Popular Inc. has learned the hard - and painfully public - way that not all regulators are created equal, particularly when the subject is subprime lending.
The San Juan, Puerto Rico, banking company wanted to charter a national bank for its mainland consumer finance operation. After months of negotiations, it announced in September that it had asked the Office of the Comptroller of the Currency for a federal charter.
But the agency insisted on moves that would have taken Popular some time to make, and the $47 billion-asset company withdrew its application and said it would simply fold the unit into its New York state charter.
"Maybe we were a little bit naive in thinking that all regulators are more or less the same," Popular's chief financial officer, Jorge Junquera, said in an interview. "They all have their own ways," particularly of looking at subprime lending, he added. "One of the things we realized in the process" was that the OCC "would rather not see you in that business."
The Comptroller's Office declined to comment, but Mr. Junquera said the agency wanted more stringent management of the unit, Popular Financial Holdings Inc., including more interest rate stress-testing of the portfolio, and more frequent loan re-scoring.
Several lawyers, consultants, and analysts said they cannot remember when one of the nation's largest banking companies was forced to change its plans after an application was filed.
"It is unusual because these things are usually worked out before they file an application," said Gilbert T. Schwartz, a partner in Schwartz & Ballen LLP, a Washington law firm. "It is certainly evidence that the comptroller is getting tough in its review of national banks, from the standpoint of what their risk tolerance is."
Popular is the second company to announce this month that it would not be operating under the OCC.
On Nov. 9, the same day Popular disclosed its withdrawal in a Securities and Exchange Commission filing, Countrywide Financial Corp. said it would swap its national bank charter for a federal thrift charter. The Calabasas, Calif., mortgage lender cited the simplicity of having a single regulator in opting for the Office of Thrift Supervision, which will oversee both the thrift and Countrywide as a holding company.
Industry observers credited the OTS with two other advantages: Its preemption of state laws is more solid than the OCC's, and its oversight of alternative mortgage products is more tolerant.
Though the decisions are unrelated, Mr. Schwartz said more companies could follow suit. Smaller banks in particular, he said, could prefer state banking regulators if the OCC returns to its early-1990s reputation as the "regulator from hell."
Fitch Inc. analyst Peter Shimkus agreed. "The OCC is getting a little bit more conservative when they look at subprime lending," he said.
Analyst Thomas J. Monaco of Sterne, Agee & Leach Group Inc. went even further. "I believe the OCC is much more strict with their requests than many state banking departments," he said.
In an interview Thursday, New York State Banking Department Superintendent Diana Taylor said Popular's decision reflects a healthy competition between regulators. "I think we have different expertise and experiences in a lot of different areas than the OCC does," she said. "The OCC looks pretty much at banks. We are much more experienced in looking at those types of loans, and we have very stringent guidelines.
Subprime lending is risky, Mr. Junquera said, "but we understand it, and we feel comfortable with it. It was going to take some time for the OCC to understand it, but it was not that they are more restrictive." The state banking department "understands our business a little better," he said.
"Some of the things that we discussed [with the OCC] were things that we are really considering implementing because you can always improve the way you do things," Mr. Junquera said.
But he added: "We concluded that our time was better spent in trying to achieve the original goal, which was the consolidation of our U.S. businesses, which could very well be done under the current state charter."
"We just wanted to move as quickly as possible in the consolidation process," he said.
The state banking department and the Federal Reserve Board, which regulates Popular's holding company, still must approve of Popular Financial's consolidation into Banco Popular North America. Mr. Junquera said the consolidation would improve funding costs for consumer loans and cut the combined subsidiary's expenses by 10% to 15% annually.
Popular's finance unit uses state licenses to offer subprime loans in 34 states. It lost $19.2 million in the third quarter, compared with a $4.4 million loss the year earlier. It cited the mortgage market slowdown and a $4.4 million restructuring charge.
