Last week, in CFPA Czar or Fox in the Hen House? You Decide, I brought you more details about the people and structure of the ACORN-esque Center for Responsible Lending (CRL) and the Center for Community Self Help (CCSH) as part of a series of pieces we’ve been writing about the financial crisis and the proposed Consumer Financial Protection Agency (CFPA).
The importance of the pieces in this series cannot be understated. As Congress faces down a massive power-grabbing partisan financial reform bill this week, it seems to have lost sight of many of the causes of the financial crisis in the first place. While we hear about the exemptions in the bill of institutions like Fannie Mae and Freddie Mac, the stories we’ve been covering on CRL and CCSH further illustrate the dangers of unchecked entities and a government with too much intervention and far too much power.
At the peak of the subprime mortgage boom and the subsequent financial crisis, primary donors to CRL and CCSH basked in billions of dollars in pure profit, thanks in large part to that very intervention and power.
Next, we’re going to introduce you to the questionable lobbying activities of this complex organization. But before we do, let’s review a few pertinent details from our previous posts about this organization:
- John Paulson is the largest single donor to the Center for Responsible Lending. Paulson owns one of the world’s largest hedge funds, and most recently, the SEC has alleged “that Paulson & Co. paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.”
- Herb and Marion Sandler are the second largest donors to CRL, and together with Paulson appear to comprise the majority of the organization’s funding. The couple owned GoldenWest Financial/World Savings bank, before selling it for over $2 billion to Wachovia, which tanked shortly thereafter
- Eric Stein, who once worked for Fannie Mae (an institution currently exempt from regulation in the financial reform bill), was also the longtime leader of CRL and Sr. Vice President of CCSH. Today, Stein sits in Obama’s Treasury Department in charge of crafting the current financial reform legislation and the new Consumer Financial Protection Agency (CFPA).
Now, onto the lobbying.
A complaint that was filed with the House, Senate, and the IRS alleges that CRL, CCSH, and its vast network of non-profit and for-profit companies may have committed serious violations of the Lobbying Disclosure Act (LDA) and the Honest Leadership in Open Government Act (HLOGA). The complaint was filed in the Fall of 2009 by the Consumers Rights League.
(Full disclosure folks, at the time the President of the Consumers Rights League was Mike Flynn. Yep, that’s OUR Mike Flynn, whose work there pre-dates his work at Big Government.)
As 501(c)(3) organizations, CRL and CCSH are required to adhere to the Internal Revenue Service’s strict limits on lobbying activities. The complaint calls for the IRS and Congress (and possibly other relevant agencies) to investigate whether CRL and CCSH may have violated these laws. Specifically, the complaint states that CRL and CCSH may have committed these violations:
- by improperly aggregating and calculating the limits on their lobbying activities;
- by exceeding the applicable lobbying limits under their Section 501(h) election;
- by failing to file reports that list their campaign contributions and other payments, as well as to certify their compliance with Congressional lobbying and ethics rules
- by abusing the status of CRL as a supporting organization by using it to receive the great bulk of their combined support from two donors;
- by possibly allowing their lobbying and advocacy activities to be improperly influenced and providing private benefits that inured to the benefit of their major donors
Download the Complaint
In researching some of the complaint’s allegations, there do appear to be quite a few valid concerns that warrant the investigations being requested.
First, there are the lobbying activities.
Let’s look in general at the lobbying. How much of the organization’s time and resources have been spent on lobbying activities, and have those been reported properly and accurately? In reviewing some of the publicly available lobbying records, it would appear evident that the amount of lobbying activity is really quite extensive for a non-profit organization. While the group’s initial lobbying history started out modestly with some focus on charter schools, there has been an enormous spike in lobbying expenses over the last several years – especially in 2008 – that appears it could possibly push the organization’s activities outside the limits.
So, what happened just before 2008?
In late October of 2007, CRL received a $15 million donation from John Paulson. Shortly thereafter, lobbying efforts increased heavily and then shifted almost entirely to Banking/Affordable Housing, with special attention moving over to the mortgage cramdown legislation. Similar lobbying behavior can also be observed from Self-Help Credit Union, a CRL/CCSH affiliate.
Further, with so much lobbying activity and so many lobbyists on their roster, it’s difficult to know who the real beneficiaries are of all this lobbying. Is it CRL/CCSH? Or is it the donors? In actuality, donors like Paulson stand to benefit a great deal from such legislation. Because as the values of mortgage-backed securities go down in light of the uncertainty that cramdown would create in the market, the profits for those hedge fund managers betting against them goes up. And for donors like the Sandlers, who have advocated for affordable housing legislation for years, while at the same time are known for creating the secondary market for subprime and Alt-A mortgages, mandating secondary loans and subsidizing that pool of customers obviously creates opportunity and profit for their investments, like World Savings Bank.
So, why would a 501(c)(3) need to hire so many lobbyists? It appears that a total of about nine outside lobbying firms registered as lobbyists for CCSH organizations since 2003 – some under “Center for Responsible Lending“, some under “Self-Help Credit Union“, and others under “Self-Help”. Many of these individuals are regulars on the lobbying scene and are essentially full-time. And at these levels, it would appear quite possible that the activity alone exceeds the allowable limit.
As the HLOGA law requires, organizations must identify major donors who help formulate their lobbying strategy. But in a 2007 BusinessWeek article, an attorney for one of the donors stated, “there are loopholes in the law, and people find ways to exploit them,” apparently insinuating CRL/CCSH could avoid the disclosure requirement.
The complaint requests that all of these activities be investigated.
Next, there are the donors.
As the complaint explains:
“According to CRL’s IRS Form 990 for 2007, its total revenue was $18.8 million and its total expenses were $16.7 million.
Although the names of its donors are masked on the public version of its IRS Form 990, Schedule B (“Schedule of Contributors”) for 2007, it shows that contributions of $15 million and $6 million were received from two sources, for a total of $21 million that year. See Attachment 3.
The $15 million amount, of course, matches the contribution by Paulson & Co. reported in the BusinessWeek article.
Although the identity of the $6 million donor in 2007 is not publicly disclosed by CRL in the public version of its Schedule B for its IRS Form 990 for 2007, the IRS Form 990 for the Sandler Foundation for its fiscal year ended June 30, 2007 indicates a contribution of $6 million to CRL. See Attachment 4 (which also shows that the Sandler Foundation’s total assets increased from approximately $625 million to $1.5 billion during its fiscal year ended June 30, 2007).”
As is pointed out in the complaint, registrants are required by law to report the names of their major donors who help formulate their lobbying strategy. While the organization may have failed to report these names, it was relatively easy to track back the donations to their donors using available press publications and tax filings. Further, given the high profile and the nature of these donors’ businesses, the lobbying activity that developed around 2008 seems at the very least suspicious and warrants a second look from investigators.
And then there’s the issue of the organization’s former President/CEO.
We covered this in detail in CFPA Czar or Fox in the Hen House? You Decide. But with financial reform up for more votes this week, this is an ever relevant topic.
For years, this organization has been run by Eric Stein. This is the same individual who is now the Deputy Assistant Secretary for Consumer Protection in the Dept. of Treasury. Stein is the author of much of the financial reform legislation and was hired on by Obama specifically to create the Consumer Financial Protection Agency. He also spent some years working for Fannie Mae, an institution that has somehow ended up exempt in this bill.
In light of the recent (and conveniently timed – sort of like IndyMac?) news of Goldman Sachs, in light of the failures of the already existing government agencies like SEC, OTS, Treasury, the Federal Reserve and others, is the CFPA really going to solve all the country’s financial ills? Or will it merely be yet another power grab – and handed over to a “regulator” that already seems quite used to turning a blind eye.
President Obama may be fond of taunting those who question this bill with accusations of “driving your friends and your neighbors out of their homes”, but I’m curious to know – who’s doing the “driving out” here?
We’re still not done covering this, so as usual, stay tuned. And if you haven’t been following, catch up on all the others in this series:
The Center for LESS Responsible Lending, 11/11/2009
The Little Fed Report that Could…and Did Create a Housing Bubble, 3/10
What is the Center for Responsible Lending?, 3/12
Hedge Fund ‘Golden Boys’ Bet on Bailouts; Win Big, 4/2
Death by Senator: As Financial Reform Looms, We Revisit IndyMac, 4/5
Hedge Fund Managers Invest in Congress, 4/13
CFPA Czar or Fox in the Hen House? You Decide., 4/16