested." Clearly, the companies have a fairly specific product line in mind that they hope could be maintained in the event they are required to divest.

The letters imply the practices as outlined in the letter had the implicit approval of the Board. We hope that is not the case because we think the Board should not permit "cross-marketing" until divestiture has taken place. After the divestiture, the companies will not own an insurance company and therefore the type of product development proposed in the letter should not be available to the companies. If these products become intimately associated with taxpayer-backed affiliates, the risk of confusion and the potential to deceive or mislead consumers will be great. A prohibitoin on cross-marketing during the divestiture period would be consistent with other Board decisions.

If the Board permits this activity to go forward, it should obtain more information about the scope, type and design of the "cross-selling" activities and "relationship pricing" and set out conditions to protect against confusion and that ensure that products can be "unwrapped" at the time of divestiture. For example, these "wrapped" products should not be identified or "branded" with a name of a depository institution affiliate or substantially similar name, e.g, "Citibank," "Citicorp" or "Citigroup." The affiliate/subsidiary "manufacturer" must be clearly identified before and after divestiture so consumers know which company actually underwrites the product. Any name should include the product’s generic identification, e.g., insurance, fixed annuity, etc. And, any product that is part of a package must also be sold separately to the consumer to protect against tying and coercive practices. See below for a further discussion of consumer protections that should be a condition of this merger.

We also believe that the Board should prohibit data sharing with firms engaged in impermissible activities (to the extent that would be permitted if these companies fully merge) until after the divestiture. It may be very difficult to unwind commingled customer data bases once divestiture takes place, particularly with such a large and diversified conglomerate. Travelers provides a wide array of insurance products requiring a great deal of personal and confidential information from customers, e.g., life, long-term care and retirement products. The risk of extremely sensitive information being disclosed and shared for inappropriate reasons is great. If data sharing is permitted, customers must first consent to it.

We urge the Board to carefully analyze the effects on competition from these activities when other companies do not have the same advantages. The Board should not set up situation in which companies would have to seek merger approval through this loophole in order to compete with otherwise similarly situated players. We fail to see how competition or the convenience and needs of communities will be served in the long run if one player is given such a clear advantage in the marketplace.

The companies make the argument that these activities are permitted under current law. If the "cross-marketing" activities that they seek to engage in are permitted now, we question why they need this merger. If their cross-marketing and data sharing relationships and activities will be deeper and more intertwined, then they will be very difficult to undo when they divest.

Essential Conditions of Any Approval to Meet the Convenience and Needs of Consumers and Ensure Competition

In evaluating the impact of the merger on the convenience and needs of the public, we urge the Federal Reserve Board and System to consider the potential for harm to consumers from the use of cookie-cutter products, higher fees, loss of consumer privacy, expanded cross-selling, and an approach to community reinvestment which may not always focus on local needs or community strengthening. If this proposed merger is approved, we believe that all the following requirements should be imposed as conditions of approval. The conditions should include commitments by the companies to do all of the following:

Consumer Protection

Compliance with Protections Against Deceptive and Abusive Sales Practices

While "one-stop shopping" and cross-selling are touted as the answer to consumers’ financial services needs, history tells us that one-stop shopping can turn into a nightmare for some consumers who are misled and deceived into losing their life savings or pressured into buying overpriced products they do not need or want.

Study after study indicates that there is confusion (often due to banks’ misleading tactics) about whether insurance and securities products are FDIC-insured or subject to risk. A few examples include:

° A survey conducted for AARP and the North American Securities Administrators Association (NASAA) in 1994 found that fewer than one in five bank customers understood that products such as mutual funds and annuities are uninsured and over one-third who purchased mutual funds had not spoken with anyone at the bank about the appropriateness of the investment.

° In our March 1994 issue of Consumer Reports, we reported on the results of an undercover investigation we conducted of 40 bank salespeople from different parts of the country. Only 16 of the 40 salespersons contacted even bothered to ask questions that would have indicated what products were suitable for the investigator.

° A May 1996 study issued by the Federal Deposit Insurance Corporation ["FDIC"] to assess bank compliance with the Interagency Guidelines found that more than one-fourth of the banks surveyed failed to tell on-site customers that products are not insured and 55 percent failed to inform telephone customers. Some banks event told consumers that productys were FDIC-insured

° In a 1996 survey, Prophet Market Research found that one in four bank brokers fail to follow the guidelines. For example, even though the guidelines direct that reasonable efforts be made to obtain information about a customer’s financial status and investment objectives in order to make the appropriate recommendation, 23% of those surveyed failed to adequately complete a customer profile before pitching a product.

° A survey issued by the Independent Insurance Agents of America (IIAA) in June of 1997 found only about one-fourth of those surveyed knew that insurance products are not federally guaranteed; almost 60% of those surveyed thought that purchasing insurance would improve their chances of getting a loan from the bank; and 55% of the respondents indicated they were either "very" or "somewhat concerned" about banks violating that privacy with their personal financial information.

Despite the evidence, bank regulators have failed to step in with enforceable and strong safeguards. Now is the time. To help ensure consumers derive some benefit from the merger, the merged entity should be required to comply with a package of consumer protections, including:

Measures to protect against confusion over products: The companies cannot use taxpayer protections to mislead or confuse customers about the products they sell. This means clear disclosures about whether the products are FDIC-insured or subject to risk of loss of the prin cipal before any solicitations involving non-insured products are made.

To avoid confusion and deception, clear and separate delineation of insured from non-insured activities must be required, e.g., separate sales areas in any bank branch, prohibition against the use of names of subsidiaries that are substantially similar to that of the bank, and compensation structures that limit potential for high-pressure sales tactics or unsuitable sales. For example, any uninsured products should not be permitted to bear the name of Citicorp, Citibank, Citigroup or any other similar name that may lead a consumer to believe that it is FDIC-insured

Protections against high pressure sales tactics: The potential for high-pressure sales tactics in this situation is extraordinary. As stated in the application, the intent is to use current distribution systems, including the PFS sales force, to distribute a wide array of products, including packaged products. Even now, PFS representatives are selling loans as well as mutual funds and various insurance products. To help protect against high-pressure sales tactics and coercion, the banks and all affiliates should not solicit insurance or securities or bank products to a loan applicant until after the loan has been made. The Board should also require a cooling-off period to give consumers the opportunity to rescind the transaction.

The companies discuss their "relationship pricing" but fail to provide much detail. June 8 letter, at p. 50-51. As stated previously, if the companies are offering bundled or packaged products, they should also offer them separately to ensure consumers are not forced to buy what they do not need or want. The companies note that they will consolidate customer balances. This is a concern if the companies link services to the detriment of consumers. For example, if a customer is behind on their insurance payment, their deposit account should not be ransacked.

Suitability requirements: To prevent the sale of inappropriate products to consumers, the Board should require that the companies’ representatives make a determination as to whether the product is suitable to meet the customers financial needs, based on financial information provided by the customer. We note that in H.R. 10, which the companies support, under the proposed National Association of Agents and Brokers [NARAB] every agent would be required to comply with suitability standards. We therefore assume the companies would have no problem requiring all their salespeople to comply with such a basic and needed requirement.

Anti-churning/twisting rules: To ensure that consumers are sold products based on their needs rather than the commissions and to prevent the inappropriate replacement of policies (which has been a huge problem in insurance sales), the companies should commit to comply with anti-churning/twisting rules that require the seller to attest to the improved value to the consumer of the replacement product.

Privacy protections: We urge the Board to require Travelers and Citicorp to notify all customers about their cross-marketing and only permit disclosing or sharing of data among affiliates or to third parties if the customer first consents to such disclosure or sharing in writing. At a minimum, the companies should agree not to share or disclose experience data unless they agree that such experience reporting be considered a consumer report, subject to the FCRA framework and protection.

Redress mechanism for people to recover losses: Most importantly, the new entity and its affiliates must all agree, even if not mandated under current law, to compensate consumers for any losses that are due to violations of these protections.

Disclose All Commissions and Fees: Proponents of this merger argue that consumers will benefit because more players in the market will mean competition in the form of lower prices, more choice for consumers. We ask that consumers be given the opportunity to test this premise — through commission and fee disclosures on all products sold by this new entity. In the absence of clear and honest disclosure, we fail to see how consumers can comparison shop and be assured the benefits of competition.


Sell only Products of Value to Consumers: Obviously, consumers do not benefit from the sale of low-value or "junk" products, including low-value life insurance, dread disease and other limited benefit policies, and credit insurance that does not meet certain criteria. If this merger is to meet the convenience and needs of communities, any insurance products sold by the merged entity and its affiliates must, at a minimum, provide value for consumers. The determination of value will be different depending on the product. For example, credit insurance underwritten by subsidiaries or affiliates should meet the standards as provided under New York law. A standard for insurance products should be the stronger (for the consumer) of the NAIC model or the state in which the affiliates operate with the greatest level of protection for consumers, including loss ratio requirements.

Affordable Banking Services

Millions of Americans are getting squeezed by higher bank fees and are finding it harder to maintain the increasing minimum balances to avoid monthly charges. One-half of American families, or 48 million households, keep less than $1,000 in their checking accounts and pay $9 billion in fees. According to the OCC, 12 million American families do not have bank accounts. If this merger is to benefit these consumers, the companies must:

Commit to not increase current fee levels and minimum balance requirements, or to introduce new fees on existing products or services for a reasonable period of time, which will benefit, in particular, consumers who have limited banking choices because of resource constraints or geography. In New York, Citicorp has ranked poorly compared to their competitors in terms of the fees they charge, ranking 49th out of 50. Their commitment to the community has been called into question in the wake of bank branch closings in low and moderate income neighborhoods in New York. As discussed below, the announced commitment is too vague and general to ameliorate these concerns.

Provide life-line accounts at all banks in all States: The companies are on record as supporting H.R. 10, which includes a low-cost basic banking requirement. Since New York already requires lifeline banking, we suggest using that as the standard for all of "Citigroup" banks operating throughout the country. These accounts should be actively marketed so people who need them get access to more affordable bank services.

Cost Savings to be Passed onto Consumers

We ask that the Board make sure consumers actually benefit from the merger by requiring that a significant portion of the projected benefits in cost-savings for the first five years after the merger is set aside to increase access to banking services and credit for low-income consumers. The set-aside of some of the promised cost savings from a proposed merger for the unbanked and other low income consumers would help to ensure that even more consumers are not excluded from the banking system as a consequence of this mergers.

Effects on Competition

The Board must assess the merger’s effects on competition. If approved, this merger would represent the first time that one of the largest banks in the country is allowed to merge with one of the largest insurance and investment concerns. If these entities are permitted to merge while the rest of the players in the market remain segregated (under the correct assumption that current law does not permit such mergers), these companies will have a competitive advantage over others in their respective markets.

How might this competitive advantage adversely affect consumers? This is a question the Board must answer. We also urge you to investigate the effects of this merger on auxiliary services provided by or through these companies. One stunning example involves the credit card business. The Department of Justice is investigating certain exclusionary practices that involve the credit card industry. Rules imposed by VISA and MasterCard on financial institutions that limit their ability to issue other cards may create serious barriers to competition and cause harm to consumers. In its application, Citicorp boasts of a 17% share of the VISA/Mastercard market and has apparently signed on to the exclusionary rules. The Board should assess the impact of this merger on competition in the markets in which the companies operate.

Commitment to Communities

Any Community Investment Pledge by the new institution must be made fully enforceable by making compliance with that pledge a condition of any approval that might otherwise be granted for the transaction. As discussed throughout this letter, we believe that this transaction should not be approved, and that the pledge is wholly inadequate. If, however, approval is granted, this pledge or any improved pledge that might be made in the future should be incorporated as a condition of approval.

The Announced Community Investment Goal is Insufficient to Meet the Convenience and Needs of Communities

The announcement of a ten-year, $115 billion community investment goal for the proposed Citigroup does not ameliorate our concerns about the long-term impact of this merger on communities and consumers throughout the U.S. We believe that the commitment is grossly inadequate in size, details, targeting, and scope for a financial institution of the size, scope, and sheer economic power of the proposed entity. The announcement also is too vague.

CRA dollar goals are important, but to be meaningful for low income consumers and communities, CRA dollar goals must be tied to specific programs, must target underserved groups, and most importantly must be part of a detailed business plan to reach underserved communities with products that are designed to meet the needs of those communities. In the past few years, a number of financial institutions have announced large dollar goals which can be met in large part by "business as usual" – more careful counting of lending that would have occurred without the goal. There is a very serious risk that this will be the primary effect of the recent goal announced by Citibank and Travelers.

A general large dollar goal which is not backed with a specific business plan to extend credit and service to the underserved can be misleading and can create unfulfilled expectations in communities most in need all of the additional credit and investment. Consumers Union participates in California with the California Reinvestment Committee (CRC). We attend annual community meetings hosted by the CRC in different parts of urban California. One of the most common messages we hear at those community meetings is that low-income communities are not seeing additional credit on the street, even several years into a large, multi-year dollar goal.

One of the reasons why low income communities may not see new credit and products after large dollar goals are announced is that a significant part of those goals can be met by counting loans that would have been made anyway. The Citibank/Travelers’ announcement illustrates this problem. The American Banker reports that nearly half of the dollar commitment is for consumer loans, which the announcement describes as including student loans, credit card loans, and other kinds of consumer loans. Low income communities have a pressing need for some kinds of consumer loans, but not for more bank-issued government guaranteed student loans and more high cost credit cards. Under such a broad goal, a dollar of credit counts the same regardless of whether it serves the pressing need for mainstream home improvement money at reasonable rates or is simply one more credit card offer which is accepted from an overstuffed mailbox.

Similarly, it is common to count all small-business loans toward large dollar goals without distinguishing between small businesses who receive a widely available credit-scored product vs. small business loans to newer small businesses, businesses located in low income communities which commit to hire local residents, and businesses which experience limited access to credit. In the home mortgage area, banks and regulators have recognized the special value in extending credit to persons not already served by the system. Perhaps it is time for any small business CRA commitment to begin to focus on "first-time business borrower" programs.

The announcement by Citicorp and Travelers refers to a major financial and technology literacy program. Effective financial and technology literacy training is deeply needed in low-income communities and communities of color. However, some financial literacy programs sponsored by industry have had an undue commercial element, promoting their sponsors and sometimes taking an overly favorable view of credit. In addition, the announcement does not give details on the target audience for the education program beyond a general reference to low and moderate income consumers. Education programs sometimes target the easiest-to-reach audience because it can be reached most cost effectively. However, this is not the group most in need of education. For example, a very targeted program designed to reach out to people engaged in the welfare to work process including hands-on training in the use and management of a checking account could make a much bigger difference in low-income communities than a kids’ money-management website.

The description of the Center for Community Development Enterprise is intriguing, but unfortunately it accounts for only about 5% of the total commitment, and apparently only half of that is in new funds.

Travelers has been the subject of discrimination complaints, alleging the application of more restrictive rules to homeowners insurance applicants living in minority neighborhoods than applicants in white neighborhoods. Greater commitment to communities should be a condition of any approval. While we support the inclusion of the insurance activities as part of the community investment goal, the information on promised efforts by Travelers is troubling. An existing program covering four cities is slated to add "up to" six more metropolitan areas. What about the rest of the country? Increasing minority agents is a good goal but it should be accompanied by efforts addressing the problems of adequacy of coverage, affordability and availability in underserved areas.

An aspect of that program described as "insurance affordability" appears to be a price discount (using a rating credit) for Citibank customers. A real commitment to depressed neighborhoods would make any discount program for those neighborhoods available beyond Citibank’s customers. The companies promise that "coverage" will be available regardless of location, value or age of property, but it is unclear what types of coverage or what their other underwriting guidelines include. The companies should provide more information about Travelers’ underwriting guidelines, insurance products, distribution channels, experience in underserved areas, and Urban Availability Programs. For example, the companies cite Travelers PFS company as a big part of their distribution system and yet PFS is specifically targeted to "middle income" customers. Could Travelers use their distribution systems to provide inferior products in certain communities?

The pledge is also silent on a key CRA issue — the effect of acceptance of deposits by insurance agents on the CRA assessment area. If the proposed new entity accepts deposits through insurance agents, the neighborhoods served by those agents should be part of the bank’s CRA assessment area even if there are no branches present in the area. Further, Citibank should explain how the deposit-taking role of insurance agents will be described, advertised, etc. so that the agents do not become an exclusive channel to solicit the higher balance customer who also is an existing insurance customer while being unavailable to and unknown by customers with more modest deposit needs.

We believe that it will be difficult for a large, centrally managed institution to meet deep and diverse community needs. We strongly support the requests that are being made by local and regional CRA coalitions for local and regional public hearings on the impacts of the proposed transaction. We believe that it is essential for large financial institutions to make specific local and regional commitments in order to meet the convenience and needs of consumers and communities. We urge the Board to give great weight to the comments of state and local CRA coalitions and community groups about this and other proposed mergers. The groups closest to the grassroots are most in the tune with actual community needs, and have the most accurate information about the meaningfulness of existing and proposed new programs and commitments.

We ask you to ask the question that community groups are beginning to ask about large dollar goals: is the goal designed and backed up by details and products to ensure that it will prompt the financial institution to make a substantial and effective effort to extend credit to those not now well served by the traditional financial services market? Will the credit extended result in more jobs, businesses and services in lower income and inner city neighborhoods?

Compliance with State and Federal Laws

Before these companies are permitted to avail themselves of a loophole in the law, they must be in compliance with federal and state laws and commit to complying with them in the future.

· Compliance with state and federal consumer laws: There is a growing trend, aided by bank regulators, to permit banks to ignore state consumer laws. States have traditionally had authority over businesses that operate within their borders. The Board should make compliance with state consumer law, particularly for bank affiliates, a condition of the merger. These entities should be in compliance with federal law, including the Fair Housing Law.

· Functional regulation of the various businesses: Consumers deserve the protections available under federal and state insurance and securities laws regardless of where they purchase products. One-stop shopping should not be used as a means to escape consumer protections. Banks are currently exempt from securities laws that provide a panoply of investor protections. While Citicorp has a registered broker subsidiary that is subject to securities laws, it should be clear that under the terms of the merger, any bank securities activities the entities engage in (now or in the future) will come under the securities law. In addition, any insurance activity must be subject to state insurance laws.

· FTC jurisdiction: To assist the public as well as regulators determine whether the business practices of these companies are fair, the Federal Trade Commission [FTC] must have authority to assess, investigate and take action when there are unfair and deceptive practices in any affiliate. Unfortunately, as a result of insurance industry pressure in the early 1980s, Congress enacted legislation that prohibits the FTC from investigating the business of insurance unless a majority of the members of the House or Senate Commerce Committees agree to permit the FTC to conduct a study. The companies, including bank and insurance affiliates, should be required to come under FTC jurisdiction as a condition of the merger.

· Compliance with anti-trust laws: We also see no reason why anti-trust protections should not apply to all businesses involved in this merger, including insurance. Travelers, with a desire to "compete" in the new global marketplace, should agree not to have the continuing privilege of exemption from the anti-trust laws that McCarran-Ferguson granted so many years ago.

Commercial Activities should not be Permitted: The new holding company and its affiliates should not be permitted to engage in commercial activities. This merger between financial giants and the complexities and regulatory challenges demonstrate the need to preserve the barrier between banking and commerce. For example, the companies should not be permitted to use Travelers’ unitary thrift to circumvent the banking and commerce barrier.


This merger application, if approved, represents a major change the structure of our financial services industry. A change of such profound importance to the financial services industry should not be done because two financial giants will it to be so. If the Board approves a merger of this size and scope, it must be structured to benefit, not harm, consumers at every income level.



Mary Griffin
Insurance Counsel
Washington Office