Consumer Protection Considerations in Bank Merger and Acquisition Applications*
Editor’s Note: Consumer Compliance Outlook (CCO) is updating a 2010 article discussing consumer protection considerations that can arise when the Federal Reserve receives an application, to reflect changes since that article was published.1
This article provides a summary of statutory factors and long-standing practices related to the Federal Reserve's consideration of an applicant’s Community Reinvestment Act (CRA) and consumer compliance record in the bank merger and acquisition application process.
How Is CRA Performance Factored into Decisions on Bank Merger and Acquisition Applications?
The Federal Reserve is required to consider certain statutory factors when evaluating applications for mergers and acquisitions.2 Under the convenience and needs statutory factor, information from the most recent CRA examination is considered because it represents a detailed evaluation of the institution’s record of meeting the convenience and needs of the communities it serves, including low- and moderate-income communities.3 However, in certain circumstances, the applicant may be asked to supplement its CRA performance evaluation to address substantive issues that may be raised in adverse comments. This is generally accomplished through the additional information request process, which provides the applicant with an opportunity to respond to issues raised.4
How Is a Bank’s Consumer Compliance Record Factored into Decisions on Merger and Acquisition Applications?
The relevant statutes require the Federal Reserve to evaluate an applicant’s managerial resources, including its record of complying with consumer protection laws and regulations.5 In assessing consumer compliance under the managerial factor, the Federal Reserve considers the compliance records of the institutions involved in the proposal regarding relevant consumer protection laws and regulations. The Federal Reserve reviews an institution’s most recent consumer compliance rating and supervisory information, including outstanding enforcement actions. For depository institutions with assets exceeding $10 billion that are supervised by the Consumer Financial Protection Bureau (CFPB), the Federal Reserve also considers the CFPB’s consumer compliance examination ratings, supervisory information, and any outstanding enforcement actions in its evaluation.
What Are the Benefits to Maintaining a Satisfactory or Better CRA and Consumer Compliance Rating?
Organizations whose banks are rated satisfactory or better for CRA and consumer compliance may be eligible for expedited processing of their applications. To qualify, the organizations must also be well capitalized and well managed, and the application must otherwise meet all criteria for expedited action.6
Additionally, these organizations could be eligible for the Federal Reserve to waive the requirement of filing a bank holding company application, which eliminates duplicative review by federal banking agencies for transactions that would normally require both bank merger and bank holding company applications.7 Moreover, the waiver process does not require publication and reduces paperwork and processing time.
What Are the Consequences of Adverse Consumer Compliance Ratings for Bank Merger and Acquisition Applications?
A proposal involving a state member bank or a bank holding company’s depository institution with a less-than-satisfactory consumer compliance record could raise concerns relating to the managerial factor and would require additional analysis that considers several factors, including:8
- the nature and severity of the issues that led to the less-than-satisfactory rating or weaknesses in the consumer compliance program.
- whether the less-than-satisfactory rating or the identified issues are of a repeat nature.
- the corrective action taken to date, including the primary federal regulator’s view of such action and examiner documentation indicating substantial and verified corrective action.
- the size of the institution with less-than-satisfactory ratings or other significant consumer compliance issues relative to the size of the whole organization.
- whether the proposal would pose a material distraction to management in its efforts to achieve corrective action.
What Is the Role of Public Comment in the Applications Process?
The opportunity for public comment allows the public to provide input on an application. Public comments help regulators evaluate whether institutions are meeting the convenience and needs of their communities and can provide additional context for an institution’s CRA or consumer compliance performance. Applicants must publish notice in a newspaper of general circulation and generally provide for a 30-day public comment period.9 The Federal Reserve also publishes notice of bank merger and acquisition proposals in the Federal Register and provides a list of pending bank holding company and notices subject to public comment on its public website.10 Common topics noted in comments the Federal Reserve receives include fair lending concerns based on publicly available Home Mortgage Disclosure Act data, concerns regarding branch closures and their effects, and complaints about one or more of the institutions involved in a proposal. Comments that are in writing, are received by the appropriate Federal Reserve Bank before the expiration of the comment period, and are considered substantive require review by the Federal Reserve Board (Board).11 Comments are considered substantive unless they involve complaints or raise frivolous, previously considered, or wholly unsubstantiated claims or irrelevant issues.12 Cases requiring Board review are processed within 60 days unless the applicant is notified that the period has been extended and is told the reason for the extension, such as a pending response to an additional information request from the applicant.13
When Does the Board Hold Public Meetings on Applications?
Public meetings represent another way the Board can receive information from the public regarding merger and acquisition applications. These meetings provide the Board an opportunity to gather information and clarify facts about applications and allow interested individuals to give testimony.14 This testimony can aid the Board in evaluating the statutory factors required for approval of applications, including the convenience and needs of the communities affected by the transaction. Commenters and applicants may request a public meeting, or the Board may choose to hold a public meeting on its own initiative. In the past 20 years, the Federal Reserve has held eight public meetings related to banking applications. Most of those public meetings involved applications by very large institutions with potentially significant and wide-ranging effects, such as the 2022 proposal by U.S. Bancorp to acquire MUFG Union Bank,15 or the 2024 application by Capital One Financial Corporation to acquire Discover Financial Services and Discover Bank.16
Concluding Remarks
It is important that applicants maintain satisfactory CRA and consumer compliance ratings. Questions should be raised with the applications contact at your Federal Reserve Bank or your other appropriate primary federal regulator.
ENDNOTES
* Contributions from employees of the Board of Governors of the Federal Reserve System (Board) are not subject to copyright and are in the public domain as a matter of law. This includes articles jointly authored by Board and Reserve Bank employees.
1 This article is based in part on an earlier article by Charles S. Fleet that appeared in the First Quarter 2010 issue of CCO.
2 These statutes include, but are not limited to, the Bank Holding Company Act (12 U.S.C. §1841 et seq.), the Federal Deposit Insurance Act (12 U.S.C. §1811 et seq.), and the Home Owners’ Loan Act (12 U.S.C. §1461 et seq.).
3 12 U.S.C. §2901(a)(1): “regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business”; 12 U.S.C. §2903(a)(1)–(2): a federal financial supervisory agency is required to take into account a financial institution’s “record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution,” when evaluating an application for a deposit facility. The Federal Reserve Board’s website provides additional information on the CRA and the applications process (“Evaluation by the Federal Reserve System of CRA and other Consumer Issues in Conjunction with an Application”).
4 12 C.F.R. §225.15 (Procedures for other bank acquisition proposals).
5 12 U.S.C. §1842(c)(2); 12 U.S.C. §1467a(e)(2); 12 U.S.C. §1828(c).
6 12 C.F.R. §225.14 (Expedited action for certain bank acquisitions by well-run bank holding companies).
7 12 C.F.R. §225.12(d) (Waivers for acquisitions involving bank mergers and internal corporate reorganizations).
8 Supervision and Regulation letter 14-2/Community Affairs letter 14-1, “Enhancing Transparency in the Federal Reserve’s Applications Process.”
9 12 C.F.R. §225.16(b) (Public notice provisions governing applications and notices).
10 Federal Reserve H.2A, “Notice of Formation and Mergers of, and Acquisitions by, Bank Holding Companies or Savings and Loan Holding Companies; Change in Bank Control.”
11 12 C.F.R. §225.16(c)(3) (Public comment provisions governing applications and notices).
12 12 C.F.R. §225.16(c)(3).
13 12 C.F.R. §225.15(d)(2) (Procedures for other bank acquisition proposals), §238.14(g)(2) (Procedural requirements).
14 12 C.F.R. §262.25 (Hearings, alteration of activities, and other matters).
15 See U.S. Bancorp / MUFG Union Bank Application and related materials on the Federal Reserve’s website.
16 See Capital One-Discover Application and related material on the Federal Reserve’s website.