Commentary by Steven Lofchie

CFPB Director Rohit Chopra argued that the FDIC’s proposed policy on bank merger review aims to restore “a comprehensive assessment of the impact on local residents and small businesses.”

In remarks before the National Community Reinvestment Coalition, Mr. Chopra stated that the Bank Merger Act of 1960 required banking regulators to consider three primary factors in the evaluation of bank mergers: the competitive effects of the merger, the financial and managerial resources and future prospects of the company and the convenience and needs of the community to be served. He said that the Supreme Court later emphasized that mergers should be evaluated based on their overall effect on the public interest.

Mr. Chopra argued that, over the years, the rigorous review process intended by the Act diminished, as regulatory agencies began relying heavily on the Community Reinvestment Act (“CRA”) rating as a proxy for assessing the merger’s impact on community convenience and needs. He said this approach was problematic because CRA ratings are backward-looking, evaluating how well banks have met community needs in the past, and may not accurately reflect how a merger would address the broader community’s future needs. According to Mr. Chopra, this shift away from a focus on the public interest created a gap, prompting community groups to negotiate directly with banks, despite lacking the authority to enforce agreements effectively.

Mr. Chopra argued that the FDIC’s proposed policy on bank merger review aims to “address [past] weaknesses and shift back to the original intent of the law by restoring a comprehensive assessment of the impact on local residents and small businesses.” (See related coverage.)

Key features of the proposed policy include:

Community Benefit: The policy mandates that bank mergers factor in the impact on the communities that the merger will affect. The burden of proof is on the applicant to provide actual evidence and if there is no clear benefit, the application can be denied.

Regulatory Accountability: If banks make certain representations or commitments in the application to demonstrate how the community will be better off, including by submitting a Community Benefits Agreement, these requirements may be considered formal conditions for approval.

Consideration of Branch Closures: The policy requires the agency to consider branch closures in the “convenience and needs” review, recognizing the importance of physical bank branches, especially for lower-income, older and rural households. Mr. Chopra argued that, over the past 15 years, regulators have too often ignored branch closures in the context of merger review citing data showing that since 2009, branches have decreased by 15% nationally, a trend driven by megamergers and large bank branch closures.

Compliance with Consumer Protection and Fair Dealing Laws: The policy considers the merging banks’ track record of compliance with laws designed to protect consumers and promote fair dealing. Mr. Chopra said that banks with histories of legal violations may face scrutiny, as mergers can amplify the potential for harm to consumers and businesses.

Commentary by Steven Lofchie

The legislative language authorizing the CFPB (Section 1101 of Dodd Frank) provides as follows:

There is established in the Federal Reserve System, an independent bureau to be known as the ‘Bureau of Consumer Financial Protection’, which shall regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws.

It is not the job of the CFPB to regulate bank mergers. There is no doubt that many of the senior regulators in the government, including Mr. Chopra, are very intelligent, highly educated and have well informed views on subjects that extend outside of their realm of jurisdiction. Even so, when speaking to the public in their regulatory capacity, they really should stick to their day jobs. It is not the job of each regulator to remake the world. Perhaps bank mergers are closer to the CFPB’s day job, than climate change is to the job of the Federal Reserve Board, but they are both stretches.