Large Bank Mergers: Fair Lending Review Could be Enhanced With Better Coordination

U.S. Government Accountability Office

Large Bank Mergers:

Fair Lending Review Could be Enhanced With Better Coordination

GGD-00-16: Published: Nov 3, 1999. Publicly Released: Nov 3, 1999.

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Pursuant to a congressional request, GAO reviewed large bank holding company mergers and regulatory enforcement of the Fair Housing Act and the Equal Credit Opportunity Act, focusing on the: (1) fair lending issues raid by consumer and community groups during the application process for six large bank holding company mergers; and (2) Federal Reserve Board's (FRB) consideration of those issues.

GAO noted that: (1) in each of the six mergers, consumer and community groups raised the issue of perceived high loan denial and low lending rates to minorities by banks, bank subsidiaries, and nonbank mortgage subsidiaries involved in the mergers; (2) in four merger cases, community and consumer groups were concerned about alleged potential discriminatory practices of the holding companies' nonbank mortgage subsidiaries; (3) nonbank mortgage subsidiaries are not subject to routine examinations by federal regulators for compliance with fair lending and other consumer protection laws and regulations; (4) the fair lending laws generally confer enforcement, authority for nonbanking companies with the Federal Trade Commission, Department of Housing and Urban Development, or Department of Justice and do not specifically authorize any federal agency to conduct examinations of nonbanking companies for compliance with these laws; (5) the consumer and community groups were concerned that: (a) sub-prime lending activities of the nonbank mortgage subsidiaries had resulted or could result in minorities being charged disproportionately higher rates and fees; and (b) minority loan applicants were being "steered" between the affiliated banking or nonbank subsidiaries of the holding company to the lender that charged the highest rates or offered the least amount of services; (6) other fair lending issues included alleged discriminatory prescreening and marketing, low lending rates to minority-owned small businesses, discriminatory treatment of applicants, and redlining; (7) FRB considered these fair lending issues in the six merger cases by analyzing information from various sources, including the bank holding companies involved in the mergers and other federal and state agencies; (8) FRB staff analyzed Home Mortgage Disclosure Act data provided annually by the banks and nonbank mortgage subsidiaries involved in the mergers; (9) FRB staff stated that they placed heavy emphasis on prior and on-going compliance examinations performed by the appropriate primary banking regulators for the banks involved in the merger; (10) examinations for nonbank mortgage subsidiaries were generally not available because these entities are not routinely examined by any federal agency; (11) in two of the six mergers in GAO's review, FRB has previously performed compliance investigations of nonbank mortgage subsidiaries involved in the mergers; and (12) according to FRB staff, FRB had used its general examination and supervisory authority for bank holding companies to conduct these particular investigations.

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Recommendations for Executive Action

Status: Closed - Implemented

Comments: Federal Reserve System staff are using a Fair Lending Contact Form to document their discussions with other relevant federal agencies on merger applications in which concerns have been raised about fair lending compliance. On April 27, 2001, FRS issued letters to the FTC, DOJ, and HUD that (1) requested information on an ongoing basis about any significant supervisory or investigatory actions initiated by the agencies concerning nonbank subsidiaries of a holding company; (2) stated FRS would provide the agencies with a list of the nonbank home mortgage lending subsidiaries associated with merging institutions whose merger applications are protested on fair lending grounds; and (3) stated that FRS was prepared to forward comment letters received during the merger application process that raise fair lending issues to the agencies for their consideration.

Recommendation: To enhance the consideration of fair lending issues during the bank holding company merger approval process, the Board of Governors of the Federal Reserve System should develop a policy statement and procedures to help ensure that: (1) all parties asked to provide information or views about the fair lending performance of entities within the bank holding companies are given or directed to sources for structural information about the holding companies; and (2) all federal agencies responsible for helping to ensure the fair lending compliance of entities involved in the proposed merger are asked for consumer complaints and any other available data bearing on the fair lending performance of those entities.

Agency Affected: Federal Reserve System: Board of Governors

Status: Closed - Implemented

Comments: Federal Reserve System staff are using a Fair Lending Contact Form to document their discussions with other relevant federal agencies on merger applications in which concerns have been raised about fair lending compliance. The Fair Lending Contact Form contains a section for FRS staff to document whether or not they offered to provide the agency with comments/protests received on the application. On April 27, 2001, FRS issued letters to the FTC, DOJ, and HUD that (1) requested information on an ongoing basis about any significant supervisory or investigatory actions initiated by the agencies concerning nonbank subsidiaries of a holding company; (2) stated FRS would provide the agencies with a list of the nonbank home mortgage lending subsidiaries associated with merging institutions whose merger applications are protested on fair lending grounds; and (3) stated that FRS was prepared to forward comment letters received during the merger application process that raise fair lending issues to the agencies for their consideration.

Recommendation: To aid in ongoing federal oversight efforts, the Board of Governors of the Federal Reserve System should develop a policy and procedures to ensure that it provides federal agencies relevant comment letters and any other information arising from the merger application process that pertains to lenders for which they have fair lending enforcement authority. For example, the other agencies may be interested in receiving FRB's Home Mortgage Disclosure Act analysis as well as the other data obtained and analyzed by FRB in response to the fair lending allegations raised in the comment letters.

Agency Affected: Federal Reserve System: Board of Governors

Status: Closed - Implemented

Comments: FRB was already providing statistical analysis of Home Mortgage Disclosure Act data to HUD each year for independent mortgage lenders. FRB will broaden its effort to also provide the statistical analyses for nonbank mortgage subsidiaries of bank holding companies to HUD and provide the same information to FTC as well. FRB emphasized that the responsibility for monitoring the lending activity of nonbank mortgage subsidiaries has been expressly allocated to the FTC by statue for these entities (including nonbank mortgage subsidiaries). However, FRB has not ruled out the possibility of conducting a fair lending investigation in a particular case if circumstances warrant.

Recommendation: The Board of Governors of the Federal Reserve System should monitor the lending activity of nonbank mortgage subsidiaries and consider examining these entities if patterns in lending performance, growth, or operating relationships with other holding company entities indicate the need to do so.

Agency Affected: Federal Reserve System: Board of Governors