oversight

Large Bank Mergers: Fair Lending Review Could be Enhanced With Better Coordination

Published by the Government Accountability Office on 1999-11-03.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Honorable Maxine Waters
                and the Honorable Bernard Sanders
                House of Representatives


November 1999

                LARGE BANK
                MERGERS
                Fair Lending Review
                Could be Enhanced
                With Better
                Coordination




GAO/GGD-00-16
United States General Accounting Office                                                         General Government Division
Washington, D.C. 20548




                                    B-280045
                                    November 3, 1999

                                    The Honorable Maxine Waters
                                    United States House of Representatives

                                    Honorable Bernard Sanders
                                    United States House of Representatives

                                    As you requested, this report discusses large bank holding company
                                    mergers and regulatory enforcement of the Fair Housing Act (FHAct) and
                                    the Equal Credit Opportunity Act (ECOA), known collectively as the fair
                                                 1
                                    lending laws. The fair lending laws prohibit discrimination in lending
                                    based on an applicant’s race, color, religion, gender, national origin, or
                                    certain other protected characteristics. During the past few years, mergers
                                    between several of the largest U.S. banking institutions have prompted
                                    consumer and community groups to raise a number of fair lending
                                    concerns.

                                    The objectives of this report are to (1) describe the fair lending issues
                                    raised by consumer and community groups during the application process
                                                                                  2
                                    for six large bank holding company mergers and (2) assess the Federal
                                                                                            3
                                    Reserve Board’s (FRB) consideration of those issues. Appendix I provides
                                    information that you requested regarding actions that regulators have
                                    taken in response to recommendations made in our 1996 report on fair
                                             4
                                    lending. Appendix II contains information about emerging fair lending
                                    issues related to credit scoring, automated loan underwriting, and
                                    mortgage brokers.

                                    1
                                     The requesters also asked us to assess the impact of large bank mergers on community lending to low-
                                    and moderate-income neighborhoods and the Federal Reserve Board’s process for assessing the
                                    Community Reinvestment Act performance of merger applicants. We conducted a separate assignment
                                    to address these issues. See Federal Reserve Board: Merger Process Needs Guidelines for Community
                                    Reinvestment Issues, GAO/GGD-99-180 (Sept. 25, 1999).
                                    2
                                     The six bank holding company mergers that we looked at ultimately resulted in four holding
                                    companies.
                                    3
                                     The regulatory role of FRB includes scrutiny of proposed transactions that involve bank holding
                                    companies and member banks of the Federal Reserve System. FRB administers the Bank Holding
                                    Company Act, which requires FRB approval of the acquisition of banks, bank holding companies, and
                                    nonbank affiliates by bank holding companies. Under the Bank Merger Act, FRB must approve mergers
                                    involving state member banks and may deny acquisition of a state member bank under the Change in
                                    Bank Control Act.
                                    4
                                     Fair Lending: Federal Oversight and Enforcement Improved but Some Challenges Remain, GAO/GGD-
                                    96-145 (Aug. 13, 1996).




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                   B-280045




                   In each of the six mergers, consumer and community groups raised the
Results in Brief   issue of perceived high loan denial and low lending rates to minorities by
                   banks, bank subsidiaries, and nonbank mortgage subsidiaries involved in
                   the mergers. In four merger cases, community and consumer groups were
                   concerned about alleged potential discriminatory practices of the holding
                   companies’ nonbank mortgage subsidiaries. Unlike bank subsidiaries,
                   nonbank mortgage subsidiaries are not subject to routine examinations by
                   federal regulators for compliance with fair lending and other consumer
                   protection laws and regulations. The fair lending laws generally confer
                   enforcement authority for nonbanking companies with the Federal Trade
                   Commission (FTC), Department of Housing and Urban Development
                   (HUD), or Department of Justice (DOJ) and do not specifically authorize
                   any federal agency to conduct examinations of nonbanking companies for
                   compliance with these laws. The consumer and community groups were
                                                 5
                   concerned that (1) sub-prime lending activities of the nonbank mortgage
                   subsidiaries had resulted or could result in minorities being charged
                   disproportionately higher rates and fees, and (2) 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. Other fair lending issues,
                   which involved the banks, included alleged discriminatory prescreening
                                  6
                   and marketing (four mergers), low lending rates to minority-owned small
                   businesses (two mergers), discriminatory treatment of applicants (two
                                            7
                   mergers), and redlining (one merger).

                   FRB 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. Specifically, FRB staff analyzed Home Mortgage
                   Disclosure Act (HMDA) data provided annually by the banks and nonbank
                   mortgage subsidiaries involved in the mergers. In addition, 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. However, examinations for nonbank
                   mortgage subsidiaries were generally not available because these entities
                   are not routinely examined by any federal agency. In two of the six

                   5
                    Sub-prime lending refers to the extension of credit to higher risk borrowers, a practice also referred to
                   as “B/C” or “nonconforming credit.”
                   6
                    Discriminatory prescreening and marketing refer to practices that selectively discourage or encourage
                   applicants with respect to inquiries about or applications for credit at the preapplication stage.
                   7
                   Redlining is the refusal of lenders to make mortgage loans in certain geographic areas, typically
                   minority or low-income neighborhoods, regardless of the creditworthiness of the loan applicant.




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             B-280045




             mergers in our review, FRB had previously performed compliance
             investigations of nonbank mortgage subsidiaries involved in the mergers.
             According to FRB staff, FRB had used its general examination and
             supervisory authority for bank holding companies to conduct these
             particular investigations.

             FRB did not routinely contact FTC or HUD concerning the six mergers
             despite their fair lending enforcement responsibilities. Specifically, FTC
             has primary law enforcement responsibilities under ECOA for the nonbank
             mortgage subsidiaries of bank holding companies, and HUD is responsible
             for the enforcement of the Fair Housing Act for all institutions. In addition,
             FRB shared some, but not all, of the fair lending-related comment letters it
             received during the application process with the appropriate primary
             banking regulators, FTC, and HUD. Allegations of fair lending problems
             expressed in the letters could be useful to these other agencies in their
             ongoing enforcement activities. Finally, FRB did not provide or direct the
             public or enforcement agencies to sources for structural information about
             the bank holding companies involved in the mergers. This could have
             limited the information these sources provided to FRB. This letter contains
             recommendations that address these concerns.

             Although not specifically required to do so by statute, FRB considers the
Background   fair lending compliance of the entities under the holding companies
             involved in the merger and any substantive public comments about such
             compliance. FRB must act on a merger request within 90 days of receiving
             a complete application or the transaction will be deemed to have been
             approved. FRB also seeks comments from appropriate state and federal
             banking regulatory agencies, which have 30 days to respond. While the
             application is pending, public comment on the proposed merger is to be
             solicited through notices in newspapers and the Federal Register. The
             public is allowed 30 days to provide written comments. FRB is required to
             consider several factors when reviewing a merger application, including
             (1) the financial condition and managerial resources of the applicant, (2)
             the competitive effects of the merger, and (3) the convenience and needs
             of the community to be served.

             Fair lending oversight and enforcement responsibilities for entities within
             a bank holding company vary according to entity type (see fig. 1). Federal
             banking regulators are responsible for performing regularly scheduled
             examinations of insured depository institutions and their subsidiaries to




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                                                       8
assess compliance with fair lending laws. In contrast, nonbank
subsidiaries of bank holding companies are not subject to regularly
scheduled compliance examinations by any agency. However, the fair
lending laws provide primary enforcement authority over nonbank
mortgage subsidiaries to HUD and FTC. HUD has enforcement authority
with respect to FHAct violations for all institutions, and FTC has ECOA
enforcement responsibility with respect to all lenders that are not under
the supervision of another federal agency. For example, FTC is responsible
for the enforcement of ECOA with respect to nonbank mortgage
subsidiaries of bank holding companies. FRB has general legal authority
under the Bank Holding Company Act and other statutes to examine
nonbank mortgage subsidiaries of bank holding companies. Appendix III
contains information regarding the extent of mortgage lending performed
by banks, thrifts, and independent mortgage companies, another major
component of the mortgage lending market, which are not addressed in
this study. It also provides data specific to the banking sector.




8
In the context of this report, the term “federal banking regulators” refers to FRB, the Office of the
Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Office
of Thrift Supervision (OTS).




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                                        B-280045




Figure 1: Fair Lending Enforcement Responsibility for Components of a Hypothetical Bank Holding Company




                                        Note 1: The primary federal agency for fair lending enforcement is shown in the parentheses. With
                                        respect to nonbank mortgage subsidiaries, FTC’s authority is limited to enforcement of ECOA.
                                        Note 2: HUD has primary enforcement responsibility for FHAct compliance of all institutions, including
                                        all components of a bank holding company.
                                        Source: GAO.


                                        Federal banking regulatory agencies are authorized under ECOA to use
                                        their full range of enforcement authority to address discriminatory lending
                                        practices by financial institutions under their jurisdictions. This includes
                                        the authority to seek prospective and retrospective relief and to impose
                                        civil money penalties. HUD, on the other hand, has enforcement authority
                                        with respect to FHAct violations for all institutions and HMDA compliance
                                        responsibilities for independent mortgage companies. Both ECOA and
                                        FHAct provide for civil suits by DOJ and private parties. Whenever the
                                        banking regulatory agencies or HUD have reason to believe that an
                                        institution has engaged in a “pattern or practice” of illegal discrimination,
                                        they must refer these cases to DOJ for possible civil action. Such cases



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B-280045




include repeated, regular, or institutionalized discriminatory practices.
Other types of cases also may be referred to DOJ.

From 1996 through 1998, DOJ entered into four settlements and one
consent decree involving fair lending compliance. In the same period, FTC
entered into three consent decrees and issued one complaint that were
based at least in part on ECOA compliance issues. FRB and OCC,
respectively, took two and nine enforcement actions against regulated
institutions for violations of the fair lending laws and regulations in this
same time period. During this time period FRB, OCC, and FTC also
conducted various investigations of consumer complaints they received
regarding alleged fair lending violations by institutions under their
jurisdiction. For example, FRB conducted 32 investigations of consumer
complaints it received in 1998 that alleged fair lending violations by state
member banks.

HUD can investigate fair lending complaints against various types of
institutions, including bank holding companies, national banks, finance
companies, mortgage companies, thrifts, real estate companies, and
others. In processing fair lending complaints, HUD is to conduct an
investigation and, if evidence suggests a violation of the law, issue a
charge. HUD is required by law to attempt to conciliate such cases. From
1996 through 1998, HUD entered into 296 conciliation agreements. Of the
296, at least 108 involved banks, mortgage companies, or other entities
related to bank holding companies. If conciliation is not achieved, HUD
may pursue the case before an Administrative Law Judge. However, a
complainant, respondent, or aggrieved person may elect to have the claims
asserted in a federal district court instead of a hearing by an
Administrative Law Judge. The Secretary of HUD may review any order
issued by the Administrative Law Judge. Decisions of the Administrative
Law Judge may be appealed to the federal court of appeals.

Regulatory enforcement of ECOA and FHAct, enacted in 1974 and 1968,
respectively, is supported by the HMDA. As amended in 1989, HMDA
requires lenders to collect and report data annually on the race, gender,
and income characteristics of mortgage applicants and borrowers. Lenders
who meet minimum reporting requirements submit HMDA data to their
primary banking regulator or HUD in the case of independent mortgage
            9
companies. HMDA data are then processed and made available to the

9
 For data collection in 1998, depository institutions with a home or branch office in a metropolitan
statistical area (MSA) had to report HMDA data if they had more than $29 million in assets as of
December 31, 1997. Nondepository lenders were required to report HMDA data if they had assets of
more than $10 million and had an office or loan activity in an MSA. They were also required to report,




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              B-280045




              public through the reporting lenders, the Federal Financial Institutions
                                     10
              Examination Council, and other sources. Such information is intended to
              be useful for identifying possible discriminatory lending patterns.

              As we noted in our 1996 report on fair lending, federal agencies with fair
              lending enforcement responsibilities face a difficult and time-consuming
                                                              11
              task in the detection of lending discrimination. Statistical analysis of loan
              data used by some federal agencies can aid in the search for possible
              discriminatory lending patterns or practices, but these methods have
              various limitations. For example, these statistical models cannot be used
              to detect illegal prescreening or other forms of discrimination that occur
              prior to the submission of an application. For these forms of
              discrimination, consumer complaints may be the best indicator of
              potential problems. We noted in the report that it is critical that the
              agencies continue to research and develop better detection methodologies
              in order to increase the likelihood of detecting illegal practices. In
              addition, we encouraged the agencies’ efforts to broaden their knowledge
              and understanding of the credit search and lending processes in general
              because such knowledge is prerequisite to improving detection and
              prevention of discriminatory lending practices.

              To describe the fair lending issues raised by consumer and community
Scope and     groups during the application process for large bank holding company
              mergers, we looked at FRB’s internal summaries of comments made by
Methodology   consumer and community groups for six selected large bank holding
              company mergers that occurred from 1995 to 1998. For each of those
              years, we selected the mergers with the largest asset values for the
              acquired bank holding company. The six large bank holding company
              mergers that we reviewed were



              regardless of asset size, if they originated 100 or more home purchase loans (including refinancings)
              during the calendar year.

              Depository institutions are exempt from reporting HMDA data if they made no first-lien home purchase
              loans (including refinancings of home purchase loans) on one-to-four family dwellings in the preceding
              calendar year. Nondepository institutions are exempt if their home purchase loan originations
              (including refinancing of home purchase loans) in the preceding calendar year came to less than 10
              percent of all their total loan originations (measured in dollars).
              10
                 FFIEC was established in 1979 as a formal interagency body empowered to prescribe uniform
              principles, standards, and report forms for the federal examination of financial institutions and to
              make recommendations to promote uniformity in the supervision of these institutions. The Council’s
              membership is composed of FRB, OCC, FDIC, OTS, and the National Credit Union Administration.
              11
                   GAO/GGD-96-145, p. 66.




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    B-280045




•   NBD’s acquisition of First Chicago in 1995,
•   Fleet’s acquisition of Shawmut in 1995,
•   Chemical’s acquisition of Chase in 1996,
•   NationsBank’s acquisition of Boatmen’s in 1997,
•   NationsBank’s acquisition of BankAmerica in 1998, and
•   BancOne’s acquisition of First Chicago NBD in 1998.

    To verify the completeness of FRB’s summaries of the comment letters, we
    developed a data collection instrument, reviewed a sample of comment
    letters submitted for two of the mergers, and compared our data with the
    FRB summaries. From our sampling of comment letters, we determined
    that FRB’s internal summaries of the comment letters were accurate and
    that we could rely upon the other FRB summaries as accurate reflections
    of the public comments submitted.

    To assess FRB’s consideration of the types of fair lending issues raised
    during the merger process for large bank holding companies, we reviewed
    FRB’s internal memorandums and supporting documentation for the six
    selected mergers and FRB’s orders approving the mergers in question. We
    also interviewed FRB staff involved in assessing the comments made by
    consumer and community groups for the six selected mergers. In addition,
    we obtained and analyzed fair lending enforcement actions taken by FRB,
    OCC, DOJ, FTC, and HUD to determine if they involved institutions that
    were part of the six selected mergers. We also conducted interviews with
    representatives of these agencies to discuss coordination policies and
    procedures related to the merger process for these large bank holding
    companies.

    We held discussions with representatives of the four bank holding
    companies that resulted from the six mergers, representatives of bank
    industry trade groups, and various consumer and community groups that
    commented on the six mergers to obtain their views regarding the federal
    regulatory response to fair lending issues raised during the merger
    process. We conducted our review from November 1998 to July 1999, in
    accordance with generally accepted government auditing standards.

    We requested comments on a draft of this report from FRB, OCC, FTC,
    DOJ, and HUD. FRB, OCC, and HUD provided written comments that are
    included in appendixes IV through VI. A summary of the agencies’
    comments and our responses are presented at the end of this letter.




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                                         B-280045




                                         Consumer and community groups submitted comment letters raising fair
Fair Lending Concerns                    lending issues in each of the six mergers. The number of comment letters
                                         that FRB received on the mergers—which included letters supporting or
Were Raised in Each                      opposing the merger—ranged from 17 to approximately 1,650. Table 1 lists
Merger                                   the primary fair lending issues raised and the number of mergers in which
                                         each issue was raised.

Table 1: Fair Lending Issues Raised in
Six Selected Merger Cases                Fair lending issue                                                             Number of mergers
                                         Denial of credit/low lending to minorities                                                     6
                                         Abusive sub-prime lending                                                                      5
                                         Discriminatory prescreening/marketing                                                          4
                                         Steering                                                                                       3
                                         Low lending to minority-owned small                                                            2
                                         businesses
                                         Discriminatory treatment of applicants                                                                   2
                                         Redlining                                                                                                1
                                         Source: GAO analysis of FRB data.


Issue of High Denial and                 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.
Low Lending Rates for                    The groups typically based these concerns on their analysis of HMDA data.
Minorities Was Raised in All             For example, one of the community groups commenting on a proposed
Six Mergers                              merger cited denial rates for minorities that were twice the rate for Whites
                                         in a particular geographic area. In other cases, consumer and community
                                         groups cited HMDA data indicating that the number of loans made to
                                         minority groups by the institutions involved in the merger was not
                                         consistent with the demographics of a particular market. The groups
                                         claimed that the HMDA data provided evidence of a disparate impact in
                                                               12
                                         lending to minorities.

                                         The consumer and community groups were most often concerned about
                                         the lending record of the subsidiaries of the holding company that was the
                                         acquirer. However, a number of these groups raised issues with the lending
                                         records of both holding companies involved in the proposed merger. In a
                                         few cases, the lending record of the subsidiaries of the holding company
                                         that was to be acquired was identified as an issue. The consumer and
                                         community groups often did not identify the specific institution under the
                                         12
                                            According to the 1994 Policy Statement issued by the Interagency Task Force on Fair Lending, the
                                         courts have recognized three methods of proof of lending discrimination under ECOA and FHAct:
                                         overt evidence of discrimination, disparate treatment, and disparate impact. Overt evidence of
                                         discrimination exists when a lender blatantly discriminates on a prohibited basis. Disparate treatment
                                         occurs when a lender treats applicants differently on the basis of one of the prohibited factors.
                                         Disparate impact occurs when a lender applies a policy or practice uniformly to all applicants but the
                                         policy or practice has a discriminatory effect on a prohibited basis and is not justified by business
                                         necessity.




                                         Page 9                                    GAO/GGD-00-16 Large Bank Mergers and Fair Lending
                                 B-280045




                                 holding company in question but, instead, focused on the overall lending in
                                 specific geographic markets.

Nonbank Mortgage                 Consumer and community groups raised fair lending concerns in five of
                                 the six mergers regarding the activities of nonbank mortgage subsidiaries.
Subsidiary Concerns Were         In four of the mergers, the concerns involved the nonbank mortgage
Raised On Five Mergers           subsidiaries of the holding companies. Nonbank mortgage subsidiaries of
                                 holding companies accounted for approximately one-fifth of the total
                                 mortgage lending of the bank sector, and they experienced steady growth
                                 in both the number and dollar value of mortgage loans originated from
                                 1995 through 1997. Their growth in lending activity out-paced other bank
                                 sector entities in 1997. (See app. III, figs. III.2 to III.5.) The nonbank
                                 mortgage company in the fifth merger was a subsidiary of one of the lead
                                 banks involved in the merger.

Groups Were Concerned About      In five merger cases, consumer and community groups cited abusive or
Abusive Sub-Prime Lending        what they characterized as “predatory” sub-prime lending as a fair lending
Practices                        issue. Sub-prime lending itself is not illegal and is generally acknowledged
                                 as a means of widening consumer access to credit markets. However, as
                                 stated in a recent interagency document, the “higher fees and interest rates
                                 [associated with sub-prime lending] combined with compensation
                                 incentives can foster predatory pricing or discriminatory steering of
                                 borrowers to sub-prime products for reasons other than the borrower’s
                                                               13
                                 underlying creditworthiness.”

                                  The alleged abusive sub-prime lending activities cited by the consumer
                                 and community groups included such practices as undisclosed fees and
                                 aggressive collection practices that were more likely to affect the elderly,
                                 minorities, and low- to moderate-income individuals. Other concerns
                                 identified with sub-prime lending included the alleged targeting of
                                 minorities for the higher priced sub-prime loans even if they would qualify
                                 for loans at lower rates. The groups typically relied on anecdotal rather
                                 than statistical evidence to support their concerns. HMDA data cannot be
                                 used to analyze sub-prime lending because HMDA does not require lenders
                                 to identify which loans are sub-prime or report loan characteristics that
                                 can be used to identify sub-prime lending, such as the pricing and fees, and
                                 does not require the reporting of borrowers’ credit information.

Concerns About Steering Raised   In three of the merger cases, consumer and community groups alleged that
in Three Mergers                 minorities were being directed or steered disproportionately to the holding

                                 13
                                  Interagency Guidance on Subprime Lending, as adopted by FRB, OCC, FDIC, and OTS on March 1,
                                 1999.




                                 Page 10                                GAO/GGD-00-16 Large Bank Mergers and Fair Lending
                             B-280045




                             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 steering issue raised in the
                             third merger involved referral practices between a bank and its
                             subsidiaries that allegedly resulted in minorities typically receiving a lower
                             level of service.

                             One of the consumer and community groups alleged that a holding
                             company established the nonbank mortgage company as a bank holding
                             company subsidiary rather than as a bank subsidiary to escape regulatory
                             scrutiny. As noted earlier, nonbank subsidiaries of bank holding
                             companies are not subject to regularly scheduled compliance
                             examinations. The group stated that this created a “regulatory blindspot.”

Other Fair Lending Issues    Consumer and community groups raised prescreening and marketing
                             issues in four mergers. In two of the four, the consumer and community
Were Raised on Some of the   groups were concerned about prescreening of applicants that resulted in
Mergers                      the referral of only those applicants deemed qualified. The groups alleged
                             that the prescreening programs violated the ECOA provision that requires
                             lenders to provide applicants with written notification of a loan application
                             denial stating the reason or basis for the denial. The community groups
                             also raised issues with bank fee or marketing practices. According to these
                             groups, some practices were intended to discourage minorities from
                             applying for credit, and other practices disproportionately targeted
                             minorities for loans with higher interest rates.

                             In two of the merger cases, consumer and community groups raised issues
                             related to lending to small businesses owned by minorities or located in
                             minority communities. The primary support for these issues appeared to
                                                                                                      14
                             be analysis of HMDA data and Community Reinvestment Act (CRA) data.
                             The consumer and community groups alleged that the holding companies
                             involved in the two mergers were discriminating against or providing an
                             inadequate level of funding to minority-owned small businesses or small
                             businesses located in minority communities.

                             Concerns about the discriminatory treatment of minority applicants were
                             raised in two of the mergers. The basis for the complaint on one merger

                             14
                              The Community Reinvestment Act requires the federal banking regulators to encourage depository
                             institutions to help meet credit needs in all areas of the communities they serve, including low- and
                             moderate-income neighborhoods, consistent with safe and sound operations. CRA regulations issued
                             by the banking regulators require nonexempt depository institutions to annually report data on small
                             business loans they originated or purchased.




                             Page 11                                   GAO/GGD-00-16 Large Bank Mergers and Fair Lending
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                       was the results of an independent testing program that used matched-pair
                               15
                       testing. According to the complainant, Black applicants were kept waiting
                       longer, were quoted higher closing costs and overall processing times, and
                       overall were discouraged from applying for credit in comparison to White
                       applicants. In another merger, FRB received several comment letters that
                       objected to the acquiring bank holding company’s customer call center’s
                       handling of fair lending complaints. Specifically, they asserted that the
                       center’s staff did not inform callers of their right to file a complaint and
                       lacked expertise in fair lending and investigative techniques.

                       Redlining of predominantly minority neighborhoods was alleged in one
                       merger. A consumer/community group said that the acquiring bank holding
                       company had redlined many of the low- and moderate-income,
                       predominantly minority communities in a particular city. The group based
                       its allegation on the lack of bank branches and minimal marketing of credit
                       products in those communities.

                       FRB analyzed HMDA data to help assess the validity of the fair lending
FRB Analyzed HMDA      concerns raised by the groups. FRB also obtained and reviewed additional
                       information from the bank holding companies involved in the proposed
Data and Relied        merger. FRB staff stated that in assessing fair lending concerns, they relied
Heavily on Prior       primarily on current and past fair lending compliance examinations
                       performed by the primary banking regulator(s).
Exams to Assess Fair
Lending Concerns       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. According to
                       FRB officials, they forwarded the comments received from the consumer
                       and community groups during the public comment period to the bank
                       holding companies involved in the mergers. They explained that the bank
                       holding companies were encouraged, but not required, to provide
                       information or a response to the issues raised in the comment letters. In
                       addition, FRB sometimes requested specific information from the bank
                       holding companies in response to issues raised by the consumer and
                       community groups. For example, FRB staff requested and assessed
                       information from one holding company about the settlement of lawsuits
                       involving consumer complaints. 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.
                       15
                          Matched-pair testing consists of having similarly qualified “testers” (e.g., one minority and the other
                       nonminority) pose as prospective loan applicants. After discussing loan possibilities on an individual
                       basis with an institution, the testers document their treatment and the completeness of the information
                       given to them by the institution’s personnel.




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                              B-280045




FRB Performed HMDA            In response to consumer and community groups’ concerns about overall
                              lending to minorities by the entities involved in the proposed holding
Analyses in All Six Mergers   company mergers, FRB staff obtained and analyzed HMDA data. Using
                              these data, FRB compared the lending performance of the bank holding
                              company subsidiary in question to the performance of other lenders in the
                              aggregate for a particular community or geographic area. In addition, they
                              looked at the holding company’s record of lending to minorities over the
                              last several years to determine if there were any discernible patterns that
                              could indicate discriminatory lending.

                              In conducting their analysis, FRB staff identified lending rate disparities in
                              some areas/markets that indicated that the holding company subsidiary
                              was lagging behind the aggregate or not doing as well as could be
                              expected. However, FRB staff noted that although HMDA data may
                              indicate a need for further analysis or targeted reviews through
                              examinations, HMDA data alone cannot provide conclusive evidence of
                              illegal discrimination because of known limitations in the HMDA data.

                              Bank regulators, bank officials we contacted, and some academics and
                              community group representatives agreed that HMDA data are limited in
                              their potential to demonstrate discrimination. Principal among the
                              limitations associated with HMDA data is the lack of information on
                              important variables used in the credit underwriting process. For example,
                              HMDA data do not include information on the creditworthiness of the
                              applicant, the appraised value of the home, or the credit terms of the loan.
                              This information typically is maintained only in the lender’s loan files and
                              is accessible to regulators conducting compliance examinations or
                              investigations.

FRB Relied Heavily on         FRB staff stated that they relied heavily on the primary regulator’s
                              compliance examinations because on-site comprehensive reviews of actual
Results of Bank Regulators’   bank practices and records are the best means to assess compliance with
Compliance Examinations       the fair lending laws. Moreover, time, access, and authority constraints
                              limit the analysis of fair lending issues that FRB staff can perform during
                              the application process for bank holding company mergers. FRB officials
                              stated that the merger application review process is not a substitute for the
                              fair lending examination process. Therefore, FRB relied on the past and
                              current fair lending examination results of the primary banking regulator.

                              In response to the fair lending concerns raised by the consumer and
                              community groups, FRB staff said they obtained information on the scope
                              of and conclusions reached on prior and on-going fair lending compliance
                              examinations performed by the primary banking regulator. The age of the



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B-280045




examinations relied on by FRB ranged from over 3 years old to having
been recently completed or still on-going. These examinations covered the
fair lending compliance of the banks and their subsidiaries with the fair
lending laws and regulations. The fair lending examination reports
typically did not address all of the fair lending issues raised by the
consumer and community groups during the merger process, such as
abusive sub-prime lending, discriminatory prescreening/marketing, and
         16
steering.

Moreover, nonbank mortgage subsidiaries of bank holding companies are
not routinely examined for fair lending compliance by any federal
regulatory or enforcement agency. On a case-by-case basis, FRB officials
told us they have exercised their general authority granted under the Bank
Holding Company Act and other statutes to conduct fair lending
compliance investigations of a bank holding company’s nonbank mortgage
subsidiaries. In two cases, FRB had conducted prior investigations of
nonbank mortgage subsidiaries involved in proposed mergers we studied.

According to FRB officials, a long-standing FRB policy of not routinely
conducting consumer compliance examinations of nonbank subsidiaries
was formally adopted in January 1998. The policy is based on three
primary considerations. First, ECOA and other major laws enforced under
FRB’s compliance program give primary enforcement responsibility for
nonbank subsidiaries of bank holding companies to FTC. Second, routine
examinations of the nonbank subsidiaries would be costly. Third, such
examinations would, in the FRB officials’ opinion, raise questions about
“evenhandedness” given that similar entities, such as independent
mortgage companies, that are not part of bank holding companies would
not be subjected to examinations. FRB does not have specific criteria as to
when it will conduct on-site investigations of these nonbank mortgage
subsidiaries. According to FRB, on-site inspections of a holding company
nonbank mortgage subsidiary are conducted when factors present suggest
that discriminatory practices are occurring and when it seems appropriate
to do so because the matter may relate to relevant managerial factors. In
contrast, FRB’s policy is to conduct full, on-site examinations of the
subsidiaries of the banks it regulates. Banks still account for a greater
amount of lending than the other bank sector entities—bank subsidiaries
and nonbank mortgage subsidiaries of holding companies. However, the


16
   Representatives of one of the primary banking regulators explained that examiners did not have
examination procedures for such fair lending issues as redlining and steering prior to the adoption of
Interagency Fair Lending Examination Procedures in January 1999.




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                             B-280045




                             growth in lending by nonbank mortgage subsidiaries has steadily increased
                             since 1995 and outpaced other bank sector entities in 1997 (see app. III).

                             In discussions with FTC officials, we confirmed that they do not examine
                             or routinely investigate nonbank mortgage subsidiaries of holding
                             companies. They emphasized that FTC is a law enforcement agency, not a
                             regulator. FTC, they said, does not conduct compliance examinations but
                             does investigations targeted at specific entities, most of which are agency-
                             initiated. However, investigations can result from consumer complaints
                             that indicate a pattern or practice or public interest problem to be
                             explored. The officials noted that FTC’s jurisdiction is broad—generally
                             covering any lending entity that is not a bank, thrift, or their holding
                             companies—but FTC resources are limited. They said FTC’s current ECOA
                             enforcement efforts have focused on independent mortgage or finance
                             companies and discriminatory pricing issues. During the period of the six
                             mergers that we reviewed, 1996 through 1998, FTC achieved three
                             settlements and issued one complaint in ECOA enforcement actions; none
                             involved bank holding company entities.

                             In all six mergers, FRB noted that the primary banking regulator had found
                             no evidence of illegal credit discrimination in its most recent fair lending
                             compliance examinations. Of the two prior FRB investigations of nonbank
                             mortgage subsidiaries, FRB found no evidence of illegal discrimination in
                             one case. As discussed further in the next section, FRB made a referral to
                             DOJ on the other case on the basis of the nonbank mortgage subsidiary’s
                             use of discretionary loan pricing practices that resulted in disparate
                             treatment based on race.

FRB Imposed Conditions on    FRB approved all six of the mergers, but one was approved with a
                             condition related to a fair lending compliance issue. At the time of the
One Merger on the Basis of   merger application in question, DOJ was pursuing an investigation—on the
Fair Lending Issues          basis of a FRB referral—of the holding company’s nonbank mortgage
                             subsidiary. The focus of the investigation was on the nonbank mortgage
                             subsidiary’s use of discretionary loan pricing—known as overaging—
                             which allegedly resulted in minorities disproportionately paying higher
                             loan prices than nonminorities. The nonbank mortgage subsidiary was
                             under a commitment with FRB not to engage in overage practices. FRB
                             approved the merger with the condition that the holding company not
                             resume the overage practice without FRB’s approval. DOJ subsequently
                             entered into a settlement agreement with the nonbank mortgage subsidiary




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                            B-280045




                            in which it agreed to change its overage policies and pay $4 million into a
                                             17
                            settlement fund.

                            In our review of the six merger cases, we found weaknesses in some of
FRB’s Processes Had         FRB’s practices that could limit the access of various government agencies
                            to information about the fair lending compliance performance of bank
Weaknesses That             holding company entities. Two weaknesses could limit FRB’s access to
Could Limit                 such information during consideration of bank holding company merger
                            applications. Specifically, FRB did not routinely contact FTC or HUD to
Government Agencies’        obtain information about any fair lending complaints or concerns related
Access to Relevant          to the entities involved in the mergers. Moreover, FRB did not ensure that
Information                 information about the structural organization of the bank holding
                            companies was available to the public or DOJ, which could have limited
                            the information provided to FRB by these sources. A third weakness could
                            limit the access of other agencies with fair lending compliance
                            responsibilities to information FRB obtained during consideration of
                            merger applications. 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.

FRB Did Not Routinely       As discussed previously, the enforcement of fair lending laws is shared by
                            a number of federal agencies. For example, there are four agencies (FRB,
Seek Information From FTC   FTC, HUD, and DOJ) that have roles in fair lending enforcement with
or HUD                      regard to nonbank mortgage subsidiaries of bank holding companies.
                            Federal agencies involved in fair lending oversight and enforcement—
                            including FRB, FTC, HUD, and DOJ and other federal banking regulators—
                            recognize the need for effective coordination in their Interagency Policy
                            Statement on Discrimination in Lending. This policy states that they will
                            seek to coordinate their actions to ensure that each agency’s action is
                            consistent and complementary.

                            In keeping with the spirit of this policy, FRB routinely solicited input from
                            the primary federal regulator for the banking subsidiaries of the holding

                            17
                             According to FRB, one bank holding company merger or acquisition application has been denied on
                            the basis of fair lending compliance issues. In 1993, FRB denied the application by Shawmut National
                            Corporation to acquire the New Dartmouth Bank on the basis of fair lending concerns. In denying the
                            application, FRB cited DOJ’s and FTC’s ongoing joint investigation of the lending practices of Shawmut
                            Mortgage Company, a holding company affiliate. The statement also emphasized inaccuracies in HMDA
                            data reported by Shawmut. The investigation was prompted by a 1992 FRB referral reflecting its
                            concern that Shawmut, through the mortgage affiliate, may have engaged in discriminatory treatment
                            of minorities in mortgage lending in Boston. At the time of the application, DOJ and FTC had not yet
                            completed their joint investigation.




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                         B-280045




                                                                        18
                         companies involved in the merger. In addition, FRB and DOJ staff told us
                         that they coordinated informally with each other during the merger
                         application process regarding the fair lending compliance of the holding
                         company subsidiaries involved in the mergers. However, FRB did not
                         typically contact FTC or HUD to determine if they had ongoing
                         investigations involving any of the bank holding company subsidiaries or
                         other data, including consumer complaints, that could be useful in
                         assessing the fair lending concerns raised by consumer and community
                         groups during the merger process. In the five merger cases in which fair
                         lending concerns about the nonbank mortgage subsidiaries were raised,
                         FRB contacted FTC with regard to only one of the merger applications;
                         FRB did not contact HUD in any of the cases. Without coordination with
                         FTC and HUD, FRB cannot ensure that it has access to all relevant
                         information about fair lending issues that may arise in its consideration of
                         bank holding company merger applications.

                         In three of the six merger cases, HUD had fair lending complaint
                         investigations in process at the same time that FRB was considering the
                         merger applications. There was one merger in which HUD had three
                         ongoing investigations arising out of consumer complaints (complaint
                         investigations) at the time of the merger application. For example, one of
                         the cases that HUD was investigating during a merger involved alleged
                         discrimination at the preapplication interview, such as minority applicants
                         receiving less information about the bank’s mortgage products and being
                         quoted less favorable terms than similarly qualified White applicants. All
                         six of the complaint investigations that were in process at the time of the
                         mergers were the result of complaints by individuals. In five of the six
                         cases, HUD entered into conciliation agreements that involved monetary
                         payments to the complainants ranging from $350 to $46,000.

Public and Enforcement   In soliciting input on the proposed merger, FRB did not provide or direct
                         federal enforcement agencies or the public to structural information about
Agencies Need Holding    bank holding companies that would identify an affiliated bank and
Company Structure        nonbank lenders involved in the merger. As a result, federal enforcement
Information              agencies and the public may not have been able to provide all relevant
                         information. For this reason, FRB may not have had current and complete
                         fair lending information on bank holding companies to properly assess the
                         fair lending activities of these companies during the merger application
                         process.


                         18
                          FRB also solicited information from the relevant state regulator of the banking subsidiaries of the
                         holding companies involved in the merger.




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                          B-280045




                          Ensuring knowledge of and access to structural information on bank
                          holding companies, including the names and addresses of bank and
                          nonbank lenders under the applicant, could enable the enforcement
                          agencies to better complement FRB’s efforts to assess the fair lending
                          activities of bank holding company entities for the merger application
                          process. A HUD official we interviewed stated that without information
                          from FRB regarding the structural organization of a bank holding
                          company, HUD may not be able to identify the entities within the holding
                          company structure that were subject to ongoing or past complaint
                          investigations. Officials from DOJ and FTC also indicated the need for
                          such information.

                          Access to information about the structural organization of the holding
                          companies involved in proposed mergers could also help improve the
                          quality of public comments that FRB receives during the merger process.
                          FRB staff stated that the comments that they receive from consumer and
                          community groups often exhibit a lack of understanding of the often
                          complex structural organization of the holding companies involved in a
                          proposed merger—particularly as it relates to mortgage lending activity.

                          Outlines of the hierarchical structure of bank holding companies have
                          been available since January 1997 through the FRB’s National Information
                                                          19
                          Center (NIC) on the Internet. However, not all the government agencies
                          and consumer and community groups may be aware of the NIC source or
                          have access to it. In addition, the structural information provided by NIC
                          could be viewed as somewhat overwhelming and, in that sense, difficult to
                          use. As noted on the NIC Web site itself, the information for large
                          institutions “can be quite lengthy and complex.” The structural information
                          on the NIC Web site is also limited in that geographical information is
                          provided for some, but not all, lenders within holding companies. Although
                          the site offers the names and addresses of banking institutions’ branch
                          offices, it does not offer such information for nonbank lenders within a
                          holding company. To determine the affiliation of a local lender’s branch
                          office, consumers are likely to find names and addresses necessary—
                          especially in light of the many consolidations that are occurring in today’s
                          financial marketplace and the similarities that can exist in lenders’ names.

FRB Did Not Routinely     Because the enforcement of fair lending laws is shared by a number of
                          federal agencies and fair lending problems may involve the interaction of
Forward Comment Letters   entities overseen by differing federal agencies, coordinated information-
                          sharing among the agencies can contribute to effective federal oversight.
                          19
                               The NIC data can be accessed at http://www.ffiec.gov/nic.




                          Page 18                                      GAO/GGD-00-16 Large Bank Mergers and Fair Lending
              B-280045




              FRB staff told us they do not typically forward the fair lending-related
              comment letters received during the merger process to the appropriate
              primary banking regulator, FTC, or HUD for consideration in subsequent
              fair lending oversight activities. FRB staff stated that they do refer some of
              the fair lending-related comment letters if they identify problems or
              practices that give rise to supervisory concerns. They explained that their
              internal policies and, in the case of HUD, a Memorandum of Agreement
              between HUD and the banking regulators require FRB to forward
                                                                                        20
              consumer complaints by individuals to the appropriate federal agency.
              However, FRB staff stated that comment letters that raised general fair
              lending issues regarding lending patterns or policies would not have been
              routinely forwarded to other agencies. For example, FTC did not receive
              the comment letters from consumer and community groups that raised fair
              lending issues with the nonbank mortgage subsidiaries of the holding
              companies involved in four of the mergers. We believe that by forwarding
              the fair lending-related comment letters, FRB will provide the other
              agencies the opportunity to detect problems that arise from the
              interactions of entities under the holding company structure that may
              otherwise go undetected.

              The historical division of fair lending oversight responsibility and
Conclusions   enforcement authority presents challenges and opportunities to agencies
              that have jurisdiction over the entities in large bank holding companies.
              Although large bank holding companies typically include entities overseen
              by different federal regulators, some types of fair lending abuses could
              involve operating relationships between such entities. An adequate federal
              awareness during the merger application process of fair lending
              compliance performance and federal response to any alleged fair lending
              abuses may well depend upon effective information-sharing among the
              various agencies and the ready availability to these agencies and the public
              of information identifying lenders under the holding company. Although
              the merger application process is not intended to substitute for fair lending
              examination or enforcement processes of individual agencies, it presents
              an opportunity to enhance the effectiveness of those processes. To take
              advantage of this opportunity, the FRB’s merger application process for
              large bank holding companies should provide that relevant information,
              including consumer complaints or consumer complaint data, be obtained
              from all agencies with responsibility for compliance with fair lending laws.
              Further, the process should ensure that this information, as well as
              comment letters received from consumer and community groups, is shared

              20
               Executive branch agencies are required to notify HUD of FHAct violations and complaints under
              Executive Order 12892. Exec. Order No. 12892, 59 Fed. Reg. 2, 939 (1994).




              Page 19                                 GAO/GGD-00-16 Large Bank Mergers and Fair Lending
                  B-280045




                  among those agencies to assist in their continuing efforts to identify and
                  oversee developments in mortgage lending that can affect lender
                  compliance with fair lending laws.

                  FRB, as regulator of bank holding companies, is uniquely situated to
                  monitor developments in operating relationships among holding company
                  entities that could affect fair lending. Its role could be especially valuable
                  in monitoring the lending activity of nonbank mortgage subsidiaries. The
                  FRB policy of not routinely examining nonbank mortgage subsidiaries for
                  fair lending compliance and the FTC role as an enforcement agency rather
                  than a regulator result in a lack of regulatory oversight of the fair lending
                  performance of nonbank mortgage subsidiaries whose growth in lending
                  out-paced other bank sector entities in 1997.

                  To enhance the consideration of fair lending issues during the bank
Recommendations   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.

                  To aid in ongoing federal oversight efforts, we recommend that FRB
                  develop a policy and procedures to ensure that it provides federal agencies
                  relevant comment letters and any other information arising from the
                  merger application process that pertains to lenders for which they have
                  fair lending enforcement authority. For example, the other agencies may
                  be interested in receiving FRB’s HMDA analysis as well as the other data
                  obtained and analyzed by FRB in response to the fair lending allegations
                  raised in the comment letters.

                  In addition, we recommend that FRB monitor the lending activity of
                  nonbank mortgage subsidiaries and consider examining these entities if
                  patterns in lending performance, growth, or operating relationships with
                  other holding company entities indicate the need to do so.




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                      B-280045




                      We requested comments on a draft of this report from the Chairman of the
Agency Comments and   Federal Reserve Board, the Comptroller of the Currency, the Secretary of
                      Housing and Urban Development, the General Counsel of the Federal
Our Evaluation        Trade Commission, and the Assistant Attorney General for Administration
                      of the Department of Justice. Each agency provided technical comments,
                      which we incorporated into the report where appropriate. In addition, we
                      received other written comments from FRB, OCC, and HUD; these are
                      reprinted in appendixes IV through VI of this report.

                      With respect to the draft report’s recommendations, FRB sought
                      clarification regarding the first recommendation, generally agreed with the
                      next two recommendations, and disagreed with the last recommendation.
                      OCC and HUD did not disagree with our recommendations and expressed
                      their support for efficient and effective enforcement of the fair lending
                      laws. Further, HUD suggested that a more formal arrangement be created
                      for obtaining and considering agency input during FRB’s merger approval
                      process.

                      FRB sought clarification of our intent in the first recommendation—that,
                      when soliciting comments on proposed bank holding company mergers,
                      FRB provide structural information about those holding companies. FRB
                      said that information about holding company structure is available to the
                      public and federal agencies on the Internet at the Federal Reserve’s
                      National Information Center (NIC) site and, upon request, from the Board
                      and the Reserve Banks. FRB also said that the information is often in the
                      application filed by the applicant bank holding company, for those who
                      elect to review the application in full; and the information is widely
                      available from publications and from other federal agencies.

                      We added information to the text to clarify our intent. Our intent in
                      recommending that FRB provide the structural information or a source or
                      sources of such information is to enhance consideration of fair lending
                      issues during the merger approval process. We believe that the provision
                      of structural information, including names and addresses of branch offices
                      of lenders, or directions about how to obtain that information, can help
                      ensure that FRB receives from interested parties timely and complete fair
                      lending information on lenders involved in the merger. Without being able
                      to identify the bank and nonbank lenders in the holding companies
                      involved in a merger, interested parties could be unable to determine if
                      lenders whose actions have raised fair lending concerns are affiliated with
                      those holding companies. We do not disagree that this information is
                      sometimes available from a variety of sources. However, ready public
                      access to that information depends upon public awareness of the



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B-280045




availability of the information. We note that none of the Federal Register
notices requesting public comment on bank holding company mergers in
our sample that occurred after 1997, when NIC was created, mentioned the
NIC Internet site or any other source of information about the structure of
the applicant bank holding companies.

Responding to the report’s statement that information provided on NIC
can be quite lengthy and complex, FRB said that it believed the complexity
is largely a reflection and a function of the size and scope of these large
organizations. FRB also said it was not clear just how the information
could be made simpler for the public. We agree that the complexity of the
information about the largest bank holding companies on NIC is a function
of the size and scope of these organizations. However, we also believe that
the information could be narrowed, and in that way simplified, by a
mechanism that could help interested parties focus on the relevant details
of the holding company’s structure. A variety of entities are often affiliated
with large holding companies, including, for example, investment, leasing,
and real estate development companies. A NIC search mechanism to
narrow the structural information to bank and nonbank lenders affiliated
with a holding company would aid federal agencies and consumer
organizations that may need such information to collect or sort through
fair lending concerns about such institutions from field offices or member
                            21
organizations nationwide. More focused information, including names
and addresses of branch offices, would also benefit consumers attempting
to determine the affiliation of a local lender’s office.

As mentioned in the report, NIC provides a mechanism for obtaining lists
of the names and addresses of banking institutions’ branch offices;
however, it does not provide the addresses of nonbank lenders’ branch
offices or list such branch offices. We believe that this is an important
weakness in NIC as a tool to be used in the merger application process by
agencies, consumer groups, and individuals, considering the prevalence of
concerns about nonbanks’ fair lending performance in the merger cases
we analyzed.

FRB said that persons generally start out with the identity of the
organization about which they have concerns, and it should be relatively
simple to confirm whether that organization is affiliated with an applicant
bank holding company. We agree that persons would generally use NIC to

21
   Nonbank subsidiaries of large holding companies include firms engaged in a wide variety of activities.
For example, lenders that are nonbank subsidiaries of holding companies could include mortgage
companies and finance companies.




Page 22                                    GAO/GGD-00-16 Large Bank Mergers and Fair Lending
  B-280045




  determine if an identified organization is affiliated with an applicant bank
  holding company. However, the ease of determining this through NIC
  could vary, depending upon whether the organization of concern is a
  banking institution or a nonbank subsidiary of the holding company. As of
  October 10, 1999, NIC users could determine the holding company
  affiliation of a banking institution (but not a nonbank holding company
  subsidiary) by entering the legal name of a banking institution (or even
  part of that name) and the city and state in which the institution is located.
  NIC also offered a function enabling users to obtain a listing of addresses
  of all branch offices of banking institutions (but not addresses of
  franchises or branch offices of lenders that are nonbank holding company
  subsidiaries). To confirm a nonbank lenders’ affiliation with an applicant
  bank holding company, the interested party’s only option is to search for
  the nonbank lender’s legal name while reading through the multipage
  listings of entities that describe the entire hierarchial structure, starting
  with the parent holding company. The only geographical information
  provided for a nonbank holding company subsidiary in the listing is the
  city and state domicile of the head office—that is, no branch offices or
  franchises are identified in the listing.

  Referring to our mention of the absence of geographic information on NIC,
  FRB notes that a person’s concerns about a particular entity will likely
  relate to the geographic area in which the person resides, or to which the
  person has some link. We agree with this statement. We also believe that a
  person concerned about a particular local lender is likely to need to see
  the names and addresses of lenders affiliated with holding companies
  involved in a proposed merger to determine if his concern about the local
  lender is relevant for FRB’s consideration.

  With regard to our recommendation for greater information sharing
  between FRB, the other banking regulators, HUD, and FTC during the
  merger application process, FRB generally agreed and said it would
  explore ways to enhance the systematic exchange of relevant information.
  However, FRB did not agree that it should seek information about other
  agencies’ consumer complaints as part of the merger application review
  process. The reasons for this were:

• A 1992 Memorandum of Understanding between HUD and the banking
  regulators’ calls for HUD to refer allegations of fair lending violations to
  the appropriate banking regulator, which is to take these into account in
  examinations and supervisory activity.
• HUD cases involving individual or isolated grievances—and not a finding
  of a pattern or practice—would not likely represent the type of



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B-280045




information that is particularly useful in FRB’s review of managerial
resources for purposes of the Bank Holding Company Act.

Although the 1992 Memorandum of Understanding between HUD and the
banking regulators calls for the referral of allegations of fair lending
violations to the appropriate banking regulator, it does not address the
referral of these fair lending allegations to FRB for consideration during
the bank holding company merger application process. The fair lending
allegations received by HUD, FTC, and the other banking regulators could
be useful to FRB in its consideration of the managerial resources factor
during the merger process. We acknowledge that not all consumer
complaints received by other agencies would be relevant for FRB to
consider during the bank holding company merger process. However, an
otherwise unobserved pattern or practice bearing on the managerial
resources of a large and complex holding company could emerge from a
review of widely collected consumer complaints. Moreover, consumer
complaint letters can be a useful indicator of certain types of illegal credit
discrimination, such as discriminatory treatment of applicants and illegal
prescreening and marketing. FRB stated that the exchange of information
between agencies should (1) ensure that the information is provided in a
timely manner and (2) maximize the benefits of the exchange while
minimizing the burden to all parties. We concur with FRB’s expectations
regarding the exchange of information and acknowledge FRB’s initiative in
planning to consult with the other federal agencies to identify possible
ways to enhance the systematic exchange of relevant information.

FRB stated that it planned to take action in response to our
recommendation that it provide copies of relevant comment letters
received during the merger application process to the other federal
agencies involved with fair lending enforcement. Specifically, FRB
indicated that it would consult with the other agencies and was prepared
to establish whatever mechanism deemed appropriate to ensure that the
agencies receive public comments that they would find helpful to ongoing
supervisory oversight. FRB’s plans are a positive first step in responding to
our recommendation.

FRB disagreed with our recommendation as stated in the draft report that
it monitor the lending activities of nonbank mortgage subsidiaries and
consider reevaluating its policy of not routinely examining these entities if
circumstances warranted. FRB stated that it had recently studied this issue
at length and concluded that although it had the general legal authority to
examine nonbank mortgage subsidiaries of bank holding companies, it
lacked the clear enforcement jurisdiction and legal responsibility for



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B-280045




engaging in routine examinations. We revised the wording of our
recommendation to clarify that we were not necessarily recommending
that FRB consider performing routine examinations of nonbank mortgage
subsidiaries. We recognize that FTC has the primary fair lending
enforcement authority for the fair lending compliance of nonbank
mortgage subsidiaries. However, FRB is uniquely situated to monitor the
activities of these nonbank mortgage subsidiaries by virtue of its role as
the regulator of bank holding companies and its corresponding access to
data that are not readily available to the public or other agencies, such as
FTC. If patterns in growth, lending performance, or operating relationships
with other holding company entities do not change dramatically, then
there may be no reason to examine these entities. Monitoring the lending
activities of the nonbank mortgage subsidiaries would help FRB determine
when it would be beneficial to conduct targeted examinations of specific
nonbank mortgage subsidiaries using size, extent of lending in
predominately minority communities, involvement in sub-prime lending, or
other factors as the basis for selection. In other cases, FRB may determine
that the results of its monitoring efforts should be referred to those
agencies responsible for enforcement of nonbank mortgage subsidiaries’
compliance with fair lending laws.

OCC and HUD did not disagree with our recommendations. OCC stated
that it was committed to working with all the agencies that have a role in
providing efficient and effective oversight of compliance with fair lending
laws. HUD stated that it stands committed to enhancing coordination
among federal agencies to achieve fair lending. HUD noted its support for
efforts to ensure greater compliance among nondepository lenders with
the FHAct and other consumer protection laws. HUD suggested that a
memorandum of understanding that would govern interagency
coordination during the merger application process might be appropriate.
Such a memorandum could be a useful tool to document each agency’s
responsibility regarding information sharing and coordination during the
merger application process for bank holding companies.

As agreed with your offices, we are sending copies of this report to
Representative Rick Lazio, Chairman, and Representative Barney Frank,
Ranking Minority Member, of the House Subcommittee on Housing and
Community Opportunities; Representative James Leach, Chairman, and
Representative John LaFalce, Ranking Minority Member, of the House
Committee on Banking and Financial Services; and Senator Phil Gramm,
Chairman, and Senator Paul Sarbanes, Ranking Minority Member, of the
Senate Committee on Banking, Housing, and Urban Affairs. We are also
sending copies of the report to the Honorable Alan Greenspan, Chairman,



Page 25                        GAO/GGD-00-16 Large Bank Mergers and Fair Lending
B-280045




Board of Governors of the Federal Reserve System; the Honorable John D.
Hawke, Jr., Comptroller of the Currency; the Honorable Andrew Cuomo,
Secretary, Department of Housing and Urban Development; the Honorable
Stephen R. Colgate, Assistant Attorney General for Administration,
Department of Justice; and the Honorable Deborah A. Valentine, General
Counsel, Federal Trade Commission. Copies will also be made available to
others on request.

If you or your staff have any questions regarding this letter, please contact
me or Kay Harris at (202) 512-8678. Key contributors to this report are
acknowledged in appendix VII.




Thomas J. McCool
Director, Financial Institutions
and Markets Issues




Page 26                            GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Page 27   GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Contents



Letter                                                                                             1


Appendix I                                                                                        32

Status of Actions on
Recommendations
Made in Our 1996
Report
Appendix II                                                                                       33
                        Credit-Scoring Issues                                                     33
Emerging Fair Lending   Automated Loan Underwriting Issues                                        34
Issues Not Raised in    Mortgage Broker Issues                                                    35

the Six Mergers
Appendix III                                                                                      38

Data on Loans
Originated by
Institution Type From
1995 Through 1997
Appendix IV                                                                                       44

Comments From the
Federal Reserve Board
Appendix V                                                                                        48

Comments From the
Office of the
Comptroller of the
Currency




                        Page 28                     GAO/GGD-00-16 Large Bank Mergers and Fair Lending
                    Contents




Appendix VI                                                                                     49

Comments From the
Department of
Housing and Urban
Development
Appendix VII                                                                                    51

GAO Contacts and
Staff
Acknowledgments
Tables              Table 1: Fair Lending Issues Raised in Six Selected                          9
                      Merger Cases


Figures             Figure 1: Fair Lending Enforcement Responsibility for                        5
                      Components of a Hypothetical Bank Holding Company
                    Figure III.1: Loans Originated by Financial Sector From                     39
                      1995 to 1997
                    Figure III.2: Proportion of the Number of Loans                             40
                      Originated by Bank Sector Component From 1995 to
                      1997
                    Figure III.3: Proportion of the Dollars of Loans                            41
                      Originated by Bank Sector Component From 1995 to
                      1997
                    Figure III.4: Percent Change in the Number of Loan                          42
                      Originations for Each Bank Sector Component From
                      1995 to 1997
                    Figure III.5: Percent Change in the Dollar Value of Loan                    43
                      Originations for Each Bank Sector Component From
                      1995 to 1997




                    Page 29                       GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Contents




Abbreviations

CRA         Community Reinvestment Act
DOJ         Department of Justice
ECOA        Equal Credit Opportunity Act
FDIC        Federal Deposit Insurance Corporation
FHA         Fair Housing Act
FRB         Federal Reserve Board
FTC         Federal Trade Commission
HMDA        Home Mortgage Disclosure Act
HUD         Department of Housing and Urban Development
NCUA        National Credit Union Administration
OCC         Office of the Comptroller of the Currency
OTS         Office of Thrift Supervision
FRS         Federal Reserve System


Page 30                      GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Page 31   GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Appendix I

Status of Actions on Recommendations Made
in Our 1996 Report

GAO recommendation                           Responsible agency(ies)                                Action taken by agency(ies)
Remove the disincentives associated with     Federal Reserve Board (FRB) and                        Congress enacted legislation in September
self-testing.                                Department of Housing and Urban                        1996. FRB and HUD issued implementing
                                                                                                                                   a
                                             Development (HUD)                                      regulations in December 1997.

Develop and adopt uniform fair lending       FRB, Office of the Comptroller of the                  The Federal Financial Institutions
examination procedures.                      Currency (OCC), Federal Deposit Insurance              Examination Council approved Interagency
                                             Corporation (FDIC), Office of Thrift                   Fair Lending Examination Procedures in
                                                                                                                    b
                                             Supervision (OTS), and National Credit                 December 1998.
                                             Union Administration (NCUA)


                                                                                                               c
Adopt guidelines and procedures for the use FRB, OCC, FDIC, OTS, and NCUA                           FRB - yes
of preapplication discrimination testing.                                                           OCC - yes
                                                                                                              d
                                                                                                    FDIC - no
                                                                                                             e
                                                                                                    OTS - no
                                                                                                    NCUA - no

Use full range of enforcement authority,     FRB, OCC, FDIC, OTS, and NCUA                          FRB - yes
including civil money penalties, to ensure                                                          OCC - yes
timely and accurate HMDA data.                                                                      FDIC - yes
                                                                                                    OTS - yes
                                                                                                               g
                                                                                                    NCUA - no

Update guidance on the characteristics of    Department of Justice (DOJ)                            DOJ issued updated guidance on pattern and
referable pattern or practice cases under                                                           practice of discrimination to the banking
                                                                                                                                             h
ECOA and FHA.                                                                                       regulators and HUD in November 1996.
                                             a
                                              Economic Growth and Regulatory Paperwork Reduction Act of 1996, sec. 2302 (a)(1) & (b)(1), 15
                                             U.S.C. 1691c-1(1996); Regulation B, 12 C.F.R. sec. 202.15(1998)(FRB’s implementing regulation on
                                             self-testing); and 12 C.F.R. parts 100 and 103 (1998) (HUD’s implementing regulation on self-testing).
                                             b
                                             FRB, FDIC, and OTS have implemented the procedures. OCC and NCUA indicated they are in the
                                             process of developing additional guidance to use in conjunction with the Interagency Fair Lending
                                             Examination Procedures.
                                             c
                                              FRB stated it has authorized the use of preapplication testing in its reserve banks. However, none of
                                             the reserve banks have conducted any tests to date.
                                             d
                                              In a letter dated September 4, 1998, FDIC stated it does not engage in the use of testers in fair
                                             lending examinations. Instead, FDIC encourages banks to implement their own testing programs, and
                                             FDIC examiners are to undergo training relative to a bank’s self-testing program.
                                             e
                                                 OTS has initiated a project to determine the feasibility of conducting a preapplication testing program.
                                             f
                                              NCUA is in the process of developing guidance to address preapplication testing.
                                             g
                                              NCUA indicated that timely and accurate HMDA data has not been identified as a problem; therefore,
                                             it has not assessed civil money penalties.
                                             h
                                             Department of Justice Memorandum, “Identifying lender practices that may form the basis of a
                                             pattern or practice referral to the Department of Justice,” November 1996.
                                             Source: Data provided by FRB, OCC, FDIC, OTS, NCUA, DOJ, and HUD.




                                             Page 32                                       GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Appendix II

Emerging Fair Lending Issues Not Raised in
the Six Mergers

                        In addition to the issues raised by consumer and community groups in the
                        six mergers that we looked at, representatives of the regulatory and
                        enforcement agencies and the bank holding companies we contacted
                        identified various emerging fair lending issues. These issues involved (1)
                        credit scoring, (2) automated loan underwriting, and (3) mortgage brokers.
                        The fair lending concerns associated with these three issues are discussed
                        below. We do not attempt to address all of the various and complex
                        enforcement, compliance, and consumer protection issues associated with
                        each of the three topics. Instead, we highlight some of the fair lending
                        concerns that have been associated with each topic.

                        The Federal Reserve Board (FRB) and the Department of Justice (DOJ)
Credit-Scoring Issues   raised the issue of potential discrimination in credit scoring as an emerging
                        fair lending concern. The Office of the Comptroller of the Currency (OCC)
                        expressed the concern that some lenders may view credit scoring as a safe
                        harbor from fair lending issues. This would ignore the possibility that
                        differential treatment may occur in segmenting the applicant population
                        during the development or input of the data, or in judgmental overrides of
                        the credit-scoring system.

                        According to credit reporting companies (credit bureaus), credit scoring is
                        intended to be an objective method for predicting the future credit
                        performance of borrowers. Credit scoring has gained wide usage among
                        lenders who use it to make lending decisions on various types of loans,
                        such as installment; personal finance; bankcard; and, most recently,
                        mortgages. To develop a credit-scoring system, lenders generally use a
                        risk-scoring process that examines consumer credit reports, assigns
                        numerical values to specific pieces of information, puts those values
                        through a series of mathematical calculations, and produces a single
                        number called a risk score or credit score. Lenders generally offer credit to
                        borrowers with the higher scores. The premise is that the higher scores
                        indicate a better likelihood that the borrower will repay the loan.

                        According to FRB, discrimination in credit scoring could be revealed in
                        two ways, either through disparate treatment or disparate impact.
                        Disparate treatment and disparate impact are methods of analyzing
                        whether discrimination exists. The disparate treatment analysis
                        determines whether a borrower is treated less favorably than his/her peers
                        due to race, sex, or other characteristics protected by the Equal Credit
                        Opportunity Act (ECOA) or the Fair Housing Act (FHAct). The disparate
                        impact analysis determines whether a lender’s seemingly neutral lending
                        policy has a disproportionately adverse impact against a protected group,




                        Page 33                        GAO/GGD-00-16 Large Bank Mergers and Fair Lending
                      Appendix II
                      Emerging Fair Lending Issues Not Raised in the Six Mergers




                      the policy is justified by business necessity, and a less adverse alternative
                      to such policy or practice exists.

                      OCC, DOJ, and the Federal Trade Commission (FTC) agree that fair
                      lending concerns in credit scoring most often arise when lenders ignore
                      the credit score (i.e., override the score) and use subjective judgment to
                      make a lending decision. Fair lending concerns associated with credit
                      scoring were not raised as an issue in any of the six bank holding company
                      mergers in our study. Officials from all four of the bank holding companies
                      we interviewed stated they used credit-scoring systems. However, they
                      indicated that their credit-scoring systems were applied with safeguards
                      designed to ensure compliance with fair lending laws and regulations.

                      From 1990 through 1998, the regulators and enforcement agencies had few
                      cases of discrimination in credit scoring. OCC referred a case in 1995 and
                      another in 1998 to DOJ that dealt with alleged discrimination in credit
                      scoring. An agreement was reached with OCC in the 1995 case, and the
                      1998 referral resulted in DOJ filing a lawsuit. In this particular case, DOJ
                      alleged that the bank required a higher credit score for Hispanic applicants
                      to be approved for loans/credit. FTC cited one case of credit
                      discrimination in 1994, which resulted in a consent decree. In this case, the
                      lender had used overrides of the credit-scoring system that discriminated
                      against applicants on the basis of marital status.

                      The fair lending issues that were raised regarding credit scoring are closely
Automated Loan        associated with the issues associated with automated loan underwriting.
Underwriting Issues   According to the Federal National Mortgage Association (Fannie Mae),
                      automated loan underwriting is a computer-based method that is intended
                      to enable lenders to process loan applications in a quicker, more efficient,
                      objective, and less costly manner. The lender enters information from the
                      borrower’s application into its own computer system. This information is
                      communicated to an automated loan underwriting system, such as those
                      developed by Fannie Mae and the Federal Home Loan Mortgage
                      Corporation (Freddie Mac). The lender then requests a credit report and
                      credit score from a credit bureau. The automated loan underwriting
                      system then evaluates the credit bureau data and other information to
                      arrive at a recommendation about whether or not the loan meets the
                      criteria for approval.

                      The following is an excerpt from a recent report by the Department of
                      Housing and Urban Development (HUD) on the single-family underwriting
                      and appraisal guidelines of Fannie Mae and Freddie Mac that summarizes




                      Page 34                             GAO/GGD-00-16 Large Bank Mergers and Fair Lending
                  Appendix II
                  Emerging Fair Lending Issues Not Raised in the Six Mergers




                  some of the fair lending concerns associated with automated loan
                  underwriting systems:

                  “Currently, there is little known about the effects of automated underwriting systems on
                  low- and moderate-income or minority applicants. Some informants believe these systems
                  may prevent underwriters [lenders] from taking full advantage of the increased levels of
                  underwriting flexibility allowed by the GSEs [government-sponsored enterprises]. Lower
                  income applicants are more likely to be required to produce documentation supporting
                  their loan application, such as letters explaining past credit problems or statements from
                  employers about expected salary increases. Automated systems may not have the ability to
                  assess all of these kinds of data, and so may place lower income borrowers at a
                  disadvantage. Informants also raised concerns that these systems may allow lenders to
                  reduce their underwriting staff because automated systems increase the productivity of
                  individual underwriters. Lenders, informants pointed out, could reduce staff and only
                  process applications identified by automated systems as requiring minimal further review.
                  As a result, automated systems may make it harder for marginal applicants to receive
                  personalized attention from an underwriter.”1 ”

                  Representatives of the four holding companies that resulted from the
                  mergers included in our study stated that they all used automated loan
                  underwriting and credit-scoring systems to some degree. Three of the four
                  holding companies said they have adopted a program in which loans that
                  are not initially approved by their automated loan underwriting systems
                  are subject to a secondary review by an experienced loan underwriter.
                  Although the secondary review programs added additional costs and time
                  to the process, the holding companies stated that it was necessary to guard
                  against potential disparate impacts with respect to lending to minorities.

                  Another concern that was raised by bank holding company officials that
Mortgage Broker   we met with involved a lender’s liability for the fair lending activities of
Issues            mortgage brokers who are affiliated in some fashion with the lender.
                  Although no standard definition of a mortgage broker exists, mortgage
                  brokers are generally entities that provide mortgage origination or retail
                  services and bring a borrower and a creditor together to obtain a loan from
                                                        2
                  the lender (or funded by the lender). Typically, the lender decides whether
                  to underwrite or fund the loan. HUD defines two categories of mortgage
                  brokers. HUD’s narrowly defined category consists of entities that may
                  have an agency relationship with the borrower in shopping for a loan and

                  1
                  A Study of the GSEs’ Single Family Underwriting Guidelines, Final Report, April 1999, Department of
                  Housing and Urban Development.
                  2
                   According to HUD, mortgage brokers initiate an estimated half of all home mortgages made each year
                  in the United States. This estimate covers loans originated by all lender types, including independent
                  finance companies that are not affiliated with insured depository institutions or their holding
                  companies. (See app. III for data regarding the number of loans originated from 1995 through 1997 by
                  lender type.)




                  Page 35                                   GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Appendix II
Emerging Fair Lending Issues Not Raised in the Six Mergers




therefore have a responsibility to the borrower because of this agency
representation. HUD’s broadly defined category consists of entities who do
not represent the borrower but who may originate loans with borrowers
utilizing funding sources in which the entity has a business relationship.
The banking industry is concerned that lenders could be held liable for a
fair lending violation resulting from the activity of a mortgage broker that
provides origination or retail services for a lender. When lenders use
mortgage brokers in providing mortgage credit, it is not always clear
whether the lender, the mortgage broker, or both are responsible for the
credit approval decision. FRB officials noted differences between the
federal enforcement agencies and FRB with respect to the criteria used to
determine when lenders are responsible for lending transactions involving
brokers.

Of the four holding companies resulting from the mergers in our study,
three indicated that they use mortgage brokers. Officials of one of the
holding companies we contacted said they wanted additional clarification
from bank regulators regarding the bank’s liability for its lending decisions
in transactions involving brokers because it used mortgage brokers
extensively in making loans for manufactured housing and automobile
loans.

ECOA, as implemented by FRB’s Regulation B, defines a creditor as
someone who “regularly participates” in credit-making decisions.
Regulation B includes in the definition of creditor “a creditor’s assignee,
transferee, or subrgee who so participates.” For purposes of determining if
there is discrimination, the term creditor also includes “a person who, in
the ordinary course of business, regularly refers applicants or prospective
applicants to creditors, or selects or offers to select creditors to whom
requests for credit may be made.” Regulation B states that “a person is not
a creditor regarding any violation of ECOA or regulation B committed by
another creditor unless the person knew or had reasonable notice of the
act, policy, or practice that constituted the violation before becoming
involved in the credit transaction.” This is referred to as the “reasonable
notice” standard. On the basis of the definition of creditor contained in
Regulation B and the specific facts, a mortgage broker can be considered a
creditor and a lender can also be considered a creditor even if the
transaction involves a mortgage broker.

FRB noted that lenders have increasingly asked for guidance regarding the
definition of a creditor as they expand their products and services. In
March 1998, FRB issued an Advance Notice of Proposed Rulemaking that
solicited comments related to the definition of “creditor” and other issues



Page 36                             GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Appendix II
Emerging Fair Lending Issues Not Raised in the Six Mergers




as part of its review of Regulation B. Specifically, FRB solicited comments
on whether (1) it was feasible for the regulation to provide more specific
guidance on the definition of a creditor; (2) the reasonable notice standard
regarding a creditor’s liability should be modified; and (3) the regulation
should address under what circumstances a creditor must monitor the
pricing or other credit terms when another creditor (e.g., a loan broker)
participates in the transactions and sets the terms.

On August 4, 1999, FRB published proposed revisions to Regulation B that
expand the definition of creditor to include a person who regularly
participates in making credit decisions, including setting credit terms. In
the Discussion of Proposed Revisions to the Official Staff Commentary
(the Discussion), FRB stated that it believes that it is not possible to
specify by regulation with any particularity the circumstances under which
a creditor may or may not be liable for a violation committed by another
creditor. Thus, FRB decided that Regulation B would retain the
“reasonable notice” standard for when a creditor may be responsible for
the discriminatory acts of other creditors. In the Discussion, FRB further
stated that it believes that the reasonable notice standard may carry with it
the need for a creditor to exercise some degree of diligence with respect to
third parties’ involvement in credit transactions, such as brokers or the
originators of loans. However, FRB believes that is not feasible to specify
by regulatory interpretation the degree of care that a court may find
required in specific cases.

Opinions vary among regulatory agencies in terms of a lender’s liability in
transactions that involve mortgage brokers. OCC and FRB share the view
that a broker must be an agent of the lender, or the lender must have
actual or imputed knowledge of a broker’s discriminatory actions, for a
lender to share liability for discrimination by a broker. DOJ has taken the
position that lenders are liable for all of their lending decisions, including
those transactions involving mortgage brokers. In 1996, DOJ took one
enforcement action involving a mortgage broker. The case involved
mortgage company employees and brokers charging African-American,
Hispanic, female, and older borrowers higher fees than were charged to
younger, White males. HUD officials told us their agency has not taken a
position on this issue. FTC officials told us that FTC has not taken any
action that reflects a position on this issue.




Page 37                             GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Appendix III

Data on Loans Originated by Institution Type
From 1995 Through 1997

               From 1995 through 1997, Federal Reserve Board (FRB) data indicated that
                                                1
               home mortgage lending activity by institution type within the financial
               sector generally increased as measured by the total number of loans
               originated. Figure III.1 provides an overview of mortgage lending activity
                                   2
               by financial sector. It shows that the bank sector originated more loans
               than the thrift sector or independent finance companies over this period
               when the large bank holding company mergers we studied occurred. As
               discussed previously, banking regulators (FRB, Office of the Comptroller
               of the Currency, the Federal Deposit Insurance Corporation, and the Office
               of Thrift Supervision) have the primary oversight responsibility for the
               bank and thrift sectors. 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.

               Figures III.2 and III.3 provide overviews of lending by components of the
               bank sector: banks, bank subsidiaries, and nonbank mortgage subsidiaries
               of bank holding companies. The home mortgage lending activity of the
               three components has remained relatively stable from 1995 to 1997. Figure
               III.2 shows that banks originated the most home mortgage loans in this
               period followed by bank subsidiaries and then nonbank mortgage
               subsidiaries of bank holding companies. Figure III.3 reveals the same
               pattern when dollar value of loans is considered. However, the data reveal
               larger percentages in the dollar value of home mortgage loan originations
               for both bank subsidiaries and bank holding company mortgage
               subsidiaries in comparison to the share of mortgage loan originations. The
               banking regulators are responsible for the fair lending oversight of the
               banks and bank subsidiaries; FTC and HUD are responsible for fair lending
               enforcement of the nonbank mortgage subsidiaries of bank holding
               companies.

               Because the nonbank mortgage subsidiaries of bank holding companies
               are not routinely examined for fair lending compliance by any federal
               regulatory or enforcement agencies, we analyzed their rate of growth
               compared to other bank sector lenders. Figure III.4 shows that in 1997, the
               percent change in loan originations by nonbank mortgage subsidiaries of
               bank holding companies was large in comparison to loan originations by

               1
                The Home Mortgage Disclosure Act Data (HMDA) on lending activity includes: (1) purchasing loans
               for single and multifamily dwellings, manufactured homes, and mobile homes; (2) home equity loans;
               and (3) mortgage refinances.
               2
                Credit Union data were not included in the figures due to the relatively small volume of mortgage
               loans they originated versus the other types of lenders.




               Page 38                                   GAO/GGD-00-16 Large Bank Mergers and Fair Lending
                                     Appendix III
                                     Data on Loans Originated by Institution Type From 1995 Through 1997




                                     banks and banking subsidiaries. Figure III.5 shows that the dollar value of
                                     mortgage loan originations has a pattern similar to the percentage change
                                     in loan originations. Figure III.4 and III.5 combined show an increasing
                                     presence in home mortgage lending by nonbank mortgage subsidiaries of
                                     bank holding companies.

Figure III.1: Loans Originated by
Financial Sector From 1995 to 1997




                                     Source: HMDA data provided by Division of Research and Statistics, FRB.




                                     Page 39                                 GAO/GGD-00-16 Large Bank Mergers and Fair Lending
                                            Appendix III
                                            Data on Loans Originated by Institution Type From 1995 Through 1997




Figure III.2: Proportion of the Number of
Loans Originated by Bank Sector
Component From 1995 to 1997




                                            Source: HMDA data provided by Division of Research and Statistics, FRB.




                                            Page 40                                 GAO/GGD-00-16 Large Bank Mergers and Fair Lending
                                             Appendix III
                                             Data on Loans Originated by Institution Type From 1995 Through 1997




Figure III.3: Proportion of the Dollars of
Loans Originated by Bank Sector
Component From 1995 to 1997




                                             Source: HMDA data provided by Division of Research and Statistics, FRB.




                                             Page 41                                 GAO/GGD-00-16 Large Bank Mergers and Fair Lending
                                       Appendix III
                                       Data on Loans Originated by Institution Type From 1995 Through 1997




Figure III.4: Percent Change in the
Number of Loan Originations for Each
Bank Sector Component From 1995 to
1997




                                       Source: GAO analysis of HMDA data provided by Division of Research and Statistics, FRB.




                                       Page 42                                 GAO/GGD-00-16 Large Bank Mergers and Fair Lending
                                        Appendix III
                                        Data on Loans Originated by Institution Type From 1995 Through 1997




Figure III.5: Percent Change in the
Dollar Value of Loan Originations for
Each Bank Sector Component From
1995 to 1997




                                        Source: GAO analysis of HMDA data provided by Division of Research and Statistics, FRB.




                                        Page 43                                 GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Appendix IV

Comments From the Federal Reserve Board




              Page 44    GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Appendix IV
Comments From the Federal Reserve Board




Page 45                           GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Appendix IV
Comments From the Federal Reserve Board




Page 46                           GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Appendix IV
Comments From the Federal Reserve Board




Page 47                           GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Appendix V

Comments From the Office of the
Comptroller of the Currency




              Page 48     GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Appendix VI

Comments From the Department of Housing
and Urban Development




              Page 49   GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Appendix VI
Comments From the Department of Housing and Urban Development




Page 50                          GAO/GGD-00-16 Large Bank Mergers and Fair Lending
Appendix VII

GAO Contacts and Staff Acknowledgments


                  Tom McCool, (202) 512-8678
GAO Contacts      Kay Harris, (202) 512-8678

                  In addition to those named above, Harry Medina, Janet Fong, Christopher
Acknowledgments   Henderson, Elizabeth Olivarez, and Desiree Whipple made key
                  contributions to this report.




                  Page 51                      GAO/GGD-00-16 Large Bank Mergers and Fair Lending
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