Trends in Home Purchase Lending: Consolidation and the Community Reinvestment Act

Federal Reserve Bulletin, Feb, 1999 by Robert B. Avery, Raphael W. Bostic, Paul S. Calem, Glenn B. Canner, Kelly A. Bryant, John E. Matson

A related concern is that mergers and acquisitions, as well as failures, may lead to branch closings and the loss of lending personnel who are familiar with the needs of the local community. Real estate agents, home builders, and those working for nonprofit groups or community organizations often develop working relationships with individual mortgage loan officers and may find the disruption of such relationships problematical.

Opportunities Created by Technology Transfer, Information Sharing, and Risk Management

Although mergers and acquisitions may lead to disruptions and changes in business relationships, some contend that consolidation often provides new opportunities to expand service to lower-income and minority borrowers and neighborhoods. Beneficial effects may arise through a variety of channels. For example, a small lender that becomes part of a larger organization may be able to take advantage of new technologies that reduce loan origination costs, such as automated underwriting, thus potentially improving access to credit for consumers. More generally, mergers and acquisitions may result in greater efficiencies in underwriting, application processing, and loan-servicing activities if scale economies can be achieved or if the firm being acquired has been less well managed than the acquirer. The lifting of regulatory restrictions on geographic expansion may permit mergers that enhance the efficiency of the combined institutions, with the potential of making available additional resources for lending. Each of these efficiencies may increase an institution's ability to serve lower-income and minority borrowers and neighborhoods.

Consolidation may generate a sufficient volume of activity or allow the pooling of information to enable the development of certain types of expertise. For instance, so-called informational returns-to-scale may be present by which merging banks gain sufficient volume to become specialists in lending in lower-income and minority communities, leading to greater efficiencies and reduced costs for such lending.(11) Another type of informational advantage may come from a consolidation in which the parties are able to pool mutually beneficial information that would otherwise remain private.(12)

As noted, effective lending to lower-income borrowers often involves leveraging private- and public-sector funds. Public programs are frequently complex in their administration, and implementing such programs can require expenditures that smaller institutions have difficulty absorbing.(13) As a consequence, new credit-related programs and other types of public-sector resources that broaden access to credit may become available to the customers of an acquired bank that previously lacked sufficient resources to fully participate in these programs.

Diversification of loan portfolios achieved through consolidation can potentially play an important role in fostering and sustaining a lending program targeted to lower-income borrowers or communities. Diversifying a portfolio by including loans from different, geographic areas and different customer bases, both within and across communities, can enable a lender to achieve more predictable and stable earnings. Portfolio diversification may also enhance opportunities to package loans for resale in the secondary market, thereby providing new avenues to raise funds for additional lending. Moreover, consolidation may enhance mortgage lending opportunities if an institution facing capital constraints on additional lending merges with an institution that has a capital surplus.