With fewer mergers by big banks, the focus of Community Reinvestment Act scrutiny has shifted to midsized banks. On at least three proposed deals, regulators have taken additional time to review lending disparities identified by CRA commenters.
In one of those cases, the regulators imposed a rare condition for approving the merger. In the other two, the deals were delayed. The takeaway for banks, I think, is that as consumer groups turn their attention to smaller institutions and find disparities that had heretofore escaped their scrutiny, they bring them to the attention of regulators. At least for now, the regulators seem to take these issues more seriously than they did during the 1990s and early 2000s heyday of bank megamergers.
Take, for example, Investors Bancorps deal to buy fellow New Jersey institution Roma Financial Corp. My organization, Inner City Press (Fair Finance Watch), had protested this deal back in March. The Federal Reserve Board gave provisional approval to the transaction Dec. 3, stipulating:
as a condition of its approval, the Board has determined that the audit committee of the board of directors of Investors Bancorp must issue a written report to the board of directors of Investors Bancorp that shall include: an assessment of Investors Banks consumer compliance risk systems, processes, and procedures; an assessment of compliance with any reports or recommendations made by any state or federal agency issued in the last five years with respect to consumer compliance; and recommendations for improving the consumer compliance risk program, if necessary.
This is a rare requirement for the Fed to impose, at least on consumer compliance. Along with this condition, the Federal Reserve's order says:
the Board focused its review on data related to loans made or denied to borrowers of the races and ethnicities highlighted by the public comment, i.e., African Americans and Hispanics. With respect to Investors Bank, Roma Bank, and RomAsia Bank, the Board confirmed the levels of conventional home purchase loans and the denial disparity ratios associated with conventional home purchase and refinance loans noted by the commenter.
That commenter was my group. As noted in our March 1 letter, in the New York City Metropolitan Statistical Area in 2011, Investors made 220 home purchase loans to whites and only two such loans to African Americans. That's hard to do in New York.
Likewise, in examining the 2012 Home Mortgage Disclosure Act data of Michigan's Mercantile Bank, we found that in the Grand Rapids MSA for conventional home purchase loans, Mercantile Bank lent only to whites. Its mortgage company made 42 such loans to whites, none to African Americans or Latinos.
After we put this and other data in an October comment on Mercantile's application to acquire FirstBank, the Fed asked Mercantile a round of questions on Nov. 6, and another on Nov. 26. These included:
Describe any other community outreach efforts (e.g., credit needs ascertainment, marketing / advertising, and product development) by Mercantile to make credit available to residents throughout the bank's assessment areas, including to African America or Hispanic individuals or residents of minority census tracts in those areas, including in the Grand Rapids MSA.
Mercantile stated (page 11) that, effective in 2013, the monthly reports to the bank's CRA Committee include the number of minority loan applications and originations and that these changes were implemented to bring focus to the bank's efforts to increase the number of minority loan applications. Indicate when this expanded reporting began...
Could it be too little, too late? Also on Nov. 26, following media reports that the deal could be held up, Mercantile filed with the Securities and Exchange Commission that its plan to close the deal by the end of the year, and for FirstBank to not file a 2013 annual report to the Securities and Exchange Commission, indeed no longer held.
The Feds questions to Mercantile are more detailed than the ones they asked the big banks the applied for mergers in the salad days. The Fed's relative inattention to those big banks' practices in the years leading up to 2008 arguably contributed to the magnitude and depth of the subprime meltdown.
Another proposed merger in Virginia, of United Bancshares and Virginia Commerce Bancshares, has similarly been delayed by comments by the National Community Reinvestment Coalition and its member organizations, including Inner City Press. United Bancshares went out and hired the Sullivan & Cromwell law firm, to try to push its application through with the Fed.
Is this a trend? It would seem so. In a recent conversation with a pro-industry cynic (that is, an arbitrageur), I developed several possible explanations. Regulators may have "excess capacity" to vet mergers, or perhaps they feel some responsibility for the subprime lending triggered meltdown of 2008 and are trying to compensate.
There was one thing I agreed on with the arbitrageur. A narrower lesson for banks might be to not set aggressive closing dates and then have to extend them. Or better yet, why not clean up and improve their lending records before applying for mergers?
Matthew R. Lee is the founder of Inner City Press, based in Bronx, N.Y., which has sought judicial review of several Federal Reserve Board actions including merger approvals. He is the author of Predatory Bender: A Story of Subprime Finance.