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Consumer Compliance Outlook: First Quarter 2010

CRA and Consumer Protection Issues in Banking Applications

By Charles S. Fleet, Senior Supervisory Consumer Financial Services Analyst, Board of Governors of the Federal Reserve System

This article provides information about how the Federal Reserve considers an applicant's Community Reinvestment Act (CRA) and consumer compliance performance in making decisions on applications for bank mergers and acquisitions. Because examination ratings serve as a measure of performance in these areas, this article focuses particularly on the role of CRA and consumer compliance ratings in the application decision process.

HOW IS CRA PERFORMANCE FACTORED INTO DECISIONS ON BANKING APPLICATIONS?

The CRA requires the Federal Reserve to consider a depository institution's record of helping to meet the credit needs of its local communities in evaluating applications for mergers and acquisitions and branches.1 According to interagency guidance on the CRA,2 information from a CRA examination is a particularly important consideration in the applications process because it represents a detailed evaluation of the institution's CRA performance by its supervisory agency. The guidance further states that an examination is an important, and often controlling, factor in evaluating an institution's record. However, the guidance also notes that, in some cases, an examination may not be sufficiently recent. In other situations, a specific issue raised during the application process (such as progress in addressing weaknesses identified by examiners, progress in implementing commitments previously made to the reviewing agency, or a supported allegation from a commenter) is relevant to CRA performance under the regulation but may not have been addressed in the examination. In these circumstances, the applicant may be asked to present sufficient information to supplement its record of performance and to respond to the substantive issues raised.

HOW IS CONSUMER COMPLIANCE PERFORMANCE FACTORED INTO DECISIONS ON BANKING APPLICATIONS?

The statutes governing the processing of applications for bank holding company mergers and acquisitions, bank mergers, and bank branches require the Federal Reserve to assess certain managerial factors when considering such proposals.3 In making this assessment, the Federal Reserve reviews the record of compliance with laws and regulations by the institutions involved in the proposal. The institution's most recent consumer compliance rating is central to this review.

WHAT ARE THE CONSEQUENCES OF ADVERSE CRA OR CONSUMER COMPLIANCE RATINGS FOR BANKING APPLICATIONS?

Applicants are best positioned to receive favorable action by the Federal Reserve when they have sound CRA and consumer compliance risk management programs in place and working well. A less than satisfactory CRA rating can pose a formidable and often insurmountable hurdle for an applicant. Denials are made public and therefore carry significant reputational risk.

Proposals involving an application by a state member bank with a less than satisfactory consumer compliance rating or by a bank holding company with a depository institution subsidiary that has a less than satisfactory consumer compliance examination rating raise significant concerns relating to the managerial factors considered by the Federal Reserve. Such proposals, if entertained, would require substantial analysis and justification. The Federal Reserve would consider a number of factors, including the nature and severity of the weaknesses that led to the rating; the corrective action taken to date, including the primary regulator's view of such action; the size of the problem institution relative to the organization's consolidated total assets; and whether the proposal would pose a material distraction to management in its efforts to achieve corrective action.

HOW COULD AN ADVERSE RATING AFFECT AN APPLICATION FOR MEMBERSHIP IN THE FEDERAL RESERVE SYSTEM?

On July 1, 2009, the Federal Financial Institutions Examination Council issued a Statement on Regulatory Conversions4 that encompasses situations in which the institution has a rating of 3, 4, or 5 for consumer compliance or safety and soundness (or "Needs to Improve" or "Substantial Noncompliance" for CRA) or in which the institution has a serious or material corrective program in place or being contemplated. The statement reaffirms that supervisors will consider only applications undertaken for legitimate reasons. It also reaffirms that conversion requests submitted while serious or material enforcement actions are pending with the current chartering authority or primary federal regulator should not be entertained because such requests could delay or undermine supervisory actions.

The statement also conveyed the expectation that the prospective supervisor would consult with the current supervisor and follow that supervisor's examination and enforcement actions, including consumer protection and safety and soundness issues. The statement further provides that if the last examination is not recent or if other circumstances warrant, the prospective supervisor may conduct an eligibility examination and invite the current supervisor to help ensure continuity in the bank's supervision.

WHAT ARE THE BENEFITS TO MAINTAINING A SATISFACTORY OR BETTER CRA AND CONSUMER COMPLIANCE RATING?

Organizations whose banks are rated satisfactory or better for CRA and consumer compliance may be eligible for streamlined processing of applications, provided the banks involved are also rated satisfactory for safety and soundness, the Federal Reserve has not received any substantive comments on the proposal, and the application otherwise meets the criteria for expedited action. Streamlined processing can reduce the paperwork and the processing time for applications.5

WHAT IS THE ROLE OF PUBLIC COMMENT IN THE APPLICATIONS PROCESS?

The opportunity for public comment is an important aspect of the applications process because comments can provide a valuable perspective on an institution's CRA or consumer compliance performance. Public notice of applications is published in local newspapers and/or the Federal Register, generally for a 30-day comment period. The Federal Reserve also provides on its public website a list of pending applications and notices subject to public comment.6 Comments that are considered timely and substantive (i.e., that do not involve individual complaints or that raise frivolous, previously considered, or wholly unsubstantiated claims or irrelevant issues) trigger the need for review by the Board of Governors of the Federal Reserve System (Board). Cases requiring Board action are processed within 60 days unless the applicant is notified that the period has been extended and is told the reasons for the extension.

WHEN DOES THE BOARD HOLD PUBLIC MEETINGS ON APPLICATIONS?

The Board decides whether to hold a public meeting on a case-by-case basis. The decision is based on a number of factors, including the size and expected impact of the transaction on the communities affected; the potential to gather useful information for purposes of deciding on the application; and the level of public interest. Since 1990, the Federal Reserve has held 13 public meetings related to banking applications, which represents a very small percentage of the total applications filed. Most of those public meetings involved applications by very large institutions with potentially significant and wide-ranging effects, such as the 2008 proposal by Bank of America to acquire Countrywide.7

CONCLUDING REMARKS

The Federal Reserve takes its consumer protection responsibilities seriously, including closely scrutinizing consumer compliance and CRA records as part of the applications process. Accordingly, it is very important that applicants devote appropriate resources to building and maintaining strong CRA and consumer compliance risk management programs. Specific issues and questions should be raised with the consumer compliance contact at your Reserve Bank or with your primary regulator.