In contrast, nonbank subsidiaries of bank holding companies are not subject to regularly scheduled compliance examinations by any agency. FRB has general legal authority under the Bank Holding Company Act and other statutes to examine nonbank mortgage subsidiaries of bank holding companies. Issue of High Denial and Low Lending Rates for Minorities Was Raised in All Six Mergers

As shown in table 1, consumer and community groups raised the issue of perceived high denial and low lending rates to minorities in all six cases. Concerns About Steering Raised in Three Mergers

In three of the merger cases, consumer and community groups alleged that minorities were being directed or steered disproportionately to the holding company lender that offered the highest-priced loans or the least amount of service. In two of the mergers, the allegations focused on steering between the banks and the holding companies’ nonbank mortgage companies engaged in sub-prime lending. The group stated that this created a “regulatory blindspot.”

		Other Fair Lending Issues Were Raised on Some of the Mergers

Consumer and community groups raised prescreening and marketing issues in four mergers. Concerns about the discriminatory treatment of minority applicants were raised in two of the mergers. In each of the six mergers, FRB staff obtained and reviewed additional information provided by the bank holding companies to assess the fair lending issues raised by consumer and community groups. This request was made in response to a group’s concerns about the compliance of a nonbank mortgage subsidiary with fair lending and consumer protection laws. These examinations covered the fair lending compliance of the banks and their subsidiaries with the fair lending laws and regulations. Moreover, nonbank mortgage subsidiaries of bank holding companies are not routinely examined for fair lending compliance by any federal regulatory or enforcement agency. In two cases, FRB had conducted prior investigations of nonbank mortgage subsidiaries involved in proposed mergers we studied. Second, routine examinations of the nonbank subsidiaries would be costly. Specifically, FRB did not routinely provide the primary banking regulators, FTC, and HUD with the comment letters it received during the merger applications process regarding the fair lending compliance of the banks and nonbank mortgage subsidiaries of the holding companies involved in the six mergers. Its role could be especially valuable in monitoring the lending activity of nonbank mortgage subsidiaries. Recommendations

To enhance the consideration of fair lending issues during the bank holding company merger approval process, we recommend that the Board of Governors of the Federal Reserve System develop a policy statement and procedures to help ensure that 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 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. These issues involved (1) credit scoring, (2) automated loan underwriting, and (3) mortgage brokers. The Federal Trade Commission (FTC) and the Department of Housing and Urban Development (HUD) are responsible for fair lending enforcement of independent finance companies, which are not addressed in this study.
Why GAO Did This Study

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.

What GAO Found

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.