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

Institutions with poor CRA track records are more likely to encounter broad-based substantive objections from the public when applying for approval of mergers or acquisitions, although even merging institutions with strong records of CRA performance sometimes encounter CRA-related protests. Such protests can result in adverse publicity and additional costs because the institution must often prepare extensive material to respond to them. To avoid CRA-related protests, as well as for other reasons, many banking institutions, particularly those likely to be involved in consolidation, have sought to enhance their records of serving their local communities by entering into agreements with community organizations. These agreements often include commitments by the institution to achieve targeted lending volumes in lower-income communities.(17)

Thus, for institutions active in mergers and acquisitions, the CRA provides incentives to maintain an aggressive program of lending to lower-income borrowers and neighborhoods. The incentives created by the CRA may contribute to a positive association between consolidation activity and lending to lower-income borrowers or to lower-income neighborhoods.

By statute, regulators must also consider the competitive implications of proposed mergers and acquisitions along with their potential effects on the "convenience and needs" of the communities involved. Proposed consolidations that may have a substantial adverse effect on competition in a market generally are not approved unless there are countervailing convenience and needs considerations (such as the acquisition of a failing bank by a healthy institution). Often, proposed mergers or acquisitions that initially raise serious anticompetitive issues are approved only after the parties agree to sell (divest) banking offices with deposits and assets to limit their increase in market share. Thus, regulatory review of proposed mergers and acquisitions mitigates the possibility that consolidation may adversely affect competition and credit availability in the local community.

Consolidations Involving Savings Associations

Many of the recent consolidations in banking have involved the acquisition of savings associations by commercial banks, a development that may affect home purchase lending. Savings associations are encouraged, through tax provisions and other incentives, to hold the majority of their assets in home mortgages and also face restrictions on the amount of commercial lending they are permitted. Because commercial banks do not have similar incentives to extend mortgages and are not similarly restricted in their non-mortgage lending, the share of total assets devoted to mortgages may decline in the wake of commercial bank acquisitions of savings associations.

CONSOLIDATION AND MARKET-LEVEL CHANGES IN MORTGAGE LENDING

Given the variety of possible theoretical effects of consolidation on lending to lower-income and minority borrowers and neighborhoods, empirical analysis can help provide a greater understanding of this issue. We use a specially constructed database that combines information on mergers, acquisitions, and failures of banking institutions with data on the location of banking offices, neighborhood economic and demographic characteristics, and home purchase lending activity in metropolitan areas. (See the appendix for more details on the construction of the database.) The analysis of these data provides information on trends in lending patterns in geographic areas with varying levels of consolidation activity. This information allows us to assess the degree to which consolidation is associated with changes in home purchase lending overall, as well as to lower-income and minority borrowers and neighborhoods.