Agency sets high hurdle in Shawmut merger case.

Mortgage lending compliance officers may have an extremely tough act to follow now that the Federal Reserve Board has given Shawmut National Corp. the go-ahead for its acquisition program, primarily because of the way the $27.4 billion superregional institution has cleared the regulatory hurdles in this case.

The Fed said April 28 that Shawmut could proceed with its acquisition of New Dartmouth Bank, even though the latter institution received a "needs to improve" rating in its latest CRA review. In a 24-page order, the Fed explained why it viewed Shawmut in a different light than it did on Nov. 15, when it considered - but did not approve - the merger request.

Perhaps the biggest change since November was Shawmut's consent decree with the Department of Justice and the Federal Trade Commission to settle allegations of mortgage discrimination. As part of that agreement, signed Dec. 13, Shawmut agreed to set up a $960,000 compensation fund to provide money for minority applicants denied loans from January 1990 to October 1992.

The Fed's order on Shawmut "suggests that the key factor for the Fed was Shawmut's successful resolution of the Department of Justice investigation resulting from a Fed referral," said Andrew L. Sandler, a lawyer with Skadden, Arps, Slate, Meagher & Flom who represented Shawmut in the Justice negotiations.

The Fed order "specifically notes that Shawmut's settlement with Justice did not result in any finding that Shawmut had violated the [Equal Credit Opportunity Act] and places emphasis on Justice's finding that Shawmut's fair lending compliance program is now working well and is adequate to ensure its compliance with ECOA and the [Fair Housing Act]."

Shawmut's case is unusual because the Justice investigation was the result of a referral from the Fed. Language in the Fed's order indicates it was setting tough standards in part because it made the referral.

"In light of this referral, the board believed that this matter raised a most serious concern and precluded approval of the applications without strong evidence that Shawmut has programs in place to ensure compliance with the ECOA and has a demonstrated record that the programs are adequate and working well," the order states.

Until the Fed takes further actions in similar cases, however, it is unclear how much of a precedent is being set.

Much of the Fed's order is devoted to a recitation of the actions Shawmut has taken to improve its compliance with fair lending laws. These run the gamut from reorganizing the compliance department, to opening a branch in a low-income neighborhood, to increasing the volume of advertising in media aimed at minority groups.

The order is very specific in its description of Shawmut's efforts and provides many quantitative performance measures, such as a sharp decline in denial rates for minority applicants. The order suggest the kinds of actions the Fed will be expecting from other institutions, and include:

Reduced denial rates. Shawmut's mortgage subsidiary made "substantial reductions in the denial rates" for minority applicants from 1991 to 1993, the Fed said. In the 23 areas served by the company, the rejection rate for blacks went to 17.9% from 32.3% and for Hispanics to 13.4% from 28.5%.

Mortgage review committees. Panels that were established in 1991 to review minority applicants for eligibility under special lending programs were given an expanded charge in November 1993 to "review all applicants with incomes equal to less than 115% of median income." During 1993 the committees, since combined into one, "approved 54% of the 753 applications reviewed," clearing the way for $36.9 million in mortgages.

Shawmut is planning a second-review process for small business, home-equity and installment-finance areas.

Loan officer compensation. Shawmut has agreed to change its compensation structure "to add incentives to encourage the origination of loans on lower-valued homes."

Testers and consumer advocates. Shawmut hired a research firm in 1993 to conduct a "mystery shopper" program to test for racial discrimination in the mortgage process. It intends to expand the program to other lending lines and to evaluate treatment by age and gender as well.

Shawmut Mortgage designated an independent advocate to look into "complaints by applicants who are denied credit or who are encountering difficulties in the application process." Last year the advocate received 372 phone inquiries. Of these, 54 received in-depth counseling, and 39 of these consumers received mortgage loans.

Targeted mortgage funding. Shawmut has committed $185 million to fund mortgages from minority and low-income applicants, loans that can be provided with lower down payment rules, modified income calculations and less restrictive underwriting ratios. As of Dec. 31, Shawmut had closed 396 portfolio mortgage loans totaling $37.3 million under this program.

Targeted advertising. Shawmut has increased the frequency of advertisements for mortgage loans in community-based media, including four black radio stations, six Hispanic radio stations and six black publications.

New branch. Last December, Shawmut opened a branch in the pre-dominantly black community of Roxbury, Mass. The bank assigned an "urban business banker" to the branch, and Shawmut's mortgage company opened a sales office there.

New products. Shawmut's banks introduced basic checking and savings accounts for "low-income customers with limited banking needs." It published a brochure to publicize these services and set up a toll-free customer information line available 24 hours a day and accessible to hearing-impaired and Spanish-speaking customers.

Credit counseling. The bank created a consumer credit counseling unit "to provide assistance to customers having financial difficulty." During 1993, the unit reviewed 764 cases and restructured 440 customer accounts.

Small business lending. Shawmut established a small business banking group during the first quarter of 1993. During the course of the year, the group approved 1,075 loans totaling $64.6 million.

This Fed approval is expected to break a regulatory logjam for Shawmut. It also has pending agreements to acquire Peoples Bancorp of Worcester Inc., Worcester, Mass.; Gateway Financial Corp., Norwalk, Conn.; Cohasset Savings Bank, Cohasset, Mass.; and West Newton Savings Bank of West Newton, Mass.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER