Large Bank Mergers

The fair lending laws prohibit discrimination on the basis of an applicant's race, color, religion, gender, national origin, or other characteristics. In recent years, mergers between several of the nation's largest banks have prompted consumer and community groups to raise fair lending concerns. This report (1) describes the fair-lending issues raised by consumer and community groups during the application process for six larger bank holding company mergers and (2) assesses the Federal Reserve Board's consideration of those issues. GAO provides information on actions that regulators have taken in response to earlier GAO recommendations on fair lending. GAO also provides information on emerging fair-lending issues related to credit scoring, automated loan underwriting, and mortgage brokers. In each of the six mergers GAO reviewed, consumer and community groups raised the issue of perceived high loan denial and low lending rates to minorities by the mergers. The Fed considered these fair-lending issues in the six merger cases by collecting, reviewing, and analyzing information from various sources, including the bank holding companies involved in the mergers and other federal and state agencies. The Fed did not routinely contact the Federal Trade Commission or the Department of Housing and Urban Development about the six mergers despite their fair lending enforcement responsibilities.

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.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Team: Phone: