Guidance Has Not Been Developed for Implementing the BHC Act and CRA in the BHC Merger Application Process

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 records of the relevant depository institutions under CRA. Neither the BHC Act nor CRA, or their legislative histories, provide guidance on how FRB is to take into account the convenience and needs of the community when considering a BHC merger application. The federal regulators, including FRB, have developed guidance on how to assess a depository institution’s CRA performance. However, FRB has not developed guidance on how it will evaluate the CRA record, comprising the regulators’ ratings of institutions’ CRA performance and comments from the public, for large BHC merger applications. FRB’s CRA Performance Review Process for the Six Large BHC Merger Applications Lacked Transparency

In reviewing the six BHC merger applications, it appeared to us that FRB attempted to balance the CRA performance ratings with information that raised concerns with the institutions’ CRA performance obtained through the public comment process. FRB conducted analyses with HMDA and CRA small business data to address concerns of insufficient home mortgage and small business lending, respectively. 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. FRB’s lack of written guidance on how it addresses public comments contributed to the concerns voiced by the community groups and BHC applicants we contacted regarding the lack of transparency in the merger application process. Home Mortgage Lending, Small Business Lending, Branch Closures, and CRA Agreements Were the Four Principal CRA Public Concerns in the Six Mergers

The four principal CRA concerns raised in the six mergers were (1) an insufficient amount of home mortgage lending in LMI areas, (2) an insufficient amount of small business lending in LMI areas, (3) expected bank branch closures in LMI areas, and (4) the lack of specificity in CRA agreements. FRB approved four of the mergers with conditions for the reporting of branch closures. Bank Merger Activity Was Not Associated With Adverse Change in Mortgage Lending in Minority and LMI Areas for Three BHC Mergers

By analyzing three large BHC mergers using appropriate statistical measures and benchmarks for lending performance, we found that after none of the three mergers was there a disproportionate decline in single- family home mortgage lending to minority and LMI census tracts. FRB’s Legal Responsibilities

Our legal analysis included a review of the Bank Holding Company Act of 1956 (BHC Act) and the Community Reinvestment Act of 1977 (CRA). NBD’s Acquisition of First Chicago

NBD Corporation acquired First Chicago Corporation in 1995. Chemical’s Acquisition of Chase Manhattan

Commenters raised CRA concerns for both Chemical and Chase Manhattan.
Why GAO Did This Study

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.

What GAO Found

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.