Federal Reserve Board:

Merger Process Needs Guidelines for Community Reinvestment Issues

GGD-99-180: Published: Sep 24, 1999. Publicly Released: Sep 24, 1999.

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Thomas J. McCool
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Pursuant to a congressional request, GAO reviewed large bank holding company mergers and the impact of such mergers on low- and moderate-income (LMI) areas, focusing on: (1) the Federal Reserve Board's (FRB) legal responsibilities in assessing Bank Holding Company Act of 1956 (BHC) mergers for Community Reinvestment Act of 1977 (CRA) performance; (2) FRB's process for assessing the CRA performance of six large BHC merger applicants, including how FRB addressed the principal public concerns related to the CRA performance; and (3) the premerger and postmerger mortgage lending in LMI and minority communities for three large BHC mergers.

GAO noted that: (1) in acting on a BHC merger application, FRB must consider the convenience and needs of the community to be served under the BHC Act and take into account the record of the relevant depository institutions under CRA; (2) neither the BHC Act nor CRA, or their legislative histories, provide guidance on how FRB is to take these factors into account when considering a BHC merger application; (3) the depository institutions' primary federal regulators have developed guidance for their assessments of a depository institution's CRA performance; (4) however, FRB has not developed guidance on how it evaluates the CRA records of the merging BHCs; (5) for the six BHC merger applications that GAO reviewed, FRB attempted to balance the regulators' ratings of the depository institutions' CRA performance and information presented through public comments that raised concerns with the institutions' CRA records; (6) all of the bank subsidiaries included in the six mergers had satisfactory or outstanding performance ratings in their most recent CRA examinations; (7) the principal CRA concerns raised by commenters included insufficient home mortgage lending, insufficient small business lending, and branch closures in LMI areas; (8) FRB analyzed Home Mortgage Disclosure Act of 1975 (HMDA) and small business data to address concerns of insufficient home mortgage and small business lending, respectively; (9) FRB's consideration of branch closures was generally limited to a determination of whether the applicant had an adequate branch closure policy and its past branch closure record; (10) FRB approved all six mergers, but four of the mergers were approved with conditions for the reporting of subsequent branch closures; (11) FRB's lack of written guidance on how it addresses public comments raising CRA concerns contributed to the concerns voiced by community groups and the BHC applicants regarding the lack of transparency in the merger application process; (12) on the basis of GAO's analysis of home mortgage lending, BHC merger activity had not been associated with adverse changes in single-family home mortgage lending in minority and LMI areas in the major metropolitan areas served by the acquired BHCs for the three BHC mergers GAO analyzed; and (13) NBD Corporation's acquisition of First Chicago and Chemical Banking Corporation's acquisition of Chase Manhattan Bank have been associated with stable to increased lending in the relevant areas.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: On September 8, 2003, the Federal Reserve Board launched a web page on its application filing process including an description on how the the Federal Reserve System (FRS) evaluates CRA and other consumer issues in conjunction with an application. The web page summarized in some detail the process by which the FRS considers an institution CRA's record. It noted that FRS acts on an application based on the financial institution's CRA record and compliance record and public comments received. According to the web site, FRS staff determine whether the depository institutions affiliated with the applicant and target in the proposed transactions have satisfactory or better consumer compliance and CRA ratings. In addition, the web site provided the various types of information the FRS reviews when analyzing a depository institution's CRA record, such as CRA and compliance examination reports and recent actions taken to improve CRA and/or compliance performance weaknesses. It also described how HMDA statistics are reviewed. It specifically stated that HMDA statistics are compared with the overall aggregate lending within a specific geographic area. It added that FRS staff will focus their analysis on lending issues raised in public comments received in connection with the application. The web site provided adequate information on how CRA concerns are addressed in the BHC merger application process.

    Recommendation: To enhance the transparency and improve the efficiency with which CRA concerns are addressed in the BHC merger application process, the FRB should develop written guidelines that summarize how public comments raising CRA concerns are used with CRA examination information in FRB's merger application decisions for large BHCs. For example, such guidelines could summarize important conclusions from previous Board of Governors application decisions. Such guidelines could also include when and how concerns raised in public comments will be considered, the types of analyses FRB is likely to conduct and rely upon in reaching its conclusions, and the situations in which HMDA statistics are limited.

    Agency Affected: Federal Reserve System: Board of Governors


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