Federal Reserve Bulletin, 2011-01

Federal Reserve Bulletin 2011 Compilation BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Toorderadditionalcopiesof thisorotherFederalReserveBoardpublications,contact: PublicationsFulfillment MailStopN-127 Boardof Governorsof theFederalReserveSystem Washington,DC20551 (ph)202-452-3245 (fax)202-728-5886 (e-mail)Publications-BOG@frb.gov ThisandotherFederalReserveBoardreportsarealsoavailableonlineat www.federalreserve.gov/publications/default.htm.

i Federal Reserve BULLETIN Contents Preface ...............................................................................................................iii DesigningDisclosurestoInformConsumerFinancialDecisionmaking: LessonsLearnedfromConsumerTesting ..............................................................1 JeanneM.HogarthandEllenA.Merry TheMortgageMarketin2010:HighlightsfromtheDataReportedunderthe HomeMortgageDisclosureAct ..........................................................................29 RobertB.Avery,NeilBhutta,KennethP.Brevoort,and GlennB.Canner LegalDevelopments:FourthQuarter,2010 .........................................................89 LegalDevelopments:FirstQuarter,2011 ..........................................................103 LegalDevelopments:SecondQuarter,2011 .......................................................125 LegalDevelopments:ThirdQuarter,2011 .........................................................183 Index ................................................................................................................199

iii Federal Reserve BULLETIN Preface TheFederalReserveBulletinwasintroducedin1914asavehicletopresentpolicyissues developedbytheFederalReserveBoard.Throughouttheyears,theBulletinhasbeen viewedasajournalof record,servingtoprovidethepublicwithdataandresearchresults generatedbytheBoard. AuthorsfromtheBoard’sResearchandStatistics,MonetaryAffairs,International Finance,BankingSupervisionandRegulation,ConsumerandCommunityAffairs,Reserve BankOperations,andLegaldivisionscontributetothecontentpublishedintheBulletin, whichincludestopicalresearchandanalysisandquarterly“LegalDevelopments.” Startingin2004,theBulletinwaspublishedquarterlyratherthanmonthly.In2006,in responsetotheincreaseduseof theInternet—andinordertoreleasearticlesandreportsin amoretimelyfashion—theBoarddiscontinuedthequarterlyprintversionof theBulletin andbegantopublishthecontentsof theBulletinonitspublicwebsiteastheinformation becameavailable.Allarticles,ordersonbankingapplications,andenforcementactionsthat werepublishedintheonlineBulletinin2011areincludedinthisprintcompilation. ThetablesthatappearedintheFinancialandBusinessStatisticssectionof theBulletin from1914through2003wereremovedandpublishedmonthlyasaseparateprintand onlinepublication,theStatisticalSupplementtotheFederalReserveBulletin,from2004to 2008.Effectivewiththepublicationof theDecember2008issue,theFederalReserveBoard discontinuedboththeprintandonlineversions. Themajorityof datapublishedintheStatisticalSupplementareavailableelsewhereonthe FederalReserveBoard’swebsiteatwww.federalreserve.gov.TheBoardhascreatedawebpagethatprovidesadetailedlistof linkstothemostrecentdataonitssiteandlinksto otherdataprovidedbytheFederalReserveBankof NewYork,theU.S.Treasury,andthe FederalFinancialInstitutionsExaminationCouncil. OnlineaccesstotheBulletinisfree.Afreee-mailnotificationservice(www.federalreserve .gov/generalinfo/subscribe/notification.htm)isavailabletoalertsubscriberstothereleaseof articlesandordersintheBulletin,aswellaspressreleases,testimonies,andspeeches.The notificationmessageprovidesabrief descriptionandalinktotherecentposting. ‰ FederalReserveBulletin:www.federalreserve.gov/pubs/bulletin ‰ DatasourcesforthetablesinthediscontinuedStatisticalSupplementtotheFederal ReserveBulletin:www.federalreserve.gov/pubs/supplement/statsupdata/statsupdata.htm ‰ Subscribetoe-mailnotificationservice:www.federalreserve.gov/generalinfo/subscribe/ notification.htm

1 Federal Reserve BULLETIN August 2011 Vol. 97, No. 3 Designing Disclosures to Inform Consumer Financial Decisionmaking: Lessons Learned from Consumer Testing JeanneM.HogarthandEllenA.Merryof theBoard’sDivisionof ConsumerandCommunity Affairspreparedthisarticle. TheFederalReserveBoardhasstudiedwaystoimprovetheinformationandmaterials—includingrequireddisclosures—thatconsumersdrawonwhentheypurchaseandusefinancialproductsandservices.Aspartof itsregulatorydevelopmentprocess,theBoardhas usedqualitativeandquantitativeresearchmethodsincontrolledenvironmentstocreatenewdisclosuresandtotestthemfortheirabilitytoenhanceconsumerunderstandingof awiderangeof financialproductsandservices.Thegoalhasbeentodevelopdisclosures thatconsumerscanunderstandandusetohelpthemmakefinancialdecisionsthatalign withtheirpersonalcircumstances. Key Findings Thisarticleprovidesanoverviewof resultsfromsomeof theBoard’sconsumertesting projects.Theresultsrevealsomelessonslearned,suggestpotentialbestpracticesforconsumerdisclosurecontentandpresentation,andhighlightchallengesinvolvedincrafting effectivedisclosuresforfinancialproducts.Thefollowingarekeyfindingsfromthetesting: ‰ Disclosurelanguageshouldbeplainbutmeaningful.Whenreadingdisclosuredocuments, consumersarebestservedbytermsthatarestraightforward.Smallwordingchangescan significantlyimproveconsumerunderstanding,butforsomecontent,communicatingthe intendedmeaningmaybedifficultevenwiththeuseof plainlanguage. ‰ Thoughtfuldesigncanmakedisclosuresmoreusable.Carefullydesignedvisualelementsin disclosures,suchastitles,headings,tables,charts,andtypographycanincreaseconsumers’willingnesstoreaddisclosuresandcanaidtheirabilitytonavigateandunderstand them. ‰ Contextualinformationcanimprovecomprehensionandusability.Context,ora“frame,” forinformationonadisclosurecanhelpreadersunderstandbothspecificcontentinthe disclosureaswellasitsoverallmessage.Itcanalsohelpconsumersbettercomprehend howtousetheinformation. ‰ Achievinganeutraltonecanbechallenging.Althoughdisclosuresoftenstriveforaneutraltonetoavoid“steering”consumersinonedirectionoveranother,achievingneutralityisdifficult. ‰ Creatingdisclosuresmayinvolvecreatingachoicestructure.Insomecaseswherechoice optionsarenotspecifiedinthelaw,establishingthestructuremaybepartof creatingthe disclosure. ‰ Standardizingdisclosurecanbechallenging.Standardizationcanbebeneficial,butfindingtermsthataretrulystandardacrossallcontextscanbedifficult,andconsumersmay

2 FederalReserveBulletin|August2011 needtobealertedwhena“standardterm”hasadifferentmeaningthantheonethey maybefamiliarwith. ‰ Whatworksinprintmaynotworkonline.Disclosuredesignneedstotakeintoaccount thepossibilitiesandlimitationsof alternativedeliverychannels. ‰ “Lessismore”oftenremainstrue.Toomuchinformationcanoverwhelmconsumersor distracttheirattentionfromkeycontent. The Role of Financial Product Disclosures in Consumer Protection Disclosurehaslongbeenafundamentalcomponentof consumerprotectionpolicyin financialservices.1Forexample,in1968,CongresspassedtheTruthinLendingAct (TILA),whichrequiresthatlendersprovideconsumerswithdisclosuresaboutratesand termsformortgages,creditcards,andavarietyof otherconsumerloans.Anumberof otherlawsalsofeatureconsumerdisclosuresasacentralelement,includingtheRealEstate SettlementProceduresAct,theConsumerLeasingAct,theElectronicFundTransferAct, andtheTruthinSavingsAct.Overtime,theselawshavebeenamendedandnewrequirementshavebeenadded.Indeed,recentfederallegislationhasrequiredtherevisionoradditionof disclosuresthroughprovisionsof theMortgageDisclosureImprovementAct,the HigherEducationOpportunityAct,theHelpingFamiliesSaveTheirHomesAct,andthe CreditCardAccountabilityResponsibilityandDisclosure(CreditCARD)Act. Congresshasdelegatedauthoritytoimplementtheseandotherconsumerprotectionlaws totheBoardandotheragencies.TheBoard’sDivisionof ConsumerandCommunity Affairs(DCCA)hasdevelopeddisclosuresinconnectionwithanumberof theselaws. Theseeffortsareonecomponentof DCCA’soverallmissiontodevelopregulations,policies,andprogramsdesignedtoinformandprotectconsumers;toenforcefederalconsumer protectionlaws;tostrengthenmarketcompetition;andtopromoteaccesstobankingservicesinhistoricallyunderservedmarkets. In2010,Congressfurtheracknowledgedtheimportanceof protectingandinformingconsumersintheirfinancialtransactionsbypassingtheDodd-FrankWallStreetReformand ConsumerProtectionAct,whichcreatedanindependentConsumerFinancialProtection Bureau(CFPB).TheactconsolidatesundertheCFPBmostof thedisclosureandrulemakingresponsibilitiesforconsumercreditanddepositproductsthatpreviouslywerecarried outbytheBoardandotherfederalagenciesandgivesthebureauotherresponsibilitiesfor consumerprotectioninfinancialservices.2 Whilemanyfinancialservicefirmsprovideproductinformationintheabsenceof mandatorydisclosurerequirements,thepresenceof theserequirementsimposescommonstandardsof terminology,presentation,andcalculationof relevantfiguresthatcanaidconsumersinmakingcomparisonsbetweenproductsandproviders.Indeed,intheearly1960s, disclosuresforinterestratesonconsumercreditproductswereprimarilygovernedbystate law,andmultiplestandardswereinusebylenders.Oneof theaimsof TILAwastocreate acommon,nationalstandardfordisclosingthecostof credit.3 Modelsof informationsearchineconomicspositthatconsumerswillseekproductinformationandcomparisonshopaslongastheyperceiveamarginalbenefitfromtheseactivi- 1 ThomasA.DurkinandGregoryElliehausen(2011),TruthinLending:Theory,History,andaWayForward (NewYork:OxfordUniversityPress). 2 ManyofpiecesoftheDodd-FrankActrelatingtotheCFPBwentintoeffectonJuly21,2011. 3 DurkinandElliehausen,TruthinLending:Theory,History,andaWayForward.

DesigningDisclosurestoInformConsumerFinancialDecisionmaking 3 ties;benefitscantaketheformof lowerpricesorbettervalue,aseachconsumerdefinesit.4 Inanidealmarketplace,if completeinformationwereavailableatnocosttoallparticipants,fullyinformedconsumerswouldmakedecisionsthatareoptimalfortheirfinancial situationsandlifestylesand,atthesametime,enablemarketstofunctionefficiently.5While engineeringthisidealmarketplaceisnotfeasibleintherealworld,disclosuresthatmake productpricingandfeaturesmoretransparentcanreducesearchcosts,potentiallyimprovingoutcomesforthoseconsumerswhoshop.Furthermore,searchonthepartof someconsumersmayleadtoamorecompetitivemarketplaceasfinancialserviceprovidersadjust productfeaturesandreducepricestoattractinformedcustomers. Consumerdecisionsareaffectednotonlybythebroadcontextof theconsumer’seconomic,social,cultural,andpoliticalenvironmentbutalsobymorepersonalpsychological andsocioeconomicfactors.6Forexample,researchonconsumersearchforfinancialproductsshowsthatfindingwaystomotivateconsumerstoshop,seekout,andpayattentionto informationdisclosuresisasignificantchallenge.Manyconsumersseekingmortgagesand creditcardsdonotappeartoshopamongpossibleofferings.7Norisitclearthatmanyconsumersunderstandhowtoshopinfinancialmarketsorevenwhattheyshouldlookforor howtocorrectlyusetheinformationavailable.Forexample,thereisevidencethatconsumershaveproblemsprocessinginformationinfinancialmarketsjustastheydoinothermarkets(forexample,thenutritionandhealthcaremarkets).8Inaddition,individualdifferencesinexperience,expertise,andself-confidenceaffecthowconsumersprocess information.9 Althoughfindingsliketheseshowingdifferencesandlimitsinconsumerinformationprocessingarenotnew,suchissueshavereceivedincreasedattentioninpolicydiscussions.In part,thismaybearesponsetoanincreaseinthecomplexityof financialproductdecisions. Insomecases,thefeaturesandrisksof anewproductmaybemorechallengingtounderstandthanthe“oldmodel.”Forexample,anadjustableratemortgageloanwithmultiple monthlypaymentoptionsislikelytobeamorecomplexproductthanafixedratemort- 4 George.J.Stigler(1961)“TheEconomicsofInformation,”JournalofPoliticalEconomy,vol.69(June),pp. 213–25,www.jstor.org/stable/1829263;PaulineM.Ippolito(1988),“TheEconomicsofInformationinConsumerMarkets:WhatDoWeKnow?WhatDoWeNeedtoKnow?”inE.ScottMaynes,ed.,TheFrontierof ResearchintheConsumerInterest(Columbia,MO:TheAmericanCouncilonConsumerInterests),pp.235–63. 5 Foradiscussiononthepromotionofeconomicefficiencyandothergoalsthathavebeensuggestedforthe TruthinLendingAct,seeDurkinandElliehausen,TruthinLending:Theory,History,andaWayForward.Disclosureshaveotherusesbeyondtheirroleintheshoppingprocess;forexample,theyprovidealegalrecordof thetransaction. 6 See,forexample,GeorgeKatona(1951)PsychologicalAnalysisofEconomicBehavior(NewYork:McGraw Hill)andSandraJ.Huston(2010)“MeasuringFinancialLiteracy,”JournalofConsumerAffairs,vol.44(2),pp. 296–316,http://onlinelibrary.wiley.com/doi/10.1111/j.1745-6606.2010.01170.x/pdf. 7 JinkookLeeandJeanneM.Hogarth(1999),“ReturnstoInformationSearch:ConsumerMortgageShopping Decisions,”FinancialCounselingandPlanningJournal,vol.10(1),pp.49–66,http:// 6aa7f5c4a9901a3e1a1682793cd11f5a6b732d29.gripelements.com/pdf/vol1015.pdf;andJinkookLeeandJeanne M.Hogarth(2001),“ConsumerInformationSearchforHomeMortgages:Who,What,HowMuchandWhat Else?”FinancialServicesReview,pp.277–93,www2.stetson.edu/fsr/abstracts/vol_9_num3_p277.pdf. 8 JinkookLeeandJeanneM.Hogarth(1999),“ThePriceofMoney:Consumers’UnderstandingofAPRsand ContractInterestRates,”JournalofPublicPolicyandMarketing,vol.18(Spring),pp.66–76,www.jstor.org/ stable/30000509;AlanLevy,SaraB.Fein,andRaymondE.Schucker(1996),“PerformanceCharacteristicsof SevenNutritionLabelFormats,”JournalofPublicPolicyandMarketing,vol.15(Spring),pp.1–15,www.jstor .org/stable/30000331;andJudithH.Hibbard,PaulSlovic,andJacquelineJ.Jewett(1997),“InformingConsumerDecisionsinHealthCare:ImplicationsfromDecision-MakingResearch,”TheMilbankQuarterly,vol. 75(3),pp.395–414,http://onlinelibrary.wiley.com/doi/10.1111/1468-0009.00061/pdf. 9 JohnW.Payne,JamesR.Bettman,andEricJohnson(1993),TheAdaptiveDecisionMaker(NewYork:CambridgeUniversityPress);DouglasA.HersheyandDavidA.Walsh(2000),“KnowledgeversusExperiencein FinancialProblemSolvingPerformance,”CurrentPsychology,vol.19(Winter),pp.261–92;andCäziliaLoibl, SooHyunCho,FlorianDiekmann,andMarvinT.Batte(2009),“ConsumerSelf-ConfidenceinSearchingfor Information,”JournalofConsumerAffairs,vol.43(1),pp.26–55,http://onlinelibrary.wiley.com/doi/10.1111/j .1745-6606.2008.01126.x/pdf.

4 FederalReserveBulletin|August2011 gageloanwithasingle,constantpayment.However,decisionmakingcanalsobeaffected byhavingalargernumberof optionsavailablefromwhichtochoose.10Inthecurrentera of complexfinancialmarketsandproducts,beingwell-informedcanbeacostlyandpossiblydauntingtask,evenforthosewithsubstantialeducation. Researchinpsychology,marketing,andbehavioraleconomicshashighlightednotonlythe possiblelimitationsof disclosurebutalsonewopportunitiesforitsuse.Forexample, researchshowsthatthewayinwhichchoicesarestructuredorpresentedcanchangethe likelihoodthatconsumerswillselectthem.Oneimplicationisthataspolicymakersconfrontdecisionsabouttheproperpresentationof disclosure,theymayfacechoicesabout whetherdisclosureshouldbe“neutral”inpresentingproductoptionsorshouldpromoteor discourageaconsumer’sselectionof certainproductsorfeatures.Somearguethatif design matters,notruly“neutral”presentationof choicesexists.11Thisraisesthequestionof whichfeaturesshouldbepromoted,asthedesirabilityof somefeaturesdependsontheirfit withaparticularconsumer’spersonalsituation. Whilethesebehavioralinsightsareincreasinglyapartof thepolicydiscussionanddebate, thestatutorydisclosurerequirementsandthelongstandinggoalsof increasedtransparency andcompetitioninmarketsalsocontinuetomotivatepolicymakerstoimprovetheeffectivenessof disclosures.Thetaskforpolicymakersandregulatorsistoimplementdisclosure standardsthathavethepotentialforbeingtimely,comprehensible,andusefulinconsumer decisionmakingandthattakeintoaccounttheassociatedcostsandbenefitsforallmarket participants. Efforts to Craft Effective Disclosures Testing Efforts in the United States Beginningin1996,theBoardconductedconsumerfocusgroupstohelpinformthecontent, language,andlayoutof disclosuresforvehicleleases,mortgages,payrollcards,andelectronicallydelivereddisclosures.In2004,incollaborationwithotherfederalagencies,the Boardinstitutedamorerigorousconsumertestingprogram,usingfocusgroups,cognitive interviews,usabilitytesting,andquantitativevalidationsurveystoinformdisclosuredevelopmentforprivacynotices(seebox1foracompendiumof FederalReserveBoardtesting reports).TheBoardusedasimilarresearchdesignforitsworkoncreditcards.Inmore recentyears,theBoardhasusedcognitiveinterviewsindevelopingdisclosuresformortgages,homeequitylinesof credit,reversemortgages,privatestudentloans,bankoverdraft services,andremittances.ThisarticlefocusesprimarilyonresultsfromtheBoard’swork onmortgagesandcreditcards,anditsinteragencyworkonprivacynotices. OtherU.S.federalfinancialregulatorsalsohaveusedqualitativeandquantitativetesting whendevelopingdisclosures.Forexample,theinteragencyprojectonprivacynoticesmentionedaboveincludedsixfederalagencies.12Inaddition,theDepartmentof Housingand UrbanDevelopment(HUD)conductedextensivequalitativeandquantitativetestingbefore 10 Forexample,seeSheenaS.IyengarandEmirKamenica(2010),“ChoiceProliferation,SimplicitySeeking,and AssetAllocation,”JournalofPublicEconomics,vol.94,pp.530–39,www.sciencedirect.com/science/article/pii/ S0047272710000290. 11 See,forexample,thediscussionofchoicearchitectureinRichardH.ThalerandCassR.Sunstein(2008), Nudge:ImprovingDecisionsaboutHealth,Wealth,andHappiness(NewHaven:YaleUniversityPress). 12 InadditiontotheBoard,theFederalDepositInsuranceCorporation,FederalTradeCommission,National CreditUnionAdministration,OfficeoftheComptrolleroftheCurrency,andtheSecuritiesandExchange Commissionparticipatedintheinteragencyresearchprojectonprivacynotices.TheOfficeofThriftSupervisionjoinedtheresearchprojectforthequantitativetestingphase.

DesigningDisclosurestoInformConsumerFinancialDecisionmaking 5 Box 1. Compendium of Consumer Testing Reports ReportsoutliningthefindingsoftheconsumertestingsponsoredbytheFederalReserve Boardoverthelastfewyearsareavailableonline.Reportsoninteragencytestingeffortsare alsoavailablefordownload.Thesereportsarelistedbelowbytypeofdisclosure.Visitthe linkstoviewspecificreports. BankingServicesandPayments ReviewandTestingofOverdraftNotices(2008),www.federalreserve.gov/newsevents/press/ bcreg/bcreg20081218a6.pdf DesignandTestingofOverdraftDisclosures:PhaseTwo(2009),www.federalreserve.gov/ newsevents/press/bcreg/bcreg20091112a4.pdf DesignandTestingofRegulationCCFundsAvailabilityClauses,Disclosures,andNotices (2010),www.federalreserve.gov/newsevents/press/bcreg/bcreg20110302a_summary_findings .pdf DesignandTestingofRemittanceDisclosures(2011),www.federalreserve.gov/econresdata/ bcreg20110512_ICF_Report_Remittance_Disclosures_(FINAL).pdf CreditCards DesignandTestingofEffectiveTruthinLendingDisclosures(2007),www.federalreserve.gov/ dcca/regulationz/20070523/Execsummary.pdf DesignandTestingofEffectiveTruthinLendingDisclosures:FindingsfromExperimental Study(2008),www.federalreserve.gov/newsevents/press/bcreg/bcreg20081218a8.pdf DesignandTestingofEffectiveTruthinLendingDisclosures:FindingsfromQualitativeConsumerResearch(2008),www.federalreserve.gov/newsevents/press/bcreg/bcreg20081218a7 .pdf Mortgages ConsumerTestingofMortgageBrokerDisclosures(2008),www.federalreserve.gov/ newsevents/press/bcreg/20080714regzconstest.pdf DesignandTestingofTruthinLendingDisclosuresforClosed-EndMortgages(2009),www .federalreserve.gov/boarddocs/meetings/2009/20090723/Full%20Macro%20CE% 20Report.pdf DesignandTestingofTruthinLendingDisclosuresforHomeEquityLinesofCredit(2009),www .federalreserve.gov/boarddocs/meetings/2009/20090723/Full%20HELOC_Macro% 20Report.pdf DesignandTestingofPeriodicStatementsforHomeEquityLinesofCredit,Disclosures aboutChangestoHomeEquityLineCreditLimits,andDisclosuresaboutCreditProtection Products(2010),www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816_ MacroBOGReportOtherDisclosures(7-10)(FINAL).pdf DesignandTestingofTruthinLendingDisclosuresforRescissionNotices(2010),www .federalreserve.gov/newsevents/press/bcreg/bcreg20100816_ MacroBOGReportRescission(7-10)(FINAL).pdf DesignandTestingofTruthinLendingDisclosuresforReverseMortgages(2010),www .federalreserve.gov/newsevents/press/bcreg/bcreg20100816_Reverse_Mortgage_Report_(7- 28)_(FINAL).pdf DesignandTestingofEscrowDisclosures(2011),www.federalreserve.gov/newsevents/press /bcreg/bcreg20110223b3.pdf continuedonnextpage

6 FederalReserveBulletin|August2011 Box 1.—continued PrivacyNotices EvolutionofaPrototypeFinancialPrivacyNotice:AReportontheFormDevelopmentProject(2006),www.ftc.gov/privacy/privacyinitiatives/ftcfinalreport060228.pdf MallInterceptStudyofConsumerUnderstandingofFinancialPrivacyNotices:MethodologicalReport(2008),www.ftc.gov/privacy/privacyinitiatives/Macro-Report-on-Privacy-Notice- Study.pdf ConsumerComprehensionofFinancialPrivacyNotices:AReportontheResultsofthe QuantitativeTesting(2008),www.ftc.gov/privacy/privacyinitiatives/Levy-Hastak-Report.pdf FinancialPrivacyNotice:AReportonValidationTestingResults(2009),www.ftc.gov/privacy/ privacyinitiatives/validation.pdf Web-BasedFinancialPrivacyNoticeFinalSummaryFindingsReport(2009),www.ftc.gov/ privacy/privacyinitiatives/WebbasedNoticeFinalSummaryReport.pdf StudentLoans ConsumerResearchandTestingforPrivateEducationLoans:ReportofFindings(2009), www.federalreserve.gov/newsevents/press/bcreg/bcreg20090311a8.pdf ConsumerResearchandTestingforPrivateEducationLoans:FinalReportofFindings (2009),www.federalreserve.gov/newsevents/press/bcreg/bcreg20090730a2.pdf finalizingrevisedversionsof theGoodFaithEstimate(GFE)andHUD-1mortgagedisclosures.13Andasapartof itsrulemakingprocess,theFederalTradeCommission(FTC)has conductedquantitativetestingof opt-outdisclosuresforprescreenedcreditcardsolicitationsandusedtestingtoinformdisclosurerulesfornonfinancialproductssuchashealth claimsinfoodadvertisingandenergyusagelabelingforappliances.14TheSecuritiesand ExchangeCommission(SEC)hasconductedqualitativetestingof disclosuresformutual fundsalesfees,brokerconflictof interest,andsummarymutualfundprospectuses.15In addition,theagencyhasprovidedguidanceoncreatingplain-Englishdisclosuredocuments forinvestors.16 13 ForasummaryofHUD’stesting,seeKleimannCommunicationGroup,Inc.(2008),SummaryReport:ConsumerTestingoftheGoodFaithEstimateForm(GFE),preparedfortheDepartmentofHousingandUrban Development,OfficeofPolicyDevelopmentandResearch(February),www.huduser.org/publications/pdf/ Summary_Report_GFE.pdf.AdditionalreportsfromHUD’stestingoftheGFEcanbefoundatwww.huduser .org/portal/publications/hsgfin/goodfaith.html#pdf. 14 ManojHastak(2004),TheEffectivenessof“Opt-Out”DisclosuresinPre-ScreenedCreditCardOffers,report submittedtotheFederalTradeCommission(September),www.ftc.gov/reports/prescreen/ 040927optoutdiscprecreenrpt.pdf;JosephFarrell,JanisK.Pappalardo,andHowardShelanski(2010),“EconomicsattheFTC:Mergers,Dominant-FirmConduct,andConsumerBehavior,”ReviewofIndustrialOrganization(November3).TheFTChasalsoconductedresearchonmortgagedisclosuresthathasinformedregulationsdevelopedbytheBoardandHUD.SeeJamesM.LackoandJanisK.Pappalardo(2004),TheEffectof MortgageBrokerCompensationDisclosuresonConsumersandCompetition:AControlledExperiment,Staff Report(Washington:FTC,BureauofEconomics,February),www.ftc.gov/os/2004/01/030123mortgagefullrpt .pdf;andJamesM.LackoandJanisK.Pappalardo(2007),ImprovingConsumerMortgageDisclosures:An EmpiricalAssessmentofCurrentandPrototypeDisclosureForms,StaffReport(Washington:FederalTrade Commission,BureauofEconomics,June),www.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf. 15 Siegel&Gale,LLCandGelbConsultingGroup,Inc.(2004),ResultsofIn-DepthInvestorInterviewsRegarding ProposedMutualFundSalesFeeandConflictofInterestDisclosures,reporttotheSecuritiesandExchange Commission(November4),www.sec.gov/rules/proposed/s70604/rep110404.pdf;andAbtSRBI,Inc.(2008), FinalReport:FocusGroupsonaSummaryMutualFundProspectus,preparedfortheSecuritiesandExchange Commission(May),www.sec.gov/comments/s7-28-07/s72807-142.pdf. 16 OfficeofInvestorEducation,SecuritiesandExchangeCommission(1998),APlainEnglishHandbook:Howto CreateClearSECDisclosureDocuments(Washington:SEC,August),www.sec.gov/pdf/handbook.pdf.

DesigningDisclosurestoInformConsumerFinancialDecisionmaking 7 Testing Efforts in Other Countries Testing—boththatconductedbygovernmentagenciesandbyindustrygroups—hasalso playedaroleininformingdisclosurepoliciesinothercountries. IntheUnitedKingdom,consumerresearchcarriedoutbytheFinancialServicesAuthority (FSA)includesstudiestoinformdisclosurepolicydecisionsandtoevaluatetheusefulness of mandatorydisclosuresforconsumersof financialproducts.17Forexample,sincethe mid-1990s,theFSA(andapredecessoragency,thePersonalInvestmentAuthority)has requiredfinancialinstitutionstoprovidea“KeyFeaturesDocument”asadisclosure.Ina 2007reportexaminingfirms’implementationof therequirements,theFSArevieweda sampleof theseKeyFeaturesDocumentsagainstasetof criteriarelatingtoconductof businessrules(or“TreatingCustomersFairly”outcomes)andFSAprinciplesforbusiness.18Itfoundthatonlyabout15percentof documentsmettheestablishedcriteria.The reviewnotesthatconsumer“testingof productliteraturewasuncommon.”Inafollow-up studytwoyearslater,theFSAfoundsomeimprovementamongthesamesetof sample documents.19Itwasnotclearwhethertheseimprovementswereduetoanyconsumertesting,buttheFSA“encourage[d]allfirmstotestthequalityof theirdocuments.”Italso notedthatthereviewfocusedontheKeyFeaturesDocumentsandmightnotreflectaconsumer’sexperiencewiththefullsetof documentsandmarketingmaterialsavailableto theminthedecisionmakingprocess. Canadaalsohasusedtestingtohelpdevelopplain-languagedisclosuredocuments.In2008, theFinancialConsumerAgencyof Canadaconductedqualitativetestingof aproposed creditcardapplicationforminanefforttoimprovedisclosuredocumentsforconsumers. Theagencyassessedtheapplicationusingfourkeycriteria:relevance,perceivedeaseof comprehension,motivationtoreadthedocument,andcomprehension.20Althoughthetest documentmetthekeycriteria,consumersidentifiedsupplementalinformationthatthey wantedtoseeonawebsite.Theagency’sreportalsorecommendedincludingsomenumericalexampleswhereverfiguresorinterestrateswerementionedtohelpimprovethe document. InAustralia,anindustrygroupconductedtestinginanefforttoimproveconsumerunderstandingof disclosureinformation.Inparticular,theAssociationof Superannuation Fundsof Australiasponsoredastudyof productdisclosurestatementsforsuperannuation funds.21Whilethestudyfocusedonfeedisclosuresfortwohypotheticalinvestment accounts,theresultsshowedsubstantialmisunderstandingamongparticipantsnotjustof feesbutalsoof otherinformationinthedisclosures.Thereportincludedrecommendations 17 ReportsfromconsumerresearchcarriedoutbytheFSAcanbefoundatwww.fsa.gov.uk/pages/Library/ research/Consumer/index.shtml. 18 TheTreatingCustomersFairlyoutcome(number3)usedwas“Customersareprovidedwithclearinformation andarekeptappropriatelyinformedbefore,during,andafterthepointofsale.”TheFSAprinciple(number7) usedwas“Afirmmustpaydueregardtotheinformationneedsofitsclients,andcommunicateinformationto theminawaywhichisclear,fairandnotmisleading.”SeeFinancialServicesAuthority(2007),GoodandPoor PracticesinKeyFeaturesDocuments(London:FSA,September),www.fsa.gov.uk/pubs/other/key_features.pdf. 19 FinancialServicesAuthority(2009),SupplementaryAnnextoGoodandPoorPracticesinKeyFeaturesDocuments(London:FSA,April),www.fsa.gov.uk/pubs/other/kfd_annex.pdf. 20 LesÉtudesdeMarchéCréatec(2008),QualitativeTestingofProposedMasterCardPlainLanguageApplication Form(Ottawa:FCAC,May),www.fcac-acfc.gc.ca/eng/resources//PDFs/2008PlainLanguage-eng.pdf. 21 Superannuationfundsareretirementfundsthatblendacompulsoryemployercontributionwithanemployee co-contribution.

8 FederalReserveBulletin|August2011 concerningtheuseof tables,formattingandlayout,jargon,andtheimportanceof testing consumercomprehensionin“gettingdisclosureright.”22 Federal Reserve Board Consumer Testing Methods Financialinformationcanbecomplexandintimidatingtomanypeople.Identifyingthe informationconsumersdonotunderstandcanhelppinpointwhereadisclosuredocument isunclearandhowitcanbeimproved.Aspartof itsregulatorydevelopmentprocess,the FederalReserveBoardhasconductedconsumertestingthatreliesonqualitativeandquantitativemethodsincontrolledenvironmentstohelpcreateandtestnewdisclosurestandards.Thesetestsfocusprimarilyonconsumers’recognitionof keyfeaturesandcomprehensionof theinformationcontainedindisclosures—and,toalimitedextent,onthe usabilityof disclosuresindecisionmaking—inordertoimprovetheoveralleffectivenessof disclosures. Qualitative Studies Muchof theBoard’sconsumertestinghasinvolvedqualitativeresearchtechniques,suchas focusgroupsandcognitiveinterviews,toidentifywhyandhowconsumersmakedecisions andwhatinformationtheyuseinthedecisionmakingprocess.Afocusgroupusually involvessixtotenparticipants,whileacognitiveinterviewisconductedwithoneortwo participantsatatime(e.g.,acouplewhomadeafinancialdecisiontogether).Focusgroups allowparticipantstosharethoughtsandexperiences,whichoftenproduceinsightsand ideasthatsingleparticipantswouldnothavethoughtof bythemselves.Interviews,onthe otherhand,areusefulfortestingknowledge,usabilityof thematerials,andplannedbehaviors,andarelesssubjecttoinfluenceof thepresenceoropinionsof otherpeople.Bothof thesequalitativeresearchmethodscanbeusefulforcollectingbackgroundinformationon participants’experienceswithproducts,shoppingbehavior,generalknowledge,and preferences. Participantsarerecruitedfromthedatabasesof marketresearchfacilitiesandtypically includepeoplewhohaveexperiencewithaproductorwhoarecurrentlyshoppingforthat product.Recruitmentisdesignedtoselectparticipantsacrossarangeof demographiccharacteristics.Samplesizesforqualitativetestingaretypicallysmall,andstatisticalrepresentativenessisnotpossiblewithalimitednumberof participants.Inaddition,inorderto obtainthemostuseableinputfromasmallsample,potentialparticipantswhomaybe highlyknowledgeableaboutthetopic(e.g.,theyworkinthefinancialservicesindustry)or otherswhohavedifficultyarticulatingtheirthoughtsorexperiencesareoftenexcluded. Includingaquantitativevalidationphaseinthestudydesigncanhelpdeterminewhether thechangesbasedonfindingsfromthesmallsamplesusedinqualitativetestingactually resultinimprovementswhentestedwithalargerandstatisticallyrepresentativesampleof thepopulation. Cognitiveandusabilityinterviewsareparticularlyusefulwhendevelopingdisclosures, becausetheycapturetheparticipant’sabilitytoidentifyoruseinformationonthedisclosureindevelopmentaswellasprovideawindowintothethoughtprocessesandreactions thatcontributetoconsumers’understandingof theinformation.Generally,theinterviews conductedinsupportof theBoard’sdisclosuredevelopmenthavebeenconductedin roundsof seventoteninterviews.Althoughthesesamplesaresmall,consistentpatternsof 22 AgingAgendasSocialPolicyConsultants(2004),SuperannuationFeesDisclosureConsumerTestingReport,preparedfortheAssociationofSuperannuationFundsofAustralia(January),www.superannuation.asn.au/ ArticleDocuments/116/AgeingAgendas&ASFA_SuperFeesDisclosure.pdf.

DesigningDisclosurestoInformConsumerFinancialDecisionmaking 9 responsesdoemerge.Onestudyreportsthat80percentof usabilityproblemsareuncovered withfiveparticipantsand90percentwithten.23Whenanumberof participantsfailto noticeinformationorfindcontentconfusing,thesefindingscaninformdesignandwordingchangesforthenextroundof interviews.Designandtestingproceediterativelywith attemptstoimprovetheformineachrounduntilaworkabledisclosureisdeveloped. Eachroundof interviewshasaresearchgoal.Interviewersfollowascript,askingparticipantstocompleteseveraldifferentexercises.Theymaypresenttheparticipantwithascenariotoprovideacontextforthedisclosurethatisbeingtested.Forexample,thescenario foraTILAmortgagedisclosuremightbe“Imagineyourecentlyappliedforamortgage, andthreedayslater,youreceivethisforminthemail.”Ina“thinkaloud”exercise,participantsaregivenadocumentandareaskedtoreadthroughitwithaparticularscenarioor taskinmindwhilenotingaloudwhattheynoticeandquestionstheyhave.Thisexercise allowsresearcherstomakenumerousobservationsabouttheparticipant’sexperiencewith thedocument:whattheparticipantnoticedfirst,theorderinwhichtheyapproachedthe information,whethertheyturnedtosubsequentpagesorskippedcontent,whatcontent wascleartotheparticipantandwhatwasconfusing,andwhetherthecontent promptedsomesortof reaction—positiveornegative. Theintervieweralsoleadsparticipantsthroughasetof questionsandtasksthatrequirethe participanttousecertaininformationonthedocumentand,insomecases,explaintheir answers.Forexample,toexplorewhetherparticipantsnoticeandcomprehendinformation onamortgageprepaymentpenalty,thescriptmayincludeaseriesof questionslike “Imaginethatyouwonthelotteryandwantedtopayoff thisloanafteronlyoneyear.Do youthinkABCBankwouldchargeyouafeeif youdecidedtopayoff theloan?Howlarge doyouthinkthisfeemightbe?” Theinterviewerworksfromascriptdevelopedtoaddresstheresearchquestionsthatare thefocusof thetestingandwithattentiontophrasingquestionsobjectively.However,the optionof deviatingfromthescriptisoneof theadvantagesof thequalitativeinterview methodology.Theabilitytofollowuponparticularresponsesprovidesadditionalinformationaboutaparticipant’sunderstandingorreasoningprocess.Italsosetsamoreconversationaltonefortheinterview,whichmayhelpsomeparticipantsfeelmorecomfortablein interactingwiththecontentintheformand,thus,inprovidingmoreopenandexpansive answerstointerviewquestions. Quantitative Studies Unlikefocusgroupsorindividualinterviews,consumersurveyscanbeusedtoassess whetheralternativedisclosuredesignscanimproveconsumercomprehensionbyastatisticallysignificantamount.Thestatisticalobjectivesof quantitativestudies,suchasconsumer surveys,requirealargernumberof participantsthanfocusgroupsandindividualinterviewsandconsistentadherencebytheinterviewertothesurveyprotocol. Todate,theBoardhasimplementedconsumersurveysthroughastandardmallintercept methodologyinavarietyof locationsacrossthecountry.24Participantswererecruited frompublicareasof themallbasedonaseriesof screeningquestionsanddirectedtoaselfcontainedresearchofficewheretheycompletedtheinterview.Interviewsgenerallylasted 23 RobertVirzi(1992),“RefiningtheTestPhaseofUsabilityEvaluation:HowManySubjectsIsEnough?” HumanFactors,vol.34,pp.457–86. 24 Forexample,theBoard’screditcardsurveystookplaceinDallas,Texas;Detroit,Michigan;LosAngeles,California;Seattle,Washington;Springfield,Massachusetts;St.Louis,Missouri;andTallahassee,Florida,overa periodoffourweeksinSeptember2008.Atotalof1,022consumerswereinterviewed.

10 FederalReserveBulletin|August2011 about15minutes.Acomputer-assistedinterviewprogramcapturedparticipants’responses. Traditionally,marketresearchershaveusedmallinterceptprotocolstotestvisualstimuliin acontrolledsetting.Becausesurveyscantakeplacesimultaneouslyatmallsacrossvarying geographies,datacollectioncantakeplacequickly.However,thismethodalsohassome limitations:Itisnotaprobabilitysampleandmallcustomersmaynotreflectthegeneral population.25 Thequantitativestudiesareguidedbyasetof keyresearchquestionstoassesstheimpact of thedisclosuredocument.Boththeprivacyandcreditcardnoticesurveysweredesigned asfactorialexperiments,whichallowresearcherstotesttheeffectsof differentfactors(for example,differentwordinganddifferentdesignlayoutsaswellastheinteractionof wordingandlayout)onconsumers’comprehensionof theinformationinthedisclosure.26 Thegoalof theprivacynoticestudywastotestwhethertheformdesignhelpedconsumers understandtheinformationintheform(aknowledgecomponent)andwhetherconsumers knewwhattodoasaresultof readingtheform(abehaviorcomponent).Inaddition,the studysoughttogaugewhetherconsumers’attitudestowardsharingwereinfluencedbythe disclosureformatandwhetherconsumers’plannedbehaviorswereconsistentwiththeir statedpreferences.Incontrast,thecreditcardsurveyfocusedonlyontheknowledge component. Incaseswherethequantitativestudyhighlightspotentialimprovementstotheform,additionalroundsof qualitativetestingorabrief qualitativevalidationstudymaybeneeded. Lessons Learned from Board Testing TheBoard’squalitativeandquantitativestudiesof disclosureshighlightedanumberof elementsthatcaninfluencehowwellconsumersunderstandadisclosure’scontentand whetherconsumerswillactuallyreadanduseit. Disclosure Language Should Be Plain but Meaningful Smallwordingchangescansignificantlyaffecthowaconsumerunderstandsimportant financialproductconcepts.However,someconceptsremainimpenetrableforconsumers despiteattemptstoexplaintheminsimpleterms. Testsof mortgagedisclosuresindifferentpartsof thecountryshowed,forexample,that termsmayhavedifferentmeaningsdependingonaconsumer’sgeographiclocation. Themortgagedisclosureformsinitiallyusedtheterm“escrow,”whichparticipantsinCaliforniaunderstoodtomeanthemortgageclosingeventitself.Inotherlocations,however, participantsunderstoodthistermtomeantaxesandinsuranceincludedasapartof the monthlymortgagepayment.Thus,inthenewpaymenttablesonmortgagedisclosure 25 ScottM.SmithandGeraldS.Albaum(2005),FundamentalsofMarketingResearch(ThousandOaks,CA:Sage Publications). 26 AlanLevyandManojHastak(2008),ConsumerComprehensionofFinancialPrivacyNotices:AReportonthe ResultsoftheQuantitativeTesting(December15),preparedfortheInteragencyNoticeProject(seenote12for alistingoftheagenciesinvolvedintheproject),www.ftc.gov/privacy/privacyinitiatives/Levy-Hastak-Report .pdf;andMacroInternationalInc.(2008),DesignandTestingofEffectiveTruthinLendingDisclosures:FindingsfromExperimentalStudy(December15),reportsubmittedtotheBoardofGovernorsoftheFederal ReserveSystem,www.federalreserve.gov/newsevents/press/bcreg/bcreg20081218a8.pdf.

DesigningDisclosurestoInformConsumerFinancialDecisionmaking 11 forms,thephrase“taxesandinsurance”hasbeenaddednexttotheword“escrow”tomake themeaningof thetermclearer.27 Inanexamplefromtestsof creditcarddisclosures,someconsumersmisinterpretedthe term“defaultrate,”whichisatermusedinthepastbysomeissuerstorefertotheAPR chargedonanaccountafterthecardholdermakesalatepaymentorexceedsthecredit limit.Intesting,someparticipantsinterpreted“defaultrate”tomeanthenormalrate—like thedefaultsettingonacomputer.28Thelanguage“penaltyAPR”betterconveyedthe intendedconcept,sothenewcreditcardrulesnowrequiretheuseof thistermindisclosures.Resultsfromthecreditcardtestingalsoshowedthattheterm“financecharge”was notmeaningfultoconsumerswithrespecttocreditcardaccounts.Participantsunderstood thesecostsbetterwhentheyweredescribedas“fees”and“interest”;therefore,thisterminologyisnowrequiredoncreditcardperiodicstatements. Strivingforplainlanguagedoesn’talwaystranslateintoshorterdisclosures.Forexample, Boardresearcherstriedseveralwaystoexplaincreditcard“graceperiod”—howlonga consumerhastopaythebillinfulleachmonthtoavoidpayinginterestonpurchasesonce thebillingcyclecloses.Someparticipantsthoughtthetermreferredtothetimetheyhad afterthepaymentduedatebeforealatefeewouldbecharged.Aftertesting,themodeldisclosuresweremodifiedtousethelanguage“howtoavoidpayinginterestonpurchases” insteadof “graceperiod.” Intestingof currentmortgagedisclosures,manyconsumerscouldcorrectlyanswerthatthe lenderwouldchargethemapenaltyforpayingoff theloanbeforeacertaindate,buta numberthoughtthepenaltywouldnotapplyif theyrefinancedtheloanorsoldthehouse. Thus,thereviseddisclosuresproposedbytheBoardinAugust2009includedlanguage explicitlystatingthatthepenaltycouldapply“if youpayoff yourloan,refinance,orsell yourhome”withinaparticularperiod. Someterms,suchasthe“effectiveAPR”forcreditcards,havedefiedanyplain-language efforts.TheeffectiveAPRwasrequiredonperiodicstatementsforcreditcardswithcash advance,balancetransfer,orforeigncurrencytransactions.TheeffectiveAPRdiffersfrom the“interest-only”APRoncreditcardsolicitationsandaccountopeningstatementsfor creditcardsinthattheeffectiveAPRincludesbothinterestandcertainfees(forexample,a cashadvancefeeof $3).Incorporatingthefeewiththeinterestpaidonthetransaction createsaneffectiveAPRthatisgenerallyhigherthantheinterest-onlyAPRdisclosedinthe solicitationandaccountopeningdocuments.TheeffectiveAPRwasmeanttocreatea “teachablemoment”forconsumers,sincetheeffectiveAPRcouldbe50percentormore. TestingrevealedthatparticipantsoftenconfusedtheeffectiveAPRwiththemorefamiliar interest-onlyAPRforcreditcardsorsimplyignoreditbecausetheycouldnotunderstand it.Becauseof theconfusiongeneratedbythetwoAPRs,theBoard’sfinalrulesforcredit carddisclosuresremovedtheeffectiveAPRandnowonlyrequirethedisclosureof the usual,interest-onlyAPRonaccountstatementsincombinationwithseparateinformation ontheamountof feesinthebillingcycle. 27 MacroInternationalInc.(2009),DesignandTestingofTruthinLendingDisclosuresforClosed-EndMortgages (July16),reportsubmittedtotheBoardofGovernorsoftheFederalReserveSystem,www.federalreserve.gov/ boarddocs/meetings/2009/20090723/Full%20Macro%20CE%20Report.pdf. 28 MacroInternationalInc.(2007),DesignandTestingofEffectiveTruthinLendingDisclosures(May16),report submittedtotheBoardofGovernorsoftheFederalReserveSystem,www.federalreserve.gov/dcca/regulationz/ 20070523/Execsummary.pdf;andMacroInternationalInc.(2008),DesignandTestingofEffectiveTruthin LendingDisclosures:FindingsfromQualitativeConsumerResearch(December15),reportsubmittedtothe BoardofGovernorsoftheFederalReserveSystem,www.federalreserve.gov/newsevents/press/bcreg/ bcreg20081218a7.pdf.

12 FederalReserveBulletin|August2011 Thoughtful Design Can Make Disclosures More Usable Elementssuchastitles,tables,charts,typographicstyles,anduseof shadingcanhelpconsumersmovethroughadocumentandaidtheircomprehensionof productsandservices, butsometimeseventheseaidscomewithlimitationsthatmustbeconsidered. Inthecaseof privacynotices,consumerswhosawatablethatoutlinedthecompany’s information-sharingpracticesandconsumerrightsrelatedtothosepracticesperformed substantiallybetterthanthosewhosawthesamecontentlaidoutinprose.Inthecourseof theFederalReservecreditcardconsumertestingproject,presentationsthatseparatedfees andinterestchargeshelpedconsumersunderstandthesedifferentelementsintheirbills; however,therewasnodifferenceinunderstandingbetweenconsumerswhosawtransactionsgroupedbytype(purchases,cashadvances,andbalancetransfers)andthosewhosaw achronologicallistingof transactionsregardlessof type. Whileitislikelythaticonsandcolorcouldalsohelpconsumersrecognizeproductfeatures andnavigatearounddocuments,theBoard’stestingtodatehasnotincludedthesedesign elements.Onechallengewithrelyingoncolortoconveythecontentof amandatorydisclosureisthepotentiallossinclarityinsituationswheredisclosureswouldbedeliveredbyfax orprintedinblackandwhite.Furthermore,thedisclosuresdevelopedbytheBoardhave beenimplementedbyregulationasmodelformsthatserveasasafeharborforcreditors whofollowthemratherthanasrequiredforms.Thus,asapracticalmatter,creditorshave latitudeindesignchoicesaslongastheirdisclosurescomplywiththerequirementssetout intheregulation. Inadditiontohelpingconsumersidentifyinformationandnavigatethroughadocument, designdecisionscanaffectparticipants’willingnesstoreadadocument.Forexample,when reviewingtheFederalReserve’s“ConsumerHandbookforAdjustableRateMortgages,”29 anumberof participantscommentedthatwhilethecontentseemedhelpful,theywouldbe unlikelytoreadthroughitbecauseof itslength(36pages).Also,earlyinthedevelopment of revisedmortgagedisclosures,participantswereshowninformationonmortgagepaymentsinbothgraphandtableformats.Whilesomerespondedpositivelytothegraph,most preferredthetable.Oneparticipantindicatedthatbecauseheassumedinformationpresentedgraphicallywouldbedifficulttounderstand,hewouldnotlookatit. Contextual Information Can Improve Comprehension and Usability Languageanddesigncanaidcomprehensionandusability,butadisclosuredocumenthas moremeaningwhenaconsumerunderstandshowtheinformationrelatestohisorherpersonalcircumstances.Contextualinformationcanhelpaconsumerinterpretparticularitems onadisclosureaswellastheoverallpurposeof thedisclosure. Setting Context for Individual Elements TheBoard’stestingof consumerunderstandingof theAPRformortgagesillustratesthe relevanceof contextforinterpretingparticularelementsof disclosures.TheAPRona mortgagecanbeusefultoconsumerswhencomparingsimilarmortgageofferingsbecause itincorporatesmanyupfrontloancosts—alongwiththepaymentsoverthelifeof the loan—intoasingle,“comparison-friendly”costmeasure. 29 ThispublicationisavailableontheBoard’swebsiteatwww.federalreserve.gov/pubs/arms/arms_english.htm.

DesigningDisclosurestoInformConsumerFinancialDecisionmaking 13 However,astestingparticipantsintheBoard’smortgageprojectdescribedtheirpastmortgage-shoppingexperience,abouthalf indicatedthattheyonlycontactedonemortgagebrokerorlenderintheprocessof gettingtheirloan.Eventhosewhodidshopwithseveral lendersorbrokersusuallyappliedforaloanfromonlyoneprovider.Thus,inpractice, manypeoplemaynothavethecontextprovidedbymultipleloanofferstousetheAPRon amortgageoffertheyreceiveasacomparisontool. Consumerbehaviorresearchhasshownthatwhenconsumersmakeachoiceconsidering onlyoneoption,theycompareittothereferenceinformationtheyhaveavailable.30Testing participantshaveshownlittleunderstandingof theAPR,andtypicallyevaluateloanoffers usinginformationontheformthattheycaninterpretmoreeasilyandthatmaybemostrelevanttothem,suchasmonthlypayment,interestrate,andclosingcosts.TherevisedmortgagedisclosureformsproposedinAugust2009includedagraphicshowingtheAPRin relationtoAPRsonsimilarloansofferedtoborrowerswithexcellentcredit(example1). Thiscontextwasintendedtoprovideconsumerswithinformationtheycouldusetoevaluatetheoffertheyreceived,evenif theydidnothavemultipleofferstocompare.Nonetheless,evenwiththegraphic,testingparticipantsstillhaddifficultyunderstandingtheAPR. Asthisexampleillustrates,makingrequireddisclosurecontentmeaningfultoconsumers canbechallenging. Setting Context for the Whole Form Whenmultipleitemsappearineachdisclosure,consumersseekawhole-to-partwayof organizingalltheinformationputinfrontof them.31Therefore,itisimportanttoinclude contextualinformationthataidsconsumersinunderstandingtheoverallmessageof adisclosuredocumentaswellastheindividualparts. Takethecaseof privacynotices,forexample.Initialtestingfoundthatmanyparticipants didnotunderstandwhytheywerereceivingtheprivacydisclosureform.Tohelporient consumerstothepurposeof thenotice,thefinalformincludedtheinformationthatthe noticewouldaddressintheformof questions.Creatingatitle(“WhatdoesABCBankdo withyourpersonalinformation?”),usingasetof labels(Why?What?How?),andincluding asetof frequentlyaskedquestionsprovidedacontexttohelpconsumersunderstandwhy theywerereceivingthenoticeandhowtousetheinformation.32Thetableintheprivacy noticeprovidedthewhole-to-partframeforconsumers.Consumerscouldseeallthepossiblereasonsforwhichfinancialinstitutionscouldpotentiallysharetheirinformation(the whole)andthewayorwaysinwhichtheirparticularfinancialinstitutionshares(theparts). Becausetheknowledgeandpreviousexperiencethatpeoplebringwhenreadingaformcan bothhelpandhindertheirunderstandingof whattheyread,contextualinformationcan alsoaidconsumersininterpretingtheformcontent.Aconsumerwithsomeknowledgeof aspecificproduct,orof thegeneralworkingsof financialmarkets,maybebetterableto comprehenddisclosures.However,priorknowledgethatisincorrectorirrelevantmayalso leadparticipantstomisunderstandormisinterpretinformationonaform. 30 ChristopherK.HseeandFranceLeclerc(1998),“WillProductsLookMoreAttractiveWhenPresentedSeparatelyorTogether?”JournalofConsumerResearch,vol.25(2),pp.175–86. 31 KleimannCommunicationGroup,Inc.(2006),EvolutionofaPrototypeFinancialPrivacyNotice:AReporton theFormDevelopmentProject(February28),submittedtotheFTC,www.ftc.gov/privacy/privacyinitiatives/ ftcfinalreport060228.pdf. 32 Theprivacynoticeformdevelopedbytheagenciesreceivedthe2010ClearMarkAwardfromtheCenterfor PlainLanguage.

14 FederalReserveBulletin|August2011 Forexample,inthetestingof overdraftnotices,someparticipantswereawareof optional overdraftplansofferedbybanks.33Someof theseplansallowcustomerstosignuptolink theircheckingaccounttoasavingsaccountoralineof creditsothattheindividual’spaymentswouldbecoveredif thecheckingaccountwereoverdrawn.Someparticipantsfamiliarwiththeseoptionalplansinterpretedthedisclosureasbeingaboutthoseplans.However,theoverdraftnoticewasnotprimarilyaboutoptionaloverdraftplansthatinvolveda linktoanotheraccount,butratheraboutthebank’sstandardpracticesforcoveringoverdraftswithoutsuchaplan.Banksmaycoversometypesof paymentsforcustomerswho overdrawtheiraccounts,andmaychargefeesfordoingso,evenwhenthecustomerhasnot signedupforaplan. Thefinalmodeldisclosureforoverdraftsbeginsbyexplainingthedifferencebetweenstandardoverdraftpractices(theprimarysubjectof thedisclosure)andoptionaloverdraft plansthatareavailable.Thisintroductorytextprovidedacontextforconsumerstounderstandtheoverallmessageof theformandmarkedlyimprovedcomprehensionof thecontentbothforparticipantswhohadnounderstandingof overdraftsandthosewhowere familiarwithoverdraftplansthatinvolvedlinkingtootheraccounts.However,evenwith thisimprovementinunderstandingof thestandardoverdraftpractices,someparticipants continuedtomisinterpretthedisclosurebecauseof theirpersonalexperienceswiththe optionalplans. “Framing” Information to Inform Choice Theprecedingexamplesillustratehowthecontextualinformationonaformcanhelpreadersunderstandparticularcontentandtheoverallmessageof thedisclosure.Inaddition, supplementaryinformationandexplanationscanhelp“frame”decisionoptionssothat consumersunderstandpossibleimplicationsof theirchoices. TheBoard’sconsumertestingforcreditcardsincludedastaticdisclosureof howlongit wouldtaketopayoff abalanceof $1,000at17percentAPR,makingonlyminimumpayments(aboutsevenyears).TheBoarddidnotrequirethatcreditcardcompaniesdisclose howlongitwouldtakeconsumerstopayoff theiractualcreditcardbalances.However,in theCreditCARDActpassedinMay2009,Congressrequiredcreditcardcompaniestodisclosenotonlyhowlongitwouldtaketopayoff theconsumer’sactualbalancebutalso howmuchconsumerswouldhavetopayinordertopayoff thebalanceinthreeyears. WhiletheseparticularpaymentscenariosrequiredbytheCreditCARDActwerenota partof theBoard’sconsumertesting,resultsfromthetestingof thestaticdisclosure describedabovesuggesttheymayprovideauseful“frameof reference”forconsumersin makingdecisionsaboutmonthlypayment.Infact,formanyparticipantsinthecreditcard testing,seeinghowlongitwouldtaketopayoff acreditcardbalancewasaninsightful moment.However,otherparticipantssaidthattheywouldneverjustmaketheminimum payment. Suchdifferencesinresponsesarenotsurprisingbecausesomeconsumersmaynotthink certaininformationappliestothem.Priorresearchonconsumeruseof andattitudes towardcreditcardsfoundthat7percentof surveyrespondentsreportedthatthey“hardly ever”mademorethantheminimumpaymentontheircreditcard,whileabout35percent 33 MacroInternationalInc.(2008),ReviewandTestingofOverdraftNotices(December8),reportsubmittedtothe BoardofGovernorsoftheFederalReserveSystem,www.federalreserve.gov/newsevents/press/bcreg/ bcreg20081218a6.pdf.

DesigningDisclosurestoInformConsumerFinancialDecisionmaking 15 Example 1. APR Graphic from Board’s 2009 Proposed Rules for Home-Secured Credit TohelpestablishacontextforconsumerstobetterunderstandtheAPR,revisedmortgage disclosureformsproposedbytheBoardin2009includedagraphicshowingtheAPRin relationtoAPRsonsimilarloansofferedtoborrowerswithexcellentcredit.1 1 IntheBoard’s2009proposalfortheAPRgraphic,the“averagebestAPR”wasdefinedastheaverageprimeoffer rate.The“highcostzone”wasdefinedbytheHOEPAthresholdforhigher-pricedloans;forfirstliens,thisthreshold is1.5percentagepointsabovetheaverageprimeofferrateforacomparabletransaction.Fordetailsonhowthe averageprimeofferrateisconstructed,seewww.ffiec.gov/ratespread/newcalchelp.aspx#4. “hardlyever”paytheirbalancesinfull.34Differencesinpaymentbehaviorarelikelyto implydifferentdegreesof interestamongconsumersininformationaboutestimatedrepaymenttimes.Indeed,surveyandexperimentalevidenceontheeffectof includingaminimumpaymentoncreditcardbillsshowedthisinformationdidnotaffectthebehaviorof thosewhopaidinfull.However,thesizeof partialpaymentswerereducedwhentheminimumpaymentwasincluded,suggestingthattheminimumpaymentmayactasapsychological“anchor”forsomeconsumersmakinglessthanthefullpayment.35Individualdifferencesliketheseareoneof thechallengesregulatorsfaceindeterminingwhatcontent shouldberequiredondisclosures. Incontrasttoaproductlikeacreditcardthatconsumersmayusefrequently,muchof the financialmanagementassociatedwithmortgageloansoccursinfrequently,whenaconsumerbuysahomeordecidestorefinance.However,evenwithmortgages,month-tomonthdecisionsaboutpaymentscanadduptogeneratesavings—orproblems—overtime. Indeed,ensuringanunderstandablepresentationof informationontheeffectsof monthly paymentdecisionsisanelementof theBoard’sproposeddisclosuresfor“paymentoption” mortgages.Theseproductsgiveconsumersachoiceof severalpossiblemonthlypayments. Theminimumpaymentoptiontypicallycoversnoneof theprincipalandonlysomeof the interest.Asaresult,theloanamountcanriseif theconsumermakesminimumpayments becauseanyunpaidinterestisaddedtotheprincipalbalance.Eventually,theseloancontractsrequirerepaymentof bothprincipalandinterest.Consumerswhoroutinelymake minimumpaymentscanbesubjecttoconsiderablepaymentshockinthefuturewhenthe requiredpaymentincreasestobeginrepaymentof theloan’sprincipal. TheBoardproposedadisclosureforpaymentoptionmortgagestobeincludedwiththe monthlystatementfortheseloans.Thedisclosuregivestheamountof theminimum 34 ThomasA.Durkin(2000),“CreditCards:UseandConsumerAttitudes,1970–2000,”FederalReserveBulletin (September),pp.623–34,www.federalreserve.gov/pubs/bulletin/2000/0900lead.pdf. 35 NeilStewart(2009),“TheCostofAnchoringonCreditCardMinimumPayments,”PsychologicalScience,vol. 20,pp.39–41.

16 FederalReserveBulletin|August2011 requiredpayment,aswellasotherpaymentoptionsthatmaybeavailable,suchasapaymentthatcoversonlytheinterest,andthefullyamortizingpaymentthatcoversinterestas wellasprincipal.Theproposedmodelformalsoincludedinformationontheeffectsof makingthedifferentpayments—e.g.,thattheminimumpaymentwouldincreasetheloan balanceandresultinsignificantlyhigherpaymentsinthefuture.Thisproposedmodelis similartoanillustrationissuedbythefederalfinancialinstitutionssupervisoryagencies.36 Alltestingparticipantswhoviewedthedisclosureformunderstoodthattheyhadmultiple paymentchoicesfortheloan,andthattherewereconsequencesforselectingthedifferent payments.Mostunderstoodtheimplicationsof makingtheminimumpaymentincluded increasingtheirloanbalanceandhavingtomakelargerpaymentsinthefuture. Clearly,effectivedisclosureof complexproductsanddecisionsrequirescarefulthinking abouthowtheindividualpiecesof informationrelatetothewholeandaboutwhatadditionalcontextualinformationconsumersmightrequireinordertocorrectlyinterpret—and effectivelyuse—theinformationprovidedbythedisclosure. Achieving a Neutral Tone Can Be Challenging Disclosureshavehistoricallybeenintendedtopresent“justthefacts”:Theyshouldnot steertheconsumerinonedirectionortheother.However,as“choicearchitecture”—the ideathatthewayoptionsarepresentedinfluenceswhatpeoplechoose—hasenteredthe policydiscussion,policymakersrecognizethatfewpresentationsof informationmay betrulyneutral. Someaspectsof choicearchitecturearesetbystatute,andothersmaybelefttothediscretionof theagencywithimplementingauthority.Withintheframeworksetbystatute,the goalforpresentationof informationmaystillbeadisclosurethatdoesnotsteerconsumers, yetsometimesmaintaininganeutraltonecanbechallengingforregulators. Experiences from the Privacy Notice Project Fortheinteragencyprivacynoticeproject,thechoicearchitectureissetbystatuteandis structuredsothattheconsumers’informationwillbesharedunlesstheyopttolimitthe sharing(example2).37Thegoalof thenoticeisto,first,informconsumersabouttheinformation-sharingpracticesof theirfinancialinstitutionsand,second,discusstheirchoices forlimitinginformationsharingwithoutsteeringtheindividualtowardaparticulardecision.Thetestingfocusedonusingfactualwording,objectivepresentation,andneutral words.Ineachroundof testing,interviewerslistenedforcomments,reactions,andperceptionsfromconsumersthatindicatedareasof potentialbiasinthenotice.Theiterative testingprocessledtheagenciestoincorporatedesignelements(forexample,the Why?What?andHow?frameandthetableformat)andlanguagethatresultedinafinal noticedesignedtobeclearandneutral. Thesituationwherefirmsthatdidnotshareinformationand,therefore,didnotofferan optoutwasachallenge—thatis,therewasnothingtooptoutof,sincetheinstitutiondid notshare.Inearlyroundsof testing,consumersreactednegativelytoseeingthequestion “Canyoulimitthissharing?”answeredby“No.”Consumerswhopreferrednottohave theirinformationsharedjudgedinstitutionsthatdidnotsharelessfavorablythantheydid 36 OfficeoftheComptrolleroftheCurrency,BoardofGovernorsoftheFederalReserveSystem,Federal DepositInsuranceCorporation,OfficeofThriftSupervision,andNationalCreditUnionAdministration (2006),“ProposedIllustrationsofConsumerInformationforNontraditionalMortgageProducts,”Federal Register,vol.71(October4),pp.58672–78,http://edocket.access.gpo.gov/2006/pdf/06-8479.pdf. 37 Gramm-Leach-BlileyAct,15U.S.C.6801–6809.

DesigningDisclosurestoInformConsumerFinancialDecisionmaking 17 Example 2. Interagency Privacy Notice Disclosure Form Throughsuccessiveroundsoftesting,theinteragencyprivacynoticeprojectteamdevelopedadisclosureformforinstitutionstouseininformingconsumersabouttheirinformation-sharingpracticesandtohighlightconsumers’choicesforlimitingtheinformation sharedbytheinstitution.Thissample(frompage1oftheform)illustratesthefinaldesign elementsandlanguageincludedinthenotice. Why? What? How? Reasons we can share your personal information Does Mars Bank share? Can you limit this sharing? Contact Us institutionsthatsharedbutofferedanoptout(insomecases,evenif consumersexerciseall optouts,institutionscouldstillsharesomeinformation).Insubsequentrounds,the“No” wasreplacedwith“Wedon’tshare,”andmoreconsumersunderstoodthattheydidnot needtooptoutof informationsharingwiththeseinstitutions. Creating a Disclosure May Involve Creating a Choice Structure Therightforconsumerstolimitthesharingof theirpersonalinformationdisclosedinthe privacynoticeswasestablishedbystatuteasanopt-outchoice.However,thelawdoesnot alwaysprescribetheoptionsconsumersmustbeofferedorhowthoseoptionsaretobe structured.Creatingsimplerormorestraightforwarddisclosuresmaynotbefeasibleif the

18 FederalReserveBulletin|August2011 underlyingchoiceoptionsvarysignificantlyacrossthemarketorareinherently complicated. Incaseswherethechoiceoptionsarenotstandardizedbylaw,theBoardmaydecidetouse itsauthoritytocreateastandardbyregulation.Asnotedearlier,thechoicearchitectureof howoptionsarepresentedcanaffectconsumerdecisionmaking.Inaddition,establishing thisunderlyingstructuremaybeapartof creatingorimprovingadisclosure. Experiences from the Bank Overdraft Disclosure Project Inthecaseof overdraftdisclosures,theregulationsestablishingthechoicestructurefor overdraftcoverageof differenttypesof transactionswerebasedoninformationaboutconsumerpreferences.Inthetestingof disclosuresforbanks’standardoverdraftpractices,participantswereaskedquestionsabouttheirpreferencesabouthowbankshandledifferent typesof overdraftsaswellasaboutsampleoverdraftdisclosures.Manyindicatedthatthey wouldliketheirbanktocoveroverdraftsforchecks;automatedclearinghouseandrecurringautomaticpayments,suchasmortgageandcarloans;andotherregularbills.However, themajoritydidnotwantthebanktocoveroverdraftsonATMtransactionsandpoint-ofsaledebitcardpurchases(referredtointhefinaldisclosureas“everydaydebitcardtransactions”).Fortheselattertransactiontypes,consumersoftenpreferredthatthebankdecline thetransactioninsteadof coveringitandchargingthemafee.Inaddition,whenasked whethertheywouldprefertohavetherighttooptoutof automaticoverdraftcoveragefor ATMandpoint-of-saledebitcardtransactions,ortooptintohavingoverdraftsonthese transactionscoveredbythebank,mostindicatedtheypreferredtooptin—inotherwords, thatthedefaultoptionwouldbenottohavethesetransactioncovered. Reflectingconsumerpreferencesinthedisclosuredesignrequirednotonlydevelopmentof disclosuresbutalsoissuanceof complementaryrulestostandardizebankpracticesregardingoverdrafts.Becausebanksvariedinhowtheytreatedoverdraftsondifferenttypesof transactions,theBoarddevelopedrulesrequiringthatoverdraftcoverageforATMand everydaydebittransactions,whenavailable,beofferedasanopt-inchoiceforconsumers. Standardizing Disclosure Can Be Challenging Standardizationcanbebeneficialinhelpingconsumerslocateandunderstandinformation ondisclosures.However,customizationmaymoreeffectivelyhighlightcharacteristicsof differentproductsoralertconsumerswhenafamiliarpieceof informationmayhaveadifferentmeaning. Standardization across Financial Product Lines Resultsfromearlytestingof creditcarddisclosuresrevealedhowstandardizationcanhelp consumersrecognizedisclosures.Earlyinthetestingof creditcardsolicitations,participantslookedforthe“SchumerBox”—arequiredtablecontainingcertainkeyinformation increditcardsolicitations.Becauseparticipantsrecognizedandwerecomfortablewiththis tabularpresentationdevice,itwasretainedintheredesignedcreditcarddisclosures.In addition,someof theproposedearlydisclosuresformortgagesandhomeequitylinesof credit(HELOCs)useasimilardesign.Whilethesedesignsimilaritiesaresubtle,somehave suggestedamorewell-defined“nutritionlabel”forfinancialproducts.38Ideally,if informationcouldbepresentedusingastandard,andrelativelylimited,setof conceptsanddesign 38 SusanE.Woodward(1998),“RegulatoryCaptureattheU.S.SecuritiesandExchangeCommission,”paperpreparedfortheMilkenInstituteConferenceonCapitalMarkets(March16),http://mail.sandhillecon.com/pdf/ RegulatoryCapture.pdf.

DesigningDisclosurestoInformConsumerFinancialDecisionmaking 19 elements,thiswouldsupportlearningovertime,anda“transferof learning”asconsumers encounterthesametypeof informationfordifferentproducts. Anotherexampleof disclosurestandardizationacrossfinancialproducttypesisthe requirementforproductproviderstodisclosethe“year-to-date”amountof feesandinterestpaidinrequiredandproposeddisclosuresforcheckingaccounts,creditcards,andhome equitylinesof credit.If consumershavemorethanoneof theseproducts,theywillbegin torecognizeandbecomecomfortablewiththestandardized“year-to-date”boxapproach todisclosureof feesandinterestcharges. Departing from Standardization to Highlight Product Characteristics Nevertheless,whiletheideaof usingcommondesignandinformationelementsacross financialdisclosuresisbothappealingandpotentiallybeneficial,thevarietyandcomplexity of financialproductspresentschallengesforstandardizingdisclosures. Forexample,considerthecaseof disclosingpaymentsonclosed-endmortgageproducts.In thepast,TILAmortgagedisclosureregulationsrequiredastandardizedpaymenttablethat includedalltherequiredmonthlypaymentsdueunderthetermsof thetransaction (example3).Foradjustableratemortgages(ARMs),futurepaymentsweredisclosedunder theassumptionthattheunderlyingindexonwhichtheratewasbasedwouldremainconstantovertimeatitsinitialvalue.Underthisdisclosureregime,a30-yearARMthat adjustedonceayearandstartedatthefullyindexedrate(i.e.,therewasnodiscountorpremiumassociatedwiththestartingrate)mightresultindisclosureindicating360identical payments.A30-yearfixedratemortgagecouldalsohavehadadisclosurethatshowed360 identicalpayments.However,inreality,thepaymentontheARMloanwouldlikelyhave changedovertime,whilethepaymentonthefixedrateloanwouldnot.Thedisclosuresin thiscasewouldhavebeenverystandardized,yetwouldhavefailedtorevealimportantdifferencesinthepotentialpaymentsandnetcoststotheconsumer. Therevisedpaymenttablesforclosed-endmortgagesthatlenderswillberequiredtogiveto consumers(asof October2011,example4)aredifferentiatedforseveraldifferenttypesof mortgagesinanefforttohighlightthefeaturesthatshouldbemostrelevantforconsumer decisionmakingforthatproduct.Proposedpaymenttablesforfixed-ratemortgagesare simpler,sincetheprincipalandinterestpaymentremainsthesame;formorecomplex ARMproductssuchasthehybridARMexampleincludedhere,theproposedpayment tableincludesadditionalinformationon(1)themaximumrateandpaymentduring Example 3. Old TILA Payment Table for 3/1 Hybrid ARM Inthepast,TILAmortgagedisclosuresincludedastandardizedpaymenttablelistingthe requiredmonthlypaymentsdueunderthetermsoftheloan.Foradjustableratemortgages (ARMs),futurepaymentsweredisclosedundertheassumptionthattheunderlyingindexon whichtheratewouldbebasedremainedconstantovertimeatitsinitialvalue.However,as theexamplebelowillustrates,thetabledidnotclearlyshowthepotentialdifferenceinthe requiredpaymentifinterestratesweretochange.

20 FederalReserveBulletin|August2011 Example 4. New TILA Payment Table for 3/1 Hybrid ARM Newpaymenttablesforclosed-endmortgagesinformedbytheBoard’sconsumertestingof mortgagedisclosuresareadaptedtoaccommodatedifferentproducts.ForARMslikethe oneinthesamplebelow,thetablethatlenderswillberequiredtogiveconsumers(asof October2011)includesinformationonthemaximumrateandpayment;thepaymenttable forafixedratemortgagemayonlyhaveasinglecolumnifthepaymentdoesnotchange. thefirstfiveyearsof theloan,and(2)themaximumrateandpaymentoverthetermof the loan. The Impact of Differing Legal Requirements on Standardization Efforts Sometimesthetransferof learningthatoccursthroughstandardizeddisclosureprovesbeneficial;atothertimes,itcanbeconfusingorpotentiallymisleading.Considerthecase wherefinancialproductsaregovernedbymultiplestatuteswithmultiplerequirements.For example,creditanddebitcardsmaycarrythesamelogo,buttheyaregovernedbydifferent laws(TILAandtheElectronicFundTransferAct,respectively)thathavedifferentdisclosuresanddifferentconsumerprotections(e.g.,differentliabilitylimits).Consumerswho “transfer”lessonslearnedfromowningonecardproducttotheownershipof another wouldbemakingdecisionsbasedonwrongassumptions.Insomecases,theBoardchoseto usedistinctly“nonstandard”languageinordertohighlightdifferencesinfinancialproducts.Forexample,inconsumerleasingdisclosures,theBoardusestheterms“capitalized costreduction”and“rentcharge”ratherthan“downpayment”and“financecharge”to differentiatethetermsof avehicleleasefromthoseof avehicleloan. Thus,whilecreatingandmaintainingconsistencyacrossdisclosuresfordifferentproducts isbeneficial,attimesconsumersmayneedtobealertedwhenastandardorfamiliarpiece of informationhasadifferentmeaningforanotherproduct.Furthermore,asproducts becomemoreinnovativeandmorecomplex,andasnewpartiesbecomepartof theregulatoryscene(forexample,theFederalCommunicationsCommissioninthecaseof mobile banking),designingmeaningfuldisclosureswillbecomeincreasinglydifficult. What Works in Print May Not Work Online TheBoard’sresearchfoundthatwhatworksforarecipientof aprintdisclosuremaynot workwhentransferredtoanotherrecipient’s“screenof choice,”beitacomputermonitor

DesigningDisclosurestoInformConsumerFinancialDecisionmaking 21 oramobiledevice.39Changingthedeliverychannelforconsumerdisclosuresmaymean revisingtheformatandbeingwillingtomodifycontent.40Inthecaseof webpresentations of disclosures,thethree-dimensionalnatureof theInternetcanenableconsumerstolinkto moredetailedinformation,allowingforeducationontheproduct.Butgettingconsumers tonoticeandthenclickonkeylinkscanbeaschallengingasgettingthemtointeractwith thepaperdisclosure. Conventionalwisdomhasitthatconsumerswillreadhard-copyprintbutscanwebpages, sowebdesignershavelearnedtowritefor“scannability.”However,thereisgrowingevidencethatconsumersaretransferringtheirwebpagescanningtechniquestoprintmedia. Thus,printdisclosuresarebeginningtoincorporatesomeof theelementsof webpage design—forexample,groupinginformation,usinggraphics(boxesandbullets),andwriting in“chunks”ratherthanprose. “Less Is More” Often Remains True Whileadditionalcontenthelpscomprehensioninsomecases,sometimeslessismore.Too muchinformationcanoverwhelmconsumersordistracttheirattentionfromkeycontent.Itmaybebettertofocusonahandfulof elementsratherthan“fulldisclosure.” Forexample,whenredesigningthedisclosureboxforcreditcards,thedisclosuresquickly becamefocusedonratesandfees.Otherinformationthathadbeeninthebox—for example,balancecalculationmethods—wasmovedtoanareabelowthebox. Inthefirstthreeroundsof testingof HELOCdisclosures,furthermore,manyparticipants misunderstoodthehistoricalpaymentexamplesinthecurrentapplicationdisclosure.41 Manyparticipantsdidnotrealizethattheexampleshowedwhatpaymentsona$10,000 loanwouldhavebeenunderactualhistoricalrates.Somethoughttheexampleshowed ahypotheticalfuturescenarioof whatmighthappentoratesandpaymentsanddidnotsee theexampleasusefulbecausetheydidnotthinkitprovidedanyinformationabouttheir loan.Otherserroneouslythoughtthattheexampleshowedtheirloanandthatthepaymentswouldbetheirexactmonthlypayments.Evenwhenthetablewasexplained,participantswhohadoriginallymisunderstoodtheexamplestilldidnotthinktheinformation providedwasuseful.Someparticipantswhounderstoodtheexampleindicatedthatwhat theyfoundvaluablewasseeinghowmuchtheindexhadvariedovertimebecausethisgave theminformationthathelpedthemevaluatethelikelihoodtheinterestratecouldreachits maximuminthefuture.Basedonthesefindings,therevisedHELOCapplicationdisclosure proposedbytheBoarddidnotincludethehistoricalexample.Instead,theformincluded therangeof thevalueof theindexovera15-yearperiodinasectionfor“Historical ChangeinInterestRate”toprovidethemostimportantinformationfromthehistorical example. IntheBoard’stestingof overdraftnotices,afewparticipantsgaveincorrectanswersto questionsabouthowthebankwouldhandleoverdraftsbecausetheyfocusedonaparagraphthatexplainedlimitedexceptions(thatis,whenthebankmightpaycertaintypesof transactionsthatoverdrewtheaccount,eventhoughthebank’sstandardpracticewasto 39 Thusfar,theBoardhasnotventuredintodisclosuredesignforsmartphones. 40 KleimannCommunicationGroup,Inc.(2009),Web-BasedFinancialPrivacyNoticeFinalSummaryFindings Report(October29),submittedtotheFTC,www.ftc.gov/privacy/privacyinitiatives/ WebbasedNoticeFinalSummaryReport.pdf. 41 MacroInternationalInc.(2009),DesignandTestingofTruthinLendingDisclosuresforHomeEquityLinesof Credit(July16),reportsubmittedtotheBoardofGovernorsoftheFederalReserveSystem,www .federalreserve.gov/boarddocs/meetings/2009/20090723/Full%20HELOC_Macro%20Report.pdf.

22 FederalReserveBulletin|August2011 declinesuchtransactions).Becausethediscussionof thetechnicalexceptionsappearedto distractsomeparticipantsfromthemoreimportantconceptsinthedisclosure,thisparagraphwasdroppedfromthefinalrequiredlanguage.Instead,thefinalrequireddisclosure statesthat“If wedonotauthorizeandpayanoverdraft,yourtransactionwillbe declined.”Insimplifyingthetexttostatethestandardpracticeandnottheexception,the disclosuresacrificedsometechnicalaccuracytofocusattentiononthemoreimportant informationinthedisclosure. Challenges, Caveats, and the Need for Additional Research If disclosurerevisionsservetheirintendedpurposes—transparencyandconsumerprotection—consumerswillmakebetterdecisionsfortheirpersonalcircumstancesinactual financialservicestransactions.Theimplicitassumptionunderlyingthetestingapproaches usedintheprojectsdescribedinthisarticleisthatbetterperformancebyconsumertesters inrecognizing,comprehending,andusingthedisclosuresinacontrolledsetting,withtheir attentionfocusedonthedocumentandthetaskathand,willbecorrelatedwithimproved consumerdecisionmakingintherealworld.Thiscorrelationisnotagiven,however,and questionsremainabouthowthefindingsfromtestingmightapplyinpractice. Whilethefocushereisontheefficacyof disclosure,suchdiscussioncannotbedivorced fromtheconsiderationof othercomplementarypolicies.Failure—orlimitedsuccess—with disclosuresmaypointtotheneedforotherapproaches,notjustmoreorbetterdisclosure. Forexample,othertypesof policiesthatmaycomplementorsupplementdisclosures includeregulationsaffectingthetimingof disclosuredelivery,orthepairingof disclosure withotherinformationinterventions(e.g.,education,counseling);regulationsonseller incentivesorbehaviors;prohibitionsorrestrictionsonproductofferings;andenforcement mechanismsonsellerstopromotecompliancewithregulations.Disclosureismostusefully viewedasonecomponentof alargerstrategythatemploysotherpolicytoolsandeducationeffortstoimprovedecisionsandoutcomesforconsumers.(Seebox2forafullerdiscussionof toolsandstrategiesbeyonddisclosure.) Measurement and Methodology Making Distinctions between Good Decisions and Good Outcomes Onechallengeindeterminingthereal-worldimpactof changesindisclosuresistheproblemof observingandevaluatingdecisions.Inacontrolledenvironment,aresearchercan controltheoptionspresented.But,inpractice,itiseasiertoobtaininformationaboutthe choiceaconsumermadethanitistoknowthedetailsof alltheoptionstheyconsidered.It alsocanbedifficulttodistinguisha“good”decisionfroma“bad”one,especiallyif that evaluationdependsonconsumer-specificpreferencesorcircumstances.Aproductmaybea goodfitforoneconsumerbutabadfitforanother.Forexample,apaymentoptionmortgagemaymakesenseforsomeonewithirregularincomeandthedisciplinetomakeadditionalprincipalpaymentswhenpossible;butitmaybehazardousforhouseholdsthatcontinuallyfocusontheminimumpayment. Furthermore,informationmaybeavailableonoutcomes,butgooddecisionsdonotnecessarilyimplyagoodoutcomeorviceversa.Productsthatweretherightchoiceatthetime mayturnouttobesuboptimalthreetofiveyearslater,orwhenahousehold’scircumstanceschange. Itwouldbehelpfultoknowmoreabouthowconsumersstructuretheirdecisionsandhow theygoaboutassessingtherangeof productsinthemarket.Additionally,researcherswant

DesigningDisclosurestoInformConsumerFinancialDecisionmaking 23 Box 2. When Disclosures Aren’t the Right Tool Standardizeddisclosurescanbehelpfulforsimple,straightforwardinformation,suchas interestratesandfees.Butwhenproductsandproductfeaturesbecomecomplex,other toolsareneededtoprovidethetypeandlevelofconsumerprotectiondeemeddesirable. Regulatorsneedtoconsiderwhentodiscloseimportantinformationdirectlytoconsumers; whentoencourageconsumerstoseekothereducation,advice,orcounsel;andwhento stepinandprovidesubstantiveregulationsthatprovideconsumerprotection. Giventheinherentlimitationsofdisclosure,suchasspaceanddesignconstraints,thereisa roleforsupplementarystrategiesforprovidinginformationtoconsumers. ‰ Promotingdirectconsumerinteractionwithregulatorresources.Informationandeducationcanincludeprintmaterialsandwebresourcestocomplementdisclosure,andcan involvestrategiessuchaspublicawarenesscampaignsandinitiativestobuildcapacity amongeducators.1Forexample,requiredcreditcarddisclosuresreferconsumerstothe Board’swebsite(www.federalreserve.gov/creditcard)tolearnmoreaboutthefeaturesof creditcardsthattheymaywanttoconsiderusing.Onceconsumersdeterminewhatelse maybeimportanttothem,theycansearchadatabaseofcreditcardplans(www.federalreserve .gov/creditcardagreementsorwww.federalreserve.gov/creditcard/survey.htm)tofindacard thathasthefeaturestheyseek. Furthermore,printdisclosuresareinherentlystatic,whileotherconsumerinformationhas thepotentialforbeingdynamic.Onlineresourcescanbemuchmoreinteractiveandallow consumerstoconsideralternatives.Calculators,suchastheBoard’sCreditCardRepaymentCalculator(www.federalreserve.gov/creditcardcalculator),canhelpconsumersget estimatesoftheircostsandpayments,and“apps”canallowconsumerstodorealtimecomparisonsatthepointofsale,whetherthisisinthelender’sofficeoratthekitchen table. ‰ Encouragingconsumerstouseothereducationresources.Consumerinformationand educationcansupplementandgobeyondwhatispossibleindisclosures.Materialscanbe layeredsothatconsumerscangettheequivalentofa“quickstart”(forexample,theBoard issuesaseriesof5TipsonproductsandhasaWhatYouNeedtoKnowseriesfornew rules).Thesebriefinformationvehiclesfeedintomorecomprehensiveresources,suchas websites,thatdigdeeperintothedetailsoftheproductfeatures,provideexamplesand illustrations,andofferinteractivetools. Findingsfromtestingprovidesomeinsightsintoconsumerresponsestothesetypesof materials.Inthecourseofdevelopingrevisedmortgagedisclosures,testingparticipants wereshownseveraleducationaldisclosuresformortgages.Oneofthesewasa“Mortgage ShoppingChecklist,”whichlistedsixactionstepsconsumersshouldtakebeforeapplying foramortgage.2Abouthalftheparticipantswhoreviewedthisdisclosurefeltitwouldbe usefultothem.Generally,participantswhohadmoreexperiencewithmortgagesweremore likelytosaytheywouldnotusetheinformation;however,someoftheseparticipantsindicatedthattheythoughtthedisclosurewouldbeusefultofirst-timeborrowers. ‰ Issuingsubstantiveregulationstoprotectconsumers.Inadditiontoimprovingthe designofdisclosuresandeducationalmaterials,findingsfromconsumertestingcanalso informthedecisiontoimplementsubstantiveregulationstoprotectconsumers.Rulesmay beputintoplacetocomplementorfacilitatedisclosure-basedprotections,asinthecaseof theopt-inprovisionsforcertaintypesofoverdraftcoveragediscussedelsewhereinthis article. Inothercases,testingmayrevealtheneedtodevelopnewregulationsofproductsorpracticesratherthandisclosure-basedprotections.Forexample,inMarch2008,theBoard testedinformationabouthowcreditcardholders’paymentswouldbeallocatedamongdifferentbalances(purchases,cashadvances,andbalancetransfers,whichusuallycarry differentinterestrates).Morethanhalfofparticipantsalreadyunderstoodthatbanksusually appliedpaymentstolower-ratebalancesbeforehigher-ratebalances;severalofthesecommentedthattheythoughtthispracticewasunfair.Amongthosewhodidnothavethis understanding,noneunderstoodpaymentallocationanybetterafterreadingtheexplanationprovidedinthetesting.3ThefinalruleproposedbytheBoardinDecember2008 requiredbankstoallocatepaymentsexceedingtheminimumpaymenttothebalancewith thehighestratefirstorprorataamongallofthebalances. continuedonnextpage

24 FederalReserveBulletin|August2011 Box 2.—continued Subsequently,theCreditCARDActrequiredthatexcesspaymentsmustalwaysbeallocatedfirsttothebalancewiththehighestrate.Inaddition,theCreditCARDActprovided that,whenabalanceonanaccountissubjecttoadeferredinterestorsimilarprogram, excesspaymentsmustbeallocatedfirsttothatbalanceduringthelasttwobillingcyclesof thedeferredinterestperiodsothattheconsumercanpaythebalanceinfullandavoid deferredinterestcharges.TheBoard’sfinalruleissuedinJanuary2010mirrorsthestatutoryrequirements.However,inordertoprovideconsumerswhousedeferredinterestprogramswithadditionalmeansofavoidingdeferredinterestcharges,thefinalrulealsopermitsissuerstoallocateexcesspaymentsinthemannerrequestedbytheconsumeratany pointduringadeferredinterestperiod.Thisexceptionpermitsconsumerstopayoffa deferredinterestbalanceininstallmentsoverthecourseofthedeferredinterestperiod.4 1 SandraF.Braunstein(2009),“FinancialLiteracy,”statementbeforetheSubcommitteeonOversightofGovernment Management,theFederalWorkforce,andtheDistrictofColumbia,CommitteeonHomelandSecurityand GovernmentalAffairs,U.S.Senate,April20,www.federalreserve.gov/newsevents/testimony/braunstein20090429a .htm. 2 Theserecommendedstepsincludedobtainingafreecreditreport,decidinghowmuchsavingstoputtowardsa home,comparingquotesfromatleasttwolendersorbrokers,reviewingtwowebpublications,andseekingout helpfromaHUD-approvedcounselorifneeded. 3 MacroInternational(2008),DesignandTestingofEffectiveTruthinLendingDisclosures:FindingsfromQualitative ConsumerResearch(December),reportsubmittedtotheBoardofGovernorsoftheFederalReserveSystem,www .federalreserve.gov/newsevents/press/bcreg/bcreg20081218a7.pdf. 4 BoardofGovernorsoftheFederalReserveSystem(2010),“FederalReserveApprovesFinalRulestoProtect CreditCardUsersfromaNumberofCostlyPractices,”pressrelease,January12, www.federalreserve.gov/newsevents/press/bcreg/20100112a.htm. tounderstandtheconnectionsbetweenconsumers’informationgathering,disclosures, decisionmaking,andoutcomes. WhilesomeinformationonshoppingandchoicehasbeengatheredduringtheBoard’sdisclosuretesting,betterusemustbemadeof whatisalreadyknownaboutshoppingand choicefromexistingresearch.Thereisalsoaneedtocontinueexploringhowsurveys,interviews,orperhapsmoreinnovativedatacollectionmethodscouldimproveunderstandingof informationformatpreferences,financialproductsearch,choice,andoutcomes. Measuring the Impact of Disclosure on Consumer Decisions Asecondchallengeismeasuringtheimpactof disclosuresondecisions.Thecontextprovidedbyaconsumer’spriorknowledge—orperceivedknowledge—alongwiththeexplanationprovidedinadocumentandtheorganizationof theinformationcangreatlyinfluence theeffectivenessof disclosure.Inaddition,thecontextinwhichinformationisdelivered alsohasamajoreffectonthewayaconsumerresponds. Forexample,someparticipantsintestingof disclosuresforprivatestudentloansindicated thattimepressurewasafactorindecidingtotakethefirstloanofferedbecausegettingthe bestdealwasalowerprioritythangettingthetuitionpaidontime.42Inaddition,consumersmaylistentoasalesagentthattheytrustandnotreadthedisclosures.Or,theconsumer maybeunderpressuretocompleteatransactionandchoosetoignoreinformationjustto finishthetask(considerhowmanypeoplescrollthroughonlinedisclosuresandclickon“I agree”—withoutcompletelyreadingthosedisclosures—inordertodownloadcontentor 42 RockbridgeAssociates,Inc.(2009),ConsumerResearchandTestingforPrivateEducationLoans:Reportof Findings(March),submittedtotheBoardofGovernorsoftheFederalReserveSystem,www.federalreserve.gov /newsevents/press/bcreg/bcreg20090311a8.pdf;andRockbridgeAssociates,Inc.(2009),ConsumerResearchand TestingforPrivateEducationLoans:FinalReportofFindings(July),reportsubmittedtotheBoardofGovernorsoftheFederalReserveSystem,www.federalreserve.gov/newsevents/press/bcreg/bcreg20090730a2.pdf.

DesigningDisclosurestoInformConsumerFinancialDecisionmaking 25 connecttoawebsite).Consumersmayunderstandthedisclosure,buttheymaynotknow of otheroptionsormaylacktheunderstandingof howtheinformationappliestotheir ownsituation—inotherwords,theymaynotbemakingafullyinformedchoice.Thesecontextualfactorscaneasilyalterorperhapsoverridetheeffectsof improveddisclosures. Whileexantemeasurementof theeffectsof disclosurechangesonfinancialbehavior wouldbeidealforpolicydevelopment,expostevaluationisvaluableaswell.Effortsare underwaytoexaminetheeffectsof implementingtheCreditCARDAct,includingpossibleeffectsof thepaymentscenariosonrepaymentbehavior.43However,giventhat changesundertheactwentintoeffectrelativelyrecently,andthatthosechangeswere implementedinthemidstof amajoreconomiccrisis,establishingabodyof researchevidenceontheimpactsof thechangeswilltaketime. The Marketplace Effects of Disclosure Anotherchallengeisthatdisclosuresmayimpactnotonlythebehaviorof consumersbut alsotheactionsof suppliers.Theseeffectscansometimesbeunpredictableorcounterintuitive.Forexample,experimentalevidenceindicatesthatprovidingaconflictof interestdisclosuremayincreasethebiasintherecommendationsof advisors,possiblybecausethe advisorhaslessguiltaboutactingoutof self-interestwhentheclienthasbeenforewarned.44 Disclosurepoliciesalsocanaffectsuppliers’incentivesinpricing.Forexample,rulesfor calculatingtheAPRhavebeenfairlyexplicitaboutwhatfeesmustbeincludedinthecalculationandwhatfeesare“outside”theAPR.Underthis“somefeesin,somefeesout” approachforcalculatingtheAPRonaclosed-endmortgage,lendershaveanincentiveto shiftsomecostsintofeesthatareexcludedfromtheAPR,resultinginalowerAPR.Inits July2009proposedrules,theFederalReserveprofferedamoreinclusiveAPRdefinitionfor mortgages,notingthatlenderswouldhavelessincentivetoinclude“junkfees”incredit agreementsif theAPRcalculationincludedmostorallfees.45 Optimizing versus Constrained Maximization Itisrarethatdisclosuresstartoutasatabularasa.Inmostsituations,thoseinvolvedin designingdisclosuresareguidedand,attimes,constrainedbylanguageinthelawspassed byCongress,theneedtoconsiderbothconsumerbenefitandcreditorburdenunderrevised rules,orbyotherinstitutionallimits.Inthesesituations,disclosuresmaynothelpconsumersoptimizeasmuchastheymightonlyincreaseutilityatthemargin. Forexample,somehavearguedthatothermetricsof overallloancostwouldbebettertools thantheAPRforconsumersshoppingformortgages.However,theAPRisthedisclosure requiredbylaw.Likewise,simpleproductsmayonlyneedsimpledisclosures,butthecomplexityinthemarketplacerequiresthatdisclosurescoverarangeof optionsandalternatives.While“onesize”maynotfitall,itmaybetheonlysizeavailableundertheconditions. 43 PresentationsfromtheCFPB’sConference“TheCARDActOneYearLater,”heldonFebruary22,2011,are availableatwww.consumerfinance.gov/credit-cards/credit-card-act/card-act-conference-key-findings/. 44 DaylianM.Cain,GeorgeLoewenstein,andDonA.Moore(2005),“TheDirtonComingClean:Perverse EffectsofDisclosingConflictsofInterest,”JournalofLegalStudies,vol.34(January),www.cbdr.cmu.edu/ mpapers/CainLoewensteinMoore2005.pdf. 45 BoardofGovernorsoftheFederalReserveSystem(2009),FederalRegister,vol.74(August26),pp.43232– 425,http://edocket.access.gpo.gov/2009/pdf/E9-18119.pdf.

26 FederalReserveBulletin|August2011 Itisalsothecasethattherecanbeadisconnectbetweenwhenconsumersneedinformation formakingdecisionsandwhenthedisclosureisprovided.Forexample,consumersmaybe betterservedbyreceivinginformationonmortgageratesandtermswhentheyfirstbeginto thinkaboutmortgagechoices—thatis,throughrealestateagentsandatopenhouses, beforetheemotionalattachmenttoahouseandthetimepressuretoapplyforaloancome intoplay.Instead,theyreceivethisinformationonlywhentheycontactalender,andgiven thatconsumersmaychoosetoonlycontactonelender,thereisnotmuchof adecisionto bemade. Todate,almostallof theconsumer-testeddisclosureshavebeendevelopedinaprinted paperformat.Giveninnovationsintechnology,itiscertainlypossibleforconsumersto havemoreaccesstointeractiveinformationanddecisiontools.Real-timequotesorapplicationsthatallowconsumerstocompareacrossarangeof lendersorserviceprovidersraise theissuesof howtodesigndisclosuresforthesesettingsandthelevelof effortrequiredby bothlendersandconsumerstodealwiththisreal-timeinformation. Duration of Disclosure Testing Yetanotherchallengeindesigningdisclosuresisthatdoingitwelltakestime.Indeed,comprehensivetesting,includingqualitativedocumentdevelopmentandquantitativevalidation testing,cantakeseveralyears,dependingonthecomplexityof theproductandthedisclosuredocumentsneededtomeetregulatoryrequirements.46Interagencycoordinationand statutorychangesduringdevelopmentcanlengthentheprocess.Itiscritical,however,to allowtimefortheintensiveanalysisateachiterationandstageof theprocessinorderto developadisclosurethatcanperformbetterthanwhathascomebeforeit. Forexample,theinteragencyprivacynoticeprojectbeganwithapublicworkshopin December2001,shortlyafterthelawmandatingthenoticeswentintoeffect.InDecember 2003,theeightagenciesinvolvedissuedanAdvanceNoticeof ProposedRulemaking,seekingpubliccommentonwhetherandhowtheagenciesshoulddevelopanalternativeprivacy notice.Inthesummerof 2004,sixof theagenciesenteredintoaMemorandumof Understandingandinitiatedaconsumerresearchproject,issuingareportonMarch2006, togetherwithaprototypefinancialprivacynotice. Theagenciestheninitiatedaquantitativevalidationstudy,butinOctober2006,Congress explicitlydirectedtheagenciestodevelopandpropose“amodelform”forvoluntaryuseby financialcompanies;thestudywastemporarilysuspended.InMarch2007,theagencies issuedaproposedaruleusingtheprototypenoticeasthemodelform.ThequantitativevalidationstudyresumedinMarchandApril2008.Theanalysisandfinalreporton thiswassubmittedinDecember2008.Theagenciesconsideredfurtherrevisionstothe formbasedonthatreport,andthesechangeswerevalidatedthroughadditionalqualitative testing.47InDecember2009,theagenciespublishedafinalmodelformrule,andinApril 2010,theyprovidedanonlineformbuilderforfinancialinstitutions. Workonrevisionstocreditcarddisclosuresbeganin2004,withanAdvanceNoticeof ProposedRulemakingissuedinDecember2004.Thecontractforconsumertesting 46 Inaddition,therulemakingprocessincludesacommentperiodforproposedrules.Forexample,thecomment periodfortheproposedcreditcardrulesissuedinMay2007was120days. 47 SeeMacroInternationalInc.(2008),MallInterceptStudyofConsumerUnderstandingofFinancialPrivacy Notices:MethodologicalReport(September18),submittedtotheFTC,www.ftc.gov/privacy/privacyinitiatives/ Macro-Report-on-Privacy-Notice-Study.pdf;andKleimannCommunicationGroup,Inc.(2009)FinancialPrivacyNotice:AReportonValidationTestingResults(February12),submittedtotheFTC,www.ftc.gov/privacy/ privacyinitiatives/validation.pdf.

DesigningDisclosurestoInformConsumerFinancialDecisionmaking 27 researchwasissuedinApril2006,withthefirstreportandproposedruleissuedinMay 2007.48Additionalqualitativeandquantitativetestingwasconductedin2007and2008, withfinalreportsandafinalruleissuedinDecember2008.49InMay2009,Congress passedtheCreditCARDAct,whichincludedsomeadditionaldisclosuresandcovered someadditionalproducts(forexample,giftcards). Conclusion Findingsfrombothquantitativeandqualitativeconsumertestingconductedtoinformthe developmentof disclosuresshowthepotentialforimprovementsinconsumercomprehensionandusabilityof disclosures.Thesefindingsalsorevealsomeof thelimitationsof disclosures,includingthedifficultyof makingcomplexconceptsorproductsunderstandabletoconsumers. Inadditiontothelimitationsrevealedbytestinginacontrolledenvironment,theimpactof disclosuresonconsumerdecisionmakinginactualfinancialtransactionsislikelytobe affectedbyotherfactors,suchasthecontextinwhichthedisclosureisdeliveredandthe behaviorof suppliers.Itisinconfrontingtheselimitationsof disclosureandotherrealworldcomplicationswhereitisparticularlyusefultoexpandtherangeof policytools underdiscussiontoincludenotonlydisclosure,butalsoeducationandsubstantive regulation. Thegrowingcomplexityof financialproducts;thenumberof choices,providers,products, andfeatures;andthecomplexityof theregulationof theseproductssuggestthatmore researchisneededtoinformandevaluatepolicies.Butitalsoraisesimportantquestions aboutwhatresearchandwhatpoliciesarenotjustinformative,buttrulystrategicforfocusingconsumersandpolicymakersonthedimensionsof choicethatcanmeaningfully improveconsumerwelfareandthefunctionof markets. 48 MacroInternationalInc.(2007),DesignandTestingofEffectiveTruthinLendingDisclosures(March16),submittedtotheBoardofGovernorsoftheFederalReserveSystem,www.federalreserve.gov/dcca/regulationz/ 20070523/Execsummary.pdf. 49 MacroInternationalInc.(2008),DesignandTestingofEffectiveTruthinLendingDisclosures:Findingsfrom ExperimentalStudy(December15),submittedtotheBoardofGovernorsoftheFederalReserveSystem,www .federalreserve.gov/newsevents/press/bcreg/bcreg20081218a8.pdf;andMacroInternationalInc.(2008),Design andTestingofEffectiveTruthinLendingDisclosures:FindingsfromQualitativeConsumerResearch(December 15),submittedtotheBoardofGovernorsoftheFederalReserveSystem,www.federalreserve.gov/newsevents /press/bcreg/bcreg20081218a7.pdf.

29 Federal Reserve BULLETIN December 2011 Vol. 97, No. 6 The Mortgage Market in 2010: Highlights from the Data Reported under the Home Mortgage Disclosure Act RobertB.Avery,NeilBhutta,KennethP.Brevoort,andGlennB.Canner,of theDivisionof ResearchandStatistics,preparedthisarticle.NicholasW.HenningandShiraE.Stolarsky providedresearchassistance. TheHomeMortgageDisclosureActof 1975(HMDA)isaconsumerprotectionstatute requiringmostmortgagelendinginstitutionswithofficesinmetropolitanareastopublicly disclosedetailedinformationabouttheirhome-lendingactivityeachyear.TheCongress intendedthatHMDAachieveitslegislativeobjectivesprimarilythroughtheforceof public disclosure.1Theseobjectivesincludehelpingmembersof thepublicdeterminewhether financialinstitutionsareservingthehousingneedsof theirlocalcommunitiesandtreating borrowersandloanapplicantsfairly,providinginformationthatcouldfacilitatetheefforts of publicentitiestodistributefundstolocalcommunitiesforthepurposeof attractingprivateinvestment,andhelpinghouseholdsdecidewheretheymaywanttodeposittheirsavings.Thedatahavealsoproventobevaluableinavarietyof publicpolicyandresearch endeavorstoexploremortgagemarketactivity;inthisconnection,theHMDAdatahave beenespeciallyvaluablewhencombinedwithothertypesof information,suchasthesocioeconomicanddemographicstatusof differentpopulationsandgeographies. The2010HMDAdataconsistof informationreportedbymorethan7,900homelenders, includingallof thenation’slargestmortgageoriginators.Together,thehome-purchase, refinance,andhome-improvementloansreportedrepresentthemajorityof homelending nationwideandthusarebroadlyrepresentativeof allsuchlendingintheUnitedStates.2 TheHMDAdataincludethedispositionof eachapplicationformortgagecredit;thetype, purpose,andcharacteristicsof eachhomemortgagethatlendersoriginateorpurchaseduringthecalendaryear;thecensus-tractdesignationsof thepropertiesrelatedtothoseloans; loanpricinginformation;personaldemographicandotherinformationaboutloanapplicants,includingtheirraceorethnicityandincome;andinformationaboutloansales.3 Untilrecently,theFederalReserveBoardimplementedtheprovisionsof HMDAthrough itsRegulationC.4OnJuly21,2011,rulemakingresponsibilityforHMDAwastransferred Note:ThisarticlewaspreparedinSeptember2011,beforerevisionsweremadetoscheduledloan-sizelimitsapplicabletoloanspurchasedbytheFederalHousingAdministration,FannieMae,andFreddieMac.Subsequently,only thechangesapplicabletoFannieMaeandFreddieMacwereimplemented. 1 AbriefhistoryofHMDAisavailableatFederalFinancialInstitutionsExaminationCouncil,“HistoryofHMDA,” webpage,www.ffiec.gov/hmda/history2.htm. 2 ItisestimatedthattheHMDAdatacoverabout90to95percentofFederalHousingAdministrationlendingand between75and85percentofotherfirst-lienhomeloans.SeeU.S.DepartmentofHousingandUrbanDevelopment,OfficeofPolicyDevelopmentandResearch(2011),“ALookattheFHA’sEvolvingMarketSharesbyRace andEthnicity,”U.S.HousingMarketConditions(May),pp.6–12,www.huduser.org/portal/periodicals/ushmc/ spring11/USHMC_1q11.pdf. 3 AlistoftheitemsreportedunderHMDAfor2010isprovidedinappendixA. 4 InformationaboutRegulationC(12C.F.R.pt.203)isavailableatwww.federalreserve.gov.

30 FederalReserveBulletin|December2011 fromtheBoardtothenewlyestablishedConsumerFinancialProtectionBureau(CFPB) (discussedlaterinthesection“FutureChangesinHMDA”).5TheFederalFinancialInstitutionsExaminationCouncil(FFIEC)hasplayed,andwillcontinuetoplay,aroleincollectingtheHMDAdatafromreportinginstitutionsandfacilitatingpublicaccesstothe information.6InSeptembereachyear,theFFIEChasreleasedsummarytablespertaining tolendingactivityfromthepreviouscalendaryearforeachreportinglenderandaggregationsof home-lendingactivityforeachmetropolitanstatisticalarea(MSA)andforthe nationasawhole.7TheFFIECalsohasmadeavailabletothepublicadatafilecontaining virtuallyallof thereportedinformationforeachlendinginstitution.8 Thisarticleoffersasummaryof the2010HMDAdataandprovidesbasictablescreated fromthesedataandtheHMDAdatafromearlieryears.9Wethennarrowthefocusand presentmore-detailedfindingsfromourinitialreviewof thedata.Ourreviewhighlights severalprominentfindings: ‰ Mortgageoriginationsdecreasedbetween2009and2010intheHMDAdatafromjust under9millionloanstofewerthan8millionloans.Mostsignificantwasthedeclinein thenumberof refinanceloansdespitehistoricallylowbaselinemortgageinterestrates throughouttheyear.Home-purchaseloansalsodropped,butlesssothanthedeclinein refinancelending. ‰ WhileloansoriginatedundertheFederalHousingAdministration(FHA)mortgage insuranceprogramandtheDepartmentof VeteransAffairs(VA)loanguaranteeprogramcontinuetoaccountforahistoricallylargeproportionof loans,suchlendingfell morethandidothertypesof lending. ‰ Wedrawondatafromanationalcreditbureautohighlighttheimportanceof house pricedeclinesandchangesinunderwritingrelativetoearlierinthedecadeforrefinance activityduring2010.Weestimatethat,intheabsenceof homeequityproblemsand underwritingchanges,roughly2.3millionfirst-lienowner-occupantrefinanceloans wouldhavebeenmadeduring2010ontopof the4.5millionsuchloansthatwereactuallyoriginated. ‰ Asharpdropinhome-purchaselendingactivityoccurredinthemiddleof 2010,right alongsidetheJuneclosingdeadline(althoughthedeadlinewasretroactivelyextendedto September)of thefederalfirst-timehomebuyertaxcreditprogram.Theendingof this 5 ForinformationabouttheConsumerFinancialProtectionBureau,seewww.consumerfinance.gov. 6 TheFFIEC(www.ffiec.gov)wasestablishedbyfederallawin1979asaninteragencybodytoprescribeuniform examinationprocedures,andtopromoteuniformsupervision,amongthefederalagenciesresponsibleforthe examinationandsupervisionoffinancialinstitutions.ThememberagenciesaretheBoardofGovernorsofthe FederalReserveSystem,theConsumerFinancialProtectionBureau,theFederalDepositInsuranceCorporation,theNationalCreditUnionAdministration,theOfficeoftheComptrolleroftheCurrency,andrepresentativesfromstatebanksupervisoryagencies.UnderagreementswiththeseagenciesandtheDepartmentof HousingandUrbanDevelopment,theFederalReserveBoardcollectsandprocessestheHMDAdata. 7 Forthe2010data,theFFIECpreparedandmadeavailabletothepublic45,961MSA-specificHMDAreports onbehalfofreportinginstitutions.TheFFIECalsomakesavailabletothepublicsimilarreportsaboutprivate mortgageinsurance(PMI)activity;forthe2010data,itpreparedandmadepubliclyavailable2,478MSAspecificPMIreportsonbehalfofthePMIcompanies.AlloftheHMDAandPMIreportsareavailableonthe FFIEC’sreportswebsiteatwww.ffiec.gov/reports.htm. ThedesignationofMSAsisnotstatic.Fromtimetotime,theOfficeofManagementandBudgetupdatesthe listandgeographicscopeofmetropolitanandmicropolitanstatisticalareas.SeeOfficeofManagementand Budget,“StatisticalProgramsandStandards,”webpage,www.whitehouse.gov/omb/inforeg_statpolicy. 8 Theonlyreporteditemsnotincludedinthedatamadeavailabletothepublicaretheloanapplicationnumber, thedateoftheapplication,andthedateonwhichactionwastakenontheapplication. 9 SomelendersfileamendedHMDAreports,whicharenotreflectedintheinitialpublicdatarelease.A“final” HMDAdatasetreflectingthesechangesiscreatedtwoyearsfollowingtheinitialdatarelease.Thedatausedto preparethisarticlearedrawnfromtheinitialpublicreleasefor2009and2010andfromthe“final”HMDA dataforyearspriortothat.Consequently,numbersinthisarticlefortheyears2008andearliermaydiffer somewhatfromnumberscalculatedfromtheinitialpublicreleasefiles.

TheMortgageMarketin2010 31 programduring2010mayhelpexplainthedeclineintheincidenceof home-purchase lendingtolower-incomeborrowersbetweenthefirstandsecondhalvesof theyear. ‰ Home-purchaselendinginhighlydistressedcensustractsidentifiedbytheNeighborhoodStabilizationProgram(NSP)was75percentlowerin2010thanithadbeeninthese sametractsin2005.Thisdeclinewasnotablylargerthanthatexperiencedinothertracts andappearstoprimarilyreflectamuchsharperdecreaseinlendingtohigher-income borrowersinthehighlydistressedneighborhoods. ‰ Theshareof loansthatoriginatorsholdintheirportfoliosratherthansellintothesecondarymarket,especiallyamongowner-occupantrefinanceloans,hasrisensincethe beginningof 2009butisstillwellbelowlevelsaroundthemid-2000s. ‰ Nationalsingle-familyhomeloanlimitsonbothFHAloansandFreddieMacandFannieMaepurchasesarescheduledtofallonOctober1,2011.Analysisof the2010 HMDAdatasuggeststhatthenumberof loansaffectedbytheselimitchangesislikelyto besmall.Forexample,about1.3percentof boththe2010home-purchaseandrefinance loansfellintoasizerangeaffectedbytheproposedlimitchangesforFreddieMacand FannieMae.Althoughtheaffectednumberof loansissmallrelativetothetotalnumber of loans,theanalysisalsoshowsthatthenumberislargerelativetothecurrentjumbo loanmarket.Howeasilytheprivatemarketwouldbeabletoabsorbthispotentiallylarge increaseinthemarketforjumboloansisunclear. ‰ Allloansreportedinthe2010HMDAdataarecoveredundernewrulesgoverning whetheraloanisclassifiedashigherpriced.Thedatashowthattheincidenceof higherpricedlendingacrossallproductsin2010wasabout3.2percent.Asinthepast,black andHispanic-whiteborrowersweremorelikelyin2010,andAsianborrowerslesslikely, toobtainloanswithpricesabovetheHMDAprice-reportingthresholdsthanwere non-Hispanicwhiteborrowers.Thesedifferencesaresignificantlyreduced,butnotcompletelyeliminated,aftercontrollingforlenderandborrowercharacteristics. ‰ Overall,loandenialratesremainedaboutthesameasin2009.Analysesof theHMDA datainpreviousyearshaveconsistentlyfoundthatdenialratesvaryacrossapplicants groupedbyraceorethnicity,whichisalsothecasein2010.However,theHMDAdata donotincludesufficientinformationtodeterminetheextenttowhichthesedifferences reflectillegaldiscrimination. A Profile of the 2010 Mortgage Market HMDAcoversallof thenation’sleadinghomelendersaswellasalargenumberof others. Bankinginstitutions—commercialbanks,savingsinstitutions(savingsandloansandsavingsbanks),andcreditunions—accountformostof thereportingentities,althoughmany mortgagecompaniesarecoveredaswell.For2010,7,923institutionsreportedontheir home-lendingactivityunderHMDA:3,818commercialbanks;856savingsinstitutions; 2,041creditunions;and1,208mortgagecompanies,839of whichwerenotaffiliatedwitha bankinginstitution(table1). Thenumberof reportinginstitutionshasfluctuatedovertheyears.Someof thefluctuation isduetochangesinreportingrequirements,includingincreasesintheminimumassetlevel usedtodeterminecoverage.10Mergers,acquisitions,andfailuresalsoaccountforsomeof 10 Forthe2011reportingyear(coveringlendingin2010),theminimumassetsizeforpurposesofcoveragewas $39million.TheminimumassetsizechangesfromyeartoyearwithchangesintheConsumerPriceIndexfor UrbanWageEarnersandClericalWorkers.Thethresholdforthe2010datawasunchangedfromthelevel applicabletotheprioryear.SeetheFFIEC’sguidetoHMDAreportingatwww.ffiec.gov/hmda/guide.htm.

32 FederalReserveBulletin|December2011 Table1.DistributionofreporterscoveredbytheHomeMortgageDisclosureAct,bytypeofinstitution, 2000–10 Number Depositoryinstitution Mortgagecompany Year Allinstitutions Commercial Savings Creditunion All Independent Affiliated1 All bank institution 2000 3,609 1,112 1,691 6,412 981 332 1,313 7,725 2001 3,578 1,108 1,714 6,400 962 290 1,252 7,652 2002 3,628 1,070 1,799 6,497 986 310 1,296 7,793 2003 3,642 1,033 1,903 6,578 1,171 382 1,553 8,131 2004 3,945 1,017 2,030 6,992 1,317 544 1,861 8,853 2005 3,904 974 2,047 6,925 1,341 582 1,923 8,848 2006 3,900 946 2,037 6,883 1,334 685 2,019 8,902 2007 3,918 929 2,019 6,866 1,132 638 1,770 8,636 2008 3,942 913 2,026 6,881 957 550 1,507 8,388 2009 3,925 879 2,017 6,821 914 389 1,303 8,124 2010 3,818 856 2,041 6,715 839 369 1,208 7,923 Note:Hereandinallsubsequenttables,componentsmaynotsumtototalsbecauseofrounding. 1 Subsidiaryofadepositoryinstitutionoranaffiliateofabankholdingcompany. Source:Hereandinsubsequenttablesandfiguresexceptasnoted,FederalFinancialInstitutionsExaminationCouncil,datareportedunderthe HomeMortgageDisclosureAct(www.ffiec.gov/hmda). theyear-over-yearchanges.Finally,periodicchangesinthenumberandgeographicfootprintsof metropolitanareasinfluencereportingovertime,asHMDA’scoverageislimited toinstitutionsthathaveatleastoneofficeinanMSA. For2010,thenumberof reportinginstitutionsfell2percentfrom2009,continuingadownwardtrendsince2006,whenHMDAcoverageincludednearly8,900lenders.Amongthe typesof reporters,thenumberof mortgagecompaniesfellthemostfrom2009,decreasing 7percent;since2006,thenumberof mortgagecompanieshasdeclinedabout40percent. Reportinginstitutionsvarygreatlybybothassetsizeandvolumeof reportedmortgage lendingactivity.Mostreportersaresmall,andmanyextendrelativelyfewloans.For2010, 53percentof thebankinginstitutionscoveredbyHMDAhadassetsunder$250million, and74percentof themreportedinformationonfewerthan100loans;only0.6percentof thesesmallerbankinginstitutionsreportedonmorethan1,000loans(table2).Amongall depositoryinstitutions,about54percentreportedonfewerthan100loans.Acrossdifferent typesof lenders,mortgagecompaniestendtooriginatelargernumbersof loansonaperreporterbasisthantheotherinstitutions(38percentof themortgagecompaniesreported morethan1,000loans,asharemorethanfivetimesthatof depositoryinstitutions). Inanygivenyear,institutionfailuresandclosingscanaffectthevolumeof reportedloans andapplicationsbecausesomeof thelendersthatfailorwereclosedextendedloansbut didnotreport.Seventy-nineinstitutionsthatreportedHMDAdatafor2009ceasedoperationsanddidnotreportlendingactivityfor2010.11Althoughitisnotpossibletoknow 11 Eachyear,theFederalReserveBoardtrackseachfinancialinstitutionthatisexpectedtoreport(includingall lendersthatreporteddataforthepreviouscalendaryear)andthencontacts,ifpossible,thoseinstitutionsthat didnotsubmitareport.Insomecases,nonreportingisduetoacessationofbusiness;inmostothers,itisthe resultofamerger,acquisition,orconsolidation.Whenamerger,acquisition,orconsolidationoccurs,alllendingbytheinstitutionscoveredbyHMDAinthatyearissupposedtobereportedbythesurvivingentity;only whenaninstitutiongoesoutofbusinessorthesurvivingentityisnotaHMDA-coveredreporteristhevolume ofreportedloanslikelyaffected.

TheMortgageMarketin2010 33 Table2.Numberanddistributionofhomelenders,bytypeoflenderandbynumberofloans,2010 Typeoflender, Lessthan50 50–99 100–249 250–499 500–999 1,000ormore All andsubcategory (assetsize Percent Percent Percent Percent Percent Percent Percent inmillions Num- ofsub- Num- ofsub- Num- ofsub- Num- ofsub- Num- ofsub- Num- ofsub- Num- ofsubofdollars) ber category1 ber category1 ber category1 ber category1 ber category1 ber category1 ber category1 Depositoryinstitution Commercialbank Lessthan250 1,126 53.5 426 20.2 392 18.6 116 5.5 29 1.4 15 .7 2,104 100 250–499 224 28.5 123 15.7 220 28.0 138 17.6 61 7.8 19 2.4 785 100 500–999 86 18.4 53 11.3 88 18.8 99 21.2 100 21.4 41 8.8 467 100 1,000ormore 52 11.7 24 5.4 56 12.6 42 9.5 81 18.3 188 42.4 443 100 All 1,488 39.2 626 16.5 756 19.9 395 10.4 271 7.1 263 6.9 3,799 100 Savingsinstitution Lessthan250 140 36.6 93 24.3 91 23.8 41 10.7 11 2.9 7 1.8 383 100 250–499 16 8.6 19 10.2 68 36.6 57 30.6 16 8.6 10 5.4 186 100 500–999 12 8.4 11 7.7 31 21.7 41 28.7 30 21.0 18 12.6 143 100 1,000ormore 5 3.5 7 5.0 13 9.2 22 15.6 31 22.0 63 44.7 141 100 All 173 20.3 130 15.2 203 23.8 161 18.9 88 10.3 98 11.5 853 100 Creditunion Lessthan250 766 55.8 300 21.9 256 18.7 41 3.0 8 .6 1 .1 1,372 100 250–499 51 16.7 34 11.1 104 34.0 80 26.1 30 9.8 7 2.3 306 100 500–999 14 7.1 10 5.1 43 21.8 55 27.9 49 24.9 26 13.2 197 100 1,000ormore .0 1 .6 13 8.3 25 16.0 41 26.3 76 48.7 156 100 All 831 40.9 345 17.0 416 20.5 201 9.9 128 6.3 110 5.4 2,031 100 Alldepositoryinstitutions Lessthan250 2,032 52.7 819 21.2 739 19.2 198 5.1 48 1.2 23 .6 3,859 100 250–499 291 22.8 176 13.8 392 30.7 275 21.5 107 8.4 36 2.8 1,277 100 500–999 112 13.9 74 9.2 162 20.1 195 24.2 179 22.2 85 10.5 807 100 1,000ormore 57 7.7 32 4.3 82 11.1 89 12.0 153 20.7 327 44.2 740 100 All 2,492 37.3 1,101 16.5 1,375 20.6 757 11.3 487 7.3 471 7.0 6,683 100 Mortgagecompany2 All 185 16.1 110 9.5 139 12.1 119 10.3 159 13.8 440 38.2 1,152 100 Allinstitutions 2,677 34.2 1,211 15.5 1,514 19.3 876 11.2 646 8.2 911 11.6 7,835 100 1 Distributionsumshorizontally.Forexample,thesecondcolumn,firstrowshowsthat53.5percentofcommercialbankswithassetsofless than$250millionoriginatedlessthan50loansin2010. 2 Independentmortgagecompany,subsidiaryofadepositoryinstitution,oranaffiliateofabankholdingcompany. howmanyapplicationsorloansthese79institutionsoriginatedin2010beforediscontinuingoperations,onecangaugetheirpotentialimportancebymeasuringtheirlendingactivityin2009.Intheaggregate,thesenonreportingcompaniesaccountedforonly0.2percent of the2009loanorapplicationrecordssubmittedunderHMDA.Therefore,itseemshighly unlikelythatthe2010dataareaffectedinanymeaningfulwaybytheunderreportingthat mayhaveoccurredbecausetheselendersdidnotreportactivityforthepartof 2010in whichtheymayhavemadesomeloans. Reportinginstitutionssubmittedinformationon12.95millionapplicationsforhomeloans of alltypesin2010(excludingrequestsforpreapproval),downabout14percentfrom2009 andfarbelowthe27.5millionapplicationsprocessedin2006,justbeforethehousing marketdecline(dataderivedfromtable3.A).Themajorityof loanapplicationsare approvedbylenders,andmostof theseapprovalsresultinextensionsof credit.Insome cases,anapplicationisapproved,buttheapplicantdecidesnottotakeouttheloan;for example,in2010,about5percentof allapplicationswereapprovedbutnotacceptedbythe applicant(datanotshownintables).Overall,about61percentof theapplicationssubmittedin2010resultedinanextensionof credit(dataderivedfromtables3.Aand3.B),ashare littlechangedfrom2009.

34 FederalReserveBulletin|December2011 Table3.HomeloanactivityoflendinginstitutionscoveredundertheHomeMortgageDisclosureAct, 2000–10 A.Applications,requestsforpreapproval,andpurchasedloans Number Applicationsreceivedforhomeloans,bytypeofproperty 1–4family Requestsfor Year preapproval1 Purchasedloans Total Multifamily Home Home Refinance purchase improvement 2000 8,278,219 6,543,665 1,991,686 37,765 n.a. 2,398,292 19,249,627 2001 7,692,870 14,284,988 1,849,489 48,416 n.a. 3,767,331 27,643,094 2002 7,406,374 17,491,627 1,529,347 53,231 n.a. 4,829,706 31,310,285 2003 8,179,633 24,602,536 1,508,387 58,940 n.a. 7,229,635 41,579,131 2004 9,792,324 16,072,102 2,202,744 61,895 332,054 5,146,617 33,607,736 2005 11,672,852 15,898,346 2,539,158 57,668 396,686 5,874,447 36,439,157 2006 10,928,866 14,045,961 2,480,827 52,220 411,134 6,236,352 34,155,360 2007 7,609,143 11,566,182 2,218,224 54,230 432,883 4,821,430 26,702,092 2008 5,017,998 7,729,143 1,404,008 42,792 275,808 2,921,821 17,391,570 2009 4,201,057 9,935,678 826,916 26,257 209,055 4,294,528 19,493,491 2010 3,838,896 8,421,592 668,903 25,484 164,672 3,229,010 16,348,557 Note:Hereandinsubsequenttables,exceptasnoted,dataincludefirstandjuniorliens,site-builtandmanufacturedhomes,andowner-and non-owner-occupantloans. 1 Consistsofrequestsforpreapprovalthatweredeniedbythelenderorwereacceptedbythelenderbutnotacteduponbytheborrower.In thisarticle,applicationsaredefinedasbeingforaloanonaspecificproperty;theyarethusdistinctfromrequestsforpreapproval,whichare notrelatedtoaspecificproperty.Informationonpreapprovalrequestswasnotrequiredtobereportedbefore2004. n.a.Notavailable. TheHMDAdataalsoincludeinformationonloanspurchasedbyreportinginstitutions duringthereportingyear,althoughthepurchasedloansmayhavebeenoriginatedatany pointintime.For2010,lendersreportedinformationonnearly3.2millionloansthatthey hadpurchasedfromotherinstitutions,adeclineof nearly25percentfrom2009.Finally, lendersreportedonroughly165,000requestsforpreapprovalof home-purchaseloansthat Table3.HomeloanactivityoflendinginstitutionscoveredundertheHomeMortgageDisclosureAct, 2000–10 B.Loans Number Loans,bytypeofproperty Year 1–4family Total Multifamily Homepurchase Refinance Homeimprovement 2000 4,787,356 2,435,420 892,587 27,305 8,142,668 2001 4,938,809 7,889,186 828,820 35,557 13,692,372 2002 5,124,767 10,309,971 712,123 41,480 16,188,341 2003 5,596,292 15,124,761 678,507 48,437 21,447,997 2004 6,429,988 7,583,928 966,484 48,150 15,028,550 2005 7,382,012 7,101,649 1,093,191 45,091 15,621,943 2006 6,740,322 6,091,242 1,139,731 39,967 14,011,262 2007 4,663,267 4,817,875 957,912 41,053 10,480,107 2008 3,119,692 3,457,774 568,287 31,509 7,177,262 2009 2,784,956 5,758,875 387,970 19,135 8,950,936 2010 2,541,791 4,961,814 340,604 19,128 7,863,337

TheMortgageMarketin2010 35 didnotresultinaloanorigination Figure1.Volumeofhome-purchaseandrefinance (table3.A);preapprovalsthat originationsandaverageprimeofferrate,bymonth, resultedinloansareincludedin 2006–10 thecountof loanextensionscited earlier. Thousands of loans Percentage points Lending for Home Purchase 750 APOR Refinance 7 or Refinancing in 2010 (right scale) (left scale) 600 6 Althoughrelativelystableinthe 450 pasttwoyears,thevolumeof 5 home-purchaselendinghasfallen 300 sharplysince2006(figure1).12In June2006,thepeakmonthfor 150 Home purchase 4 (left scale) home-purchaselendingthatyear, nearly712,000home-purchase 2006 2007 2008 2009 2010 loanswereextended,compared Note:Thedataaremonthly.Loansarefirst-andsecond-lienmortgagesexcluding withonly326,000suchloans thoseformultifamilyhousing.Theaverageprimeofferrate(APOR)ispublished inJune2010,themostactive weeklybytheFederalFinancialInstitutionsExaminationCouncil.Itisanestimate oftheannualpercentagerateonloansbeingofferedtohigh-qualityprimebormonththatyear.Onayearlybasis, rowersbasedonthecontractinterestratesanddiscountpointsreportedbyFredthenumberof home-purchase dieMacinitsPrimaryMortgageMarketSurvey (www.ffiec.gov/ratespread/newcalc.aspx). loansreportedbylenderscovered byHMDAin2010wasdown nearly9percentfrom2009andwas62percentlowerthanin2006(dataderivedfromtable 3.B). Becauseof theextraordinarydifficultiesinthehousingandmortgagemarkets,thefederal governmenthastakenseveralactionstosupporttheirrecovery.Oneof theactions,the first-timehomebuyertaxcreditprogram,reducedthetaxbillorincreasedtheamountof refundforeligiblehomebuyers.13Theprogramwasoriginallyscheduledtoend(or“sunset”)onNovember30,2009,butwasextendedafewweekstoprovidebenefitstothoseeligiblehomebuyerswhoenteredintobindingcontractstopurchasetheirhomesbyApril30, 2010,andclosedthesalesbyJune30,2010(afterthefact,theclosingdeadlinewas extendedtoSeptember30,2010,butthatextensionaffectedonlyasmallnumberof sales). Thefirst-timehomebuyertaxcreditprogramlikelystimulatedhomebuyingin2009asindividualssoughttopurchasetheirhomesbeforetheinitialscheduledsunsetdate.14The extensionof thelawuntiltheendof June2010mayhelpexplain,inpart,theincreasein loanvolumeinthespringof 2010andthenthesharpfalloff inthemonthlyflowof new 12 Lendersreportthedateonwhichactiononanapplicationistaken.Fororiginations,the“actiontaken”dateis theclosingdateordateoforiginationfortheloan.Thisdateistheoneweusetocompiledataatthemonthly level.Generally,theinterestrateonaloanissetatanearlierpointknownasthelockdate.Theinterestrate seriesinthefigureisconstructedfromtheresultsofasurveyof“offerrates”madebylenderstoprimeborrowers.Theloanpricingislikelytoreflecttheinterestrateavailableatthetimeofthelockdate.Thus,thetimingof theloanvolumeandinterestrateseriesmaybeslightlymisalignedinthefigure. 13 Theprogramwasnotlimitedtofirst-timehomebuyers.Eligibilityforthetaxcreditalsowasextendedtohomebuyerswhowerelong-timeresidentsoftheirprevioushomes.Theprogramincludedincomeandhome-value limits.Formoreinformation,seeInternalRevenueService(2009),“First-TimeHomebuyerCreditExtendedto April30,2010;SomeCurrentHomeownersNowAlsoQualify,”pressrelease,November24,www.irs.gov/ newsroom/article/0,,id=215791,00.html;andInternalRevenueService,“First-TimeHomebuyerCredit,”webpage,www.irs.gov/newsroom/article/0,,id=204671,00.html. 14 Ouranalysisinanearlierarticlesuggestedthataboutone-halfofthehome-purchaseloansin2009qualified underthefirst-timehomebuyertaxcreditprogram.SeeRobertB.Avery,NeilBhutta,KennethP.Brevoort,and GlennB.Canner(2010),“The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesand EconomicDistress,”FederalReserveBulletin,vol.96,pp.A39–A77.

36 FederalReserveBulletin|December2011 home-purchaseoriginationsafterthatdespiteadeclineinmortgageinterestratesoverthe remainderof theyear.15 Toagreaterdegreethanforhome-purchaselending,thevolumeof refinancelendingis alignedwithchangesininterestrates,expandingasmortgageratesfallandretrenching whenratesrise.Theinterestrateenvironmentinboth2009and2010wasgenerallyquite favorableforwell-qualifiedborrowerswhosoughttorefinance,particularlyinthesecond half of 2010,whentherateon30-yearfixed-ratemortgagesfelltorecordlows.Nonetheless,comparedwith2009,thenumberof reportedrefinancingswasdownabout14percent (table3.B).(Factorsaffectingthelevelof refinanceactivityin2010areexploredinthelater section“FactorsInfluencingRefinancingActivityin2010.”) Non-Owner-Occupant Lending Individualsbuyinghomeseitherforinvestmentpurposesorassecondorvacationhomes areanimportantsegmentof thehousingmarketingeneral,andinsomeareasof thecountry,theyareparticularlyimportant.Inthecurrentperiodof highforeclosuresandelevated levelsof shortsales,investoractivityhelpsreducetheoverhangof unsoldandforeclosed properties.HMDAdatahelpdocumenttheroleof non-owner-occupantlendingovertime becausetheborrower’sintendedoccupancystatusisoneof thereporteditems.16 Astheboominhousingemergedinthefirsthalf of thepastdecade,theHMDAdata showedasharpincreaseinnon-owner-occupantlendingusedtopurchaseone-tofourfamilyhomes(table4).Thevolumeof non-owner-occupantlendingthenfellsharplybeginningin2007andremainedatcomparablylowlevelsthrough2010.In2010,76percent fewernon-owner-occupantloanswereextendedthanin2005,thepeakyearfornon-owneroccupantlending.Thenumberof non-owner-occupantloansin2010waslittlechanged fromthatin2009. Asshownintable4,thepost-2007declineinnon-owner-occupantlendinghasbeenmore severethanthatinowner-occupantlending.Between2000and2005,theshareof nonowner-occupantlendingusedtopurchaseone-tofour-familyhomesrose,increasingover thisperiodfromabout9percentto16percent(dataderivedfromtable4).17Since2005,the sharehasfallen,droppingtoabout11percentinboth2009and2010.Althoughdiminished sincethemiddleof thisdecade,inboththevolumeof lendingandasashareof lending, non-owner-occupantlendingcontinuestobeanimportantaspectof themortgagemarket. Asnoted,therelativeimportanceof non-owner-occupantlendingvariesfromplaceto place.Insomeplaces,suchasresorttowns,non-owner-occupantlendingreflectstheactivityof bothinvestorsandpurchasersof secondhomes.Inotherareas,mostof thenonowner-occupanthomebuyingisbyinvestorsseekingtobuyunitsforyear-roundrental.The HMDAdataprovideanopportunitytoexplorethegeographicvariationinnon-owner-oc- 15 Thevolumeofhome-purchaseoriginationsfellnearly40percentfromJune2010toJuly2010andthen remainedatreducedlevelsfortherestoftheyear. 16 Aninvestmentpropertyisanon-owner-occupieddwellingthatisintendedtoberentedorresoldforaprofit. Somenon-owner-occupiedunits—vacationhomesandsecondhomes—arefortheprimaryuseoftheowners andthuswouldnotbeconsideredinvestmentproperties.TheHMDAdatadonot,however,distinguish betweenthesetwotypesofnon-owner-occupieddwellings. 17 Researchusingcreditrecorddatasuggeststhatinstatesthatexperiencedthelargestrun-upinhomeprices, investorsaccountedforaboutone-halfofthehome-purchaseloans.SeeAndrewHaughwout,DonghoonLee, JosephTracy,andWilbertvanderKlaauw(2011),“RealEstateInvestors,theLeverageCycleandtheHousing MarketCrisis,”paperpresentedattheHousingEconomicsandResearchConference,UCLAZimanCenterfor RealEstate,LosAngeles,April,www.anderson.ucla.edu/x30674.xml.

TheMortgageMarketin2010 37 Table4.Homeloanapplicationsandhomeloansforone-tofour-familyproperties,byoccupancystatus ofhomeandtypeofloan,2000–10 Number Applications Loans Year Owneroccupied Non-owneroccupied Owneroccupied Non-owneroccupied Conventional Nonconventional1 Conventional Nonconventional1 Conventional Nonconventional1 Conventional Nonconventional1 A.Homepurchase 2000 6,350,643 1,311,101 604,919 12,524 3,411,887 963,345 404,133 8,378 2001 5,776,767 1,268,885 627,598 19,688 3,480,441 1,003,795 440,498 14,128 2002 5,511,048 1,133,770 747,758 13,923 3,967,834 870,599 547,963 8,474 2003 6,212,915 1,014,865 943,248 8,623 4,162,412 761,716 667,613 4,560 2004 7,651,113 799,131 1,335,241 6,839 4,946,423 574,841 906,014 2,710 2005 9,208,214 610,650 1,850,174 3,814 5,742,377 438,419 1,199,509 1,707 2006 8,695,877 576,043 1,653,154 3,792 5,281,485 416,744 1,040,668 1,425 2007 5,960,571 599,637 1,044,112 4,823 3,582,949 423,506 655,916 896 2008 2,940,059 1,424,483 647,340 6,116 1,727,692 972,605 415,930 3,465 2009 1,883,278 1,884,136 427,338 6,305 1,171,033 1,320,412 289,796 3,715 2010 1,728,715 1,689,471 415,315 5,395 1,088,855 1,166,477 284,625 1,834 B.Refinance 2000 6,051,484 110,380 379,299 2,502 2,170,162 64,882 198,695 1,293 2001 12,737,863 705,784 823,748 17,592 6,836,106 524,228 516,616 12,181 2002 15,623,327 742,208 1,111,588 14,504 9,058,654 535,370 706,570 9,377 2003 21,779,329 1,236,467 1,563,430 23,310 13,205,472 895,735 1,007,674 15,871 2004 14,476,350 497,700 1,084,536 13,516 6,649,588 304,591 621,667 8,082 2005 14,494,441 262,438 1,135,929 5,538 6,336,004 158,474 603,914 3,257 2006 12,722,112 208,405 1,112,891 2,553 5,382,950 122,134 585,142 1,016 2007 10,173,282 375,860 1,012,827 4,213 4,123,507 196,897 496,577 894 2008 5,829,633 1,240,472 650,042 8,996 2,593,793 522,243 337,914 3,824 2009 7,251,066 2,051,766 617,707 15,139 4,404,215 998,585 348,599 7,476 2010 6,318,522 1,447,521 640,046 15,503 3,943,819 653,671 356,238 8,086 C.Homeimprovement 2000 1,833,277 91,575 65,286 1,548 843,884 10,896 37,047 760 2001 1,771,472 16,276 60,598 1,143 788,560 6,722 32,990 548 2002 1,459,049 11,582 58,080 636 676,515 4,878 30,533 197 2003 1,430,380 13,876 63,806 325 642,065 5,226 31,113 103 2004 2,081,528 11,887 109,105 224 904,492 5,557 56,341 94 2005 2,401,030 10,053 127,857 218 1,026,340 4,483 62,298 70 2006 2,335,338 12,645 132,694 150 1,067,730 6,115 65,842 44 2007 2,072,688 16,717 128,700 119 887,123 9,409 61,321 59 2008 1,294,162 26,544 83,036 266 516,612 12,347 39,170 158 2009 740,061 28,437 58,171 247 348,409 11,212 28,183 166 2010 582,775 34,437 51,300 391 302,612 11,804 26,131 57 1 LoansinsuredbytheFederalHousingAdministrationorbackedbyguaranteesfromtheU.S.DepartmentofVeteransAffairs,theFarmService Agency,ortheRuralHousingService. cupantlendingacrossgeographies,althoughitisnotpossibletodistinguishbetweeninvestorsandsecond-homebuyers. Fortheanalysishere,wecalculatedthenon-owner-occupantshareof home-purchaselendingineachcountynationwidein2010(figure2).Manyof thecountieswithelevatednonowner-occupantlendingratesareresortlocationssuchasportionsof northernNewEng-

38 FederalReserveBulletin|December2011 Figure2.Incidenceofnon-owner-occupantlendingforfirst-lienhome-purchaseloansonone-to four-family,site-builthomes,bycountyandbyquartile,2010 Percent 0–7.1 7.2–12.0 12.1–20.4 20.5–100 land,Michigan,Colorado,andsomecoastalareas.18Otherareasmayhaveelevatednonowner-occupantactivityduetoinvestorspurchasinghomesinmarketsthathave experiencedsignificantdeclinesinhomevalues,suchasthe“sandstates”of Arizona,California,Florida,andNevada.Thesharplyreducedvaluesof propertiesinvolvedinshort salesorforeclosureshaveaffordedinvestorsandothersopportunitiestopurchasenonowner-occupiedhomesintheseareas. Nevertheless,thedeclineinthevolumeof non-owner-occupantlendingthathasbeen observednationallyhasaffectedalmostallgeographicareas.Inallbutahandfulof MSAs, thepercentagedeclineinnon-owner-occupantlendingbetween2005and2010exceededthe declineinowner-occupantlending(figure3).Non-owner-occupantlendinghasfallenthe mostintheMSAsthatexperiencedthelargestdeclinesinowner-occupantlending. Furtheranalysissuggeststhatatleastsomeof thedeclineinnon-owner-occupantlending stemsfromthelocationswheresuchloanswereconcentratedratherthananoverallchange inthenationalmarketforsuchloans.Weselectedananalysisgroupof censustractsinthe top5percentof theincidenceof totalone-tofour-familynon-owner-occupantlendingin MSAsinthesandstates(wherenon-owner-occupantlendinghasbeencitedasaparticular problem)in2005.Wecomparedthedeclineinlendinginthesetractsbetween2005and 2010withthelendingchangesinallothertractsinthesandstateMSAs. 18 Manyoftheseresortareasareinruralcounties,whichcreatesapotentialbiasforHMDA-basedcalculations. LenderswithoutofficesinmetropolitanareasdonothavetoreportHMDAdata.Ifborrowersfornon-owneroccupantloansarelesslikelythanthoseforowner-occupantloanstouselocallenders,thiscircumstancewould biastheHMDAincidenceofnon-owner-occupantlendingupwardinruralareas.

TheMortgageMarketin2010 39 Overall,lendingintheanalysis Figure3.Comparisonofthechangeinthevolumeof groupdeclined74percentbetween lendingforowner-occupiedhousingwiththechangein 2005and2010,althoughnon- thatfornon-owner-occupiedhousing,bymetropolitan owner-occupantlendingfellmore statisticalarea,2005–10 inthesetracts(78percent)than owner-occupantlending(71per- Change in non-owner occupied (percent) cent).Incontrast,overalllending + fellsignificantlylessintracts 0_ wherenon-owner-occupantlendinghadnotbeenconcentrated(59 20 percent),withnon-owner-occu- 40 pantlendingagainexperiencinga relativelylargerdecline(70per- 60 cent)thanowner-occupantlending(58percent).Itcannotbe 80 determinedfromtheseresults 45˚ whethercharacteristicsof the 80 60 40 20 –0+ tractneighborhoodsorthehigh Change in owner occupied (percent) presenceof non-owner-occupant Note:First-lienhome-purchasemortgagesforsite-builtproperties.Foreachdata lendingledtotheexcessive point,iftheobservationsforowneroccupiedandfornon-owneroccupiedare identical,thedatapointfallsonthe45-degreeline;iftheyaredifferent,itfalls decline. awayfromtheline. Types of Loans Asnoted,thetotalnumberof loanstopurchasehomeshasfallensharplysincetheheight of thehousingboomin2005and2006,whenlendersextendedabout7millionloansin eachof thoseyears(table3.B).Althoughthetotalnumberof home-purchaseloanshas fallensubstantiallysincethen,virtuallyallof thedeclinehasinvolvedconventionallending; thevolumeof nonconventionalhome-purchaseloans(sometimesreferredtoas“governmentbacked”loans)—includingloansbackedbyinsurancefromtheFHAorbyguaranteesfromtheVA,theFarmServiceAgency(FSA),ortheRuralHousingService(RHS)— hasincreasedmarkedlysincethemid-2000s.From2006to2009,thetotalnumberof reportedconventionalhome-purchaseloansfell77percent,whilethenumberof nonconventionalhome-purchaseloansmorethantripled(table4).Althoughthenumberof nonconventionalhome-purchaseloansfellsomefrom2009to2010,suchloansstillaccounted for46percentof thehome-purchaseloanmarketin2010,downmarginallyfroma 48percentsharein2009butstillmuchgreaterthanthe8percentsharein2006. Nonconventionalloansareamajorcomponentof theoverallhome-purchaseloanmarket, buttheyplayamuchsmallerroleincertainsegmentsof themarket.Forexample,nonconventionalloansaccountedforonlyabout1percentof theloansextendedtonon-owner occupantsforthepurchaseof ahomein2010.Also,nonconventionalloansmadeupa relativelysmallshare(about25percent)of theloansusedtopurchasemanufacturedhomes (table5). Asinthehome-purchaseloanmarket,nonconventionallendinghasalsogarneredalarger shareof therefinancemarketinthepastfewyears,althoughthenumberof conventional loansusedforrefinancingstillexceedsthatof nonconventionalloansbyawidemargin (table4).In2006,conventionalloansusedforrefinancingoutnumberednonconventional loans48to1;in2010,theproportionwasabout6to1. Theincreaseinnonconventionalhome-purchaseandrefinancelendingreflectsseveralfactors,suchasincreasedloan-sizelimitsallowedundertheFHAandVAlendingprograms andreducedaccess(includingmore-stringentunderwritingandhigherprices)tocon-

40 FederalReserveBulletin|December2011 Table5.Loansonmanufacturedhomes,byoccupancystatusofhomeandtypeofloan,2004–10 Number Owneroccupied Non-owneroccupied Year Conventional Nonconventional1 Conventional Nonconventional1 A.Homepurchase 2004 107,686 23,974 16,243 125 2005 101,539 27,229 17,927 56 2006 102,458 30,530 19,105 257 2007 95,584 28,554 13,963 92 2008 68,821 27,615 11,392 93 2009 43,253 20,558 7,895 29 2010 44,810 17,086 7,631 28 B.Refinance 2004 79,838 6,922 6,507 57 2005 73,520 7,727 6,331 26 2006 64,969 11,750 6,240 68 2007 59,591 16,174 6,332 74 2008 44,342 21,926 6,817 177 2009 36,765 21,765 5,922 59 2010 26,304 9,748 5,013 69 C.Homeimprovement 2004 17,119 128 1,269 5 2005 20,239 219 1,372 3 2006 20,886 490 1,425 2 2007 19,428 889 1,494 2 2008 12,621 681 1,324 36 2009 9,710 439 1,110 1 2010 7,963 427 991 2 1 Seetable4,note1. ventionalloans,particularlythosethatallowtheborrowertofinancemorethan80percent of thepropertyvalue.(Thesefactorsandtheirrolein2010lendingarediscussedinmore detailinalatersection,“TheContinuingRoleof GovernmentintheMortgageMarket.”) The Private Mortgage Insurance Market Historically,mortgagelendershaverequiredaborrowertomakeadownpaymentbefore theywouldextendaloantobuyahomeorrefinanceanexistingmortgage.Intheconventionalloanmarket,lenderstypicallyhaverequiredthataborrowermakeadownpayment of atleast20percentof ahome’svalueunlesstheborrowerreceivedsometypeof thirdpartybacking,suchasmortgageinsurance. Privatemortgageinsurance(PMI)emergedinthe1950salongsidethelongstandingFHA andVAloanprogramstohelpbridgethegapbetweenlendersreluctanttoextendmortgageswithhighloan-to-value(LTV)ratiosandconsumersinterestedinborrowingmore than80percentof theunderlyinghome’svalue.Foraborrowerseekingaconventional loanwithalowdownpayment,thelendercanrequirethattheborrowerpurchasemortgageinsurancefromPMIcompaniestoprotectthelenderagainstdefault-relatedlossesup toacontractuallyestablishedpercentageof theprincipalamount.

TheMortgageMarketin2010 41 Overtheyears,PMI-backedloansbecameasignificantpartof themortgagemarket.Asa formof protectionforlendersagainstlossesfromdefaultingborrowers,PMIcompetes withFHAinsuranceandVAloanguarantees.Thus,therelativeattractivenessof PMIat anypointintimeiscloselyrelatedtoFHAandVAunderwritingandpricingdecisionsand thesizesof theloansthesegovernmentagenciesmayback.PMIalsocompetesagainstthe willingnessof lenderstobeartheriskof lossthroughself-insurancebyextendingafirstlienmortgagewithlittleornodownpaymentinconjunctionwithajunior-lienmortgage (oftenreferredtoasa“piggyback”loan).Historically,theannualvolumeof PMIissuance hasvariedinresponsetothesecompetitivepressuresandtotheoveralllevelof mortgage activityinanygivenyear. In1993,theMortgageInsuranceCompaniesof AmericaaskedtheFFIECtoprocessdata fromthelargestPMIcompaniesonapplicationsformortgageinsuranceandtoproduce disclosurestatementsforthepublicbasedonthedataandtimedtobereleasedwiththe HMDAdata.19ThePMIdatalargelymirrorthetypesof informationsubmittedbylenders coveredbyHMDA.However,becausethePMIcompaniesdonotreceiveallof theinformationaboutaprospectiveloanfromthelendersseekinginsurancecoverage,someitems reportedunderHMDAarenotincludedinthePMIdata.Inparticular,loanpricinginformationandrequestsforpreapprovalareunavailableinthePMIdata. Thesevencompaniesthatreporteddatafor2010dominatethePMIindustry.20Thus,these datacoverthevastmajorityof PMIwrittenintheUnitedStates,allowingformeaningful analysisof thesedataalongsidetheHMDAdata.21For2010,thesevenPMIcompanies reportedonnearly370,000applicationsforinsuranceleadingtotheissuanceof 260,000 insurancepolicies,downfromabout636,000applicationsand367,000policiesin2009 (table6).Boththe2009and2010volumesweresubstantiallysmallerthanthetotalsreached in2002and2003,whenPMIissuancewasabout2millionpoliciesayear.Overall,61percentof thePMIpoliciesissuedin2010coveredhome-purchaseloans,andtheremainder coveredrefinancemortgages(home-improvementloansareclassifiedasrefinanceloansby thePMIreporters).Virtuallyallof theapplicationsforPMIpoliciesissuedinvolvedsitebuiltproperties;lessthan0.04percentof thepoliciesinvolvedmanufacturedhomes.About 10percentof PMIinsuranceapplicationsweredeniedin2010,downfromabout12percent in2009butstillsubstantiallyhigherthanin2006and2007,whenonlyabout2percentof therequestsforinsurancewereturneddown(datanotshownintables).22 ThelargereductioninPMIactivityreflectsseveralfactors,includingreduceddemand stemmingfromasharpfallinhomebuyingactivityandhigherpricesrelativetoalternatives, aswellastighterunderwritingadoptedbythePMIcompaniesinresponsetoelevated claimsandlossesexperiencedduringtherecentrecessionandtheongoingrecovery.23The rolesof thesevariousfactorscanbeseenfromthememoitemsinthelastsevencolumnsof 19 Foundedin1973,theMortgageInsuranceCompaniesofAmericaisthetradeassociationforthePMIindustry. 20 Onefirmthatreporteddatainpreviousyears,TriadGuarantyInsuranceCorporation,stoppedissuingnew policiesinJuly2008butcontinuestomanageexistingpolicies. 21 SomecaremustbeexercisedincomparingthePMIandHMDAdata.First,becauseofreportingrules,the HMDAdatadonotcoveralllendingforpropertiesinruralareas.However,thePMIreportingfirmsprovide informationonallprivatelyinsuredloansregardlessofpropertylocation.Second,the“actiondate”forPMI issuanceisthedatethatthePMIinsurancewasextended,whichisoftendifferentfromthedatetheloanwas closed,whichdeterminestheHMDAactiondate.Forloanstakenoutnearthebeginningorendofacalendar year,thisfactorcouldshiftthePMIreportingintoareportingyeardifferentfromthatoftheloan.Third,the sizeoftheloanandborrowercharacteristicscanalsodifferbetweenthetwodatasources.Finally,thePMIdata donotcapture“poolinsurance”—thatis,insurancewrittenforpoolsofloansratherthanindividualmortgage loans.TheomissionofthistypeofinsurancetendstounderstatethebreadthofPMIcoverage. 22 Fortheotherapplicationsthatdidnotresultinapolicybeingwritten,theapplicationwaswithdrawn,the applicationfileclosedbecauseitwasnotcompleted,ortherequestwasapprovedbutnopolicywasissued. 23 Foramoredetailedanalysis,seeAveryandothers,“The2009HMDAData.”

42 FederalReserveBulletin|December2011 Table6.Privatemortgageinsuranceapplicationsandissuanceforone-tofour-familyproperties,by occupancystatusofhomeandtypeofproperty,2000–10 Number Applications Issuance Owneroccupied Non-owneroccupied Owneroccupied Non-owneroccupied Year Manufactured Manufactured Manufactured Manufactured Site-built housing1 Site-built housing1 Site-built housing1 Site-built housing1 A.Homepurchase 2000 1,204,520 n.a. 95,549 n.a. 955,988 n.a. 75,473 n.a. 2001 1,266,440 n.a. 122,639 n.a. 1,002,385 n.a. 90,929 n.a. 2002 1,324,958 n.a. 153,277 n.a. 1,022,754 n.a. 115,573 n.a. 2003 1,315,221 n.a. 175,958 n.a. 1,021,476 n.a. 134,677 n.a. 2004 1,078,275 10,111 192,086 1,287 807,480 7,508 143,917 984 2005 886,749 10,470 174,174 1,480 676,758 7,512 130,945 1,171 2006 838,304 9,526 134,545 1,273 659,755 6,655 98,744 993 2007 1,260,666 7,928 148,057 1,113 1,015,240 5,531 109,772 774 2008 928,978 4,082 127,773 759 591,108 2,012 66,842 367 2009 341,311 535 14,372 92 206,878 125 5,208 29 2010 214,054 172 7,644 11 154,716 55 4,750 B.Refinance4 2000 259,245 n.a. 14,771 n.a. 185,721 n.a. 10,859 n.a. 2001 856,112 n.a. 29,870 n.a. 663,465 n.a. 17,453 n.a. 2002 1,056,788 n.a. 40,771 n.a. 775,020 n.a. 23,035 n.a. 2003 1,372,551 n.a. 46,139 n.a. 1,014,558 n.a. 27,116 n.a. 2004 597,353 6,037 31,352 233 389,563 3,956 17,243 138 2005 438,019 3,702 23,217 136 309,821 2,384 13,239 88 2006 346,978 2,554 24,201 121 234,587 1,567 14,187 78 2007 507,137 2,108 36,508 104 362,961 1,313 22,533 58 2008 454,405 1,442 33,822 123 257,189 695 11,519 34 2009 275,541 429 3,611 15 153,633 126 1,121 4 2010 145,953 135 1,437 2 99,598 56 587 0 1 Before2004,propertytypewasnotcollected;totalsforsite-builtandmanufacturedhousingareshowninthe“Site-built”column. table6,whichfocusonowner-occupantsite-builtlending.Takeninisolation,PMIroseasa shareof conventionallendingfrom2006to2007andthenfellbacksharplyin2009and furtherstillin2010.Someof thischangereflectsvariationintheshareof borrowerswith high-LTVloans.However,ascanbeseenfromthetable,muchof thechange,particularly since2008,reflectssubstitutionamonghigh-LTVcreditenhancementalternatives,includingnonconventionalFHAandVAloansandjunior-lienpiggybackloans.Indeed,since 2008,theshareof totalhome-purchaseloanscoveredbyoneof theseenhancementshas remainedquitestable(lastcolumnof table6).Thus,therecordlownumberof PMIpoliciesissuedin2010likelypaintsaverymisleadingpictureregardinghigh-LTVlending.The steadilyrisingshareof theloanmarketcoveredbysomesortof creditenhancementevidentinthelastcolumnof table6suggeststhathigh-LTVloans,perhapsdrivenbyarising portionof themarketthatiscomposedof first-timehomebuyers,maybeatrecordhigh ratherthanrecordlowlevels. Junior-Lien Lending Junior-lienloanscanbetakenouteitherinconjunctionwiththeprimarymortgage(apiggybackloan)orindependentlyof thefirst-lienloan.Asnotedintheprevioussection,

TheMortgageMarketin2010 43 Table6.Privatemortgageinsuranceapplicationsandissuanceforone-tofour-familyproperties,by occupancystatusofhomeandtypeofproperty,2000–10—continued Number Memo Ratioofloanswith Ratioofloanswith Year Ratioofloanswith PMIplus Ratioofloanswith PMIplus Conventionalloans2 PMItoconventional Nonco lo n a v n e s n 3 tional nonconventional J l u ie n n io s r PMI li p e l n u s s t ju o nior nonconventional loans loanstototal loansandjuniorliens conventionalloans loans tototalloans A.Homepurchase 2000 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2001 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2002 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2003 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2004 4,209,787 19.4 573,606 29.1 736,636 36.7 44.3 2005 4,520,378 15.2 437,552 22.7 1,221,999 42.0 47.1 2006 4,013,196 16.7 416,143 24.5 1,268,289 48.0 52.9 2007 3,031,606 33.8 422,450 41.9 551,343 51.7 57.6 2008 1,636,194 36.4 971,528 60.1 91,498 41.7 63.4 2009 1,128,950 18.4 1,318,940 62.4 42,083 22.1 64.1 2010 1,048,544 14.8 1,165,087 59.6 40,311 18.6 61.4 B.Refinance4 2000 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2001 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2002 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2003 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2004 6,543,036 6.0 306,995 10.3 859,752 19.1 22.7 2005 6,017,589 5.2 160,395 7.7 1,196,737 25.0 27.0 2006 4,707,669 5.0 125,718 7.5 1,588,754 38.7 40.3 2007 3,764,022 9.7 204,054 14.3 1,095,750 38.8 41.9 2008 2,554,287 10.1 532,340 25.6 400,414 25.7 38.6 2009 4,455,692 3.5 1,006,236 21.2 198,475 7.9 24.9 2010 3,990,017 2.5 661,650 16.4 162,755 6.6 19.9 2 First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans.Business-relatedloansarethose forwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantorco-applicantare“notapplicable.” 3 First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans.Business-relatedloansarethose forwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantorco-applicantare“notapplicable.”Loansinsuredbythe FederalHousingAdministrationorbackedbyguaranteesfromtheU.S.DepartmentofVeteransAffairs,theFarmServiceAgency,ortheRural HousingService. 4 Includeshome-improvementloans.Privatemortgageinsurancecompaniesdonotdistinguishbetweenrefinanceloansand home-improvementloansinreporting.Loantotalsarethesummationofrefinanceandhome-improvementloans. n.a.Notavailable. PMIPrivatemortgageinsurance. piggybackloanscanbeusedbyborrowerstoavoidhavingtopayforprivateorgovernment mortgageinsurance.Similarly,piggybackloanscanalsobeusedtoreducethesizeof the first-lienloantobewithinthesizelimitsrequiredbyFreddieMacorFannieMaewithout requiringalargerdownpaymentbytheborrower.Junior-lienloansthataretakenoutindependentlycanbeusedforanynumberof purposes,includingtofinancehome-improvementprojectsor,inthecaseof open-endedhomeequitylinesof credit(HELOCs),toprovideareadilyavailableandrelativelycheapsourceof credit.Undertheregulationsthat

44 FederalReserveBulletin|December2011 Table7.Homeloansforone-tofour-familyproperties,byoccupancystatusofhome,typeofloan,and lienstatus,2004–10 Number Owneroccupied Non-owneroccupied Conventional Nonconventional1 Conventional Nonconventional1 Year Firstlien Juniorlien Unsecured2 Firstlien Junior Unsecured2 Firstlien Juniorlien Unsecured2 Firstlien Junior Unsecured2 lien lien A.Homepurchase 2004 4,209,787 736,636 ... 573,606 1,235 ... 853,490 52,524 ... 2,703 7 ... 2005 4,520,378 1,221,999 ... 437,552 867 ... 1,049,555 149,954 ... 1,685 22 ... 2006 4,013,196 1,268,289 ... 416,143 601 ... 878,325 162,343 ... 1,407 18 ... 2007 3,031,606 551,343 ... 422,450 1,056 ... 605,714 50,202 ... 888 8 ... 2008 1,636,194 91,498 ... 971,528 1,077 ... 410,377 5,553 ... 3,461 4 ... 2009 1,128,950 42,083 ... 1,318,940 1,472 ... 287,760 2,036 ... 3,706 9 ... 2010 1,048,544 40,311 ... 1,165,087 1,390 ... 282,941 1,684 ... 1,822 12 ... B.Refinance 2004 6,185,418 464,170 ... 304,298 293 ... 608,956 12,711 ... 8,069 13 ... 2005 5,607,642 728,362 ... 158,198 276 ... 578,491 25,423 ... 3,236 21 ... 2006 4,347,348 1,035,602 ... 121,761 373 ... 546,430 38,712 ... 989 27 ... 2007 3,462,944 660,563 ... 196,544 353 ... 473,336 23,241 ... 879 15 ... 2008 2,374,781 219,012 ... 521,863 380 ... 328,844 9,070 ... 3,814 10 ... 2009 4,290,072 114,143 ... 998,089 496 ... 341,852 6,747 ... 7,460 16 ... 2010 3,855,876 87,943 ... 653,434 237 ... 350,517 5,721 ... 8,078 8 ... C.Homeimprovement 2004 357,618 395,582 151,292 2,697 2,243 617 40,028 8,153 8,160 30 54 10 2005 409,947 468,375 148,018 2,197 1,873 413 42,544 10,756 8,998 17 49 4 2006 360,321 553,152 154,257 3,957 1,735 423 43,913 13,739 8,190 18 20 6 2007 301,078 435,187 150,858 7,510 1,579 320 41,670 11,508 8,143 35 18 6 2008 179,506 181,402 155,704 10,477 1,610 260 26,482 5,473 7,215 135 13 10 2009 165,620 84,332 98,457 8,147 2,416 649 19,598 3,174 5,411 101 29 36 2010 134,141 74,812 93,659 8,216 2,660 928 17,730 2,482 5,919 35 17 5 1 Seetable4,note1. 2 Unsecuredloansarecollectedonlyforhome-improvementloansundertheHomeMortgageDisclosureAct. ...Notapplicable. governHMDAreporting,mostof thesestand-alonejunior-lienloansarenotreported.24 Mostpiggybackloans,however,mustbereported.Thus,thevolumeof junior-lienlending reportedunderHMDAmaybemoreindicativeof thevolumeof piggybacklendingthan of junior-lienlendingasawhole. Beforethefinancialcrisisandthecollapseinhomevalues,whentheuseof piggybackloans wasmorecommonandthesizelimitsonFannieMaeandFreddieMacpurchaseswere lower,manymorejunior-lienloanswerereportedintheHMDAdata.Forexample,in 2006,whichrepresentedthehigh-watermarkforjunior-lienlending,over1.3millionconventionaljuniorliensusedforthepurchaseof owner-occupiedpropertieswerereported underHMDA,andanother1millionconventionaljunior-lienloansweretakenouttorefi- 24 Unlessajuniorlienisusedforhomepurchaseorexplicitlyforhomeimprovements,itisnotreportedunder HMDAunlessitisusedtorefinanceanexistinglien.Further,aboutone-halfofalljuniorliensareHELOCs, whichdonothavetobereportedintheHMDAdataregardlessofthepurposeoftheloan.

TheMortgageMarketin2010 45 nanceloansbackedbyowner-occupiedproperties(table7).Virtuallyallsuchlendingwas conventional;fewerthan1,000loansinvolvedgovernment-backedprograms.Asthe elevatedcreditriskassociatedwithhigh-LTV-ratiolendingbecameapparentduringthe GreatRecessionanditsaftermath,underwritingtightenedandjunior-lienloansbecame difficulttoobtainorwerenolongermadeavailable.Thenumberof junior-lienloans forthepurchaseof owner-occupiedhomesreportedunderHMDAfellbymorethanonehalf in2007,droppedsharplyagainineachof theensuingyears,anddecreasedsomewhat toabout40,000suchloansin2010.Thenumberof junior-lienloansusedforrefinancing alsofellsubstantiallystartingin2007andcontinuedtofall,reachingalmost88,000in2010. Substantialdeclineswerealsoobservedinthenumberof junior-lienloansbackedbynonowner-occupiedproperties,whethertheloanswereforhomepurchaseorrefinancing. Thecategoryinwhichthenumberof junior-lienloansreportedintheHMDAdatahas declinedtheleasthasbeenjunior-lienloansforhome-improvementpurposes.In2010, almost80,000junior-lienloanswereusedforhomeimprovement.Whilethisnumberwas down11percentfrom2009and86percentfrom2005,thedeclinewaslesssteepthanthat observedforothertypesof junior-lienlending.Asaresult,junior-lienloansusedforhome improvementaccountedfor37percentof junior-lienloansreportedunderHMDA. Loan Sales AmongtheinformationincludedintheannualHMDAdataisthetypeof purchaserfor loansthatareoriginatedandsoldduringtheyear.Forpurposesof reporting,lendersare providedwithninetypesof purchasersthatmaybeusedtoclassifyloansaleactivity. Broadly,thesepurchasertypescanbebrokenintothosethataregovernmentrelated—GinnieMae,FannieMae,FreddieMac,andFarmerMac—andthosethatarenot.25Ginnie MaeandFarmerMacfocusonloansbackeddirectlybygovernmentguaranteesorinsurance,primarilyFHA-insuredorVA-guaranteedloans.Thegovernment-sponsoredenterprises(GSEs)FannieMaeandFreddieMacarefocusedonconventionalloansthatmeet theunderwritingstandardsestablishedbythoseentities. Overall,80percentof thefirst-lienhome-purchaseandrefinanceloansforone-tofourfamilypropertiesoriginatedin2010werereportedassoldduringtheyear(datanotshown intables).Theshareof originationsthataresoldvariessomefromyeartoyearandbytype andpurposeof theloan(table8).26Forexample,about70percentof theconventional loansextendedin2010forthepurchaseof owner-occupiedone-tofour-familydwellings weresoldthatyear.Incontrast,about93percentof thenonconventionalloansusedto purchaseowner-occupiedhomeswerereportedassoldin2010.Theshareof conventional loansmadetonon-owneroccupantsthatarereportedassoldisnotablysmallerthanthat of suchloansmadetoowneroccupants,asistheshareof loansextendedforthepurchase of manufacturedhomes. Althoughoneof thefewsourcesof informationonloansales,theHMDAdatatendto understatetheimportanceof thesecondarymarket.HMDAreportersareinstructedto recordloanssoldinacalendaryeardifferentfromtheyearoriginatedasbeingheldinport- 25 GinnieMaedoesnotbuyorsellloans;rather,itguaranteesinvestorsonthetimelypaymentofinterestand principalformortgage-backedsecuritiesbackedbyFHAorVAloans.(SeetheGinnieMaewebsiteatwww .ginniemae.gov.)FarmerMacpurchasescertaintypesofagriculture-relatedloans.(SeeadescriptionofFarmer Macprogramsatwww.farmermac.com/Lenders/Programs.)FannieMaeandFreddieMacaregovernmentsponsoredenterprises,which,whilefederallychartered,areprivatelyowned.However,in2008,thesetwoentitieswereplacedundergovernmentconservatorship.(SeetheFannieMaeandFreddieMacwebsitesatwww .fanniemae.com/kb/index?page=homeandwww.freddiemac.com.) 26 SomeloansrecordedassoldintheHMDAdataaresoldtoaffiliatedinstitutionsandthusarenottruesecondary-marketsales.In2010,6.3percentoftheloansrecordedassoldintheHMDAdataweresalestoaffiliates.

46 FederalReserveBulletin|December2011 Table8.Distributionofhomeloansalesforone-tofour-familyproperties,byoccupancystatusofhome andtypeofloan,2000–10 Percent Owneroccupied Non-owneroccupied Conventional Nonconventional1 Conventional Nonconventional1 Year Memo:Sharesold Memo:Share Memo:Sharesold Memo:Sharesold Sharesold toGSEs2 Sharesold soldtoGSEs2 Sharesold toGSEs2 Sharesold toGSEs2 A.Homepurchase 2000 64.8 31.3 89.1 46.0 53.7 29.3 81.4 22.9 2001 66.8 34.6 86.1 46.2 57.9 34.0 92.2 23.0 2002 71.0 36.7 88.7 43.7 62.5 36.4 87.9 29.7 2003 72.3 33.1 91.2 40.7 63.1 31.8 80.8 21.6 2004 74.2 25.5 92.2 40.5 63.5 23.6 63.7 11.5 2005 75.9 18.7 89.9 32.6 69.7 18.0 49.7 16.3 2006 74.8 19.0 88.6 31.7 69.3 19.0 61.3 15.0 2007 70.1 29.1 87.6 32.5 61.4 26.9 74.9 27.6 2008 71.6 40.1 90.0 36.5 60.3 36.3 95.1 21.6 2009 70.4 39.7 91.7 34.5 57.4 34.1 88.7 35.6 2010 69.8 37.1 92.7 30.0 60.3 34.9 91.7 24.0 B.Refinance 2000 47.4 18.0 84.5 50.0 47.3 21.7 86.3 42.8 2001 61.3 37.2 85.0 51.5 61.2 38.4 92.1 33.2 2002 66.8 40.4 85.7 45.0 65.9 43.2 81.3 45.4 2003 74.2 44.8 93.8 48.0 69.8 40.4 87.4 50.7 2004 69.0 27.6 93.2 44.2 62.2 22.6 88.0 35.9 2005 69.9 19.7 89.3 33.5 64.7 16.6 85.7 40.1 2006 65.7 15.2 86.8 31.8 64.9 15.7 79.0 29.6 2007 61.7 21.9 85.1 34.5 61.1 23.9 86.9 23.9 2008 65.3 38.0 88.8 35.4 56.8 33.0 95.7 20.4 2009 79.8 51.7 90.4 36.4 61.8 39.6 93.8 35.9 2010 76.8 46.2 90.2 38.1 65.4 40.4 90.5 43.9 C.Homeimprovement 2000 6.3 1.1 15.6 4.7 4.4 .4 52.9 .5 2001 6.4 1.5 22.3 7.6 3.9 .8 73.7 1.1 2002 5.9 1.4 28.4 7.1 4.0 .9 55.3 3.6 2003 10.5 .8 43.8 6.7 6.5 .7 35.0 3.9 2004 23.6 6.0 48.7 23.5 23.1 7.5 20.2 7.4 2005 27.2 7.0 46.2 25.3 30.2 8.8 27.1 8.6 2006 22.0 5.3 60.4 31.8 29.4 8.9 29.5 15.9 2007 19.1 6.4 70.6 30.8 26.4 12.1 39.0 11.9 2008 14.7 8.7 80.0 49.2 20.0 14.5 74.7 6.3 2009 25.0 17.4 63.8 37.3 18.2 13.3 55.4 9.6 2010 21.3 13.2 60.6 34.7 18.4 12.6 47.4 28.1 1 Seetable4,note1. 2 Loanssoldtogovernment-sponsoredenterprises(GSEs)includethosewithapurchasertypeofFannieMae,FreddieMac,GinnieMae,or FarmerMac. folio,leadingthereportedloansalestounderstatetheproportionof eachyear’soriginationsthatareeventuallysold.(Wedealwiththisissueinmoredetailinthelatersection “TheContinuingRoleof GovernmentintheMortgageMarket.”)

TheMortgageMarketin2010 47 Table9.Cumulativedistributionofhomeloans,byborrowerincomeandbypurposeandtypeofloan, 2010 Percent Homepurchase Refinance Upperboundof borrowerincome (thousandsofdollars)1 FHA VA Other2 Total Mem pr o ic : e H d ig 3 her FHA VA Other2 Total Mem pr o ic : e H d ig 3 her 24 5.1 .9 3.2 3.8 10.4 3.4 2.8 1.9 2.1 11.2 49 42.0 23.4 25.3 32.1 48.5 28.2 20.0 15.8 16.9 44.7 74 70.0 57.8 47.1 57.5 71.0 58.6 49.4 36.3 38.4 70.0 99 85.4 78.2 63.1 73.5 82.6 78.7 71.2 55.2 57.3 83.9 124 92.7 89.5 74.4 83.2 88.6 89.4 84.7 69.7 71.5 90.7 149 96.2 94.8 81.8 88.8 91.7 94.5 91.6 79.2 80.6 93.9 199 98.7 98.5 90.0 94.3 94.9 98.1 97.2 89.4 90.2 96.7 249 99.5 99.5 93.9 96.7 96.5 99.1 99.0 93.9 94.4 97.8 299 99.7 99.8 95.9 97.8 97.3 99.4 99.6 96.1 96.4 98.5 Morethan299 100 100 100 100 100 100 100 100 100 100 Memo:Borrowerincome,byselectedloantype(thousandsofdollars)1 Mean 65.8 77.6 110.3 89.2 79.3 78.1 85.6 118.5 114.7 72.4 Median 55 68 78 66 51 67 75 92 89 54 Note:First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans.Business-relatedloansare thoseforwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantorco-applicantare“notapplicable.”Forloanswithtwoor moreapplicants,lenderscoveredundertheHomeMortgageDisclosureAct(HMDA)reportdataononlytwo.Incomefortwoapplicantsis reportedjointly. 1 IncomeamountsarereportedunderHMDAtothenearest$1,000. 2 OtherloansincludeloansoriginatedwithaFarmServiceAgencyorRuralHousingServiceguaranteeandconventionalloans. 3 Higher-pricedloansarethosewithannualpercentagerates1.5percentagepointsormoreabovetheaverageprimeofferrateforloansofa similartypepublishedweeklybytheFederalFinancialInstitutionsExaminationCouncil. FHAFederalHousingAdministration. VADepartmentofVeteransAffairs. Borrower Incomes and Loan Sizes Undertheprovisionsof HMDA,lendersreporttheloanamountappliedforandtheapplicantincomethatthelenderreliedoninmakingthecreditdecision,if incomewasconsideredintheunderwritingdecision.Thevastmajorityof loanapplicationsandloans reportedunderHMDAincludeincomeinformation.Forexample,in2010,incomeinformationwasnotreportedforonlyabout1percentof theborrowerspurchasingahomewith anonconventionalloanandforabout3percentof thoseusingaconventionalloan(data notshownintables).Incomeinformationisnotreportedmoreoftenforrefinanceloans, particularlythosethatarenonconventional(aboutone-thirdof theFHAloansandtwothirdsof theVAloans),likelybecauseof streamlinedrefinanceprogramsthatdonot requirecurrentincometobeconsideredinunderwriting. Whiletheavailableinformationonamountsborrowedandincomecanbeevaluatedin manyways,herethefocusisonpatternsbyloanproduct.Forhome-purchaseorrefinance lending,borrowersusingFHAandVAloanshavelowermeanormedianincomesthan otherloansdespitethefactthattheFHA(andVA)loanlimitswereincreasedsubstantially in2008,allowingtheprogramtobeusedmuchmorewidelythanbythelower-andmoderate-incomehouseholdsthathavebeenthetraditionalfocusof theprogram(table9).For example,in2007,theyearbeforetheincreaseinloanlimits,about7percentof FHAborrowershadincomesof $100,000ormore,whilein2010,theshareincreasedto15percent. Overall,in2010,themedianincomesforFHA,VA,andconventionalloanborrowerswere $55,000,$68,000,and$110,000,respectively(dataforonly2010shownintables).

48 FederalReserveBulletin|December2011 Table10.Cumulativedistributionofhomeloans,byloanamountandbypurposeandtypeofloan,2010 Percent Upperboundof Homepurchase Refinance loanamount (th d ou ol s la a r n s d ) s 1 of FHA VA Other2 Total Mem pr o ic : e H d ig 3 her FHA VA Other2 Total Mem pr o ic : e H d ig 3 her 24 .1 .0 .5 .3 4.1 .1 .0 .5 .4 5.6 49 1.6 .4 3.1 2.3 18.1 1.1 .5 2.6 2.3 19.8 74 8.1 2.3 9.4 8.3 35.7 5.5 3.4 8.0 7.6 37.1 99 19.7 7.3 17.6 17.6 50.0 13.7 9.6 16.8 16.2 52.1 149 48.2 27.8 37.9 41.3 71.9 38.3 31.2 37.6 37.5 71.9 199 69.7 53.7 54.0 60.5 83.4 61.3 55.2 55.3 56.0 82.4 274 86.7 78.1 70.9 78.0 91.2 82.2 78.4 73.5 74.7 90.5 417 97.0 95.2 88.3 92.4 95.9 95.4 95.7 92.3 92.8 97.4 625 99.5 99.3 96.1 97.8 98.1 99.2 99.2 97.5 97.7 99.1 729 99.9 99.7 97.5 98.6 98.6 99.8 99.7 98.5 98.7 99.4 Morethan799 100 100 100 100 100 100 100 100 100 100 Memo:Loanamount(thousandsofdollars) Mean 176.7 215.3 236.6 210.2 140.4 197.6 211.0 222.6 219.4 131.8 Median1 153 191 184 169 100 173 187 182 181 95 Note:First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans.Business-relatedloansare thoseforwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantorco-applicantare“notapplicable.” 1 LoanamountsarereportedundertheHomeMortgageDisclosureActtothenearest$1,000. 2 Seetable9,note2. 3 Seetable9,note3. FHAFederalHousingAdministration. VADepartmentofVeteransAffairs. Loanamountsalsodifferacrossloantypes,withFHAorVAloans,onaverage,being smallerthan“other”loans(table10).However,anupwardshiftinthedistributionof loan amountsforbothFHAandVAhome-purchaseloansoccurredinthepastcoupleof years, continuinginto2010(dataforonly2010shownintables).Theshiftlikelyreflectsthesame forcesthatarechangingthedistributionof borrowerincomes. Application Disposition, Loan Pricing, and Status under the Home Ownership and Equity Protection Act Forpurposesof analysis,loanapplications,loans,andrequestsforpreapprovalreported underHMDAcanbegroupedinmanyways.Everyloanapplicationandrequestforpreapprovalreportedin2010canbecategorizedinto25distinctproductcategoriescharacterized bytypeof loanandproperty,purposeof theloan,andlienandowner-occupancystatus (tables11and12).Eachproductcategorycontainsinformationonthenumberof totaland preapprovalapplications,applicationdenials,originatedloans,loanswithpricesabovethe reportingthresholdsestablishedbyHMDAreportingrulesforidentifyinghigher-priced loans,loanscoveredbytheHomeOwnershipandEquityProtectionActof 1994 (HOEPA),andthemeanandmedianannualpercentagerate(APR)spreadsforloans reportedashigherpriced. Disposition of Applications Asnoted,the2010HMDAdataincludeinformationonnearly13millionloanapplications,about85percentof whichwereacteduponbythelender(dataderivedfrom table11).Patternsof denialratesarelargelyconsistentwithwhathasbeenobservedinear-

TheMortgageMarketin2010 49 Table11.Dispositionofapplicationsforhomeloans,andoriginationandpricingofloans,bytypeof homeandtypeofloan,2010 Applications Typeofhomeandloan Acteduponbylender Numbersubmitted Number Numberdenied Percentdenied 1–4familynonbusinessrelated3 Owneroccupied Sitebuilt Homepurchase Conventional Firstlien 1,468,647 1,280,452 193,739 15.1 Juniorlien 57,538 51,101 8,539 16.7 Governmentbacked Firstlien 1,645,713 1,442,912 230,196 16.0 Juniorlien 1,794 1,532 143 9.3 Refinance Conventional Firstlien 6,102,081 5,213,320 1,104,659 21.2 Juniorlien 152,757 139,288 46,906 33.7 Governmentbacked Firstlien 1,421,776 1,074,474 357,759 33.3 Juniorlien 443 330 83 25.2 Homeimprovement Conventional Firstlien 217,286 194,078 53,581 27.6 Juniorlien 161,820 146,322 65,692 44.9 Governmentbacked Firstlien 19,308 13,603 4,889 35.9 Juniorlien 10,845 8,551 5,437 63.6 Unsecured(conventionalorgovernment backed) 187,731 182,267 85,213 46.8 Manufactured Conventional,firstlien Homepurchase 200,165 191,498 105,052 54.9 Refinance 54,005 48,665 19,158 39.4 Other 86,655 77,187 32,703 42.4 Non-owneroccupied4 Conventional,firstlien Homepurchase 384,535 338,090 58,566 17.3 Refinance 606,900 506,110 150,278 29.7 Other 78,723 69,113 27,184 39.3 lieryears.27Denialratesonapplicationsforhome-purchaseloansarenotablylowerthan thoseobservedonapplicationsforrefinanceorhome-improvementloans.Denialrateson applicationsbackedbymanufacturedhousingaremuchhigherthanthoseonapplications 27 TheinformationprovidedinthetablesisidenticaltothatprovidedinanalysesofearlieryearsofHMDAdata. Comparisonsofthenumbersintables11and12withthoseinthetablesfromearlieryears,includingdenial rates,canbemadebyconsultingthefollowingarticles:Averyandothers,“The2009HMDAData”;andRobertB.Avery,NeilBhutta,KennethP.Brevoort,GlennB.Canner,andChristaN.Gibbs(2010),“The2008 HMDAData:TheMortgageMarketduringaTurbulentYear,”FederalReserveBulletin,vol.96,pp.A169– A211.AlsoseeRobertB.Avery,KennethP.Brevoort,andGlennB.Canner(2008),“The2007HMDAData,” FederalReserveBulletin,vol.94,pp.A107–A146;RobertB.Avery,KennethP.Brevoort,andGlennB.Canner (2007),“The2006HMDAData,”FederalReserveBulletin,vol.93,pp.A73–A109;RobertB.Avery,KennethP. Brevoort,andGlennB.Canner(2006),“Higher-PricedHomeLendingandthe2005HMDAData,”Federal ReserveBulletin,vol.92,pp.A123–A166;andRobertB.Avery,GlennB.Canner,andRobertE.Cook (2005),“NewInformationReportedunderHMDAandItsApplicationinFairLendingEnforcement,”Federal ReserveBulletin,vol.91,pp.344–94.

50 FederalReserveBulletin|December2011 Table11.Dispositionofapplicationsforhomeloans,andoriginationandpricingofloans,bytypeof homeandtypeofloan,2010—continued Loansoriginated LoanswithAPORspreadabovethethreshold1 Typeofhomeand loan Distribution,bypercentagepointsofAPORspread APORspread Number Number (percentagepoints) of Number Percent HOEPA- 5or covered 1.5–1.99 2–2.49 2.5–2.99 3–3.99 4–4.99 more Mean Median loans2 1–4familynonbusinessrelated3 Owneroccupied Sitebuilt Homepurchase Conventional Firstlien 1,002,871 32,983 3.3 39.7 21.7 15.7 15.1 5.1 2.8 2.5 2.2 ... Juniorlien 39,910 5,880 14.7 ... ... ... 40.5 48.7 10.8 4.3 4.2 ... Governmentbacked Firstlien 1,147,045 14,964 1.3 80.0 13.9 3.1 1.6 .5 .9 1.8 1.7 ... Juniorlien 1,347 9 .7 ... ... ... 33.3 55.6 11.1 4.4 4.4 ... Refinance Conventional Firstlien 3,825,680 49,359 1.3 42.0 17.6 12.8 13.9 5.8 8.0 2.7 2.2 917 Juniorlien 85,338 10,171 11.9 ... ... ... 31.6 37.5 30.9 4.8 4.4 280 Governmentbacked Firstlien 643,178 31,696 4.9 39.3 35.4 17.5 6.5 1.0 .3 2.2 2.1 277 Juniorlien 226 3 1.3 ... ... ... 33.3 33.3 33.3 4.9 4.0 0 Homeimprovement Conventional Firstlien 130,514 13,160 10.1 29.3 18.2 14.2 17.0 7.7 13.7 3.2 2.6 533 Juniorlien 73,908 8,222 11.1 ... ... ... 31.2 36.3 32.6 4.8 4.4 238 Governmentbacked Firstlien 7,830 1,254 16.0 23.3 32.1 23.6 12.7 5.7 2.7 2.6 2.4 15 Juniorlien 2,644 2,185 82.6 ... ... ... 2.0 18.2 79.9 6.5 6.7 0 Unsecured (conventional or government backed) 90,452 ... ... ... ... ... ... ... ... ... ... ... Manufactured Conventional,firstlien Home purchase 44,436 35,574 80.1 4.7 5.6 7.1 19.4 17.8 45.4 5.2 4.7 ... Refinance 25,369 9,063 35.7 13.6 10.8 13.1 24.6 16.6 21.3 3.9 3.5 711 Other 36,449 6,827 18.7 25.3 16.8 11.8 18.0 11.4 16.7 3.4 2.8 330 Non-owneroccupied4 Conventional,firstlien Home purchase 256,857 12,627 4.9 39.3 18.4 14.1 15.8 5.9 6.6 2.7 2.3 ... Refinance 327,819 9,656 2.9 48.1 17.8 11.5 12.9 5.1 4.7 2.5 2.0 54 Other 38,962 2,692 6.9 17.9 14.1 10.1 22.8 17.5 17.6 3.6 3.5 35 1 Averageprimeofferrate(APOR)spreadisthedifferencebetweentheannualpercentagerateontheloanandtheAPORforloansofasimilar typepublishedweeklybytheFederalFinancialInstitutionsExaminationCouncil.Thethresholdforfirst-lienloansisaspreadof1.5 percentagepoints;forjunior-lienloans,itisaspreadof3.5percentagepoints. 2 LoanscoveredbytheHomeOwnershipandEquityProtectionActof1994(HOEPA),whichdoesnotapplytohome-purchaseloans. 3 Business-relatedapplicationsandloansarethoseforwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantor co-applicantare“notapplicable”;allotherapplicationsandloansarenonbusinessrelated. 4 Includesapplicationsandloansforwhichoccupancystatuswasmissing.

TheMortgageMarketin2010 51 Table11.Dispositionofapplicationsforhomeloans,andoriginationandpricingofloans,bytypeof homeandtypeofloan,2010—continued Applications Typeofhomeandloan Acteduponbylender Numbersubmitted Number Numberdenied Percentdenied Businessrelated3 Conventional,firstlien Homepurchase 29,771 28,920 973 3.4 Refinance 30,632 29,617 1,612 5.4 Other 10,266 9,684 960 9.9 Multifamily5 Conventional,firstlien Homepurchase 8,315 7,689 1,004 13.1 Refinance 12,769 11,883 1,815 15.3 Other 4,400 4,034 648 16.1 Total 12,954,875 11,070,720 2,556,789 23.1 5 Includesbusiness-relatedandnonbusiness-relatedapplicationsandloansforowner-occupiedandnon-owner-occupiedproperties. ...Notapplicable. backedbysite-builthomes.Forexample,thedenialrateforfirst-lienconventionalhomepurchaseloanapplicationsforowner-occupiedsite-builtpropertieswas15.1percentin 2010,comparedwithadenialrateof 55percentforsuchapplicationsforowner-occupied manufacturedhomes. InadditiontotheapplicationdataprovidedunderHMDA,nearly443,000requestsfor preapprovalwerereportedasactedonbythelenderin2010(table12).About26percentof theserequestsforpreapprovalweredeniedbythelender.Notsurprisingly,thenumberof requestsforpreapprovalisdownsubstantiallyfromthelevelsrecordedattheheightof the Table11.Dispositionofapplicationsforhomeloans,andoriginationandpricingofloans,bytypeof homeandtypeofloan,2010—continued Loansoriginated LoanswithAPORspreadabovethethreshold1 Typeofhomeand loan Distribution,bypercentagepointsofAPORspread APORspread Number Number (percentagepoints) of Number Percent HOEPA- 5or covered 1.5–1.99 2–2.49 2.5–2.99 3–3.99 4–4.99 more Mean Median loans2 Businessrelated3 Conventional,firstlien Home purchase 27,321 953 3.5 22.7 29.7 22.3 21.5 2.8 1.1 2.6 2.4 ... Refinance 27,525 727 2.6 23.4 27.8 23.7 19.1 4.0 2.1 2.6 2.5 ... Other 8,528 151 1.8 16.6 17.9 14.6 28.5 12.6 9.9 3.2 3.0 ... Multifamily5 Conventional,firstlien Home purchase 6,249 209 3.3 32.5 24.9 25.4 14.8 .5 1.9 2.4 2.3 ... Refinance 9,620 285 3.0 31.6 24.6 22.5 16.8 2.8 1.8 2.5 2.4 1 Other 3,259 50 1.5 46.0 20.0 12.0 8.0 12.0 2.0 2.5 2.1 0 Total 7,863,337 248,700 3.2 31.3 16.5 11.2 15.8 10.6 14.6 3.2 2.6 3,391

52 FederalReserveBulletin|December2011 Table12.Home-purchaselendingthatbeganwitharequestforpreapproval:Dispositionandpricing,by typeofhome,2010 Applicationsprecededby Requestsfor requestsfor Loanoriginationswhoseapplicationswereprecededbyrequestsforpreapproval preapproval preapproval1 Acteduponby LoanswithAPORspreadabovethethreshold2 lender Type ofhome Number acted Per- Number APORspread Number Distribution,bypercentagepointsof upon cent sub- Number (percentage denied APORspread by denied mitted Number Num- Per- points) lender Number denied ber cent 1.5– 2– 2.5– 3– 4– 5or Mean Median 1.99 2.49 2.99 3.99 4.99 more spread spread 1–4familynonbusinessrelated3 Owneroccupied Sitebuilt Conventional Firstlien214,845 50,155 23 130,475 21,520 16,756 85,438 1,676 2.0 47.6 23.5 11.3 11.3 4.6 1.8 2.3 2.0 Junior lien 5,327 942 18 3,787 271 170 3,196 1,075 33.6 ... ... ... 28.463.7 7.9 4.3 4.2 Governmentbacked Firstlien175,857 53,837 31 109,419 13,499 12,287 79,928 1,055 1.3 87.5 10.2 1.5 .1 .2 .5 1.8 1.7 Junior lien 218 22 10 193 22 10 159 .0 ... ... ... ... ... ... ... ... Manufactured Conventional, firstlien 13,777 1,288 9 12,241 1,483 4,436 4,283 2,364 55.2 16.3 5.1 6.0 9.110.1 53.4 5.6 5.3 Other 2,147 781 36 1,324 286 255 724 15 2.1 73.3 13.3 13.3 ... ... ... 1.9 1.7 Non-owneroccupied4 Conventional, firstlien 28,822 5,378 19 19,395 2,983 2,290 13,045 427 3.3 41.0 16.6 14.1 14.3 9.6 4.5 2.7 2.3 Other 1,195 450 38 724 258 295 154 10 6.5 20.0 ... ... 40.010.0 30.0 4.3 3.7 Businessrelated3 Conventional, firstlien 398 19 5 372 41 17 309 15 4.9 13.3 26.7 46.7 6.7 6.7 .0 2.7 2.8 Other 106 5 5 98 12 19 65 1 1.5 ... ... ... 100.0 ... ... 3.9 3.9 Multifamily5 Conventional, firstlien 96 4 4 88 9 10 67 3 4.5 ... 33.3 66.7 ... ... ... 2.4 2.6 Other 15 15 5 2 8 1 12.5 100.0 ... ... ... ... ... 1.6 1.6 Total 442,803112,881 25 278,131 40,389 36,547 187,376 6,642 3.5 34.6 10.6 6.3 11.715.8 21.2 3.8 2.9 1 Theseapplicationsareincludedinthetotalreportedintable11. 2 Seetable11,note1. 3 Seetable11,note3. 4 Seetable11,note4. 5 Seetable11,note5. …Notapplicable. housingboom.In2006,coveredinstitutionsreportedthattheyreceivednearly1.2million requestsforpreapprovaluponwhichtheytookaction(datanotshownintables). Rule Changes Related to Higher-Priced Lending TherulesgoverningwhetheraloanisclassifiedashigherpricedunderHMDAwere changedin2008,withimplementationaffectingloanclassificationsforapplicationsafter October1,2009.Allloansreportedinthe2010HMDAdata,regardlessof thedateof

TheMortgageMarketin2010 53 application,arecoveredunderthenewrules.Thepurposeof therulechangewasto addressconcernsthathadarisenaboutthedistortiveeffectsof changesintheinterestrate environmentonthereportingof higher-pricedlendingundertheoriginalmethodology.28 Undertheoriginalmethodology,changesinunderlyingmarketratesof interest,particularlyasteepeningorflatteningof theyieldcurve,couldresultintwoloansof equivalent creditandprepaymentriskbeingclassifieddifferentlyunderHMDAashigherpriced ornotatdifferentpointsintime,anoutcomethatwasunintended.29 Toaddressthedistortionsarisingfromthemethodusedtoclassifyloansashigherpriced ornot,theprice-reportingrulesunderHMDAweremodified.Lendersarenowrequiredto comparetheAPRontheloanwiththe“averageprimeofferrate”(APOR)forloansof a similartype(forexample,a30-yearfixed-ratemortgage).TheAPOR,whichispublishedweeklybytheFFIEC,isanestimateof theAPRonloansbeingofferedtohigh-qualityprimeborrowersbasedonthecontractinterestratesanddiscountpointsreportedby FreddieMacinitsPrimaryMortgageMarketSurvey(PMMS).30If thedifferenceismore than1.5percentagepointsforafirst-lienloanormorethan3.5percentagepointsfora junior-lienloan,thentheloanisclassifiedashigherpricedandtheratespreadisreported. SinceAPORsmovewithchangesinmarketratesandareproductspecific,itisanticipated thatthedistortionsthatexistedundertheoldmethodologywillbeovercome. The Incidence of Higher-Priced Lending Thedatashowthattheincidenceof higher-pricedlendingacrossallproductsin2010was about3.2percent(table11).31Theincidencevariesacrossloantypes,products,andpurposes.First,inalmostallcases,nonconventionalloanshavealowerincidenceof higher-pricedlendingthandocomparableconventionalloanproducts,althoughthedifferencesinincidencearemuchsmallerthanintheperiodwhenmanyconventionalloanswere subprimeornearprime.In2010,amongfirst-lienhome-purchaseloansforsite-built homes,3.3percentof conventionalloanshadAPRsabovetheprice-reportingthreshold, versus1.3percentof nonconventionalloans.Second,withfewexceptions,first-lienloans havealowerincidenceof higher-pricedlendingthandojunior-lienloansforthesamepurposes.Forexample,in2010,theincidenceof higher-pricedlendingforconventionalfirstlienrefinanceloanswas1.3percent,whereasforcomparablejunior-lienloansitwas 11.9percent.Thisrelationshipisfounddespitethefactthatthethresholdforreportinga 28 TherulesforreportingloanpricinginformationunderHMDAwereoriginallyadoptedin2002,coveringlendingbeginningin2004.TheseolderrulesrequiredlenderstocomparetheAPRontheloanwiththeyieldona Treasurysecuritywithacomparabletermtomaturitytodeterminewhethertheloanshouldbeconsidered higherpriced:Ifthedifferenceexceeded3percentagepointsforafirst-lienloanor5percentagepointsfora junior-lienloan,theloanwasclassifiedashigherpricedandtheratespread(theamountofthedifference)was reported. 29 Foramoredetaileddiscussionoftheproblemswiththeoldprice-reportingrulesthatledtothechange,see Averyandothers,“The2009HMDAData.” 30 TheweeklyPMMSreportstheaveragecontractratesandpointsforallloansandthemarginforadjustable-rate loansforloansofferedtoprimeborrowers(thosewhoposethelowestcreditrisk).Thesurveycurrentlyreports informationfortwofixed-ratemortgageproducts(30-yearand15-yearterms)andtwoadjustable-ratemortgageproducts(1-yearadjustablerateanda5-yearadjustablerate).SeeFreddieMac,“WeeklyPrimaryMortgageMarketSurvey(PMMS),”webpage,www.freddiemac.com/pmms;andFederalFinancialInstitutions ExaminationCouncil,“NewFFIECRateSpreadCalculator,”webpage,www.ffiec.gov/ratespread/newcalc .aspx. 31 Inpreviousarticlesexploringthedistortionscreatedbytheoldloanpricingclassificationmethodology(see Averyandothers,“The2009HMDAData”),weusedanadjustmenttechniquethattriedtoaddressthosedistortions.Theadjustmenttechniquewassimilartothenewreportingrules,thoughitwasalsoclearlyinferiorto themandcouldnothavebeenimplementedwithoutaccesstodateinformation,whichisnotpartofthepublic usefile.Withoutthisadjustment,comparisonofhigher-priceddataforloanscoveredbytheoldreportingrules withsuchdataforloanscoveredbythenewonesisnotappropriate.Evenwiththeadjustment,itisnotpossible toadjustthedataforloansreportedundertheoldrulestomakethemfullycomparabletodatareportedunder thenewrules.Forthisreason,werestrictourdiscussionheretothe2010data.

54 FederalReserveBulletin|December2011 junior-lienloanashigherpricedis2percentagepointshigherthanitisforsoreportinga first-lienloan.Third,manufactured-homeloansexhibitthegreatestincidenceof higherpricedlendingacrossallloancategories,aresultconsistentwiththeelevatedcreditrisk associatedwithsuchlending.For2010,80percentof theconventionalfirst-lienloansused topurchasemanufacturedhomeswerehigherpriced. Rate Spreads for Higher-Priced Loans Althoughthereisconsiderablevariationacrossloanproductsintheincidenceof higherpricedlending,thevariationacrossproductsinmeanandmedianAPORspreadsas reportedintheHMDAdataismuchsmaller.Forexample,for2010,themeanAPOR spreadreportedforhigher-pricedconventionalfirst-lienloansforthepurchaseof an owner-occupiedsite-builthomewasabout2.5percentagepoints,comparedwithabout 1.8percentagepointsforhigher-pricedfirst-liennonconventionalloansusedforthesame purpose(table11). Itisworthnotingthatthevastmajorityof nonconventionalloansreportedashigherpriced in2010exceededtheHMDAprice-reportingthresholdsbyonlyasmallamount:Specifically,80percentof thehigher-pricednonconventionalfirst-lienhome-purchaseloanshad reportedspreadswithin50basispointsof thethreshold.Bycomparison,onlyabout 40percentof thecomparableconventionalloansreportedashigherpricedhadpricesthis closetothemarginof reporting.Incontrast,theshareof higher-pricednonconventional refinancingloanswithAPORsclosetothemarginof reporting(39percent)isalittleless thantheshareof higher-pricedconventionalrefinancingloanswithsuchAPORs(about 42percent). Asexpected,consistentwiththehigherreportingthresholdof junior-lienlending,higherpricedjunior-lienloanproductshavehighermeanandmedianAPORspreadsthando higher-pricedfirst-lienloans.Higher-pricedloansformanufacturedhomesdifferfrom otherloanproductsinthattheygenerallyhavethehighestmeanspreads.In2010,thetypicalhigher-pricedconventionalfirst-lienloantopurchaseamanufacturedhomehada reportedspreadof about5.2percentagepoints,comparedwithanaveragespreadof roughly2.5percentagepointsforcomparablehigher-pricedloansforsite-builtproperties. HOEPA Loans TheHMDAdataindicatewhichloansarecoveredbytheprotectionsaffordedbyHOEPA. UnderHOEPA,certaintypesof mortgageloansthathaveinterestratesorfeesabovespecifiedlevelsrequireadditionaldisclosurestoconsumersandaresubjecttovariousrestrictionsonloanterms.32For2010,655lendersreportedextendingnearly3,400loanscovered byHOEPA(table11;dataregardinglendersnotshownintables).Incomparison,1,153 lendersreportedonabout6,500loanscoveredbyHOEPAin2009.Intheaggregate, HOEPA-relatedlendingmadeuplessthan0.1percentof allof theoriginationsof homesecuredrefinancingsandhome-improvementloansreportedfor2010(dataderivedfrom tables).33 32 Unlikethethresholdrulesusedtoreporthigher-pricedloans,thethresholdrulesusedtoidentifyHOEPAloans didnotchangebetween2009and2010,andthusthe2010numberofHOEPAloansiscomparabletothatof earlieryears.TherequirementtoreportHOEPAloansintheHMDAdatarelatestowhethertheloanissubject totheoriginalprotectionsofHOEPA,asdeterminedbythecoveragetestintheFederalReserveBoard’sRegulationZ,12C.F.R.pt.226.32(a).Therequiredreportingisnottriggeredbythemorerecentlyadoptedprotectionsfor“higher-pricedmortgageloans”underRegulationZ,notwithstandingthatthoseprotectionswere adoptedunderauthoritygiventotheBoardbyHOEPA.See73Fed.Reg.44522(July30,2008). 33 HOEPAdoesnotapplytohome-purchaseloans.

TheMortgageMarketin2010 55 Factors Influencing Refinancing Activity in 2010 Asdiscussedearlier,theAPORfora30-yearfixed-ratemortgagefellsharplyattheendof 2008andinto2009,andthenitfelltowellunder5percentin2010(figure1).Moreover, theseratedeclinesappeartohavesparkedelevatedrefinanceactivityinearly2009andlate 2010.Still,overallrefinanceactivityinboth2009and2010appearslowcomparedwith whatmighthavebeenexpectedgiventhesharpdeclineininterestrates.Forexample,interestrateslastfellsharplyintheearly2000s,andrefinancevolumepeakedin2003atover15 millionloans,morethanthecombinedrefinancevolumein2009and2010(table3.B). Oneexplanationforsubduedrefinanceactivityisthatlendersmaybelesswillingorless abletotakeriskthanearlierinthedecade.TheFederalReserve’squarterlySenior LoanOfficerOpinionSurveyonBankLendingPracticesindicatesthatlendershavetightenedcreditstandardsduringthepastfewyears.34Lenderscouldalsobeadjustingpricesin lightof perceptionsthatborrowerswiththesamenominalcharacteristics(creditscore,for example)posemorerisknowthantheydidseveralyearsagobecauseof thesubstantially weakerandmoreuncertainconditionsinemploymentandhousingmarkets.Lendersmay alsobepricingriskmorestringentlybecausetheyarepassingoncertainfeesfromthe GSEs.In2008,bothFannieMaeandFreddieMacstartedchargingadditionalfees(“loanlevelpricingadjustments”)onloanstoborrowersincreditscoreandLTVrangesinwhich theyhadnotchargedsuchfeesbefore.Inadditiontothesefactors,theincreasedfeesand tighterunderwritingbyPMIcompaniesnotedearlierandtheincreasedpresenceof juniorlienloans—whichmustbeclosed,refinanced,orresubordinated—relativetothepastmay alsobeimpedingrefinanceactivity. Subduedrefinanceactivitymayalsostemfromthefactthatthefinancialstandingof many borrowershasbeenunderminedbysharphousepricedeclinesandtheassociatedlossof homeequity,especiallyforthoseresidinginArizona,California,Florida,Michigan,and Nevada,wherehomepricesfellmorethan20percentfromtheendof 2006totheendof 2009,accordingtotheFederalHousingFinanceAgency(FHFA)homepriceindex.35A borrowerwithlittleornohomeequitymayneedtopaydownhisorherloanbalancesubstantiallybeforebeingabletoqualifyforarefinance,whichcouldbedifficult. Thatsaid,afewprogramshavebeenintroducedinrecentyearstohelpfacilitaterefinancingforthosewithlittleornoequity.PerhapsmostnotableistheHomeAffordableRefinanceProgram.Tobeeligible,borrowersmustbecurrentontheirpayments,andtheir loansmusthavebeenoriginatedbeforeJune2009,bebackedbytheGSEs,andhavebalancesthatdonotexceed125percentof therespectivehomevalues.Thusfar,theprogram hashadlessof aneffectthaninitiallyexpected,perhapsbecauseof someissuesraisedpreviously,suchasgettingjunior-lienholderstoagreetoresubordinatetheirloansunderthe newrefinanceloan.36 TohelpdescriberefinanceactivityinmoredetailthanispossiblewiththeHMDAdata,we drawonarelativelynewdatasource—theFRBNYConsumerCreditPanel/Equifax.The panelisanationallyrepresentativelongitudinaldatabaseof individualswithdetailedinfor- 34 SeeBoardofGovernorsoftheFederalReserveSystem,“SeniorLoanOfficerOpinionSurveyonBankLendingPractices,”webpage,www.federalreserve.gov/boarddocs/SnLoanSurvey. 35 SeeFederalHousingFinanceAgency,“HousePriceIndex,”webpage,www.fhfa.gov/Default.aspx?Page=14. Elevatedlevelsofunemploymentandunderemploymentacrossmuchofthecountryhavealsolikelydamped refinancings,sincereducedincomesandunstableemploymentmakequalifyingforloansmoredifficult. 36 ForamoredetaileddiscussionofwhytheHomeAffordableRefinanceProgrammaynothavehadmorerobust resultsthusfar,seeElizabethA.Duke(2011),“RebalancingtheHousingMarket,”speechdeliveredattheFederalReserveBoardPolicyForum“TheHousingMarketGoingForward:LessonsLearnedfromtheRecent Crisis,”Washington,September1,www.federalreserve.gov/newsevents/speech/duke20110901a.htm.

56 FederalReserveBulletin|December2011 mation,ataquarterlyfrequencybeginningin1999,onconsumerandmortgagedebtand loanperformancedrawnfromthecreditrecordscollectedandmaintainedbyEquifax,one of thethreenationalcreditbureaus.37Thedataincludethreekeypiecesof information withrespecttothisanalysis:(1)detailsoneachmortgageoutstandingforagivenconsumer, includingtheyearof originationandcurrentbalance;(2)eachconsumer’screditscoreas of theendof 2009;and(3)eachconsumer’sgeographiclocationatthelevelof thecensus block(asubunitof acensustract).38 Refinancemortgageloansarenotexplicitlyidentifiedinthecreditbureaudata,but becausewecanfollowagivenmortgageborrowerovertime,wecaninferwhetherthatborrowerrefinancedhisorhermortgageduringanyparticularperiod.Estimatesof “refinance rates”(thesharesof borrowersthatrefinancedtheirmortgages)during2010areprovided bycreditscore,geography,andyearof loanoriginationforthosewithmortgagesoutstandingasof theendof 2009(table13,toppanel).Tosimplifytheanalysis,wefocusonconsumerswhohadexactlyoneclosed-endmortgagewithanoutstandingbalanceof atleast $50,000asof theendof 2009andstayedinthesamecensusblockoverthecourseof 2010 (aproxyfornothavingchangedresidence;wesimplywanttoomitfromtheanalysisthose whomoved).39Wethenlookattheirmortgageaccountsattheendof 2010andclassify consumersashavingrefinancedduring2010if they(1)openedatleastoneclosed-end mortgagein2010and(2)nolongerhadapositive-balancemortgagewithanorigination datematchingthatof themortgagethatwasoutstandingattheendof 2009. Estimatedrefinanceratesin2010werehighestamongconsumerswithpristinecreditscores (820orhigher)whoseloanswereoriginatedbetween2006and2008—yearswithrelatively highinterestrates.40Withintheseoriginationyears,lowercreditscoreswereassociatedwith muchlowerrefinancerateswithinbothgroupsof states.Forexample,in“other”states— thosestatesthatdidnotexperiencethelargestdeclinesinhomevalues—refinanceratesfor consumerswithcreditscoresof 680to719werelessthanhalf of thoseforconsumerswith thehighestcreditscores. Estimatedrefinanceratesarealsogenerallylowerforborrowersinthefivestatesthatexperiencedhousepricedeclinesof 20percentormore(“sharpestdeclines”)withineachscore group,especiallyforloansoriginatedbetween2005and2007—thetimethathouseprices peaked.Thosewhopurchasedhomeswithoutsignificantdownpaymentsorreducedtheir equitysubstantiallythroughrefinancingduringthisperiodwouldhavebeenmostaffected 37 Thedataaredrawnusingamethodologytoensurethatthesameindividualscanbetrackedovertime,andthat thedataarerepresentativeofallindividualswithacreditrecordasoftheendofeachquarter.Formoreinformationonthesedata,seeDonghoonLeeandWilbertvanderKlaauw(2010),“AnIntroductiontothe FRBNYConsumerCreditPanel,”FederalReserveBankofNewYorkStaffReports479(NewYork:Federal ReserveBankofNewYork,November).Itisimportanttonotethatallindividualsinthedatabaseareanonymous:Names,streetaddresses,andSocialSecuritynumbershavebeensuppressed.Individualsaredistinguishedandcanbelinkedovertimethroughaunique,anonymousconsumeridentificationnumberassignedby Equifax. 38 ThisscoreisgeneratedfromtheEquifaxRiskScore3.0model.TheEquifaxRiskScore3.0isacreditscore producedfromageneral-purposeriskmodelthatpredictsthelikelihoodanindividualwillbecome90daysor moredelinquentonanyaccountwithin24monthsafterthescoreiscalculated.TheEquifaxRiskScore3.0 rangesfrom280to850,withahigherscorecorrespondingtolowerrelativerisk(formoreinformation,see www.equifax.com).Anindividual’screditscoreattheendof2009representsareasonablemetricofthescore thatwouldhavebeenavailabletoalenderthatreceivedanapplicationforarefinancingduring2010. 39 Thoseconsumerswithrelativelysmallbalancesarelesslikelytofinditintheirfinancialinteresttorefinance. Indeed,table10indicatesthatmorethan97percentofrefinanceloansin2010wereforamountsinexcessof $50,000. 40 Unfortunately,thecreditbureaudatalackinformationontheinterestrateoftheloanorthestructureofthe loan(forexample,whetheritisanadjustable-orfixed-ratemortgage).Thus,wecannotdeterminemorepreciselywhetheragivenborrowerhasastrongfinancialincentivetorefinance.Forexample,borrowerswith adjustable-ratemortgagesmaybelessinclinedtorefinancebecausetheyalreadyenjoythebenefitsoffalling rates.

TheMortgageMarketin2010 57 Table13.Estimatedrefinanceratesforborrowerswithoutstandingloansinstatesgroupedbydegreeof declineinhouseprices,byyearofloanoriginationandcreditscorecategory,2010and2003 Percent Estimatedrefinanceratesduring2010 Creditscorecategory1 Memo Yearofloanorigination Lessthan680 680–719 720–819 820ormore Proportion APOR d S e te c e lin p e e s s 2 t Other2 d S e te c e lin p e e s s 2 t Other2 d S e te c e lin p e e s s 2 t Other2 d S e te c e lin p e e s s 2 t Other2 All difference3 borro o w f ers Before2003 .7 1.9 4.5 7.1 9.1 12.8 10.8 13.5 8.5 n.a. 10.3 2003 1.3 2.1 6.8 8.4 11.4 14.1 14.2 15.3 11.6 1.1 13.5 2004 .8 1.8 5.0 8.2 11.2 14.7 15.8 18.1 10.5 1.2 8.4 2005 .6 1.8 4.5 9.3 10.0 16.6 15.8 22.8 10.3 1.2 10.7 2006 .5 2.4 3.9 10.8 9.4 19.4 17.0 23.1 9.2 1.7 10.9 2007 1.3 3.8 4.4 12.1 11.5 19.7 17.0 24.0 10.9 1.6 12.6 2008 5.6 6.1 12.3 14.7 20.1 22.7 27.2 28.9 16.8 1.3 13.0 2009 5.0 4.5 7.8 6.2 10.8 8.6 15.1 10.5 8.4 .4 20.6 Memo Alloriginationyears 1.7 3.2 6.4 9.7 11.8 14.8 15.6 17.4 10.7 ... 100.0 Proportionofborrowers 7.0 22.0 2.0 7.6 11.1 37.7 3.7 8.8 100.0 ... ... Estimatedrefinanceratesduring2003 Before1996 21.6 18.3 30.2 28.9 33.6 34.9 31.1 29.1 29.3 n.a. 11.6 1996 24.0 18.6 30.4 36.7 43.2 40.4 30.8 37.9 32.1 2.1 2.7 1997 25.0 18.5 36.0 38.4 47.6 46.8 42.5 41.0 35.6 1.9 3.4 1998 24.1 20.8 41.3 39.3 49.8 45.5 51.3 44.2 39.4 1.2 12.0 1999 25.7 19.9 41.4 39.2 48.1 44.7 48.2 39.3 36.3 1.7 10.3 2000 27.6 21.6 48.1 43.9 48.1 47.1 36.8 45.3 34.2 2.3 5.9 2001 35.6 28.2 46.0 39.1 52.5 46.6 57.9 47.8 41.4 1.2 25.3 2002 29.1 24.3 34.9 29.7 38.2 32.8 47.1 33.6 31.4 .7 28.8 Memo Alloriginationyears 28.7 23.1 39.3 35.4 44.3 40.7 44.7 38.6 35.5 ... 100.0 Proportionofborrowers 8.1 23.7 3.3 9.5 12.9 38.8 1.3 2.5 100.0 ... ... 1 Creditscoresforborrowersaremeasuredasofthebeginningoftheyear. 2 “Steepestdeclines”consistsofthefivestateswiththesteepestdeclinesinhousepricesfrom2006to2009:Arizona,California,Florida, Michigan,andNevada;“other”consistsofallremainingstates. 3 Theaverageprimeofferrate(APOR),whichispublishedweeklybytheFederalFinancialInstitutionsExaminationCouncil,isanestimateof theannualpercentagerateon30-yearfixed-rateloansbeingofferedtohigh-qualityprimeborrowersbasedonthecontractinterestrates anddiscountpointsreportedbyFreddieMacinitsPrimaryMortgageMarketSurvey.TheAPORdifferenceisthedifferenceinaverageannual APORbetweentheyearofloanoriginationandtheyearofrefinance.For2010,theaverageannualAPORis4.75percent;for2003,itis 5.885percent. Source:FederalReserveBankofNewYorkConsumerCreditPanel/Equifax. n.a.Notavailable. ...Notapplicable. bydeclininghouseprices.Also,thedifferenceinrefinanceratestendstoriseascreditscores fall,suggestingthatlowequityseemstocompoundtheproblemof lowerscoresinefforts torefinance.Forexample,amongthosewithloansoriginatedin2006,theestimatedrefinancerateforconsumerswithpristinecreditscoresisnearly25percentintheotherstates, comparedwithroughly17percentinthestateswiththesharpestdeclines,whileforthe groupwiththesecond-highestscore(720–819),thisdifferencebecomesmorepronounced—about19percentversus9percent. Incontrast,analogousestimatesfor2003inthebottompanelof table13indicatethatrefinanceratesthatyeardidnotvarysystematicallyacrossstategroupsanddidnotfallwith creditscoresuntilscoresdroppedbelow680.Inotherwords,thecurrentpatternof refinanceactivityacrossstateandcreditscoregroupsdoesnotappeartobeexplainedbyhis-

58 FederalReserveBulletin|December2011 toricalprecedent.Thefindingsoverallprovideevidenceconsistentwiththeviewthatlosses of homeequity,weakeconomicconditions,andtighterunderwriting(whetherdueto decreasedappetiteforriskoranincreasedassessmentof risk)dampedrefinanceactivityin 2010.41 Wecanusetheestimatesintable13tomakeaninferenceabouttheshareof mortgagorsat theendof the2009whowouldhaverefinancedduring2010if homeequitywasnotan impedimentandunderwritingwassimilartowhatitwasin2003(thatis,similaracross creditscoregroupsexceptforthegroupwithscoresbelow680).Specifically,if weassume thatrefinanceratesforeachstate-score-yeargroupwereidenticaltotherefinanceratesfor thosewithpristinescoresinotherstatesandthat,asin2003,refinanceratesforthosewith scoresbelow680areabout60percentof whattheywereforpristinescoretypes,thenthe overallrefinanceratein2010wouldhavebeenjustover16percentinsteadof justunder 11percent.42 This“counterfactual”refinanceratemightbeconservativesinceitabstractsawayfromthe problemsposedbytheincreasedincidenceof juniorliens,notedearlier.However,wealso estimatedrefinanceratesforthosewithapositive-balanceHELOCandfoundnearlyidenticalrefinanceratesasthoseshownintable13.43Thecounterfactualratemightalsobeconservativebecausedeclininghousepricesaffectedborrowersintheotherstatesatleastto someextent,but,notably,wefoundrefinanceratesforthoseinthesubsetof stateswhere priceshavenotdeclinedsince2006tobeverysimilartothosefortheotherstatesasa whole(datanotshownintables).Overall,thisexercisesuggeststhatrefinanceratescould havebeenjustover5percentagepoints,orjustover50percent,higherintheabsenceof homeequityproblemsandunderwritingchanges.ApplyingthatnumbertotheHMDA dataimpliesthatroughlyanadditional2.3millionfirst-lienowner-occupantrefinance loanswouldhavebeenmadeduring2010ontopof theroughly4.5millionsuchloansthat wereinfactoriginated(dataderivedfromtable7). The Continuing Role of Government in the Mortgage Market TheHMDAdatafor2008and2009showedthattheshareof newmortgageloanseither explicitlyorimplicitlyguaranteedbythefederalgovernmentrosedramaticallyfrom2006. Thisincreasedgovernmentrolecontinuedin2010,withtheshareof loansthatwereoriginatedthroughtheFHA,VA,and,toamuchlesserextent,FSAorRHSprograms,orthat wereownedoutrightorinmortgagepoolsguaranteedbyFannieMaeorFreddieMac, remainingaboutthesameasitwasin2009.Thissectiondiscussestheunderlyingcausesof thistrend.Tofacilitateouranalysis,weemployareviseddatasetdesignedtocorrectfor oneof thelimitationsintheHMDAreportingsystem. 41 OnecouldimaginecomparingdenialratesonrefinanceapplicationsintheHMDAdataacrossgeographiesand overtimetogaugethedifficultyofrefinancingcurrently.However,asdiscussedlater,changesovertimeinthe compositionofapplicantsascreditconditionschangewouldlikelyconfoundsuchananalysis. 42 Forexample,insteadofarefinancerateof22.7percentfor2008borrowersinotherstateswithascorebetween 720and819,suchborrowerswouldhavehadarefinancerateof28.9percent.Similarly,insteadofarefinance rateof10percentfor2005borrowersinthesteepest-declinestates,theywouldhavehadarefinancerateof22.5 percent.Afteradjustingtherefinanceratesforeachcellinthismanner,thecounterfactualrateisthencalculatedasaweightedaverageofeachcell,wheretheweightsaregivenbytheshareofborrowersineachcell. 43 Analysisofthedatasuggeststhatofthosewithatleastoneclosed-endmortgagewithabalanceabove$50,000 attheendof2009,abouttwo-thirdshadjustthatonemortgage,about13percenthadtwofirst-lienmortgages, andabout20percenthadajuniorlien—eitheraclosed-endmortgageoraHELOCwithapositivebalance.Of thosewithajuniorlien,abouttwo-thirdshadaHELOCasopposedtoaclosed-endjuniorlien.Becauseofthe datastructure,itisdifficulttoestimaterefinanceratesforthosewhohaveaclosed-endjunior-lienloan.Also notethatthebureaudatadonotidentifyjunior-lienloansexplicitly;instead,weassumethatthosewitha HELOCandthosewithasecondclosed-endmortgagethatisnomorethan25percentofthesizeoftheother closed-endmortgagehaveajuniorlien.

TheMortgageMarketin2010 59 UnderHMDAreportingrules,allloansoriginatedundertheFHA,VA,FSA,orRHSprogramsmustbeidentifiedassuch.44However,loansplacedinpoolsthatareguaranteedby orsoldtotheGSEsFannieMaeandFreddieMacareidentifiedonlyif theyaresold directlytotheGSEsordirectlyplacedinapoolduringthesameyearof theloanorigination.TheHMDAdatathereforetendtoundercountloansultimatelysoldtotheGSEsfor tworeasons.First,salescantakeplaceinayearsubsequenttoorigination,especially amongloansoriginatedduringthefourthquarter.Second,lendersmaynotsellloans directlytotheGSEsbutinsteadmaysellthemtootherfinancialinstitutionsthatform mortgagepoolsforwhichinvestorssubsequentlyobtainGSEcreditguarantees. Fortheanalysisinthissection,weadjusttheHMDAdatatoattempttocorrectforthe undercountof GSEloans.First,inadditiontoreportingtheirmortgageoriginations, financialinstitutionsarealsorequiredtoreporttheirloanpurchasesandthetypesof purchasersif theloansareresold.Usinginformationonloansize,location,dateof origination,anddateof purchase,wewereabletomatchmorethan50percentof theloansthat wereoriginatedfrom2006to2010andthensoldtootherfinancialinstitutionstothe recordsforthesameloansintheloanpurchasefiles.Fromthosematchedloans,wewere thenabletoobtaintheultimateloandispositionsfromthefilingsof loanpurchases.Of the portionwewereunabletomatch,mostwereoriginated(andpurchased)byonelargeorganization,whichsupplieduswiththeaggregatedispositionof thepurchasedloans.For thosesoldloansthatwewerestillunabletomatch,weassumedthatthedistributionof the ultimatedispositionmatchedthatof similarloansthatwecouldmatch. Second,toaddresstheundercountof GSEloansoriginatedinOctoberthroughDecember of eachyear,weusedanimputationformulabasedontheallocationof loansoriginatedin theprecedingSeptemberandthefollowingJanuarytoassigntheultimatedispositionof conventionalloans.45Theimputationwasconductedseparatelyforthelargestmortgage originatorsandtookaccountof thecharacteristicsof theloan,includingsizeandlocation. Figure4illustratesthechangingstructureof themortgagemarketbetween2006and2010 usingouradjusteddataforthefourmajorloantypesreportedunderHMDA.Itgroups first-liensite-builtmortgagesintofourdistinctcategories:(1)loansinsuredbytheFHA, backedbytheVA,orissuedorguaranteedbytheFSAorRHS(“nonconventional”);(2) conventionalloanssoldtoFannieMaeorFreddieMacorplacedinpoolsguaranteedby them(“GSE”);(3)conventionalloanssoldtoanaffiliateorheldintheportfolioof the originatinglender(“portfolio”);and(4)allotherconventionalloans,includingthosesold intotheprivatesecuritizationmarketortounaffiliatedinstitutions(“other”).Panels4.A, 4.B,and4.Cshowpatternsforowner-occupanthome-purchase,refinance,andhomeimprovementloans;panel4.Dshowspatternsforallnon-owner-occupantloansregardless of purpose.46 OuradjusteddatashowagreaterrolefortheGSEsthanthatimpliedbytherawHMDA data.TherawHMDAdatareportedbylendersshowthat39.6percentof owner-occupant 44 Forthe2010reportingyear,77.5percentofthenonconventionalfirst-lienowner-occupanthome-purchase loanswereFHAloans,15.2percentwereVAguaranteed,and7.3percentwerecoveredundertheFSAorRHS programs.Fornonconventionalrefinanceloans,79.2percentwereFHA,20.3percentVA,and0.4percentFSA orRHS. 45 For2010,onlytheSeptemberdatawereused. 46 Thehome-improvementandnon-owner-occupantloancategoriesaremoreheterogeneousthantheothertwo. Thehome-improvementcategorymayincludesome“cash-out”refinanceloans,whichwouldbetreatedasrefinancingsexceptthatsomeofthefundsareusedforhomeimprovements,aswellassmallernewloansonhomes thatpreviouslyhadnomortgage.Thenon-owner-occupantcategorypresentedhereisheterogeneousbyconstructionsinceitincludesalltypesofloans.Asaconsequenceofthisheterogeneity,thedispositionofliensin thesetwocategoriesislikelymoresensitivetomarketchangesthanthatofliensintherefinanceandhome-purchasecategories.

60 FederalReserveBulletin|December2011 refinanceloansoriginatedin2010 Figure4.Shareoflending,bypurposeofloanand werereportedassolddirectlyto occupancystatusofhomeandbytypeofloan,2006–10 theGSEsorplacedinamortgage Percent poolguaranteedbythem(data A. Home purchase, owner occupied derivedfromtables7and8);our reviseddataimplythatthe“cor- 75 rect”figureislikelytobemuch 60 higher(over55percent). Nonconventional 45 Thedatainfigure4showthatthe subprime-basedprivatesecuritiza- GSE 30 tionmarketdeclinedattheendof Portfolio 2006andthroughout2007,while 15 Other theGSEsgainedmarketshare. Portfolioandnonconventional 2006 2007 2008 2009 2010 Percent marketsharesremainedrelatively B. Refinance, owner occupied constantuntiltheendof 2007. 75 Theyears2008through2010show adifferentdynamic,withnoncon- 60 ventionalhome-purchasemarket Portfolio sharerisingdramaticallyandthen 45 remainingconstantbeforedroppingsomewhatin2010.TheGSEs GSE 30 playamuchmoreprominentrole Other 15 intherefinancemarket;theirshare Nonconventional rosedramaticallyatthebeginning 2006 2007 2008 2009 2010 of 2008,fellthroughAugust,and Percent thenroseagaininto2009and C. Home improvement, owner occupied 2010.Portfolioandotherlending 75 droppedprecipitouslyfrom2007 to2009beforeincreasingsome- Portfolio 60 whatin2010,particularlyinthe refinancemarket. 45 30 Thesechangingpatternsreflectthe GSE actionsof anumberof players. Other 15 Nonconventionallendinghastra- Nonconventional ditionallyfocusedonthehigh- 2006 2007 2008 2009 2010 LTVmarket,offeringinvestors Percent mortgageinsuranceprotection D. All loans, non-owner occupied againstborrowerdefault.PMI 75 companiesalsooffersimilarinsur- GSE 60 anceforhigh-LTVconventional loans,withPMI(orsomeother Portfolio 45 creditenhancement)requiredby statuteforloanswithLTVsabove 30 80percentthataresoldtothe Other Nonconventional GSEs.Lenderscanalsochooseto 15 forgoPMIand(1)holdtheloan directlyor(2)issueajunior-lien 2006 2007 2008 2009 2010 piggybackloanfortheportionof Note:Thedataaremonthly.Loansarefirstliensonone-tofour-family,site-built theloanabove80percentandstill propertiesandexcludebusinessloans.Business-relatedloansarethoseforwhich sellthe80percentloantothe thelenderreportedthattherace,ethnicity,andsexoftheapplicantorco-applicantare“notapplicable.”Fordefinitionsofloantypes,seetext. GSEs.ThechoiceamongPMI,

TheMortgageMarketin2010 61 publicmortgageinsurance,orapiggybackloanislikelytobemadebyborrowers(and lenders)basedontherelativepricingandunderwritingstandardsof thePMIandthenonconventionalloanproducts.Pricesandunderwritingestablishedbypurchasersinthesecondarymarketalsomatter.BothGSEschargefeesforloanstheypurchaseorguarantee, withthefeesvaryingbyLTVandcreditqualityandsubjecttochangeovertime.TheGSE, FHA,andVAprogramsarealsosubjecttostatutorylimitsonloansize,whichcanand havebeenchanged.Finally,thewillingnessof financialinstitutionstoholdmortgagesin portfolioislikelytobesensitivetotheircostof funds,theircapitalposition,andother factors. Manyof theseitemshavechangedoverthepastfiveyearsandlikelyinfluencedlending outcomes,asdescribedinpreviousarticles.Relativetopreviousyears,therewasrelatively littlechangein2010.Themostnotableevent,discussedearlier,wastheexpirationof the first-timehomebuyertaxcreditprogram.Theprogram—which,inanearlierarticle,we estimatedthatone-half of thehome-purchaseloansin2009qualifiedfor—expiredinApril 2010forloansclosingthroughJune2010.Bytargetingfirst-timehomebuyers,theprogram likelystimulateddemandforhigh-LTVhome-purchasemortgages.AnFHAloanmayhave hadparticularappealforsuchborrowersbecausetheFHAallowedthetaxcredittobe usedinadvanceaspartof thedownpayment.Thisfactormaypotentiallyexplainthe declineinnonconventionalmarketshareinthelatterpartof 2010.However,anotherfactor mayalsohavebeeninplay.InApril2010,theFHAraiseditsupfrontunderwritingfee0.5 percentagepoint.47Theshareof nonconventionalloansinthehome-purchasemarket peakedinApril—wellbeforetheendof thefirst-timehomebuyertaxcreditprogram—and fellabout4percentagepoints,remainingatthatlevelthroughtheendof theyear.Notably, theshareof nonconventionalloansintherefinancemarket,whichwasunaffectedbythe taxcreditprogram,peakedinMayanddeclinedabout4percentagepointsthereafter. Inthesectionsthatfollow,wediscussthedifferentialimplicationsthatthesechangesmay havehadforparticulargroupsandthepotentialeffectsthatproposedchangesintheGSE andFHAlimitsmayhaveonthemarketplace. Demographic Patterns Asdiscussedearlier,2008and2009werecharacterizedbytheincreasedrolesof theGSEs andof theFHA,VA,FSA,andRHSprograms.Suchgovernment-relatedlendingcontinuedatroughlythesamelevelsin2010.Thissectionexamineshowgovernment-relatedlendingplayedoutdifferentlyacrossborrowergroups.Wedifferentiateamongborrowersby raceandethnicity,relativeincome(forboththeneighborhoodandtheborrower),location (state),typeof lender,andindicatorsof low-qualitylending. Changesintheshareandnumberof home-purchaseandrefinanceloansfrom2006to2010 fordifferentgroupsareshown(tables14.Aand14.B).Thesedataindicatedifferentpatterns forhome-purchaselendingcomparedwithrefinancelending.Forexample,thesharesof home-purchaseloanstoblackandHispanic-whiteborrowersdecreasedfrom2006to2009, butthedecreaseinthesegroups’sharesof therefinancemarketwasmoresevereandcontinuedin2010.Also,theshareof refinanceloanstoborrowerswithlowormoderate incomes(LMIs)fellsignificantlyfrom2006to2010,whiletheshareof home-purchase loanstosuchborrowersincreasedsignificantly.Mostof thisgrowthtookplacein2008and 2009butwassustainedin2010,whenthefirst-timehomebuyertaxcreditprogramwasstill inplace.Notably,theshareof home-purchaselendingtoLMIborrowersfellsignificantly 47 Feeswereraisedformortgageswithcasenumbersassigned(generallyatthepointofFHAapplication)after April5,2010.MostofthemortgagesclosinginAprilprobablyhadcasenumbersassignedbeforethepricerise.

62 FederalReserveBulletin|December2011 Table14.Distributionacrossvariousdefiningloancharacteristics,bytypeofloan,2006–10 A.Homepurchase Percentexceptasnoted Nonconventional1 GSE2 Other3 Portfolio4 Overall Memo:Total incidence loans Characteristic 2006 Minoritystatusofborrower5 BlackorAfricanAmerican 12.7 5.0 11.6 7.5 8.6 378,832 Hispanicwhite 9.7 7.4 16.8 12.0 12.0 530,196 Asian 1.0 4.7 4.7 4.8 4.4 193,106 Non-Hispanicwhite 67.4 72.4 53.7 63.2 63.2 2,788,537 Otherminorityormissing6 9.3 10.6 13.3 12.5 11.9 524,820 LMIcensustractorborrower7 Censustract 16.6 12.1 18.7 15.7 15.7 694,040 Borrower 39.7 24.9 20.0 23.4 24.3 1,071,650 Other8 52.6 65.6 61.6 60.6 61.6 2,718,443 Missing9 1.0 2.8 6.4 7.0 5.0 221,735 Loancharacteristicoroccupancystatus Highpayment-to-incomeratio10 10.1 11.4 23.5 17.0 16.9 744,714 Non-owneroccupant11 .1 16.4 15.7 19.3 15.8 828,530 Propertylocation12 Sandstates 7.6 15.4 31.6 23.9 22.4 989,164 Ruststates 14.6 17.3 11.6 13.9 14.2 626,722 Other 77.8 67.3 56.8 62.2 63.4 2,799,605 Typeoflender Depository 34.6 45.4 24.6 59.8 42.1 1,857,480 Affiliateofdepository 24.8 38.8 23.5 12.2 24.5 1,083,165 Independentmortgagecompany 40.6 15.8 52.0 28.0 33.4 1,474,846 Memo Shareofloans13 9.4 28.4 31.9 30.2 100.0 ... Numberofloans 415,642 1,255,763 1,410,690 1,333,396 4,415,491 4,415,491 Note:Seegeneralnotetotable10. 1 Seetable4,note1. 2 Seetable8,note2. 3 Otherloansareconventionalloanssoldtonon-government-relatedornon-affiliateinstitutions. 4 Portfolioloansareconventionalloansheldbythelenderorsoldtoanaffiliateinstitution. 5 Categoriesforraceandethnicityreflectrevisedstandardsestablishedin1997bytheOfficeofManagementandBudget.Applicantsare placedunderonlyonecategoryforraceandethnicity,generallyaccordingtotheraceandethnicityofthepersonlistedfirstonthe application.However,underrace,theapplicationisdesignatedasjointifoneapplicantreportedthesingledesignationofwhiteandtheother reportedoneormoreminorityraces.Iftheapplicationisnotjointbutmorethanoneraceisreported,thefollowingdesignationsaremade:If atleasttwominorityracesarereported,theapplicationisdesignatedastwoormoreminorityraces;ifthefirstpersonlistedonan applicationreportstworaces,andoneiswhite,theapplicationiscategorizedundertheminorityrace.Forloanswithtwoormoreapplicants, lenderscoveredundertheHomeMortgageDisclosureActreportdataononlytwo. 6 OtherminorityconsistsofAmericanIndianorAlaskanNative,andNativeHawaiianorotherPacificIslander.“Missing”indicatesthat informationforthecharacteristicwasmissingontheapplication. 7 Low-ormoderate-income(LMI)borrowershavelowerincome,orthepropertyisinalower-incomecensustract.Borrowerincomeisthe totalincomerelieduponbythelenderintheloanunderwriting.Incomeisexpressedrelativetothemedianfamilyincomeofthemetropolitan statisticalarea(MSA)orstatewidenon-MSAinwhichthepropertybeingpurchasedislocated.“Lower”islessthan80percentofthe median.TheincomecategoryofacensustractisthemedianfamilyincomeofthetractrelativetothatoftheMSAorstatewidenon-MSAin whichthetractislocated.“Lower”islessthan80percentofthemedian. 8 Otherconsistsofallnon-lower-andnon-missing-incomeborrowerswhoarenotinalower-incomecensustract. 9 Incomewasnotrelieduponintheunderwritingoftheloan. 10Highpayment-to-incomeratiois30percentormore. 11Loanshareiscalculatedasthepercentageofnon-owner-occupantloanstototalfirst-lienmortgagesforone-tofour-family,site-built properties;excludesbusinessloans. 12“Sandstates”consistofArizona,California,Florida,andNevada;“ruststates”consistofIllinois,Indiana,Michigan,Ohio,andWisconsin; “other”consistsofallotherstates. 13Loanshareiscalculatedforallfirst-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloansin theappropriateyear. ...Notapplicable.

TheMortgageMarketin2010 63 Table14.Distributionacrossvariousdefiningloancharacteristics,bytypeofloan,2006–10—continued A.Homepurchase—continued Percentexceptasnoted Nonconventional1 GSE2 Other3 Portfolio4 Overall Memo:Total incidence loans Characteristic 2007 Minoritystatusofborrower5 BlackorAfricanAmerican 13.5 6.1 7.3 7.2 7.5 260,102 Hispanicwhite 10.0 8.2 9.4 10.8 9.4 324,813 Asian .9 4.6 4.7 5.3 4.4 151,796 Non-Hispanicwhite 65.7 69.9 66.6 64.6 67.2 2,319,963 Otherminorityormissing6 9.9 11.1 12.0 12.0 11.4 393,252 LMIcensustractorborrower7 Censustract 16.5 13.3 13.7 15.4 14.4 496,923 Borrower 34.0 25.4 22.9 23.8 25.6 881,813 Other8 56.8 64.9 64.6 62.7 63.2 2,179,254 Missing9 1.4 2.2 4.5 4.5 3.2 110,259 Loancharacteristicoroccupancystatus Highpayment-to-incomeratio10 9.6 14.4 18.1 16.4 15.0 519,152 Non-owneroccupant11 .1 14.2 13.5 18.2 13.9 557,248 Propertylocation12 Sandstates 10.0 16.1 22.2 22.1 18.1 626,126 Ruststates 13.4 15.8 11.3 13.6 14.1 486,601 Other 76.6 68.2 66.5 64.3 67.7 2,337,199 Typeoflender Depository 42.0 54.9 30.4 73.7 55.3 1,906,245 Affiliateofdepository 20.5 30.0 21.4 10.8 21.5 742,984 Independentmortgagecompany 37.5 15.1 48.2 15.4 23.2 800,697 Memo Shareofloans13 12.2 41.0 15.9 30.9 100.0 ... Numberofloans 421,731 1,415,691 546,954 1,065,550 3,449,926 3,449,926 inthesecondhalf of 2010,afterthehomebuyerprogramexpired(datanotshownin tables). Wealsoshowtrendsintwometricsof loanqualitythatcanbederivedfromtheHMDA data—thepercentageof loanswithestimatedfront-enddebt-payment-to-income(PTI) ratiosexceeding30percent(awarninglevelinunderwriting)andthepercentageof loans fornon-owner-occupiedproperties.48Bothmeasuresfellsignificantlyoverthesample period,althoughmostof thisdeclinehadtakenplacebefore2009.In2010,patternsfor thesemeasuresdivergeastheincidenceof high-PTIlendingdeclinesandthatof nonowner-occupantlendingincreasesforbothhome-purchaseandrefinancelending. Someof thechangesfrom2006to2010mayreflectfactorsspecifictocertaingeographic areasratherthanfactorsspecifictocertaindemographicgroups.Forinstance,adeclinein lendinginCaliforniarelativetotherestof thenationwouldtendtogeneratearelative declineinlendingtoHispanicwhiteborrowersbecauseof theprevalenceof thisgroupin California.Indeed,theshareof loansextendedtoresidentsof thesandstates—Arizona, California,Florida,andNevada—declined,particularlyforrefinancelendingfrom2006to 2009,reboundingsomein2010.Nevertheless,evenaftercontrollingfordifferentialtrends 48 ThemonthlymortgagepaymentusedforthePTIratioisestimatedassumingallmortgagesarefullyamortizing 30-yearfixedmortgages.IftheloanpricingspreadisreportedintheHMDAdata,theloancontractrateis assumedtobethesameastheAPR.Otherwise,itisassumedtobeequaltotheAPORplus20basispointsprevailingattheloan’sestimatedlockdate.

64 FederalReserveBulletin|December2011 Table14.Distributionacrossvariousdefiningloancharacteristics,bytypeofloan,2006–10—continued A.Homepurchase—continued Percentexceptasnoted Nonconventional1 GSE2 Other3 Portfolio4 Overall Memo:Total incidence loans Characteristic 2008 Minoritystatusofborrower5 BlackorAfricanAmerican 10.6 3.4 3.6 4.4 6.3 165,326 Hispanicwhite 11.4 6.7 5.0 7.1 8.4 221,125 Asian 1.7 7.6 5.4 5.0 4.7 124,028 Non-Hispanicwhite 65.7 70.2 76.3 71.7 69.3 1,817,967 Otherminorityormissing6 10.6 12.1 9.6 11.7 11.3 295,369 LMIcensustractorborrower7 Censustract 15.8 11.3 10.6 12.4 13.2 345,114 Borrower 34.8 23.9 27.9 26.1 28.7 752,263 Other8 56.2 68.1 65.1 62.3 62.3 1,634,396 Missing9 1.8 1.3 1.5 5.1 2.2 58,967 Loancharacteristicoroccupancystatus Highpayment-to-incomeratio10 10.0 12.5 14.0 11.3 11.5 300,482 Non-owneroccupant11 .1 17.3 13.7 20.8 12.1 362,514 Propertylocation12 Sandstates 20.3 20.5 17.6 14.7 19.1 500,134 Ruststates 13.2 13.7 12.4 14.7 13.6 357,154 Other 66.5 65.8 70.0 70.6 67.3 1,766,527 Typeoflender Depository 49.0 69.4 38.4 76.6 60.8 1,594,761 Affiliateofdepository 12.2 16.0 9.9 7.1 12.4 324,708 Independentmortgagecompany 38.8 14.6 51.6 16.3 26.8 704,346 Memo Shareofloans13 37.2 35.5 7.8 19.5 100.0 ... Numberofloans 976,496 930,285 204,881 512,152 2,623,815 2,623,815 inlendingacrossmarkets—thatis,removingoverallmarkettrendsfromtheanalysis—the racialandincometrendsdescribedearliermostlyremain(datanotshownintables). Borrowersof differentdemographicgroupsshowedlargedifferencesintheirpropensityto usedifferenttypesof loans,withsignificantchangesfromyeartoyear.Allgroupsshowed substantialincreasesintheiruseof nonconventionalloansfrom2006through2009(data derivedfromtables14.Aand14.B).49BlackandHispanic-whiteborrowers,however,relied particularlyheavilyonthesegovernmentprograms,atrendthatcontinuedin2010.In2010, morethan80percentof home-purchaseloansandmorethan40percentof refinanceloans toblackborrowerswerenonconventional.ForHispanicwhiteborrowersin2010,nearly three-fourthsof theirhome-purchaseloansand25percentof theirrefinanceloanswere nonconventional.In2006,over40percentof home-purchaseandrefinanceloanstoboth blackandHispanic-whiteborrowersweresoldintotheprivatesecuritiesmarketorsoldto anongovernmentpurchaser.By2007,theseshareshaddroppedsignificantly,andtheGSE andportfoliosharesof loansamongthesegroupshadgrown.In2008and2009,theshare of home-purchaseloanstoblackandHispanic-whiteborrowersthatweresoldtotheGSEs fell,whiletheshareof refinanceloanstobothgroupsthatweresoldtotheGSEsrosefrom 2007through2009andremainedflatin2010. 49 Theincidenceofatypeofloanforagroupcanbecalculatedfromthedataintables14.Aand14.Bbymultiplyingthenumberofloansofagiventype(shownasmemoitemsinthelastrowsofthetables)bytheshare attributabletoagroupandthendividingtheresultbytheproductofthetotalnumberofloansandtheoverall incidenceforthegroup.Forexample,theincidenceofnonconventionalrefinancelendingforblacksin2010 was(1,164,102x0.093)/(2,211,409x0.06)=81.6percent.

TheMortgageMarketin2010 65 Table14.Distributionacrossvariousdefiningloancharacteristics,bytypeofloan,2006–10—continued A.Homepurchase—continued Percentexceptasnoted Nonconventional1 GSE2 Other3 Portfolio4 Overall Memo:Total incidence loans Characteristic 2009 Minoritystatusofborrower5 BlackorAfricanAmerican 8.5 1.7 2.1 3.8 5.7 139,223 Hispanicwhite 11.6 4.3 4.8 5.8 8.5 207,398 Asian 2.5 9.8 7.6 6.0 5.2 127,383 Non-Hispanicwhite 66.7 72.7 75.4 73.7 69.8 1,705,278 Otherminorityormissing6 10.6 11.4 10.0 10.7 10.8 264,419 LMIcensustractorborrower7 Censustract 14.8 8.9 9.9 11.8 12.6 307,507 Borrower 44.1 27.1 29.8 30.6 36.9 902,855 Other8 48.6 66.3 63.9 59.0 55.6 1,357,856 Missing9 1.9 1.8 1.6 4.9 2.3 56,110 Loancharacteristicoroccupancystatus Highpayment-to-incomeratio10 7.2 7.2 8.5 6.1 7.1 173,996 Non-owneroccupant11 .1 17.0 15.7 21.4 9.4 252,616 Propertylocation12 Sandstates 22.5 21.3 24.2 13.4 21.0 512,741 Ruststates 12.5 14.8 9.7 15.1 13.3 324,397 Other 65.1 63.9 66.1 71.5 65.7 1,606,563 Typeoflender Depository 47.7 67.9 36.2 80.2 56.8 1,388,372 Affiliateofdepository 11.5 12.8 7.0 7.1 11.0 267,763 Independentmortgagecompany 40.7 19.3 56.8 12.8 32.2 787,566 Memo Shareofloans13 53.9 25.9 6.2 14.1 100.0 ... Numberofloans 1,316,296 632,774 150,303 344,328 2,443,701 2,443,701 Patternsof loan-typeincidenceforLMIborrowersandborrowerslivinginLMIcensus tractsaresimilartothoseforblackandHispanic-whiteborrowersbutaremoremuted. Loanstotheseborrowerswerelesslikelytobesoldonthenongovernmentsecondarymarketin2006,andtheshifttowardnonconventionalloansin2008and2009wasnotaslarge. Theshareof borrowerswithincomemissingfromtheirloanapplicationsfellfrom2006 through2009(morethanone-half of theseloansweresoldintotheprivatesecondarymarketin2006).Theincidenceof missingincomeforrefinanceloansactuallyrosein2008and 2009,likelytheresultof “streamlined”refinanceprograms. In2006and2007,nonconventionalloansaswellasGSEloansweresignificantlylesslikely thanportfolioorprivatesecondary-marketloanstobeclassifiedaslowqualitybyour measures—highPTIornon-owneroccupant.However,by2008,thislowerincidencefor high-PTIloanshadlargelydisappeared. Loansoriginatedinthesandstatesin2006and2007weremuchmorelikelytobesoldinto theprivatesecondarymarketthanloansoriginatedinotherstates.By2008,differencesin thedispositionpatternsbetweenthesandstatesandtherestof thecountryhadlargelydisappearedinthehome-purchasemarket,perhapsinpartbecauseof changesintheFHA andGSEloanlimits.However,intherefinancemarket,loansoriginatedinthesandstates in2008and2009weremorelikelytobepurchasedbytheGSEsandlesslikelytobepartof thenonconventionalloanprogramsthanloansinotherstates.

66 FederalReserveBulletin|December2011 Table14.Distributionacrossvariousdefiningloancharacteristics,bytypeofloan,2006–10—continued A.Homepurchase—continued Percentexceptasnoted Nonconventional1 GSE2 Other3 Portfolio4 Overall Memo:Total incidence loans Characteristic 2010 Minoritystatusofborrower5 BlackorAfricanAmerican 9.3 1.7 2.1 3.9 6.0 133,479 Hispanicwhite 12.3 4.1 4.3 5.8 8.7 192,629 Asian 2.7 10.0 7.6 5.8 5.4 119,582 Non-Hispanicwhite 65.3 72.7 77.0 74.3 69.3 1,532,692 Otherminorityormissing6 10.3 11.5 9.0 10.2 10.5 233,027 LMIcensustractorborrower7 Censustract 14.7 8.5 8.7 11.0 12.1 267,862 Borrower 44.4 25.0 26.5 29.5 36.0 795,853 Other8 49.2 69.0 68.2 61.4 57.4 1,269,444 Missing9 1.2 1.2 .8 4.0 1.6 35,451 Loancharacteristicoroccupancystatus Highpayment-to-incomeratio10 6.3 4.5 4.6 4.1 5.4 118,567 Non-owneroccupant11 .0 19.5 16.7 20.8 10.3 254,770 Propertylocation12 Sandstates 23.0 22.5 21.2 13.1 21.3 471,150 Ruststates 12.1 15.0 10.8 15.5 13.3 293,754 Other 64.9 62.5 68.0 71.3 65.4 1,446,505 Typeoflender Depository 44.9 64.3 33.6 76.2 54.0 1,194,152 Affiliateofdepository 12.1 13.3 6.3 7.8 11.4 251,801 Independentmortgagecompany 43.0 22.4 60.1 16.0 34.6 765,456 Memo Shareofloans13 52.6 26.5 6.1 14.8 100.0 ... Numberofloans 1,164,102 585,550 135,216 326,540 2,211,409 2,211,409 Loan-Size Limits Before2008,theNationalHousingAct,asamendedin1998MortgageeLetter1998-28, requiredthatFHAmortgagelimitsforone-tofour-familyhomesbesetat95percentof themedianhousepriceprevailinginanarea(eithercountyorMSA),subjecttoanoverall nationalminimumandmaximum.50LoanspurchasedbytheGSEswerealsosubjecttoa limit,basedonnationalmedianhouseprices,whichwasfixedat$417,000forsingle-family homesinthecontinentalUnitedStatesfrom2006to2008.TheCongressauthorizedan increaseintheselimitsaspartof theEconomicStimulusAct,passedinFebruary2008;it didsoagainaspartof theHousingandEconomicRecoveryAct(HERA),enactedinJuly 2008;anditdidsooncemoreaspartof theAmericanRecoveryandReinvestmentAct, passedinFebruary2009.51 50 ForcountiesinanMSA,thelimitforthecountywiththehighestmedianhousepriceisusedforallcountiesin theMSA.In2006and2007,thenationalmaximumforFHAsingle-familyhomeloanswas$271,050inmost areasofthecountry.VAloansdonothaveasizelimit,buttheydohaveaguaranteelimit,whichistiedtoGSE loanlimits.FSAloansarealsosubjecttodifferent,andgenerallyhigher,limits.OnlyLMIborrowersinrural areasareeligibleforRHSloans,buttheloansdonothaveanexplicitmaximumsizelimit. 51 NewstandardsreleasedonMarch6,2008,raisedthelimitforGSEone-tofour-familyhomeloansto125percentoftheareamedianhouseprice,subjecttoanoveralllimitof$729,750forsingle-familyhomesinthecontinentalUnitedStates(thelimitcouldalsonotbelowerthan$417,000).FHAlimitswerealsoraisedto125percentofthemedianhousepriceprevailinginanarea,subjecttothesame$729,750nationalmaximumfor single-familyhomesapplicabletotheGSEs.

TheMortgageMarketin2010 67 Table14.Distributionacrossvariousdefiningloancharacteristics,bytypeofloan,2006–10 B.Refinance Percentexceptasnoted Nonconventional1 GSE2 Other3 Portfolio4 Overall Memo:Total incidence loans Characteristic 2006 Minoritystatusofborrower5 BlackorAfricanAmerican 15.4 6.4 11.2 9.4 9.5 421,906 Hispanicwhite 7.9 8.1 12.7 10.1 10.5 465,534 Asian .6 2.8 3.0 3.0 2.9 129,561 Non-Hispanicwhite 65.0 68.8 54.4 63.5 61.7 2,745,229 Otherminorityormissing6 11.2 13.9 18.7 13.9 15.5 690,582 LMIcensustractorborrower7 Censustract 19.9 14.3 20.3 17.9 17.9 796,633 Borrower 29.1 26.0 23.1 25.8 25.0 1,114,002 Other8 41.5 61.6 59.9 59.7 59.8 2,660,680 Missing9 22.4 4.7 5.3 4.6 5.4 238,240 Loancharacteristicoroccupancystatus Highpayment-to-incomeratio10 8.9 16.7 34.9 21.6 24.7 1,099,408 Non-owneroccupant11 .5 10.1 10.5 10.9 10.3 512,617 Propertylocation12 Sandstates 10.6 28.3 38.5 29.9 32.0 1,424,317 Ruststates 22.1 16.6 11.8 14.6 14.3 638,511 Other 67.4 55.0 49.6 55.5 53.7 2,389,984 Typeoflender Depository 30.1 44.4 20.4 60.1 41.6 1,852,818 Affiliateofdepository 21.3 42.4 24.6 17.6 26.2 1,165,423 Independentmortgagecompany 48.6 13.2 55.0 22.3 32.2 1,434,571 Memo Shareofloans13 2.7 24.3 34.9 38.1 100.0 ... Numberofloans 121,388 1,081,771 1,552,086 1,697,567 4,452,812 4,452,812 Note:Seenotestotable14.A. ThenewFHAandGSElimitshaveremainedinplace,withonlymodestvariation,since early2008.However,barringcongressionalaction,nationalsingle-familyhomeloanlimits onbothFHAandGSElendingarescheduledtofallfrom$729,750to$625,500onOctober1,2011.BothFHAandGSEloanlimitsinareasnotsubjecttothenationalcapare scheduledtofallfromthecurrent125percentto115percentof thearea’smedianhouse price,withGSEsingle-familyloansstillsubjecttoabaselimitof $417,000. Analysispresentedinapreviousarticleconcludedthattheincreasedloanlimitsaccounted forlessthan10percentof thegrowthinnonconventionallendingin2008andaneven smallerportionof thegrowthinGSEloanpurchases.52Hereweexaminewhattheeffects of thelimitchangesscheduledforOctober1,2011,arelikelytobe,basedonlendingpatternsobservedin2010. AnalysisreleasedbytheDepartmentof HousingandUrbanDevelopment(HUD)suggests that669countiesandcountyequivalents,predominantlylocatedinhigh-costareasonboth coasts,willfacechangedFHAloanlimitsforone-tofour-familyhomesasof October1, 52 SeeAveryandothers,“The2008HMDAData.”

68 FederalReserveBulletin|December2011 Table14.Distributionacrossvariousdefiningloancharacteristics,bytypeofloan,2006–10—continued B.Refinance—continued Percentexceptasnoted Nonconventional1 GSE2 Other3 Portfolio4 Overall Memo:Total incidence loans Characteristic 2007 Minoritystatusofborrower5 BlackorAfricanAmerican 15.8 6.5 8.3 8.9 8.3 302,575 Hispanicwhite 7.2 8.3 9.7 9.7 9.1 331,243 Asian .6 2.9 3.2 3.4 3.0 110,107 Non-Hispanicwhite 63.8 67.9 60.8 63.5 64.7 2,363,168 Otherminorityormissing6 12.7 14.4 18.0 14.4 14.9 545,126 LMIcensustractorborrower7 Censustract 19.4 14.4 16.3 17.0 16.0 585,951 Borrower 27.0 24.3 20.8 23.8 23.7 864,197 Other8 48.0 64.0 64.9 61.9 62.4 2,278,791 Missing9 16.6 3.7 4.7 4.5 4.9 179,165 Loancharacteristicoroccupancystatus Highpayment-to-incomeratio10 9.7 16.9 27.2 20.7 19.8 724,001 Non-owneroccupant11 .3 10.9 10.8 11.8 10.8 439,923 Propertylocation12 Sandstates 10.0 25.0 32.6 28.5 26.9 982,417 Ruststates 22.1 16.5 11.4 14.6 15.2 555,083 Other 68.0 58.5 55.9 56.9 57.9 2,114,719 Typeoflender Depository 38.6 52.1 23.3 70.2 54.0 1,971,896 Affiliateofdepository 15.9 32.9 28.4 18.0 25.2 918,701 Independentmortgagecompany 45.4 15.0 48.3 11.7 20.9 761,622 Memo Shareofloans13 5.4 37.1 16.7 40.9 100.0 ... Numberofloans 196,178 1,354,690 608,485 1,492,866 3,652,219 3,652,219 2011.53SimilaranalysisbytheFHFAsuggeststhat250countiesandcountyequivalents willfacechangesinGSElimits.54Thesenumbersarenotfullyset,andsomedisagreement remainsastowhatthefinalchangeswillbe.55Nevertheless,weusetheprojectedlimit changesforecastbyHUDandFHFAtoidentifylendingin2010inpotentiallyaffected areas.56 Allof thecountiesfacingchangesinGSElimitsareinhigh-costareaswhere2010GSE andFHAlimitsarethesame.Foraboutone-half of thesecounties,theFHAandGSElimitsareprojectedtobereducedbythesameamount,andfutureborrowersseekingloansin sizerangesaffectedbythelimitswouldnotbeabletouseeithertheFHAorGSEprograms.IntheremainingcountiesfacingGSElimitchanges,theFHAlimitsareprojectedto fallbelowthe$417,000GSEbaselimitforsingle-familyhomes.Inthesecounties,borrow- 53 U.S.DepartmentofHousingandUrbanDevelopment(2011),“PotentialChangestoFHASingle-FamilyLoan LimitsbeginningOctober1,2011fromImplementationoftheHousingandEconomicRecoveryActof2008,” marketanalysisbrief,May26,portal.hud.gov/hudportal/documents/huddoc?id=FHA_Loan_Limits_HERA .pdf. 54 FederalHousingFinanceAgency(2011),“PossibleDeclinesinConformingLoanLimits,”MortgageMarket Note11-01,revisedMay26,www.fhfa.gov/rss.aspx?page=77&id=0. 55 SeeRobertDietzandNataliaSiniavskaia(2011),GSEandFHALoanLimitChangesfor2011:ScopeofImpact, SpecialStudies(Washington:NationalAssociationofHomeBuilders,June1),www.nahb.org/reference_list .aspx?sectionID=734. 56 Asimilaranalysiswasdoneusingthe2009HMDAdata.SeeJosiahMadarandMarkA.Willis(forthcoming), “WhyWeNeedtoPayAttentiontotheUpcomingFHAandGSELoanLimitReductions,”workingpaper (NewYork:FurmanCenterforRealEstateandUrbanPolicy).

TheMortgageMarketin2010 69 Table14.Distributionacrossvariousdefiningloancharacteristics,bytypeofloan,2006–10—continued B.Refinance—continued Percentexceptasnoted Nonconventional1 GSE2 Other3 Portfolio4 Overall Memo:Total incidence loans Characteristic 2008 Minoritystatusofborrower5 BlackorAfricanAmerican 12.9 3.8 3.2 5.7 5.9 173,990 Hispanicwhite 6.6 5.7 4.1 5.6 5.7 166,460 Asian .8 4.0 3.5 2.9 3.1 90,200 Non-Hispanicwhite 66.2 73.0 78.0 74.6 72.6 2,125,675 Otherminorityormissing6 13.6 13.4 11.2 11.2 12.7 371,098 LMIcensustractorborrower7 Censustract 16.4 10.4 9.1 12.5 11.9 349,779 Borrower 24.6 22.5 22.0 26.2 23.9 698,388 Other8 48.2 68.2 71.1 64.3 63.7 1,865,918 Missing9 20.5 3.5 1.7 2.9 6.3 183,152 Loancharacteristicoroccupancystatus Highpayment-to-incomeratio10 10.8 12.5 14.1 11.9 12.2 355,909 Non-owneroccupant11 .3 9.7 8.8 12.4 8.9 285,676 Propertylocation12 Sandstates 9.3 20.2 18.5 15.4 16.8 491,249 Ruststates 18.9 17.4 16.4 17.4 17.6 515,072 Other 71.8 62.4 65.1 67.2 65.6 1,921,102 Typeoflender Depository 42.4 70.9 39.5 79.4 65.7 1,923,557 Affiliateofdepository 12.3 16.9 12.7 12.1 14.4 422,510 Independentmortgagecompany 45.2 12.2 47.9 8.5 19.9 581,356 Memo Shareofloans13 18.0 46.6 7.6 27.7 100.0 ... Numberofloans 526,300 1,365,322 223,593 812,208 2,927,423 2,927,423 erswithloanrequestsbetween$417,000andthecurrentlimitswillnolongerhaveaccessto eithertheFHAorGSEprograms.BorrowerswhowillnolongerbeeligibleforFHAloans withrequestsbelow$417,000inthesecountiesandborrowersincountiesfacingonly declinesintheirFHAlimitswillstillmeetGSEloan-sizestandards.Consequently,inour analysis,wedivide2010loansintoeightgroupsbasedonproposedGSEandFHAlimit changes:loansincountieswithprojectedGSElimitchangeswithloansizes(1)belowboth the2010GSE/FHAandproposed2011FHAlimits,(2)abovethe2011FHAlimitbut belowtheproposed2011GSElimit,(3)belowthe2010GSE/FHAlimitbutabovetheproposed2011GSElimit,or(4)aboveboththe2010andproposed2011GSE/FHAlimits (jumboloans);loansincountieswithprojectedFHAbutnotGSElimitchangeswithloan sizes(5)belowboththe2010andproposedFHA2011limits,(6)belowthe2010FHAlimit butabovetheproposed2011FHAlimit,or(7)aboveboththe2010andproposed2011 FHAlimits;andloans(8)incountieswithnochangesineithertheGSEorFHAloan limits. Totalsforfirst-lienowner-occupantone-tofour-familyhome-purchaseandrefinance2010 lendingbasedonthesegroupingsarepresented(tables15.Aand15.B).Lendingtotalsare shownforthemarketasawholeandforvariousdemographicandotherloancharacteristics.Forcomparisonpurposes,wealsogiveoverallfiguresforjumboloans—thosewith loansizesabovetheGSE(andFHA)loanlimitsfortheirareasin2010. Overall,only1.3percentof the2010home-purchaseloans(and1.3percentof refinance loans)fellintoasizerangethatiscurrentlyeligibleforboththeFHAandGSEprograms

70 FederalReserveBulletin|December2011 Table14.Distributionacrossvariousdefiningloancharacteristics,bytypeofloan,2006–10—continued B.Refinance—continued Percentexceptasnoted Nonconventional1 GSE2 Other3 Portfolio4 Overall Memo:Total incidence loans Characteristic 2009 Minoritystatusofborrower5 BlackorAfricanAmerican 9.9 1.8 1.5 2.9 3.5 184,715 Hispanicwhite 6.7 2.8 2.7 3.7 3.7 194,931 Asian 1.2 5.1 4.5 3.4 4.1 214,526 Non-Hispanicwhite 69.0 77.9 81.4 77.3 76.4 4,036,066 Otherminorityormissing6 13.2 12.4 10.0 12.6 12.3 651,511 LMIcensustractorborrower7 Censustract 12.9 6.1 5.8 8.6 7.8 410,913 Borrower 17.8 19.6 19.2 23.7 19.9 1,049,444 Other8 30.6 72.6 75.5 68.7 64.3 3,396,044 Missing9 48.8 4.2 1.8 2.9 12.2 642,540 Loancharacteristicoroccupancystatus Highpayment-to-incomeratio10 6.5 5.9 7.0 5.2 6.0 318,238 Non-owneroccupant11 .5 5.6 5.3 10.1 5.4 304,291 Propertylocation12 Sandstates 12.0 17.4 17.8 13.2 15.7 831,014 Ruststates 16.3 19.2 15.1 18.1 18.1 956,928 Other 71.7 63.4 67.1 68.7 66.1 3,493,807 Typeoflender Depository 45.0 74.5 48.2 84.6 68.3 3,606,134 Affiliateofdepository 9.4 11.6 5.7 6.3 9.8 516,553 Independentmortgagecompany 45.6 13.9 46.1 9.1 21.9 1,159,062 Memo Shareofloans13 18.9 55.7 8.9 16.5 100.0 ... Numberofloans 996,883 2,943,187 469,542 872,137 5,281,749 5,281,749 butwillnotbeeligibleforeitherprogramundertheproposedlimits(column3).Anadditional2.1percentof 2010home-purchaseloans(and2.4percentof refinanceloans)would potentiallyhavebeenaffectedbytheFHAchangesinmarketswhereGSElimitsare unchanged(column6)orFHAlimitsfallmorethanGSElimits(column2). However,withintheseranges,theproposedchangeslikelywouldhavehadasignificant effect—53.4percentof thehome-purchaseloansand59.6percentof therefinanceloans originatedin2010insizerangesthatwouldhaveexceededtheproposed2011GSEsizelimitsweresoldtotheGSEs.ForFHAloans,theeffectissomewhatsmallerbutstillsignificant—43.7percentof thehome-purchaseloanswithsizeseligibleunder2010limitsbut ineligibleunder2011limitsincountieswithnoGSEchangeswereFHAorVAloans.For refinanceloans,only15.2percentof loansmeetingthesecriteriawereFHAorVAloans. BorrowersaffectedbyFHAlimitchangesbutwithloansizesundertheGSElimitswould appeartobelikelytohavetheGSEsasaviableoptionif thechangesareimplemented (althoughlendingstandardsforFHAloansdifferfromthoseforloanseligibleforpurchase bytheGSEsinwaysotherthanjustloansize).In2010,35.0percentof home-purchase borrowersand58.8percentof refinanceborrowersfallingintoasizerangeaffectedbythe proposedFHAchangesinareaswhereGSElimitsareunchangedhadtheirloanssoldto theGSEs. Itismoredifficulttoknowwhatoptionswillbeavailableforborrowersnolongereligible undereithertheGSEorFHAprograms.Ontheonehand,theoverallshareof national

TheMortgageMarketin2010 71 Table14.Distributionacrossvariousdefiningloancharacteristics,bytypeofloan,2006–10—continued B.Refinance—continued Percentexceptasnoted Nonconventional1 GSE2 Other3 Portfolio4 Overall Memo:Total incidence loans Characteristic 2010 Minoritystatusofborrower5 BlackorAfricanAmerican 8.3 1.8 1.3 2.5 2.9 129,539 Hispanicwhite 6.5 3.0 2.5 3.5 3.5 159,529 Asian 1.7 6.3 6.3 4.1 5.1 231,709 Non-Hispanicwhite 72.0 76.2 80.1 77.1 76.1 3,427,377 Otherminorityormissing6 11.6 12.7 9.8 12.8 12.3 555,817 LMIcensustractorborrower7 Censustract 11.5 6.1 5.5 7.7 7.2 323,864 Borrower 18.5 19.1 16.9 20.5 19.1 861,326 Other8 38.9 76.0 78.6 64.1 68.3 3,074,326 Missing9 39.3 1.1 .9 11.5 8.9 400,435 Loancharacteristicoroccupancystatus Highpayment-to-incomeratio10 3.9 3.9 3.5 4.2 3.9 175,837 Non-owneroccupant11 1.1 7.3 6.5 9.3 6.8 329,180 Propertylocation12 Sandstates 14.7 19.3 19.3 16.3 18.0 809,714 Ruststates 14.1 19.5 14.0 20.2 18.4 830,582 Other 71.2 61.2 66.6 63.5 63.6 2,863,675 Typeoflender Depository 45.9 71.5 39.0 86.1 68.3 3,077,907 Affiliateofdepository 8.3 12.0 5.0 5.6 9.5 428,287 Independentmortgagecompany 45.8 16.5 56.1 8.3 22.2 997,777 Memo Shareofloans13 14.5 55.7 8.1 21.7 100.0 ... Numberofloans 652,922 2,510,493 365,277 975,279 4,503,971 4,503,971 lendingforloansthatwouldbeaffectedbychangesintheGSElimitwasconsiderably higherin2010thanin2008and2009(bottomof tables15.Aand15.B).However,itis aboutthesameasthesharein2006and2007,beforethelimitswereraised.Thesefigures suggestthatfactorsotherthanGSE(andFHA)loanlimitsaffectedtherelativeamountof lendingtakingplacewithinthesebands. Ontheotherhand,if theloansaffectedbytheGSE(andFHA)changeshadbeenforced intothejumbomarketin2010,thismovewouldhaveresultedina50percentincreasein thesizeof thenationalhome-purchasejumbomarketanda63percentincreaseinthatof thenationalrefinancejumbomarket.57Holdingsuchloansontheportfoliosof originating institutionswouldhavemeantanincreaseof over20percentinportfolioedloansforinstitutionsservingthe250countieswherelimitswerechanged.Thesenumbersaresubstantial 57 Theeffectsofthelimitchanges(andthedisappearanceoftheprivatesecondarysecuritiesmarket)areevident inthesubstantialdeclineofthejumboshareofthemortgagemarketfrom2007to2008.Onthesurface,it wouldappearthatnoneofthejumbomarketloanswouldhavebeeneligiblefortheFHA/VAprogramsorfor purchasebytheGSEs.Yetin2010,almostone-fourthofthehome-purchaseloans,and16percentofthe refinanceloans,exceedingthemaximumGSE/FHAloanlimitswerereportedintheHMDAdataasnonconventionalorsoldtotheGSEs.Oneexplanationforthisresultisthattheloansmaybefortwo-tofour-family homes,whichhavehigherlimits.SomeareVAloans,whicharenotstrictlysubjecttothelimitsbutonlytoa limitationontheinsuranceguarantee(about35percentofjumbononconventionalloanswereVAloans,apercentagesignificantlyhigherthantheoverallshareofVAnonconventionalloans).Somemaysimplybereportingerrorsorhaveloansizesverynearthelimitssuchthatroundingerrorsmayhaveledtotheirmisclassification.ThisissuemaybeofparticularconcernforFHAloans—almostone-halfofall2010FHAloansreported asexceedingtheFHAloanlimithadloansizeswithin$10,000ofthelimit.

72 FederalReserveBulletin|December2011 Table15.Distributionacrossvariousdefiningloancharacteristics,bytypeofloanandbyloansizein relationtogovernment-sponsoredenterpriseorFederalHousingAdministrationloanlimits,2010 A.Homepurchase Percent CountieswithGSE/FHAlimitchange OnlyFHAlimitchange Memo Characteristic L th e a s n s On l l i y m F it HA G F S H E A l a im nd it Gr th e a a n ter L th e a s n s FHAlimit Gr th e a a n ter U m na a f r fe k c e t t e 1 d 2010 2010 status overall jumbo lim a i l t l s1 ch s a t n at g u e s d1 ch s a ta n t g u e s d1 lim a i l t l s1 bo lim th it F s H 1 A changed1 a li l m lF it H s A 1 incidence loans Minoritystatusofborrower2 BlackorAfricanAmerican 6.3 2.4 1.6 1.4 6.6 2.9 2.4 6.1 6.0 3.4 Hispanicwhite 13.2 7.3 3.1 3.1 8.4 3.5 2.2 6.6 8.7 4.2 Asian 11.4 8.2 16.3 9.3 3.2 5.1 4.8 2.1 5.4 5.5 Non-Hispanicwhite 55.5 68.2 59.7 64.6 72.3 76.2 77.5 77.1 69.3 71.4 Otherminorityormissing3 13.6 13.9 19.3 21.6 9.5 12.3 13.0 8.1 10.5 15.6 LMIcensustractorborrower4 Censustract 18.2 2.9 3.9 2.8 13.0 3.2 2.9 8.5 12.1 1.9 Borrower 34.3 .2 .1 .1 46.2 1.2 .3 35.8 36.0 1.9 Other5 56.6 96.1 95.0 95.3 48.6 94.6 95.7 58.0 57.4 68.7 Missing6 .9 .8 1.1 1.7 .9 1.1 1.2 2.8 1.6 27.5 Loancharacteristic,typeofloan,oroccupancystatus Highpayment-to-income ratio7 10.3 6.1 9.9 7.9 3.9 4.9 3.4 2.6 5.4 5.9 Nonconventional8 50.2 31.9 21.0 14.0 60.2 43.7 15.1 53.9 52.6 18.7 GSE9 31.8 42.9 53.4 1.8 23.1 35.0 41.8 23.1 26.5 5.8 Other10 7.0 13.0 8.9 3.1 5.6 8.5 9.9 5.4 6.1 3.4 Portfolio11 11.0 12.2 16.7 81.2 11.0 12.9 33.1 17.7 14.8 72.2 Non-owneroccupant12 10.5 14.2 5.2 13.3 10.9 7.9 10.2 9.9 10.3 12.9 Propertylocation13 Sandstates 40.9 39.4 53.7 40.0 23.7 28.0 15.7 2.4 21.3 20.0 Ruststates .0 .0 .0 .0 23.5 17.7 22.9 15.5 13.3 8.4 Other 59.0 60.6 46.3 60.0 52.8 54.3 61.4 82.1 65.4 71.6 Typeoflender Depository 48.6 50.9 58.5 76.4 49.3 51.0 61.6 60.8 54.0 66.4 Affiliateofdepository 9.6 8.3 11.2 13.0 11.4 11.5 14.4 12.5 11.4 9.4 Independentmortgage company 41.8 40.8 30.3 10.6 39.3 37.5 23.9 26.7 34.6 24.2 Memo14 2010shareofloans 27.8 .7 1.3 1.0 29.1 1.4 2.5 36.2 100.0 2.6 2009shareofloans 27.4 .7 .8 .8 29.8 1.3 2.1 37.1 100.0 3.1 2008shareofloans 25.3 1.0 .9 1.2 28.5 1.7 3.0 38.5 100.0 3.7 2007shareofloans 23.3 1.1 1.0 2.3 28.6 1.9 3.5 38.3 100.0 8.9 2006shareofloans 24.7 1.2 1.2 2.3 36.4 1.5 2.4 30.2 100.0 10.1 Note:Seegeneralnotetotable10. 1 “Lessthanalllimits”indicatesloansmadewithloansizelessthantheoldandnewlyproposedloan-sizelimitforboth government-sponsoredenterprise(GSE)andFederalHousingAdministration(FHA)loans.“OnlyFHAlimitstatuschanged”indicatesloans madewithloansizebetweentheoldandnewlyproposedFHAloanlimitsbutunaffectedbytheGSElimitchanges.“FHAandGSElimitstatus changed”indicatesloansmadewithloansizebetweenboththeoldandnewlyproposedGSEandFHAloanlimits.“Greaterthanalllimits” indicatesloansmadewithaloansizegreaterthanboththeoldandnewlyproposedloan-sizelimitsforGSEandFHAloans.“Lessthanboth FHAlimits”indicatesloansmadewithloansizelessthantheoldandnewlyproposedloan-sizelimitforFHAloans.“FHAlimitstatus changed”indicatesloansmadewithloansizebetweentheoldandnewlyproposedFHAloanlimits.“GreaterthanallFHAlimits”indicates loansmadewithaloansizegreaterthanboththeoldandnewlyproposedloan-sizelimitsforFHAloans.“Unaffectedmarket”indicatesloans madeincountiesthathadnochangeintheGSEorFHAlimits. 2 Seetable14.A,note5. 3 Seetable14.A,note6. 4 Seetable14.A,note7. 5 Seetable14.A,note8. 6 Seetable14.A,note9. 7 Seetable14.A,note10. 8 Seetable4,note1. 9 Seetable8,note2. 10Seetable14.A,note3. 11Seetable14.A,note4. 12Seetable14.A,note11. 13Seetable14.A,note12. 14Seetable14.A,note13.

TheMortgageMarketin2010 73 Table15.Distributionacrossvariousdefiningloancharacteristics,bytypeofloanandbyloansizein relationtogovernment-sponsoredenterpriseorFederalHousingAdministrationloanlimits,2010 B.Refinance Percent CountieswithGSE/FHAlimitchange OnlyFHAlimitchange Memo Characteristic Lessthan On l l i y m F it HA G F S H E A l a im nd it Greater L th e a s n s FHAlimit Gr th e a a n ter U m na a f r fe k c e t t e 1 d 2010 2010 alllimits1 ch s a ta n t g u e s d1 ch s a ta n t g u e s d1 all t l h im an its1 bo lim th it F s H 1 A ch s a t n at g u e s d1 a li l m lF it H s A 1 in o c v id e e ra n l c l e j l u o m an b s o Minoritystatusofborrower2 BlackorAfricanAmerican 3.0 1.3 .8 .9 2.8 1.5 1.4 3.3 2.9 1.3 Hispanicwhite 5.1 4.0 2.0 1.8 3.0 1.9 1.4 2.8 3.5 1.9 Asian 10.3 6.0 15.4 7.1 2.9 5.1 4.0 1.6 5.1 4.9 Non-Hispanicwhite 65.1 72.9 62.6 69.3 80.4 79.2 81.6 83.4 76.1 77.1 Otherminorityormissing3 16.5 15.7 19.2 20.9 10.9 12.2 11.7 8.9 12.3 14.9 LMIcensustractorborrower4 Censustract 9.2 2.4 2.3 1.9 7.6 3.0 2.3 5.9 7.2 1.7 Borrower 18.7 1.3 .2 .2 23.3 2.2 .9 20.1 19.1 1.5 Other5 68.1 89.2 93.5 94.5 63.3 86.3 92.5 67.4 68.3 74.9 Missing6 8.4 7.4 4.2 3.5 9.9 8.9 4.4 9.2 8.9 22.0 Loancharacteristic,typeofloan,oroccupancystatus Highpayment-to-income ratio7 6.2 6.7 8.2 8.6 2.7 5.5 4.9 2.2 3.9 6.9 Nonconventional8 11.3 11.1 10.0 6.4 16.2 15.2 5.2 17.4 14.5 8.8 GSE9 59.9 61.0 59.6 1.9 56.2 58.8 54.0 52.4 55.7 8.7 Other10 9.2 11.6 12.3 2.4 6.9 9.0 10.1 7.7 8.1 4.0 Portfolio11 19.5 16.2 18.2 89.2 20.7 17.0 30.7 22.4 21.7 78.6 Non-owneroccupant12 7.2 9.3 3.8 9.7 6.2 4.9 7.0 7.1 6.8 9.6 Propertylocation13 Sandstates 37.8 31.6 63.0 42.6 11.5 19.3 11.6 1.6 18.0 20.9 Ruststates .0 .0 .0 .0 33.9 30.0 29.5 23.2 18.4 13.4 Other 62.2 68.3 37.0 57.4 54.6 50.8 58.9 75.1 63.6 65.8 Typeoflender Depository 64.9 62.7 56.8 78.0 68.9 61.6 65.7 72.1 68.3 76.4 Affiliateofdepository 8.3 8.2 10.8 14.6 9.8 10.1 12.8 9.9 9.5 11.5 Independentmortgage company 26.7 29.1 32.5 7.4 21.3 28.2 21.5 18.0 22.2 12.1 Memo14 2010shareofloans 31.9 .7 1.3 .9 28.3 1.7 2.9 32.3 100.0 2.1 2009shareofloans 30.7 .7 .6 .5 28.3 1.8 3.1 34.2 100.0 2.0 2008shareofloans 27.8 .8 .6 1.0 28.7 1.8 3.2 36.1 100.0 2.8 2007shareofloans 31.7 1.2 1.2 2.3 28.5 1.7 3.2 30.1 100.0 9.3 2006shareofloans 28.5 1.3 2.0 3.3 28.8 1.7 2.9 31.5 100.0 10.5 Note:Seenotestotable15.A. andsuggestthatatleastsomeof theseloanswouldnothavebeenoriginatedorwouldhave beenoriginatedonlyathigherprices. Examinationof thedemographicdatashowsthatborrowerswithloansizeseligibleunder 2010limitsbutineligibleunder2011limitsforbothGSEandFHAlimitchangesweredisproportionatelyAsian,livedoutsideLMIcensustracts,hadnon-LMIincomes,andused independentmortgagebanks,relativetotheaverageborrower.Morethanone-half of such borrowerslivedinthesandstates,andnonelivedinthe“ruststates”of Illinois,Indiana, Michigan,Ohio,andWisconsin(becausenoneof theaffectedcountieslieintherust states).SuchborrowerswerealsomorelikelythanaveragetohaveaPTIratioexceeding 30percent.

74 FederalReserveBulletin|December2011 BorrowersfacingonlyFHAlimitchangessimilarlywerelesslikelythanaveragetolivein LMIcensustractsorhaveLMIincomes,butunlikethoseaffectedbytheGSElimits,such borrowersshowgeographicandracialdistributionssimilartothenationalaverages. Credit Circumstances in Neighborhood Stabilization Program Neighborhoods Concernsaboutneighborhoodsexperiencinghighlevelsof housingmarketdistresshave beenaparticularfocusof publicpolicyinrecentyears.Thisfocushasbeenmotivatedby thebelief thatelevatedlevelsof foreclosureandpropertyabandonmentcanadverselyaffect notonlythosedirectlyinvolvedintheforeclosures,butalsoothersinthesurrounding neighborhood.58Suchnegativeexternalitiesorspillovereffectsmayariseasforeclosedand oftenvacantpropertiesattractvandalismandcrime,andtheseunitsmaybepoorlymaintained,castingapallovertheneighboringpropertiesandadverselyaffectingtheirmarketvalues.59Intheextreme,thesespillovereffectscanhelpcreateaself-reinforcingdownwardspiralthatcandevastatethequalityof lifeinanarea. Toaddresstheforeclosureproblem,aspartof the2008HERA,theCongressestablished andfundedtheNeighborhoodStabilizationProgram.60TheNSPprovidesemergency assistancetostateandlocalgovernmentsseekingtosupportneighborhoodsexperiencing highlevelsof propertyabandonmentandforeclosure.Tohelpensurethatfundsareappropriatelytargeted,themoniesaredirectedtohouseholdsorindividualswithincomesless than120percentof thebroaderareamedianincome. Tobolstercongressionalefforts,inDecember2010,thefederalbankandsavingsinstitution regulatoryagenciesrevisedtheregulationsthatimplementtheCommunityReinvestment Act(CRA)tosupportthestabilizationof communitieshardhitbyelevatedforeclosures.61 Inparticular,therevisedregulationsencouragecoveredinstitutionstosupporttheNSP. UndertheCRArules,lendersareencouragedtomakeloansandinvestmentsandprovide servicestosupportNSPactivitiestoindividualsandneighborhoodsbeyondthetraditional focusof theCRA(specifically,individualsandneighborhoodsclassifiedaslowerincome). AllowingbankinginstitutionstoreceiveCRAconsiderationforactivitiesinNSP-targeted 58 SeePaulA.Joice(2011),“NeighborhoodStabilizationProgram,”U.S.DepartmentofHousingandUrban Development,Cityscape:AJournalofPolicyDevelopmentandResearch,vol.13(1),pp.135–41. 59 See,forexample,Kai-yanLee(2008),“ResearchReview:SpilloverEffectsofForeclosuresonCommunities,” FederalReserveBankofBoston,NewEnglandCommunityDevelopments,issue2,pp.10–12,www .bostonfed.org/commdev/necd/index.htm#2008.Estimatesofspillovereffectsonsurroundingpropertiesare alsoinCenterforResponsibleLending(2009),“SoaringSpillover:AcceleratingForeclosurestoCostNeighbors$502Billionin2009Alone;69.5MillionHomesLose$7,200onAverage,”May,www.responsiblelending .org/mortgage-lending/research-analysis/soaring-spillover-accelerating-foreclosures-to-cost-neighbor s-436-billion-in-2009-alone-73-4-million-homes-lose-5-900-on-average.html. 60 TheNSPisadministeredbyHUD.Fundsaredistributedtoacquire,repair,andresellforeclosedandabandonedproperties.Sincethecreationoftheprogram,additionalfundinghasbeenprovidedintwosubsequent laws:theAmericanRecoveryandReinvestmentActof2009andtheDodd–FrankWallStreetReformand ConsumerProtectionActof2010.Althougheachofthethreelawshasthesamebroadobjective,theprovisionsofthelawsdifferinhowthefundsmaybeallocated.FormoreinformationabouttheNSP,seeU.S. DepartmentofHousingandUrbanDevelopment,“NeighborhoodStabilizationProgramResourceExchange,” webpage,http://hudnsphelp.info/index.cfm. 61 Formoreinformation,seeBoardofGovernorsoftheFederalReserveSystem,FederalDepositInsuranceCorporation,OfficeoftheComptrolleroftheCurrency,andOfficeofThriftSupervision(2010),“Agencies ExpandScopeofCommunityReinvestmentActRegulationstoEncourageSupportforHUDNeighborhood StabilizationProgramActivities,”jointpressrelease,December15,www.federalreserve.gov/newsevents/press/ bcreg/20101215a.htm.FordetailsontheproposedrevisiontotheCRA,seeBoardofGovernorsoftheFederal ReserveSystem,FederalDepositInsuranceCorporation,OfficeoftheComptrolleroftheCurrency,andOffice ofThriftSupervision(2010),“AgenciesProposetoExpandScopeofCommunityReinvestmentActRegulationstoEncourageDepositoryInstitutionSupportforHUDNeighborhoodStabilizationProgramActivities,” jointpressrelease,June17,www.federalreserve.gov/newsevents/press/bcreg/20100617c.htm.

TheMortgageMarketin2010 75 neighborhoodsprovidesadditionalincentivesfortheseinstitutionstoleveragegovernment fundstargetedtotheseareasandpopulations. UndertheNSPprogram,fundsmaybeusedindifferentways,includingforthepurchase orrehabilitationof abandonedorforeclosedproperties,thedemolitionof blighted structures,andtheredevelopmentof demolishedorvacantproperties.NSPfundscanalso beusedtohelphomebuyerspurchaseproperties.TheNSPisanationwideprogram,but participationrequirementsmaydifferacrossstatesandcities. Indecidingwhichneighborhoodstotarget,HUDreliesonastatisticalmodelthatestimates whichneighborhoodsarelikelytobeexperiencinghighratesof foreclosureandmortgage delinquencies.Basedontheoutputsof thismodel,eachcensustractisgivenanNSPscore rangingfrom1to20.Scoresarescaledsothateachscorepointisgivento5percentof the censustracts.CensustractswithNSPscoresinthetopquintile(“high-NSPtracts”),those withscoresof 17to20,areeligibleforaid.“Lower-NSPtracts,”thosewithscoresbelow 17,arenotgenerallyeligibleforaidunlesstheyareinstatesthathaveveryfewtractswith NSPscoresabove17,inwhichcasethestateispermittedtousealower-thresholdNSP scoreforidentifyingareaseligibleforNSPfunds. Anevaluationof theeffectivenessof theNSPprogramisbeyondthescopeof thisarticle. Someof theinterventions,likethechangestotheCRA,aretoonewtoevaluate,andothers requiremoredatathanHMDAprovides.However,theHMDAdatacanbeusedtoassess mortgageactivityacrossallareasscoredfortheNSPprogram.BecausetheNSPprogram hasbeeninexistenceforafewyears,itispossiblethatrecentloanflowsmayhavebeen affectedbytheprogramtosomedegree.Nevertheless,thisanalysiscanhighlightsomeof thepotentialchallengesinvolvedinaidingthesecommunities. Substantialdifferencesbetweenhigh-NSPtractsandlower-NSPtractsexistedlongbefore therecentdifficultiesinmortgageandhousingmarketsemerged.Inthe2000census,high- NSPtractswerecharacterizedbyhigherminorityconcentrationsandlowerrelative-income levelsthanlower-NSPtracts(table16).Similarly,lendingactivityinthesetractsbeforethe subprimecrisiswasnotablydifferent.Using2005asareferencepoint,lendinginthehigh- NSPtractswascharacterizedbyelevatedratesof loandenial;largerincidencesof higherpricedloans,piggybackloans,andnon-owner-occupantlending;andsmallersharesof lendingbylenderssubjecttotheCRA.Newhomebuyersinareaswithhigh-NSPtracts alsotendedtohavelowercreditscoresthanbuyersinotherareas. Since2005,lendingactivityinhigh-NSPtractshasfallenfasterthaninlower-NSPtracts. In2005,morehome-purchaseloanswereextendedinhigh-NSPtractsthanintractsinany of theotherNSPscorequintiles.Since2005,declinesinhome-purchaselendingvolumes havebeenparticularlysteepinhigh-NSPneighborhoods.In2010,home-purchaselending inhigh-NSPtractswasdown75percentfrom2005levels.Thisdeclinewasmuchmore rapidthanthatexperiencedintheotherNSPquintiles.Asaresult,in2010,fewerloans wereoriginatedinthehigh-NSPtractsthaninanyof theotherNSPquintiles,areversalof thepatternobservedin2005. Onepotentialreasonforthesteeperdeclineinhome-purchaselendinginthehigh-NSP neighborhoodsisofferedbytheroleof thesandstates.Housepricedeclineshavebeenparticularlysteepinthesestates,andpreviousHMDAanalyseshaveshownthatmortgage lendinghasfallenmoresteeplyinthesestatessincetheheightof thehousingboom. Becausethehigh-NSPtractsaremorelikelytobelocatedinthesandstatesthanlower- NSPtracts—in2005,thesandstatesaccountedfor71percentof loanstohigh-NSPneighborhoods,asharedoublethatof anyof theotherNSPquintiles—wewouldexpectthe more-rapidlendingdeclinesexperiencedbythesandstatestoresultinafasterdeclinein

76 FederalReserveBulletin|December2011 Table16.Borrower,loan,andcensus-tractcharacteristicsrelatedtolendinginareasgroupedby NeighborhoodStabilizationProgramscore,2005and2010 Percent NSPscore1 Characteristic 1–4 5–8 9–12 13–16 17–20 All 2005 Borrower Incomeratio(percentofareamedian)2 Lower 14.8 21.7 25.4 27.1 19.5 21.4 Middle 20.9 24.8 25.4 23.9 21.8 23.2 High 60.2 49.3 44.8 44.2 52.3 50.4 Minority3 18.8 17.1 21.3 29.8 45.5 27.1 Memo:Meancreditscore4 728.0 708.0 697.0 688.0 675.0 701.0 Loanorapplicationcharacteristicoroccupancystatus Higherpriced5 8.9 15.6 20.9 26.9 36.0 22.0 Non-owneroccupant6 13.7 14.2 15.9 18.3 24.5 17.6 Nonconventional7 5.7 8.6 8.9 8.0 4.6 7.0 Denialrate 10.4 12.9 15.2 17.8 21.4 15.9 Piggyback8 12.4 15.3 16.9 19.5 25.1 18.1 Censustractofproperty9 Minoritiesasapercentofpopulation10 24.0 18.1 23.8 36.3 55.9 31.6 Incomeratio(percentofareamedian)11 127.6 111.4 101.2 93.3 83.2 103.3 CRAassessmentarea12 34.7 29.3 27.1 25.6 21.7 27.5 Sandstates13 7.6 8.7 14.1 29.4 70.7 27.7 Memo:Totalloans 1,167,022 1,157,129 1,093,234 1,025,695 1,358,619 5,801,699 Note:First-lienhome-purchasemortgagesforone-tofour-family,site-builtproperties. 1 TheNeighborhoodStabilizationProgram(NSP)scoreisbasedontheNSP3scorecreatedbytheDepartmentofHousingandUrban Development.TheNSPscoreclassifiescensustractsinto5percent“buckets”onarangeof1to20,with1beingthebesttractsand20 beingtheworstintermsofavarietyoffactors,suchasforeclosurerates.NSPscoresdetermineeligibilityforNSPfunding;censustracts withthehighestscoresareconsideredthetractswiththegreatestneedforsupport.Seetextforfurtherdetails. 2 Borrowerincomeisthetotalincomerelieduponbythelenderintheloanunderwriting.Incomeisexpressedrelativetothemedianfamily incomeofthemetropolitanstatisticalarea(MSA)orstatewidenon-MSAinwhichthepropertybeingpurchasedislocated.“Lower”isless than80percentofthemedian;“middle”is80percentto119percent;and“high”is120percentormore. 3 Seetable14.A,note5.Minorityborrowersareborrowersotherthannon-Hispanicwhites. 4 Creditscoresareforthoseindividualswhomovedintothecensustractin2005or2010,asappropriate,andtookoutafirstmortgageduring thatyear.NotethatbecauseofdifferencesbetweenreportingrequirementsundertheHomeMortgageDisclosureAct(HMDA)andthe informationprovidedtotheconsumercreditreportingagencies,thecreditscorespresentedmaydiffersomefromthoseoftheborrowers includedintheHMDAdata.CreditscoredatafromtheFederalReserveBankofNewYorkConsumerCreditPanel/Equifax. 5 Seetable9,note3. 6 Includesloansforwhichoccupancystatuswasmissing. 7 Seetable4,note1. 8 Inpiggybacklending,borrowerssimultaneouslyreceiveafirst-lienloanandajunior-lien(piggyback)loantopurchaseahomefromthesame lender. 9 Census-tractdataforminorityandincomecharacteristicsarederivedfromtract-weightedmeansbasedonpopulation.Minorityandincome dataarebasedonthe2000censusandarecalculatedfortractsthatoriginatedatleastoneloanintheappropriateyear. 10Seetable14.A,note5.Thoseotherthannon-Hispanicwhitesareconsideredminorities.Thischaracteristicreflectstheaverageminority populationofthecensustractsintheNSPscoregroup. 11TheincomecategoryofacensustractisthemedianfamilyincomeofthetractrelativetothatoftheMSAorstatewidenon-MSAinwhich thetractislocatedasderivedfromthe2000census.“Lower”islessthan80percentofthemedian;“middle”is80percentto119percent; and“high”is120percentormore. 12TheloanwasmadeinaneighborhoodthatisinaCommunityReinvestmentAct(CRA)assessmentareaofthelender. 13SandstatesconsistofArizona,California,Florida,andNevada. Source:DepartmentofHousingandUrbanDevelopment;FederalFinancialInstitutionsExaminationCouncil,datareportedundertheHome MortgageDisclosureAct.

TheMortgageMarketin2010 77 Table16.Borrower,loan,andcensus-tractcharacteristicsrelatedtolendinginareasgroupedby NeighborhoodStabilizationProgramscore,2005and2010—continued Percent NSPscore1 Characteristic 1–4 5–8 9–12 13–16 17–20 All 2010 Borrower Incomeratio(percentofareamedian)2 Lower 19.7 29.3 35.7 41.6 46.0 32.8 Middle 22.9 25.6 25.4 24.0 23.4 24.3 High 55.3 43.1 36.8 32.3 29.0 41.0 Minority3 17.9 15.5 18.8 26.8 42.4 22.9 Memo:Meancreditscore4 754.0 738.0 729.0 720.0 710.0 734.0 Loanorapplicationcharacteristicoroccupancystatus Higherpriced5 1.5 2.1 2.8 3.1 3.0 2.4 Non-owneroccupant6 9.6 10.3 11.4 12.4 14.5 11.4 Nonconventional7 32.4 44.7 50.7 55.6 63.0 47.4 Denialrate 11.0 12.9 15.0 17.4 20.9 15.0 Piggyback8 .6 .4 .3 .3 .2 .4 Censustractofproperty9 Minoritiesasapercentofpopulation10 23.8 17.9 23.7 35.9 55.0 31.1 Incomeratio(percentofareamedian)11 128.0 111.6 101.4 93.7 84.2 103.8 CRAassessmentarea12 39.1 31.0 29.3 30.0 33.6 33.0 Sandstates13 7.6 8.3 13.4 29.7 71.6 22.7 Memo:Totalloans 615,001 550,180 466,428 392,822 384,384 2,408,815 lendingtohigh-NSPtracts.However,theHMDAdatarevealthatlendingvolumesinhigh- NSPtractslocatedoutsideof thesandstatesactuallyfellslightlymore(73percent)thanin thesandstates(71percent).Thisresultsuggeststhatthedeclinesinlendingvolumesthat areobservedforthehigh-NSPtractsdonotsimplyreflectgeographicdifferences.62 Asecondpossiblereasonforthesteeperdeclinesinhome-purchaselendinginthehigh- NSPneighborhoodsistheroleof thenon-owner-occupantlendingintheseneighborhoods. Again,using2005asthebaseyear,theshareof home-purchaselendingbackedbynonowner-occupiedpropertiesinhigh-NSPtracts(25percent)was6percentagepointshigher thaninanyof thelower-NSPquintiles.Sincenon-owner-occupantlendinghasfallenmore rapidlythanlendingforowner-occupiedpropertiesacrosstheboard(asnotedearlier),this findingcanhelpexplainsomeof themore-rapiddeclineinthelendingactivityinhigh-NSP neighborhoods.Non-owner-occupantlendingfell83percentinthehigh-NSPtracts between2005and2010—adeclinethatwashigherthanthatobservedforoverallhomepurchaselendinginthehigh-NSPtractsorinthelower-NSPquintilesoverthesame period.Nevertheless,whentheanalysisislimitedtoowner-occupantlending,home-purchaselendinghasstillfallensubstantiallyinhigh-NSPtracts(68percent)andataratethat iswellabovethedeclinesinlower-NSPtracts. Thisoutcomesuggeststhatthesteeperdeclineinlendinginhigh-NSPneighborhoods appearstobebroadlybased,inthatithasnotbeenlimitedtonon-owner-occupantlending orlendinginspecificstatesorMSAs.Instead,thesteeperdeclineappearstoreflecta changingpatternof home-purchaseactivitybyhigher-incomeborrowers.Loanstolower- 62 Thisfindingdifferswiththeconclusionsofananalysisoflendinginhigh-foreclosureneighborhoodsconductedinapreviousarticle(seeAveryandothers,“The2009HMDAData”).Thatanalysissuggestedthatthe more-rapiddeclinesinlendingactivityinhigh-foreclosureneighborhoods,comparedwithotherneighborhoods,largelyreflectedgeographicdifferences.

78 FederalReserveBulletin|December2011 incomeborrowersdeclinedlesssteeplybetween2005and2010inhigh-NSPtracts(31percent)thaninlower-NSPtracts(36percent).Thispatternisreversedforlendingtohigherincomeborrowers.Inhigh-NSPtracts,loanstohigher-incomeborrowerswere84percent lowerthantheyhadbeenin2005.Whilelower-NSPtractsalsoexperiencedsharpcontractions,thedeclineshavebeenlesssevere.Thepercentagedeclineinthehigh-NSPtractswas 13percentagepointsabovethefourthNSPquintileand35percentagepointshigherthan thedeclinesinthefirstquintile.Thepatternsforloanstomiddle-incomeborrowershave alsocontractedmoresharplyinhigh-NSPtracts,thoughthesizesof thedifferenceshave notbeenaslarge. Thischangingincomepatternof homebuyerssuggestsachallengethateffortsliketheNSP confrontinattemptingtostabilizeneighborhoods.Notonlyhashome-purchaselending declinedmorerapidlyinthehighlydistressedneighborhoodsidentified,butalsothecompositionof theborrowerstakingoutloanshasshiftednotablytowardthosewithlower incomes.Whiletheshareof loansgoingtohigher-incomeborrowersinthelower-NSP quintilesdeclinedfrom50percentin2005to43percentin2010,inhigh-NSPtractsthe declinewasmuchsteeper,fallingfrom52percentin2005to29percentin2010.Thisoutcomesuggeststhatmuchof thedeclineinlendinginthehighlydistressedtractsreflects reducedinflowsfromhigher-incomeborrowers.Thelowerincomelevelsof newborrowers inthehigh-NSPtractsmayinhibitthestabilizationof thesecommunities. Differences in Lending Outcomes by Race, Ethnicity, and Sex of the Borrower OnereasontheCongressamendedHMDAin1989wastoenhanceitsvalueforfairlending enforcementbyaddingtotheitemsreportedthedispositionof applicationsforloansand therace,ethnicity,andsexof applicants.Asimilarmotivationunderlaythedecisiontoadd pricingdataforhigher-pricedloansin2004.Overtheyears,analysesof HMDAdatahave consistentlyfoundsubstantialdifferencesintheincidenceof higher-pricedlendingandin applicationdenialratesacrossracialandethniclines,differencesthatcannotbefully explainedbyfactorsincludedintheHMDAdata.63AnalysesalsohavefoundthatdifferencesacrossgroupsinmeanAPRspreadspaidbythosewithhigher-pricedloansweregenerallysmall.64Hereweexaminethe2010HMDAdatatodeterminetheextenttowhich thesedifferencespersist. Theanalysisherepresentsaggregatedlendingoutcomesacrossallreportinginstitutions. Patternsforanygivenfinancialinstitutionmaydifferfromthoseshown,andforanygiven financialinstitution,relationshipsmayvarybyloanproduct,geographicmarket,andloan purpose.Further,althoughtheHMDAdataincludesomedetailedinformationabouteach mortgagetransaction,manykeyfactorsthatareconsideredbylendersincreditunderwritingandpricingarenotincluded.Accordingly,itisnotpossibletodeterminefromHMDA dataalonewhetherracialandethnicpricingdisparitiesreflectillegaldiscrimination.However,analysisusingtheHMDAdatacanaccountforsomefactorsthatarelikelyrelatedto thelendingprocess.Giventhatlendersofferawidevarietyof loanproductsforwhichbasic 63 SeeAvery,Brevoort,andCanner,“The2006HMDAData”;Avery,Brevoort,andCanner,“Higher-Priced HomeLendingandthe2005HMDAData”;andAvery,Canner,andCook,“NewInformationReportedunder HMDA.” 64 See,forexample,AndrewHaughwout,ChristopherMayer,andJosephTracy(2009),SubprimeMortgagePricing:TheImpactofRace,Ethnicity,andGenderontheCostofBorrowing,StaffReport368(NewYork:Federal ReserveBankofNewYork,April);andMarshaJ.Courchane(2007),“ThePricingofHomeMortgageLoans toMinorityBorrowers:HowMuchoftheAPRDifferentialCanWeExplain?”JournalofRealEstate Research,vol.29(4),pp.399–439.

TheMortgageMarketin2010 79 termsandunderwritingcriteriacandiffersubstantially,theanalysisherecanonlybe viewedassuggestive. Comparisonsof averageoutcomes(bothloanpricinganddenials)foreachracial,ethnic, orsexgrouparemadebothbeforeandafteraccountingfordifferencesintheborrower-relatedfactorscontainedintheHMDAdata(income;loanamount;locationof theproperty, orMSA;andpresenceof aco-applicant)andfordifferencesinborrower-relatedfactors plusthespecificlendinginstitutionusedbytheborrower.65Comparisonsforlendingoutcomesacrossgroupsareof threetypes:gross(or“unmodified”),modifiedtoaccountfor borrower-relatedfactors(or“borrowermodified”),andmodifiedtoaccountforborrowerrelatedfactorspluslender(or“lendermodified”).66Theanalysisheredistinguishesbetween conventionalandnonconventionallending,reflectingthedifferentunderwritingstandards andfeesassociatedwiththesetwobroadloanproductcategories.67 Incidence of Higher-Priced Lending by Race, Ethnicity, and Sex Asnotedearlier,2010isthefirstHMDAreportingyearforwhichallof theloanssubject tohigher-pricedloanreportingusedthenewFreddieMacPMMSthreshold(thePMMS thresholdwasalsousedforthelastthreemonthsof 2009).BeforeOctober1,2009,aTreasury-basedthresholdwasused.Thechangeinthresholdmakesitproblematictocompare thereportedincidenceof higher-pricedlendingin2010withtheincidencereportedforpreviousyears.Nevertheless,inpreviousarticles,wehaveemployedamethodologythat adjustedtheTreasury-basedspreadtoaspreadoverthe30-yearfixed-ratemortgageAPOR reportedinthePMMS.Foralmostallof theperiodfrom2006to2009,thismethodology gaveagoodapproximationof theincidenceof loanswithAPORspreadsmorethan 1.75percentagepointsabovethePMMS(25basispointshigherthanthecutoff forhigherpricedreportingin2010).Calculationsusingthe“adjustedspread”showedthattheestimatedincidenceof loansmorethan1.75percentagepointsabovethePMMSissignificantlyreducedfrom2006to2008forallracialandethnicgroups,andthatdifferences acrossgroupsareconsiderablysmallersince2008thanintheyearsprior.68Datareported forthelastthreemonthsof 2009usingthenewthresholdshowedonlymodestdifferences acrossgroups. Theoverallreportedincidenceof higher-pricedlendingisslightlyhigherin2010thanfor thelastthreemonthsof 2009.Grouppatternsaresimilar.The2010HMDAdataindicate thatblackandHispanic-whiteborrowersaremorelikely,andAsianborrowerslesslikely,to obtainconventionalloanswithpricesabovetheHMDAprice-reportingthresholdsthan arenon-Hispanicwhiteborrowers(table17.A).Theserelationshipsholdbothforhome-purchaseandrefinancelendingandfornonconventionalloans(table17.B).Forexample,for conventionalhome-purchaselendingin2010,theincidenceof higher-pricedlendingwas 6.0percentforblackborrowers,7.1percentforHispanicwhiteborrowers,and1.0percent forAsians,comparedwith3.3percentfornon-Hispanicwhiteborrowers. Thegrossdifferencesintheincidenceof higher-pricedlendingbetweennon-Hispanic whitesandblacksorHispanicwhitesin2010aresignificantlyreduced,butnotcompletely 65 Excludedfromtheanalysisareapplicantsresidingoutsidethe50statesandtheDistrictofColumbiaaswellas applicationsdeemedtobebusinessrelated.Applicantgenderiscontrolledforintheracialandethnicanalyses, andraceandethnicityarecontrolledforintheanalysesofgenderdifferences. 66 Forpurposesofpresentation,theborrower-andlender-modifiedoutcomesshowninthetablesarenormalized sothat,forthebasecomparisongroup(non-Hispanicwhitesinthecaseofcomparisonbyraceandethnicity andmalesinthecaseofcomparisonbysex),themeanateachmodificationlevelisthesameasthegrossmean. 67 Althoughresultsherearereportedfornonconventionallendingasawhole,theanalysiscontrolsforthespecific typeofgovernment-backedloanprogram(FHA,VA,orFSA/RHS)usedbytheborrowerorloanapplicant. 68 SeeAveryandothers,“The2008HMDAData.”

80 FederalReserveBulletin|December2011 Table17.Incidenceofhigher-pricedlending,unmodifiedandmodifiedforborrower-andlender-related factors,bytypeandpurposeoftheloanandbyrace,ethnicity,andsexofborrower,2010 A.Conventionalloan Percentexceptasnoted Modifiedincidence,by Modifiedincidence,by modificationfactor modificationfactor Numberof Unmodified Numberof Unmodified loans incidence Borrower- loans incidence Borrower- Race,ethnicity,andsex Borrower- Borrowerrelated related related related pluslender pluslender Homepurchase Refinance Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative 3,066 6.62 5.43 3.82 8,915 2.93 1.84 1.65 Asian 87,321 1.02 2.87 3.39 219,886 0.22 0.97 1.31 BlackorAfricanAmerican 21,982 6.00 5.44 3.98 74,144 3.96 2.88 1.92 NativeHawaiianorotherPacific Islander 2,357 2.04 3.37 3.57 7,428 0.85 1.61 1.35 Twoormoreminorityraces 364 1.92 2.98 3.07 1,378 0.73 1.44 1.25 Joint 14,776 2.37 3.41 3.43 56,000 0.80 1.51 1.53 Missing 88,728 1.04 1.77 3.38 403,288 0.59 0.83 1.34 White,byethnicity1 Hispanicwhite 41,665 7.08 5.00 3.81 110,378 2.30 1.73 1.61 Non-Hispanicwhite 731,874 3.34 3.34 3.34 2,919,913 1.33 1.33 1.33 Sex Onemale 271,589 3.35 3.35 3.35 731,931 1.46 1.46 1.46 Onefemale 196,692 2.94 2.79 3.12 576,115 1.73 1.37 1.40 Twomales2 10,960 7.23 7.23 7.23 26,429 1.59 1.59 1.59 Twofemales2 8,256 4.17 5.32 6.67 25,460 1.70 1.40 1.47 Note:First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans.Business-relatedloansare thoseforwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantorco-applicantare“notapplicable.”Fordefinitionof higher-pricedlendingandexplanationofmodificationfactors,seetextandtable9,note3.Loanstakenoutjointlybyamaleandfemalearenot tabulatedherebecausetheywouldnotbedirectlycomparablewithloanstakenoutbyoneborrowerorbytwoborrowersofthesamesex. 1 Seetable14.A,note5. 2 DatareflectupdatestotheHomeMortgageDisclosureAct(HMDA)filesreceivedbytheFederalFinancialInstitutionsExaminationCouncil sincethepublicreleaseofthefilesinSeptember2011.Theupdateddataareprimarilycorrectionsofgenderidentificationofapplicants previouslysubmittedbyonelargelender.Allotherdatainthetablesandfigurespresentedinthisarticleareunchangedandreflectthe HMDAfilesasoriginallyreleasedtothepublicinSeptember2011. n.a.Notavailable. eliminated,aftercontrollingforlenderandborrowercharacteristics.Forexample,thegross 2010differenceintheincidenceof higher-pricedconventionallendingforhome-purchase loansbetweenHispanicwhitesandnon-Hispanicwhitesof 3.7percentfallstoonlyabout 0.5percentagepointwhentheotherfactorsavailablewithintheHMDAdataareaccounted for.Forbothconventionalandnonconventionallending,theblack-versus-non-Hispanicwhitedisparityisreducedtoabout0.6percentagepointforbothhome-purchaseandrefinanceloans.Thesedisparitiesaresignificantlylowerthanthehigher-pricedincidence disparitiesobservedfrom2004to2007usingboththeoldTreasury-basedthresholdand ourPMMS-basedadjustedspread. Withregardtothesexof applicants,wereportdifferencesbetweenonemaleandone femaleandbetweentwomalesandtwofemales.Here,nonotabledifferencesareevidentfor eitherconventionalornonconventionallending. Rate Spreads by Race, Ethnicity, and Sex The2010dataindicatethatamongborrowerswithhigher-pricedloans,thegrossAPOR spreadsaresimilaracrossgroupsforbothhome-purchaseandrefinancelending.This

TheMortgageMarketin2010 81 Table17.Incidenceofhigher-pricedlending,unmodifiedandmodifiedforborrower-andlender-related factors,bytypeandpurposeoftheloanandbyrace,ethnicity,andsexofborrower,2010 B.Nonconventionalloan Percentexceptasnoted Modifiedincidence,by Modifiedincidence,by modificationfactor modificationfactor Numberof Unmodified Numberof Unmodified loans incidence Borrower- loans incidence Borrower- Race,ethnicity,andsex Borrower- Borrowerrelated related related related pluslender pluslender Homepurchase Refinance Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative 7,047 1.35 1.34 1.08 2,636 4.74 3.58 2.09 Asian 31,550 0.76 0.81 0.88 10,898 3.14 3.26 3.13 BlackorAfricanAmerican 106,782 2.39 1.91 1.56 53,487 9.88 5.48 4.20 NativeHawaiianorotherPacific Islander 5,133 1.05 1.25 1.15 2,400 4.25 3.51 3.40 Twoormoreminorityraces 750 0.67 1.73 1.62 349 1.72 2.79 2.93 Joint 16,561 0.62 1.18 0.91 11,048 1.96 3.35 3.49 Missing 88,344 1.37 1.06 1.03 57,523 2.50 2.63 2.27 White,byethnicity1 Hispanicwhite 134,178 2.18 1.24 1.21 36,241 5.77 3.16 2.90 Non-Hispanicwhite 742,748 1.01 1.01 1.01 458,231 4.62 4.62 4.62 Sex Onemale 393,079 1.42 1.42 1.42 177,634 4.12 4.12 4.12 Onefemale 275,264 1.81 1.32 1.34 118,046 9.28 5.50 5.05 Twomales2 17,524 1.39 1.39 1.39 5,706 1.63 1.63 1.63 Twofemales2 13,442 1.55 1.39 1.59 4,983 3.65 3.48 2.55 Note:Seenotestotable17.A. resultholdsforbothconventional(table18.A)andnonconventionallending(table18.B). Forexample,forconventionalhome-purchaseloans,thegrossmeanAPORspreadwas 2.74percentagepointsforblackborrowersand2.66percentagepointsforHispanicwhite borrowers,whileitwas2.48percentagepointsfornon-Hispanicwhiteborrowersand 2.45percentagepointsforAsianborrowers.Accountingforborrower-relatedfactorsorthe specificlenderusedbytheborrowersreducesthesedifferences. Denial Rates by Race, Ethnicity, and Sex Analysesof theHMDAdatainpreviousyearshaveconsistentlyfoundthatdenialrates varyacrossapplicantsgroupedbyraceorethnicity.Thisisalsothecasein2010.In2010,as inpastyears,blacksandHispanicwhiteshadnotablyhighergrossdenialratesthannon- Hispanicwhites,whilethedifferencesbetweenAsiansandnon-Hispanicwhitesgenerallywerefairlysmallbycomparison(tables19.Aand19.B).Forexample,in2010,thedenial ratesforconventionalhome-purchaseloanswere30.9percentforblacks,22.9percentfor Hispanicwhites,14.4percentforAsians,and12.3percentfornon-Hispanicwhites.The patternwasaboutthesamefornonconventionalhome-purchaselending,althoughthegap ingrossdenialratesbetweenblacksorHispanicwhitesandnon-Hispanicwhiteswas smallerthanforconventionalhome-purchaseloans;thegapbetweenAsiansandnon-Hispanicwhiteswashigher. Forbothconventionalandnonconventionallending,controllingforborrower-relatedfactorsintheHMDAdatagenerallyreducesthedifferencesamongracialandethnicgroups. Accountingforthespecificlenderusedbytheapplicantreducesdifferencesfurther,

82 FederalReserveBulletin|December2011 Table18.Meanaverageprimeofferratespreads,unmodifiedandmodifiedforborrower-and lender-relatedfactors,forhigher-pricedloansonone-tofour-familyhomes,bytypeandpurposeofthe loanandbyrace,ethnicity,andsexofborrower,2010 A.Conventionalloan Percentexceptasnoted Modifiedmeanspread, Modifiedmeanspread, bymodificationfactor bymodificationfactor Numberof Unmodified Numberof Unmodified higher-priced mean higher-priced mean Race,ethnicity,andsex loans1 spread Borrower- Borrower- loans1 spread Borrower- Borrowerrelated related related related pluslender pluslender Homepurchase Refinance Raceotherthanwhiteonly2 AmericanIndianorAlaskaNative 203 2.81 2.67 2.64 261 2.99 3.18 2.71 Asian 888 2.45 2.53 2.43 474 2.34 2.67 2.55 BlackorAfricanAmerican 1,318 2.74 2.91 2.64 2,934 3.31 3.25 2.70 NativeHawaiianorotherPacific Islander 48 2.54 2.57 2.56 63 2.68 3.03 2.63 Twoormoreminorityraces 7 2.52 2.66 2.36 10 2.75 2.38 2.67 Joint 350 2.70 2.76 2.49 448 2.68 2.60 2.65 Missing 919 2.28 2.27 2.54 2,394 2.68 3.26 2.59 White,byethnicity2 Hispanicwhite 2,949 2.66 2.52 2.53 2,537 3.00 2.74 2.66 Non-Hispanicwhite 24,458 2.48 2.48 2.48 38,698 2.63 2.63 2.63 Sex Onemale 9,095 2.54 2.54 2.54 10,677 2.72 2.72 2.72 Onefemale 5,773 2.48 2.48 2.51 9,946 2.80 2.73 2.72 Twomales3 792 2.56 2.56 2.56 419 2.75 2.75 2.75 Twofemales3 344 2.55 2.48 2.98 434 2.91 2.52 2.95 Note:Fordefinitionofhigher-pricedlendingandexplanationofmodificationfactors,seetext.Loanstakenoutjointlybyamaleandfemaleare nottabulatedherebecausetheywouldnotbedirectlycomparablewithloanstakenoutbyoneborrowerorbytwoborrowersofthesamesex. Fordefinitionofaverageprimeofferratespread,seetable11,note1. 1 Seetable9,note3. 2 Seetable14.A,note5. 3 DatareflectupdatestotheHomeMortgageDisclosureAct(HMDA)filesreceivedbytheFederalFinancialInstitutionsExaminationCouncil sincethepublicreleaseofthefilesinSeptember2011.Theupdateddataareprimarilycorrectionsofgenderidentificationofapplicants previouslysubmittedbyonelargelender.Allotherdatainthetablesandfigurespresentedinthisarticleareunchangedandreflectthe HMDAfilesasoriginallyreleasedtothepublicinSeptember2011. n.a.Notavailable. althoughunexplaineddifferencesremainbetweennon-Hispanicwhitesandotherracialand ethnicgroups. Conventionallendingdenialratedisparitiesbetweengroups,bothgrossandcontrollingfor otherfactors,havenarrowedsomewhatinthepastseveralyears.Forexample,theconventionalhome-purchasedenialratedisparitybetweenblacksandnon-Hispanicwhites,controllingforallfactors,narrowedfrom10.8percentagepointsin2008to9.2percentage pointsin2010.Thisnarrowingappearstostemmorefromchangesinthecompositionof theapplicantpoolovertimethanfromchangesinthewaylendersactonspecificapplications.Forexample,thegrossoveralldenialrateforconventionalhome-purchaseloansused intheanalysisof thissectionfellabout0.3percentagepointfrom2009to2010(datanot shownintables).Yetif theanalysisisrestrictedtoacomparisonof applicantsof thesame race,gender,income,location,andloanrequest,applyingtothesamelender,thedenialrate roseabout0.2percentagepoint.Asimilaranalysisusing2008and2009datashowsthata grossdeclineinthedenialrateof about2.9percentagepointsbetweenthetwoyearsdrops toalmostzerowhencontrollingforborrowercharacteristicsandlender.Ananalysisof refinanceloansshowssimilarpatterns,althoughthedifferencesbetweengrossdenialrate

TheMortgageMarketin2010 83 Table18.Meanaverageprimeofferratespreads,unmodifiedandmodifiedforborrower-and lender-relatedfactors,forhigher-pricedloansonone-tofour-familyhomes,bytypeandpurposeofthe loanandbyrace,ethnicity,andsexofborrower,2010 B.Nonconventionalloan Percentexceptasnoted Modifiedmeanspread, Modifiedmeanspread, bymodificationfactor bymodificationfactor Numberof Unmodified Numberof Unmodified higher-priced mean higher-priced mean Race,ethnicity,andsex loans1 spread Borrower- Borrower- loans1 spread Borrower- Borrowerrelated related related related pluslender pluslender Homepurchase Refinance Raceotherthanwhiteonly2 AmericanIndianorAlaska Native 95 1.84 1.81 1.78 125 2.20 2.12 2.12 Asian 239 1.83 1.81 1.83 342 2.10 2.12 2.15 BlackorAfricanAmerican 2,556 1.83 1.85 1.89 5,286 2.39 2.31 2.26 NativeHawaiianorotherPacific Islander 54 1.99 1.78 1.89 102 2.09 2.07 2.09 Twoormoreminorityraces 5 1.62 1.79 1.95 6 2.10 2.01 2.09 Joint 103 1.93 1.96 1.66 217 2.08 2.15 2.20 Missing 1,213 1.83 1.84 1.80 1,437 2.03 2.22 2.07 White,byethnicity2 Hispanicwhite 2,929 1.77 1.79 1.84 2,091 2.26 2.17 2.16 Non-Hispanicwhite 7,510 1.86 1.86 1.86 21,178 2.17 2.17 2.17 Sex Onemale 5,600 1.82 1.82 1.82 7,322 2.21 2.21 2.21 Onefemale 4,984 1.83 1.82 1.81 10,955 2.29 2.22 2.22 Twomales3 243 1.77 1.77 1.77 93 2.03 2.03 2.03 Twofemales3 208 1.77 1.73 1.74 182 2.03 2.24 2.03 Note:Seenotestotable18.A. changesandchangescontrollingforborrowercharacteristicsandlenderaremoremuted. Patternsfornonconventionallendingaresimilarbutalsomoremuted. Some Limitations of the Data in Assessing Fair Lending Compliance Bothpreviousresearchandexperiencegainedinthefairlendingenforcementprocessshow thatunexplaineddifferencesintheincidenceof higher-pricedlendingandindenialrates amongracialorethnicgroupsstem,atleastinpart,fromcredit-relatedfactorsnotavailable intheHMDAdata,suchasmeasuresof credithistory(includingcreditscores)andLTV anddifferencesinchoiceof loanproducts.Differentialcostsof loanoriginationandthe competitiveenvironmentalsomaybearonthedifferencesinpricing,asmaydifferences acrosspopulationsincredit-shoppingactivities. Despitetheselimitations,theHMDAdataplayanimportantroleinfairlendingenforcement.Thedataareregularlyusedbybankexaminerstofacilitatethefairlendingexaminationandenforcementprocesses.Whenexaminersforthefederalbankingagenciesevaluate aninstitution’sfairlendingrisk,theyanalyzeHMDApricedataandloanapplication outcomesinconjunctionwithotherinformationandriskfactorsthatcanbedrawndirectly fromloanfilesorelectronicrecordsmaintainedbylenders,asdirectedbytheInteragency

84 FederalReserveBulletin|December2011 Table19.Denialratesonapplications,unmodifiedandmodifiedforborrower-andlender-related factors,bytypeandpurposeoftheloanandbyrace,ethnicity,andsexofapplicant,2010 A.Conventionalloanapplication Percentexceptasnoted Modifieddenialrate,by Modifieddenialrate,by Numberof modificationfactor Numberof modificationfactor applications Unmodified applications Unmodified actedupon denialrate Borrower- actedupon denialrate Borrower- Race,ethnicity,andsex bylender Borrower- relatedplus bylender Borrower- relatedplus related related lender lender Homepurchase Refinance Raceotherthanwhiteonly1 AmericanIndianorAlaska Native 4,874 30.9 25.1 17.4 15,873 38.0 36.0 27.7 Asian 112,928 14.4 15.0 14.3 291,887 18.5 21.7 21.8 BlackorAfricanAmerican 34,916 30.9 24.8 21.5 141,550 41.3 35.6 31.1 NativeHawaiianorotherPacific Islander 3,279 20.8 17.3 15.5 11,972 31.7 31.4 25.8 Twoormoreminorityraces 541 26.6 23.4 14.1 2,271 32.1 35.1 29.0 Joint 18,241 12.5 15.1 13.1 72,901 17.5 22.3 20.6 Missing 121,297 18.8 18.6 15.5 619,516 28.3 27.5 23.3 White,byethnicity1 Hispanicwhite 59,719 22.9 17.3 16.5 178,990 31.9 27.0 25.0 Non-Hispanicwhite 894,301 12.3 12.3 12.3 3,844,364 19.0 19.0 19.0 Sex Onemale 352,879 16.5 16.5 16.5 1,073,760 25.6 25.6 25.6 Onefemale 251,817 15.9 14.7 15.2 827,460 24.8 23.5 23.8 Twomales2 14,497 18.1 18.1 18.1 68,883 58.4 58.4 58.4 Twofemales2 10,901 18.3 16.6 15.9 40,212 32.0 32.8 36.1 Note:First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans.Business-relatedloansare thoseforwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantorco-applicantare“notapplicable.”Forexplanationof modificationfactors,seetext.Applicationsmadejointlybyamaleandfemalearenottabulatedherebecausetheywouldnotbedirectly comparablewithapplicationsmadebyoneapplicantorbytwoapplicantsofthesamesex. 1 Seetable14.A,note5. 2 DatareflectupdatestotheHomeMortgageDisclosureAct(HMDA)filesreceivedbytheFederalFinancialInstitutionsExaminationCouncil sincethepublicreleaseofthefilesinSeptember2011.Theupdateddataareprimarilycorrectionsofgenderidentificationofapplicants previouslysubmittedbyonelargelender.Allotherdatainthetablesandfigurespresentedinthisarticleareunchangedandreflectthe HMDAfilesasoriginallyreleasedtothepublicinSeptember2011. n.a.Notavailable. FairLendingExaminationProcedures.69Theavailabilityof broaderinformationallowsthe examinerstodrawfirmconclusionsaboutinstitutioncompliancewiththefairlendinglaws. ItisimportanttokeepinmindthattheHMDAdata,ascurrentlyconstituted,canbeused onlytodetectdifferencesinpricingacrossgroupsforloanswithAPRsabovethereporting threshold;pricingdifferencesmayexistamongloansbelowthethreshold.Thisgapinthe loanpricinginformationwillbeaddressedincomingyearsastheCFPBimplementsthe expandeddatareportingrequirementssetforthintheDodd–FrankWallStreetReformand ConsumerProtectionActof 2010(Dodd–FrankAct),includingtheprovisionrequiring thereportingof ratespreadinformationforallloans(seethenextsection). 69 TheInteragencyFairLendingExaminationProceduresareavailableatwww.ffiec.gov/PDF/fairlend.pdf.

TheMortgageMarketin2010 85 Table19.Denialratesonapplications,unmodifiedandmodifiedforborrower-andlender-related factors,bytypeandpurposeoftheloanandbyrace,ethnicity,andsexofapplicant,2010 B.Nonconventionalloanapplication Percentexceptasnoted Modifieddenialrate,by Modifieddenialrate,by Numberof modificationfactor Numberof modificationfactor applications Unmodified applications Unmodified actedupon denialrate Borrower- actedupon denialrate Borrower- Race,ethnicity,andsex bylender Borrower- relatedplus bylender Borrower- relatedplus related related lender lender Homepurchase Refinance Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative 9,187 18.1 18.2 16.6 4,900 39.1 41.6 35.7 Asian 41,472 18.4 17.4 16.2 18,754 34.1 35.6 33.0 BlackorAfricanAmerican 145,752 22.0 20.1 19.3 105,774 42.2 41.6 37.8 NativeHawaiianorotherPacific Islander 6,697 18.2 16.8 15.4 3,939 32.0 39.1 35.7 Twoormoreminorityraces 1,002 20.4 16.4 13.9 796 48.0 50.7 42.8 Joint 19,901 12.6 14.1 13.3 16,577 26.5 31.8 31.3 Missing 118,582 20.4 20.9 18.3 130,599 48.3 43.9 33.6 White,byethnicity1 Hispanicwhite 179,737 19.9 16.4 16.3 62,190 33.2 35.2 34.7 Non-Hispanicwhite 892,067 12.7 12.7 12.7 715,795 29.5 29.5 29.5 Sex Onemale 496,319 16.4 16.4 16.4 306,236 35.0 35.0 35.0 Onefemale 346,589 16.3 15.2 15.5 203,795 35.4 33.1 33.5 Twomales2 23,455 20.5 20.5 20.5 9,291 31.2 31.2 31.2 Twofemales2 1,777 19.2 17.4 16.3 8,465 33.9 30.9 29.7 Note:Seenotestotable19.A. Future Changes in HMDA TheDodd–FrankActincludesmanyprovisionsthatchangethelandscapeof thefinancial servicesindustrygenerallyandthatof themortgagemarketinparticular.Twoprovisionsin theDodd–FrankActbeardirectlyontheHMDAdata.First,titleXof theDodd–Frank Actshiftstheresponsibilityforwritingrulestoimplementahostof consumerprotectionstatutes,includingHMDA,tothenewCFPB.WithrespecttoHMDA,theCFPBhas authoritytoprescriberulesregarding(1)thenatureandscopeof thedatatobecollected andreported,(2)themethodof submittingdata,(3)theformatandcontentof disclosures, and(4)requiredmodificationstotheHMDAdatapriortopublicdisclosurebytheFFIEC andthereportingentitiestohelpprotecttheprivacyof individuals. Second,theDodd–FrankActamendedHMDA,requiringcoveredinstitutionstocollect andreportseveralnewdataitems.Thenewdataitemsrangewidelyandincludeinformationaboutloanterms,thepropertyandoriginatorinvolvedinthetransaction,andtheborrower,aswellasauniqueloanidentificationnumber. The New Data Items Thefollowingenumeratesthenewdataitemsthatmustbereportedandthosethatwere mentionedintheDodd–FrankActbutforwhichdiscretionwaslefttotheCFPBtodecide whethertoincludethemintherequiredreporting.Thenewitemsfallintoseveralcategories;theitemsthatmaybeincludedatthediscretionof theCFPBarenoted. ‰ Loanterms — Totalpointsandfees

86 FederalReserveBulletin|December2011 — APORratespreadforallloans,measuredagainstabenchmarkratetobedetermined bytheCFPB(nowrequiredonlyforhigher-pricedloans) — Duration(andexistence)of prepaymentpenalty — Indicatorof whethermortgagehasanadjustablerate — Lengthof introductoryinterestrateperiodforadjustable-ratemortgages — Presenceof negativeamortizationfeature — Termtomaturity ‰ Propertyinformation — Propertyvalue — Parcelidentificationnumber,attheoptionof theCFPB ‰ Originatorinformation — Originationchannel(suchasretailloanofficerorbroker) — Originatoridentificationnumber(assetforthintheSecureandFairEnforcementfor MortgageLicensingAct,orSAFEAct),attheoptionof theCFPB70 ‰ Borrowerinformation — Creditscore,inaformdeterminedbytheCFPB — Age ‰ Universalloanidentificationnumber,attheoptionof theCFPB Fourof theseitemsarecurrentlybeingcollectedbyinstitutionscoveredbyHMDAbutare notreportedordisclosedtothepublic.Theseitemsarerequiredinputsintothe“rate spreadcalculator”madeavailabletocoveredentitiesbytheFFIECtodeterminewhether theAPORspreadonaloanislargeenoughtorequirereportingof theinterestrate spread.71Thefouritemsare(1)thetermtomaturity,(2)theAPORspread,(3)anindicator of whethertheloanhasafixedoradjustableinterestrate,and(4)thelengthof theintroductoryrateperiodforadjustable-rateloans. TheDodd–FrankActalsostipulatedchangesinthewayinwhichthenewdataitems (exceptforborrowerage)wouldbereleasedtothepublicascomparedwiththecurrent datarelease.Theactstatesthatthenewitemswillbereportedingroupedformascountsof loansandloandollars,withtheCFPBdeterminingtheappropriategroupings. Timing Atthetimeof thiswriting,thereissomeuncertaintyaboutthescheduleforforthcoming changestoHMDArules.UndertheDodd–FrankAct,reportingentitiesaregivenaperiod of timetomakechangestotheirdatacollectionandreportingsystemsbeforecompliance mustbeginwitharevisedrule.Followingtheissuanceof finalrules,aminimumof nine additionalmonthsmustpassbeforedatacollectionbegins.OntheJanuary1followingthat nine-monthperiod,institutionswouldberequiredtobegincollectingthenewdataelements,withreportingof themodifieddatabyMarch1of thenextcalendaryear.For example,if newfinalrulesareadoptedinFebruary2013,collectionof theexpandeddata wouldbeginJanuary1,2014,withreportingbeginningin2015. 70 TheSAFEActcreatedtheNationwideMortgageLicensingSystemandRegistry,whichwill,amongother things,assignuniqueidentifyingnumberstoallresidentialmortgageoriginatorsemployedbybankinginstitutions,FarmCreditSysteminstitutions,andothers,includingmortgagecompaniesandbrokers.SeeFederal FinancialInstitutionsExaminationCouncil,“SecureandFairEnforcementforMortgageLicensingAct (S.A.F.E.Act)FAQs,”webpage,www.ffiec.gov/safeact.htm. 71 SeeFederalFinancialInstitutionsExaminationCouncil,“NewFFIECRateSpreadCalculator,”webpage, www.ffiec.gov/ratespread/NewBulkRateSpread.aspx.

TheMortgageMarketin2010 87 APPENDIX A: REQUIREMENTS OF REGULATION C TheFederalReserveBoard’sRegulationCrequireslenderstoreportthefollowinginformationonhome-purchaseandhome-improvementloansandonrefinancings: For each application or loan ‰ applicationdateandthedateanactionwastakenontheapplication ‰ actiontakenontheapplication — approvedandoriginated — approvedbutnotacceptedbytheapplicant — denied(withthereasonsfordenial—voluntaryforsomelenders) — withdrawnbytheapplicant — fileclosedforincompleteness ‰ preapprovalprogramstatus(forhome-purchaseloansonly) — preapprovalrequestdeniedbyfinancialinstitution — preapprovalrequestapprovedbutnotacceptedbyindividual ‰ loanamount ‰ loantype — conventional — insuredbytheFederalHousingAdministration — guaranteedbytheDepartmentof VeteransAffairs — backedbytheFarmServiceAgencyorRuralHousingService ‰ lienstatus — firstlien — juniorlien — unsecured ‰ loanpurpose — homepurchase — refinance — homeimprovement ‰ typeof purchaser(if thelendersubsequentlysoldtheloanduringtheyear) — FannieMae — GinnieMae — FreddieMac — FarmerMac — Privatesecuritization — Commercialbank,savingsbank,orsavingsassociation — Lifeinsurancecompany,creditunion,mortgagebank,orfinancecompany — Affiliateinstitution — Othertypeof purchaser For each applicant or co-applicant ‰ race ‰ ethnicity ‰ sex ‰ incomereliedonincreditdecision

88 FederalReserveBulletin|December2011 For each property ‰ location,bystate,county,metropolitanstatisticalarea,andcensustract ‰ typeof structure — one-tofour-familydwelling — manufacturedhome — multifamilyproperty(dwellingwithfiveormoreunits) ‰ occupancystatus(owneroccupied,non-owneroccupied,ornotapplicable) For loans subject to price reporting ‰ spreadabovecomparableTreasurysecurityforapplicationstakenpriortoOctober1, 2010 ‰ spreadaboveaverageprimeofferrateforapplicationstakenonorafterOctober1,2010 For loans subject to the Home Ownership and Equity Protection Act ‰ indicatorof whetherloanissubjecttotheHomeOwnershipandEquityProtectionAct

89 Federal Reserve BULLETIN March 2011 Vol. 97, No. 1 Legal Developments: Fourth Quarter, 2010 Orders Issued Under Bank Holding Company Act Order Issued Under Section 3 of the Bank Holding Company Act SKBHC Holdings LLC Corona del Mar, California OrderApprovingtheFormationof aBankHoldingCompany SKBHCHoldingsLLC(“SKBHC”)hasrequestedtheBoard’sapprovalundersection3of theBankHoldingCompanyAct(“BHCAct”)1tobecomeabankholdingcompanyandto acquireallthevotingsharesof StarbuckBancshares,Inc.(“Bancshares”)andindirectly acquireBancshares’whollyownedsubsidiarybank,TheFirstNationalBankof Starbuck (“Bank”),bothof Starbuck,Minnesota. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(75FederalRegister16,808(April2,2010)).Thetimeforfilingcommentshasexpired,andtheBoardhasconsideredtheapplicationandallcommentsreceived inlightof thefactorssetforthinsection3of theBHCAct. SKBHCisanewlyorganizedcorporationformedbyanindividualwhowillbecomethe chief executiveofficerandchairmanof theboardof SKBHC.SKBHCwillbecapitalized byagroupof investorstoenableittoacquireBancsharesandBankandtomakefuture acquisitionsof otherinstitutionseitherthroughFederalDepositInsuranceCorporation resolutionsoronanopen-bankbasis.SKBHCplanstoacquireinstitutionsprimarilyinthe PacificNorthwest,WestCoast,andtheSouthwestregionsof theUnitedStates.2 Bank,withtotalassetsof approximately$17million,isthe439thlargestinsureddepository institutioninMinnesota,controllingdepositsof approximately$15.5million,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutions inthestate.3 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorthatwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitstheBoardfrom 1 12U.S.C.1842. 2 AnyfutureexpansionproposalwouldbesubjecttoreviewandapprovalbytheBoardorotherrelevantfederalbankingagencyonitsownmeritsunderthestandardsoftheBHCActorBankMergerAct. 3 AssetanddepositdataareasofJune30,2010.RankingdataarealsoasofJune30,2010,andreflectmergeractivity throughthatdate.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,andsavingsassociations.

90 FederalReserveBulletin|March2011 approvingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbanking market,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthe publicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneeds of thecommunitytobeserved.4 SKBHCdoesnotcurrentlycontroladepositoryinstitution.Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof bankingresourcesin anyrelevantbankingmarketandthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andSupervisoryConsiderationsandFutureProspects Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesanddepositoryinstitutionsinvolvedinthe proposalandcertainothersupervisoryfactors.5TheBoardhasconsideredthosefactorsin lightof allthefactsof record,includingsupervisoryandexaminationinformationreceived fromtherelevantfederalsupervisorof Bankandpubliclyreportedandotheravailable financialinformation,includinginformationprovidedbySKBHC.Inaddition,theBoard hasconsultedwiththeprimaryfederalsupervisorof Bank. Inevaluatingfinancialfactorsinexpansionproposalsbybankingorganizations,theBoard reviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-onlyand consolidatedbasis,aswellasthefinancialconditionof thesubsidiarybanksandsignificant nonbankingoperations.TheBoardalsoevaluatesthefinancialconditionof thecombined organization,includingitscapitalposition,assetquality,andearningsprospects,andthe impactof theproposedfundingof thetransaction.Inassessingfinancialfactors,theBoard consistentlyhasconsideredcapitaladequacytobeespeciallyimportant. TheBoardhasconsideredcarefullythefinancialfactorsof thisproposal.Bancsharesand Bankcurrentlyarewellcapitalizedandwouldremainsoonconsummationof theproposal. SKBHCalsowouldbewellcapitalizedandincompliancewithrelevantcapitalstandards onconsummation.Thetransactionisstructuredasacashpurchasefundedfromtheproceedsof anissuanceof newholdingcompanystockinSKBHC,inexchangeforadrawdownof capitalfromitsinvestors.6Basedonitsreviewof thosefactors,theBoardfinds thatSKBHChassufficientfinancialresourcestoeffecttheproposalandtocomplywith theBoard’sSmallBankHoldingCompanyPolicyStatement.7 TheBoardalsohasconsideredthemanagerialresourcesof theapplicant,includingthe proposedmanagementof theorganization.TheBoardhasreviewedtheexamination recordsof Bank,includingassessmentsof itscurrentmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhasconsideredthesupervisoryexperienceof theotherrelevantbankingagencieswithBank,includingitsrecordof compliancewith applicablebankinglawsandanti-money-launderinglaws,andtheproposedmanagement officialsandprincipalshareholdersof SKBHC.TheBoardalsohasconsideredSKBHC’s planfortheproposedacquisition,includingtheproposedmanagementof SKBHCand 4 12U.S.C.§1842(c)(1). 5 12U.S.C.§1842(c)(2)and(3). 6 TheremainingcapitalcommitmentsofSKBHC’sinvestorsareavailableforan18-monthperiodtofundongoingoperationsandexpenses,satisfyanyapplicableregulatoryrequirements,andfundpotentialadditional acquisitions. 7 SKBHCwillbeasmallbankholdingcompanyafteracquiringBancsharesandwillbesubjecttotheSmall BankHoldingCompanyPolicyStatement,aslongasithaslessthan$500millionintotalconsolidatedassets.

LegalDevelopments:FourthQuarter,2010 91 proposedchangesinmanagementatBancsharesandBankaftertheacquisition.Inaddition,theBoardhasconsideredcarefullythefutureprospectsof SKBHC,Bancshares,and Bankinlightof thefinancialandmanagerialresourcesandproposedbusinessplan. Basedonallthefactsof record,theBoardconcludesthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsinvolvedintheproposalareconsistentwithapproval,asaretheothersupervisoryfactorsundertheBHCAct. ConvenienceandNeedsConsiderations Inactingonproposalsundersection3of theBHCAct,theBoardalsomustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantinsureddepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).8TheBoardhascarefullyconsideredallthefacts of record,includingevaluationsof theCRAperformancerecordof Bank,information providedbySKBHC,andpubliccommentreceivedontheproposal.TheBoardhasalso consideredconfidentialsupervisoryinformationprovidedbytheOfficeof theComptroller of theCurrency(“OCC”),Bank’sprimaryfederalregulator.Bankreceiveda“satisfactory” ratingatitsmostrecentCRAperformanceevaluationbytheOCC,asof January3,2005. TheOCChasscheduledaCRAperformanceexaminationof BankforJuly2010. Severalcommentersexpressedconcernsthatinformationintheapplicationabout SKBHC’splanstoprovideproductsandservicestoitscommunitieswasinsufficient.As notedabove,Bankreceiveda“satisfactory”ratingatitsmostrecentCRAperformance. Examinersfoundthatthemajorityof Bank’sloansweremadewithintheassessmentarea andthatBank’srecordof lendingtoborrowersof differentincomesandbusinessesof differentsizesexceededthestandardforachievinga“satisfactory”rating. SKBHCrepresentsthattheproposalwouldprovideconvenienceto,andmeettheneedsof, Bank’scustomersbycontinuingproductsandservicescurrentlyofferedbyBankatthe samelevelsasBanknowprovides.SKBHCalsorepresentsthatitsmanagementwouldnot diminishBank’scommitmenttomeetingthecreditneedsof thecommunityinwhichit operates,includingtheneedsof low-andmoderate-incomegeographiesandindividuals.In addition,SKBHCplanstoformaCRACommitteeresponsibleforensuringBank’scontinuedcommitmenttoitsCRAperformance. Basedonareviewof theentirerecord,theBoardhasconcludedthatconvenienceand needsconsiderationsandtheCRAperformancerecordof Bankareconsistentwith approvalof theproposal. Conclusion Basedontheforegoing,andinlightof allfactsof record,theBoardhasdeterminedthat theapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoard hasconsideredtheapplicationrecordinlightof thefactorsthatitisrequiredtoconsider undertheBHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedoncompliancebySKBHCwithalltheconditionsimposedinthisorderandthe commitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof this action,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwriting bytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybe enforcedinproceedingsunderapplicablelaw. 8 12U.S.C.§2901etseq.

92 FederalReserveBulletin|March2011 Theproposedtransactionmaynotbeconsummatedbeforethe15thcalendardayafterthe effectivedateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder, unlesssuchperiodisextendedforgoodcausebytheBoardortheFederalReserveBankof SanFrancisco,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveOctober26,2010. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsWarsh, Duke,Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard Order Issued Under Sections 3 and 4 of the Bank Holding Company Act Caja de Ahorros de Valencia, Castellón y Alicante, Bancaja Valencia, Spain Banco Financiero y de Ahorros, S.A. Madrid, Spain OrderApprovingtheAcquisitionof aBankHoldingCompany CajadeAhorrosdeValencia,CastellónyAlicante,Bancaja(“Bancaja”),Valencia,Spain,a foreignbankingorganizationsubjecttotheBankHoldingCompanyAct(“BHCAct”),1 andBancoFinancieroydeAhorros,S.A.(“NewBank”),Madrid,Spain,anewlyformed foreignbank(collectively,“Applicants”),haverequestedtheBoard’sapprovalundersection3of theBHCAct2toacquirecontrolof CajadeAhorrosyMontedePiedadde Madrid(“CajaMadrid”),andtherebyindirectlyacquireCajaMadrid’ssubsidiaries,Caja MadridCibelesS.A.(“Cibeles”),bothof Madrid;CMFloridaHoldings,Inc.(“CM Florida”),CoralGables,Florida;andCityNationalBancshares,Inc.(“CNB”)andCity NationalBankof Florida(“Bank”),bothof Miami,Florida.CajaMadrid,Cibeles,CM Florida,andCNBarefinancialholdingcompanies. Noticeof theproposal,affordinginterestedpersonsanopportunitytocomment,hasbeen published(75FederalRegister69,666(2010)).Thetimeforfilingcommentshasexpired, andtheBoardhasconsideredtheapplicationandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. Bancaja,withtotalconsolidatedassetsequivalentto$153billion,isthesixthlargestdepositoryorganizationinSpainandoperatesabranchinMiami.NewBank,onaproforma basis,willhavetotalassetsof approximately$470billionandwillbethethirdlargestbankinginstitutionbytotalassetsinSpain. NewBankwasformedasacommercialbankunderthelawsof Spaininconnectionwith theproposedintegrationof sevensavingsbanks,orcajasdeahorros,3intoasinglefinancial groupthroughaSistemaInstitucionaldeProtección(“SIP”).ASIPintegratesagroupof cajasdeahorrosintoaunitedeconomicgroupheadedbyacommercialbankwhileallowing eachcajadeahorrostomaintaintheregionalapproachof itsbusiness.TheSpanishgov- 1 BancajaoperatesabranchintheUnitedStatesand,therefore,issubjecttotheBHCAct(12U.S.C.§3106(a)). 2 12U.S.C.§1842. 3 Cajasdeahorroshavenoshareholdersbutarecontrolledbygoverningbodiesthatrepresentvariousgroups, suchasdepositors,employees,thelocalgovernment,andlocalcompanies.

LegalDevelopments:FourthQuarter,2010 93 ernmentandtheBankof Spainhavepromotedsuchintegrationtransactionsinaneffortto consolidatethenumberof cajasdeahorrosoperatinginSpain.NewBankwillserveasthe centralpointof governanceandtheheadof theintegratedgroupand,thus,willexercise controloverthemanagementandpoliciesof CajaMadridandeachof theothersixcajas deahorrosinthegroup. CajaMadridwillholdapproximately52percentof thetotalissuedsharesof NewBank andwillbeitslargestshareholder.Bancajawillholdapproximately38percentof thetotal issuedsharesof NewBank.Eachof theremainingfivecajasdeahorroswillownlessthan 3percentof NewBank.4Thefivecajasdeahorrosare(1)CajaInsulardeAhorrosde Canarias,LasPalmas,(2)CajadeAhorrosyMontedePiedaddeÁvila,Ávila,(3)Caixa d'EstalvisLaietana,Mataró,(4)CajadeAhorrosdeSegovia,Segovia,and(5)Cajade AhorrosdelaRioja,Logroño,allof Spain. Byenteringintotheintegrationtransaction,NewBankwillbeeligibletoreceivefunds fromtheFondodeReestructuraciónOrdenadaBancaria(“FROB”),whichwascreatedby theSpanishgovernmenttosupportandfacilitateintegrationtransactionsamongSpanish financialinstitutions.Inexchangeforthefunds,FROBwillpurchaseperpetualconvertible preferencesharesof NewBankthatareconvertibletovotingsharesif notredeemedinfive years.Thefive-yearperiodmaybeextendedfortwoadditionalyearswiththeapprovalof theBankof Spain. FROBproposestoinvestupto€4.465billioninNewBank.FROB’sinvestmentinNew Bankwouldrepresentapproximately30percentof thetotalequityandif convertedtovotingshares,wouldcurrentlyrepresent30percentof NewBank’svotingshares. CompetitiveConsiderations TheBHCActprohibitstheBoardfromapprovingaproposalthatwouldresultina monopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarkets.TheBHCActalsoprohibitstheBoardfromapprovingabankacquisitionthatwouldsubstantiallylessencompetitioninanyrelevantbanking market,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthe publicinterestbyitsprobableeffectinmeetingtheconvenienceandneedsof thecommunitytobeserved.4 BancajaoperatesanuninsuredbranchinMiami.Applicantsdonotcurrentlycontrola U.S.insureddepositoryinstitution.Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffecton competitionorontheconcentrationof bankingresourcesinanyrelevantbankingmarket andthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andSupervisoryConsiderationsandFutureProspects Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesanddepositoryinstitutionsinvolvedinthe proposalandcertainothersupervisoryfactors.5TheBoardhasconsideredthesefactorsin lightof allthefactsof record,includingsupervisoryandexaminationinformationreceived fromtheOfficeof theComptrollerof theCurrency(“OCC”),theprimaryfederalsupervisorof Bank,andpubliclyreportedandotheravailableinformation,includinginformation 4 12U.S.C.§1842(c)(1). 5 12U.S.C.§1842(c)(2)and(3).

94 FederalReserveBulletin|March2011 providedbyApplicants.TheBoardalsohasconsultedwiththeBankof Spain,theagency withprimaryresponsibilityforthesupervisionandregulationof Spanishbanks,including BancajaandNewBank. Inevaluatingthefinancialfactorsinproposalsinvolvingbankholdingcompanies,the Boardreviewsthefinancialconditionof theapplicantsandthetargetdepositoryinstitution.TheBoardalsoevaluatesthefinancialconditionof theproformaorganization, includingitscapitalposition,assetquality,earningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardhasconsideredcarefullythefinancialfactorsof theproposal.Thecapitallevels of BancajaandNewBankexceedtheminimumlevelsthatwouldberequiredunderthe BaselCapitalAccordandareconsideredtobeequivalenttothecapitallevelsthatwouldbe requiredof aU.S.bankingorganization.Inthisregard,FROBproposestoinvestupto €4.465billioninNewBank,whichwouldsubstantiallyenhancethecapitalandfinancial strengthof NewBankanditsaffiliatedsavingsbanks.6Inaddition,Bankiswellcapitalized andwouldremainsoonconsummation.Basedonitsreviewof therecord,theBoardfinds thatApplicantshavesufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolved.The Boardhasreviewedtheexaminationrecordsof Bancaja,CMFlorida,andBank,including assessmentsof theirmanagement,risk-managementsystems,andoperations.TheBoard hasalsoconsultedwiththeBankof Spain.Inaddition,theBoardhasconsidereditssupervisoryexperiences,andthoseof otherrelevantbankingsupervisoryagencies,withtheorganizationsandtheirrecordsof compliancewithapplicablebankinglawandwithantimoney-launderinglaws.TheBoardalsohasconsideredApplicants’plansforimplementing theproposal,includingtheproposedmanagementof theorganizationafterconsummation. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalareconsistentwithapproval,asaretheothersupervisoryfactors.7 Section3of theBHCActalsoprovidesthattheBoardmaynotapproveanapplication involvingaforeignbankunlessthebankissubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbytheappropriateauthoritiesinthebank'shomecountry.8As noted,theBankof Spainistheprimarysupervisorof Spanishbanks,includingApplicants. TheBoardpreviouslyhasdeterminedthatBancajaissubjecttocomprehensivesupervision 6 TheBoardreceivedacommentconcerning,amongothermattersdiscussedlater,thelossesthatCajaMadrid hassufferedincertainforeigninvestments.BecauseofFROB'sinvestmentofupto€4.465billion,theBoard believesNewBankandCajaMadridhavesufficientfinancialresourcestoeffecttheproposal. 7 Section3oftheBHCActalsorequirestheBoardtodeterminethatanapplicanthasprovidedadequateassurancesthatitwillmakeavailabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseofits affiliatesthattheBoarddeemsappropriatetodetermineandenforcecompliancewiththeBHCAct(12U.S.C. §1843(c)(3)(A)).TheBoardhasreviewedtherestrictionsondisclosureintherelevantjurisdictionsinwhich Applicantsoperateandhascommunicatedwithrelevantgovernmentauthoritiesconcerningaccesstoinformation.Inaddition,BancajaandNewBankmust,totheextentnotprohibitedbyapplicablelaw,makeavailable totheBoardsuchinformationontheoperationsofitsaffiliatesthattheBoarddeemsnecessarytodetermine andenforcecompliancewiththeBHCAct,theInternationalBankingAct,andotherapplicablefederallaws.In lightofthecommitmentsandconditionsinthiscase,theBoardhasconcludedthatApplicantshaveprovided adequateassurancesofaccesstoanyappropriateinformationtheBoardmayrequest. 8 12U.S.C.§1843(c)(3)(B).AsprovidedinRegulationY,theBoarddetermineswhetheraforeignbankissubject toconsolidatedhome-countrysupervisionunderthestandardssetforthinRegulationK.See12CFR 225.13(a)(4).RegulationKprovidesthataforeignbankwillbeconsideredsubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisiftheBoarddeterminesthatthebankissupervisedorregulated insuchamannerthatitshome-countrysupervisorreceivessufficientinformationontheworldwideoperations ofthebank,includingitsrelationshipwithanyaffiliates,toassessthebank'soverallfinancialconditionandits compliancewithlawsandregulation.See12CFR211.24(c)(1).

LegalDevelopments:FourthQuarter,2010 95 onaconsolidatedbasisbyitshome-countrysupervisor.9TheBoardalsohasdetermined thatotherbanksinSpainweresubjecttohome-countrysupervisiononaconsolidated basis.10NewBankissupervisedbytheBankof Spainonsubstantiallythesametermsand conditionsasBancajaandthoseotherbanks.Basedonallthefactsof record,theBoard hasdeterminedthatBancajacontinuestobe,andNewBankwillbe,subjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhome-countrysupervisor. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardisrequiredtoconsider theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved andtotakeintoaccounttherecordsof therelevantinsureddepositoryinstitutionsunder theCommunityReinvestmentAct(“CRA”).11TheCRArequiresthefederalfinancial supervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecredit needsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsound operation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeinto accountarelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentire community,includinglow-andmoderate-incomeneighborhoods.12 TheBoardhasconsideredcarefullyallthefactsof record,includingevaluationsof the CRAperformancerecordof Bank,otherinformationprovidedbyApplicants,confidential supervisoryinformation,andapubliccommentreceivedontheproposal.Thecommenter allegedthatBankhasengagedindisparatetreatmentof minorityindividualsinhome mortgagelending. CRAPerformanceEvaluations AsprovidedintheCRA,theBoardhasreviewedtheconvenienceandneedsfactorinlight of theevaluationsbytheappropriatefederalsupervisorof theCRAperformancerecordof therelevantinsureddepositoryinstitution.Aninstitution’smostrecentCRAperformance evaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseit representsadetailed,on-siteevaluationof theinstitution’soverallrecordof performance undertheCRAbyitsappropriatefederalsupervisor.13 Bankreceivedan“outstanding”ratingatitsmostrecentCRAperformanceevaluationby theOCC,asof May18,2009.14Applicantshaverepresentedthattheydonotintendto changeBank’sCRAprogramonconsummation. A.HMDAandFairLendingRecord TheBoardhascarefullyconsideredBank’sfairlendingrecordandHomeMortgageDisclosureAct(“HMDA”)datainlightof thepubliccommentcontendingthatBankdenieda disproportionatepercentageof loanapplicationsfromAfricanAmericansintheMiami 9 SeeCajadeAhorrosdeValencia,CastellónyAlicante,Bancaja,84FederalReserveBulletin231(1998). 10 See,e.g.,CajadeAhorrosyMontedePiedaddeMadrid,95FederalReserveBulletinB23(2009);CajadeAhorrosdelMediterráneo,92FederalReserveBulletinC133(2006);CajadeAhorrosdeGalicia,CaixaGalicia,92 FederalReserveBulletinC132(2006);BancoPopularEspañolS.A.,92FederalReserveBulletinC130(2006). 11 12U.S.C.§1842(c)(2). 12 12U.S.C.§2901etseq. 13 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11,642and 11,665(2010). 14 Withtheexceptionofcommunitydevelopmentloans,theevaluationperiodfortheLendingTestwasJanuary1, 2006,throughDecember31,2008.Forcommunitydevelopmentloans,theInvestmentTest,andtheService Test,theevaluationperiodwasApril6,2006,thedateofthelastCRAevaluation,throughMay18,2009.

96 FederalReserveBulletin|March2011 MetropolitanStatisticalArea(“MSA”).TheBoardhasfocuseditsanalysisonthe2009 HMDAdatareportedbyBank.15 AlthoughtheHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications, originations,anddenialsamongmembersof differentracialorethnicgroupsincertain localareas,theyprovideaninsufficientbasisbythemselvesonwhichtoconcludewhether ornotBankisexcludingorimposinghighercostsonanygrouponaprohibitedbasis.The BoardrecognizesthatHMDAdataaloneprovideonlylimitedinformationaboutthecoveredloans.16HMDAdata,therefore,havelimitationsthatmakethemaninadequatebasis, absentotherinformation,forconcludingthataninstitutionhasengagedinillegallending discrimination. TheBoardisneverthelessconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlendingandbelievesthatalllendinginstitutionsareobligatedtoensurethattheir lendingpracticesarebasedoncriteriathatensurenotonlysafeandsoundlendingbutalso equalaccesstocreditbycreditworthyapplicantsregardlessof theirraceorethnicity. Becauseof thelimitationsof HMDAdata,theBoardhasconsideredthesedatacarefully andtakenintoaccountotherinformation,includingexaminationreportsthatprovideonsiteevaluationsof Bank’scompliancewithfairlendinglaws. Therecordof thisapplication,includingconfidentialsupervisoryinformation,indicates thatBankhastakenstepstoensurecompliancewithfairlendingandotherconsumerprotectionlaws.TheBoardalsohasconsideredtheHMDAdatainlightof otherinformation, includingtheoverallperformancerecordof BankundertheCRA.Bank’sestablished effortsanditsrecordof performancedemonstratethatBankisactiveinhelpingtomeetthe creditneedsof itsentirecommunity. B.ConclusiononConvenienceandNeedsandCRAPerformance TheBoardhasconsideredcarefullyallthefactsof record,includingreportsof examinationof theCRArecordof theinstitutioninvolved,informationprovidedbyApplicants, thecommentreceivedontheproposal,andconfidentialsupervisoryinformation.Basedon areviewof theentirerecord,theBoardhasconcludedthatconvenienceandneedsconsiderationsandtheCRAperformancerecordof Bankareconsistentwithapprovalof the proposal. Conclusion Basedontheforegoingandallfactsof record,theBoardhasdeterminedthatthetransactionshouldbe,andherebyis,approved.17Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.18TheBoard’sapprovalisspecificallyconditioned 15 TheBoardreviewedHMDAdatafromtheMiamiandFt.LauderdaleMSAs,aswellasfromBank’sentire CRAassessmentarea. 16 Thedata,forexample,donotaccountforthepossibilitythataninstitution'soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenot availablefromHMDAdata. 17 Thisapprovalincludesanyapprovalsrequiredundersection3oftheBHCActasaresultoftheindirectacquisitionofsharesofBankbyFROB. 18 ThecommenterrequestedthattheBoardholdapublicmeetingorhearingontheproposal.Section3ofthe BHCActdoesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisoryauthorityforthebanktobeacquiredmakesawrittenrecommendationofdenialoftheapplication.The

LegalDevelopments:FourthQuarter,2010 97 oncompliancebyApplicantswiththeconditionsinthisorderandallthecommitments madetotheBoardinconnectionwiththeproposal.19Forpurposesof thisaction,these commitmentsandconditionsaredeemedtobeconditionsimposedinwritingbytheBoard inconnectionwithitsfindingsanddecisionand,assuch,maybeenforcedinproceedings underapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuch periodisextendedforgoodcausebytheBoardortheFederalReserveBankof Atlanta, actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveDecember16,2010. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsWarsh, Duke,Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard Orders Issued Under Bank Merger Act Centennial Bank Conway, Arkansas OrderApprovingtheMergerof BanksandtheEstablishmentof Branches CentennialBank(“Centennial”),1astatememberbank,hasrequestedtheBoard’sapproval undersection18(c)of theFederalDepositInsuranceAct2(“BankMergerAct”)toacquire theassetsandassumetheliabilitiesof Gulf StateCommunityBank(“Gulf State”),Carrabelle,Florida.Centennialalsoproposestoestablishandoperatebranchesatthelocations of theacquiredbranchesof Gulf State. TheFederalDepositInsuranceCorporation(“FDIC”)hasbeenappointedreceiverof Gulf Stateandhasscheduledthesaleof certainassetsandthetransferof certainliabilitiesof Gulf StateforNovember19,2010.TheFDIChasrecommendedimmediateactionbythe Boardtopreventtheprobablefailureof Gulf State.Onthebasisof theinformationbefore theBoard,theBoardfindsthatitmustactimmediatelypursuanttotheBankMergerAct3 Boardhasnotreceivedsucharecommendationfromtheappropriatesupervisoryauthorities.Underitsrules, theBoardalsomay,initsdiscretion,holdapublicmeetingorhearingonanapplicationtoacquireabankif necessaryorappropriatetoclarifythefactualissuesrelatedtotheapplicationandtoprovideanopportunity fortestimony(12CFR223.16(e),262.25(d)).TheBoardhasconsideredcarefullythecommenter’srequestin lightofallthefactsofrecord.IntheBoard’sview,thecommenterhadampleopportunitytosubmititsviews and,infact,submittedwrittencommentsthattheBoardhasconsideredcarefullyinactingontheproposal. Thecommenter’srequestfailstodemonstratewhywrittencommentsdonotpresentitsviewsadequately orwhyameetingorhearingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonall thefactsofrecord,theBoardhasdeterminedthatapublicmeetingorhearingisnotrequiredorwarrantedin thiscase.Accordingly,therequestforapublicmeetingorhearingontheproposalisdenied. 19 TheBoardhasprovidedcertaintemporaryexemptionstoBancajaandNewBankundersection4(c)(9)ofthe BHCAct(12U.S.C.§1843(c)(9)),whichauthorizestheBoardtograntexemptionstoforeigncompaniesfrom thenonbankingrestrictionsoftheBHCActwhentheexemptionswouldnotbesubstantiallyatvariancewith thepurposesoftheactandwouldbeinthepublicinterest.SeeBoardlettertoAlcidesI.Avila,Esq.,dated December16,2010 1 CentennialisasubsidiaryofHomeBancshares,Inc.,alsoofConway. 2 12U.S.C.§1828(c). 3 12U.S.C.§1828(c)(3).

98 FederalReserveBulletin|March2011 tosafeguardthedepositorsof Gulf State.Accordingly,publicnoticeof theapplicationand anopportunityforcommentarenotrequiredbytheBankMergerAct. Centennial,theonlybanksubsidiaryof HomeBancshares,Inc.,hastotalassetsof approximately$3.8billionandoperatesinArkansasandFlorida,controllingtotaldeposits of approximately$3.0billion.4Gulf State,withtotalassetsof approximately$117million, operatesonlyinFlorida,controllingdepositsof approximately$116million.Onconsummationof theproposal,Centennialwouldbecomethe34thlargestinsureddepositoryinstitutioninFlorida,controllingdepositsof approximately$1.5billion,whichrepresentless than1percentof totaldepositsinFlorida. InterstateAnalysis Section102of theRiegle-NealInterstateBankingandBranchingEfficiencyActof 1994 (“Riegle-NealAct”)authorizesabanktomergewithanotherbankundercertainconditionsunless,beforeJune1,1997,thehomestateof oneof thebanksinvolvedinthetransactionadoptedalawexpresslyprohibitingmergertransactionsinvolvingout-of-state banks.5Forpurposesof theRiegle-NealAct,thehomestateof CentennialisArkansas, andthehomestateof Gulf StateisFlorida.6TheRiegle-NealActprovidesanexceptionto certainrequirementsof section102of theactformergertransactionsinvolvingbanksin defaultorindangerof default.7Theproposalcomplieswithallotherrequirementsof the Riegle-NealAct.Accordingly,approvalof theproposedtransactionisconsistentwiththe Riegle-NealAct. CompetitiveConsiderations TheBoardhasconsideredcarefullythecompetitiveeffectsof theproposalinlightof the factsof record.TheBankMergerActprohibitstheBoardfromapprovingaproposalthat wouldresultinamonopolyorwouldbeinfurtheranceof anattempttomonopolizethe businessof bankinginanyrelevantbankingmarket.TheBankMergerActalsoprohibits theBoardfromapprovingabankacquisitionthatwouldsubstantiallylessencompetition inanyrelevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalare clearlyoutweighedinthepublicinterestbytheprobableeffectof thetransactioninmeetingtheconvenienceandneedsof thecommunityserved.8 CentennialandGulf StatecompetedirectlyintwoFloridabankingmarkets:theTallahasseebankingmarketandtheFranklinCountybankingmarket.9TheBoardhasreviewed carefullythecompetitiveeffectsof theproposalinbothbankingmarketsinlightof allthe factsof record.Inparticular,theBoardhasconsideredthefinancialconditionof Gulf StateandthefactthattheFloridaOfficeof FinancialRegulation(“FOFR”)hasplacedthe bankinFDICreceivership.Inaddition,theFDIC,asreceiverforGulf State,hasselected 4 ThesedatareflectCentennial’srecentacquisitionsofBaysideSavingsBank,CoastalCommunityBank,and WakullaBank,allofFlorida.Forpurposesofthisorder,insureddepositoryinstitutionsincludecommercial banks,savingsbanks,andsavingsassociations. 5 See12U.S.C.§1831u. 6 12U.S.C.§1831u(a)(4)and(g)(4). 7 12U.S.C.§1831u(e).Theexceptedrequirementsincludeprovisionsrelatingtotheapplicationandapproval process. 8 12U.S.C.§1828(c)(5). 9 TheTallahasseebankingmarketisdefinedasGadsden,Jefferson,Leon,andWakullacounties,Florida.The FranklinCountybankingmarketisdefinedasFranklinCounty,Florida.

LegalDevelopments:FourthQuarter,2010 99 Centennial’sbidforGulf Stateinaccordancewiththeleast-costresolutionrequirementsin theFederalDepositInsuranceAct.10 Undertheproposal,Centennialwouldpurchasetheassetsandassumetheliabilitiesof Gulf StateandtherebymergeGulf State’sbusinessesintoaviable,goingconcern withdemonstratedcapitalstrengthandmanagementcapability.Centennial’sproposal wouldcontinuetheavailabilityof creditopportunitiesandbankingservicestothecustomersandcommunitiesthatGulf Stateservedandwouldavoidseriouseconomicdisruption toGulf Statedepositors.TheFDICactivelysolicitedbidsforGulf StateandselectedCentennial’sproposalundertheproceduresspecifiedbyCongressintheFederalDepositInsuranceActforresolvingfailedbanks.11TheFDICconsideredthisproposalanddetermined thatCentennial’sbidrepresentedthelowestcosttotheDepositInsuranceFund.Onthis basis,theCentennialproposalistheonlymeansbeforetheBoardof achievingthepublic benefitsdiscussedabove. Underthesecircumstances,andaftercarefulconsiderationof allthefactsof record,the Boardconcludesthattheanticompetitiveeffectsof thisproposalintherelevantmarketsareclearlyoutweighedinthepublicinterestbytheprobableeffectof theCentennial proposalinmeetingtheconvenienceandneedsof thecommunitiestobeservedinFlorida. FinancialandManagerialResourcesandFutureProspects TheBankMergerActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesanddepositoryinstitutionsinvolvedinthe proposalandcertainothersupervisoryfactors.TheBoardhasconsideredthesefactorsin lightof allthefactsof record,includingconfidentialsupervisoryandexaminationinformationfromtheFOFRandfederalbankingsupervisorsof theinstitutionsinvolved,and publiclyreportedandotherfinancialinformation,includinginformationprovidedby Centennial. Inevaluatingfinancialfactorsinexpansionproposalsbybankingorganizations,theBoard reviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-onlyand consolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandsignificantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.In assessingfinancialresources,theBoardalsoevaluatesthefinancialconditionof thecombinedorganizationatconsummation,includingitscapitalposition,assetquality,earnings prospects,andtheimpactof theproposedfundingof thetransaction. TheBoardhasconsideredcarefullythefinancialresourcesof theorganizationsinvolvedin theproposal.Centennialiswellcapitalizedandwouldremainsoonconsummationof the proposal.Inaddition,theparentholdingcompanyof Centennial,HomeBancshares,Inc., recentlyraisedinapublicofferingapproximately$150millioninadditionalcapital,of whichasufficientportionwillbedownstreamedtoCentennialtosupporttheproposedand futuretransactions.Basedonitsreviewof therecordinthiscase,theBoardfindsthatCentennialhassufficientfinancialresourcestoeffecttheproposal.Asnoted,theproposed transactionisstructuredasapurchaseof assetsandassumptionof liabilitiesfromthe FDICasreceiver. 10 Theleast-costproceduresrequiretheFDICtochoosetheresolutionmethodinwhichthetotalamountofthe FDIC’sexpendituresandobligationsincurred(includinganyimmediateorlong-termobligationandanydirect orcontingentliability)istheleastcostlytothedepositinsurancefundofallpossiblemethods.See12U.S.C. §§1821,1822,and1823(c)–(k).CentennialwastheonlybidderforGulfState. 11 See12U.S.C.§§1821,1822,and1823(c)–(k).

100 FederalReserveBulletin|March2011 TheBoardalsohasconsideredthemanagerialresourcesof Centennial.TheBoardhas reviewedtheexaminationrecordsof Centennial,includingassessmentsof itsmanagement, risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbankingsupervisoryagencies,includingthe FDIC,withbothorganizationsandtheirrecordsof compliancewithapplicablebanking andanti-money-launderinglaws.TheBoardalsohasconsideredCentennial’splansfor implementingtheproposal,includingitsplansformanagingtheintegrationof theacquired assetsandoperationsintothebank. Basedonallthefactsof record,theBoardconcludesthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof Centennialareconsistentwith approvalundertheBankMergerAct,asaretheotherstatutoryfactors. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardisrequiredtoconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved andtotakeintoaccounttherecordsof therelevantinsureddepositoryinstitutionsunder theCommunityReinvestmentAct(“CRA”).12Centennialreceiveda“satisfactory”rating atitsmostrecentCRAperformanceevaluationbytheFederalReserveBankof St.Louis, asof May4,2009.Gulf Statereceiveda“satisfactory”ratingatitsmostrecentCRA performanceevaluationbytheFDIC,asof February1,2006.Afterconsummationof the proposal,CentennialplanstoimplementitsCRApoliciesattheGulf Statebranchesand consumerlendingoperationsacquiredintheproposal. Asnoted,theBoardbelievesthattheproposalwillresultinsubstantialbenefitstotheconvenienceandneedsof thecommunitiestobeservedbymaintainingtheavailabilityof creditanddepositservicestoGulf Statecustomers.Centennialhasrepresentedthatconsummationof theproposalwouldallowittoprovideabroaderrangeof financialproducts andservicestothecustomersof Gulf State.Basedonallthefactsof record,theBoard concludesthatconsiderationsrelatingtotheconvenienceandneedsof thecommunitiesto beservedandtheCRAperformancerecordsof therelevantdepositoryinstitutionsare consistentwithapproval. Conclusion Basedontheforegoingandallfactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BankMergerAct.TheBoard’sapprovalisspecificallyconditionedoncompliancebyCentennialwiththecommitmentsmadetotheBoardinconnectionwiththeapplicationand theconditionsimposedinthisorder.Thesecommitmentsandconditionsaredeemedtobe conditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecision hereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Thetransactionmaybeconsummatedimmediatelybutinnoeventlaterthanthreemonths aftertheeffectivedateof thisorder,unlesssuchperiodisextendedforgoodcausebythe BoardorbytheFederalReserveBankof St.Louis,actingpursuanttodelegatedauthority. 12 12U.S.C.§§2901–2908.

LegalDevelopments:FourthQuarter,2010 101 Byorderof theBoardof Governors,effectiveNovember19,2010. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsWarsh, Duke,Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard

103 Federal Reserve BULLETIN June 2011 Vol. 97, No. 2 Legal Developments: First Quarter, 2011 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act First Niagara Financial Group, Inc. Buffalo, New York OrderApprovingtheAcquisitionof aBankHoldingCompany FirstNiagaraFinancialGroup,Inc.(‘‘FNFGroup’’)andFNFGMergerSub,Inc. (‘‘FNFG’’),awhollyownedsubsidiaryof FNFGroup,bothof Buffalo,NewYork,have requestedtheBoard’sapprovalundersection3of theBankHoldingCompanyAct(‘‘BHC Act’’)1toacquireNewAllianceBancshares,Inc.(‘‘NewAlliance’’)anditssubsidiarybank, NewAllianceBank,bothof NewHaven,Connecticut.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(75FederalRegister68608(2010)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. FNFGroup,withtotalconsolidatedassetsof approximately$21.1billion,controlsFN Bank,whichoperatesinPennsylvaniaandNewYork.FNBankisthe10thlargestinsured depositoryinstitutioninPennsylvania,controllingdepositsof approximately$6.9billion, whichrepresent2.4percentof thetotalamountof depositsof insureddepositoryinstitutionsinthatstate.3 NewAlliance,withtotalconsolidatedassetsof $9billion,controlsNewAllianceBank, whichoperatesinConnecticutandMassachusetts.NewAllianceBankisthe6thlargest insureddepositoryinstitutioninConnecticutand67thlargestinsureddepositoryinstitutioninMassachusetts,controllingdepositsof $4.9billionand$380million,respectively. InterstateAnalysis Section3(d)of theBHCActallowstheBoardtoapproveanapplicationbyabankholding companytoacquirecontrolof abanklocatedinastateotherthanthebankholdingcompany’shomestateif certainconditionsaremet.Forpurposesof theBHCAct,thehome 1 12U.S.C.§1842. 2 Specifically,FNFGrouphasrequestedapprovalforFNFGtomergewithNewAlliance,withNewAllianceasthe survivingentity.Afterthemerger,FNFGroupwouldmergeNewAllianceBankwithandintoFirstNiagaraBank, NationalAssociation(‘‘FNBank’’),awhollyownedsubsidiaryofFNFGroup.FNBankhasfiledanapplication withtheOfficeoftheComptrolleroftheCurrencypursuanttotheBankMergerAct(12U.S.C.§1828(c))tomerge withNewAllianceBank. 3 DepositdataareasofJune30,2010.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks.Forthereasonsdiscussedlaterinthisorder,Pennsylvaniaisthehomestateof FNFGroupundertheBHCAct.

104 FederalReserveBulletin|June2011 stateof FNFGroupisPennsylvania,4andNewAllianceislocatedinConnecticutand Massachusetts.5Basedonareviewof allthefactsof record,includingrelevantstatestatutes,theBoardfindsthattheconditionsforaninterstateacquisitionenumeratedinsection 3(d)of theBHCActaremetinthiscase.6 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopoly.TheBHCActalsoprohibitstheBoardfromapprovingaproposedbank acquisitionthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.7 FNFGroupandNewAlliancecompetedirectlyintheMetropolitanNewYorkbanking market(‘‘MetroNewYorkbankingmarket’’).8TheBoardhasreviewedcarefullythecompetitiveeffectsof theproposalinthisbankingmarketinlightof allthefactsof record, includingthenumberof competitorsthatwouldremainandtherelativesharesof total depositsininsureddepositoryinstitutionsintheMetroNewYorkbankingmarket(‘‘marketdeposits’’)thattheywouldcontrol,9theconcentrationlevelof marketdepositsandthe increaseinthatlevel,asmeasuredbytheHerfindahl–HirschmanIndex(‘‘HHI’’)andthe Departmentof JusticeBankMergerCompetitiveReviewguidelines(‘‘DOJBankMerger Guidelines’’),10andothercharacteristicsof themarket. 4 Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofallbankingsubsidiariesofsuch companywerethelargestonJuly1,1966,orthedateonwhichthecompanybecameabankholdingcompany, whicheverislater(12U.S.C.§1841(o)(4)(C)). 5 Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersabanktobelocatedinthestatesinwhich thebankischarteredorheadquarteredoroperatesabranch(12U.S.C.§§1841(o)(4)–(7)and1842(d)(1)(A)and 1842(d)(2)(B)). 6 12U.S.C.§§1842(d)(1)(A)–(B)and1842(d)(2)–(3).FNFGroupisadequatelycapitalizedandadequatelymanaged,asdefinedbyapplicablelaw.NewAllianceBankhasbeeninexistenceandoperatedfortheminimum periodoftimerequiredbyapplicablestatelawsandformorethanfiveyears.See12U.S.C.§1842(d)(1)(B)(i)– (ii).Onconsummationoftheproposal,FNFGroupwouldcontrollessthan10percentofthetotalamountof depositsofinsureddepositoryinstitutionsintheUnitedStates(12U.S.C.§1842(d)(2)(A)).FNFGroupalso wouldcontrollessthan30percentof,andlessthantheapplicablestatedepositcapfor,thetotalamountof depositsininsureddepositoryinstitutionsintherelevantstates(12U.S.C.§1842(d)(2)(B)–(D)).Allother requirementsofsection3(d)oftheBHCActwouldbemetonconsummationoftheproposal. 7 12U.S.C.§1842(c)(1). 8 FormallydesignatedtheMetropolitanNewYork-NewJersey-Connecticut-Pennsylvaniabankingmarket,the marketisdefinedasBronx,Dutchess,Kings,Nassau,NewYork,Orange,Putnam,Queens,Richmond,Rockland,Suffolk,Sullivan,Ulster,andWestchestercounties,NewYork;Bergen,Essex,Hudson,Hunterdon, Middlesex,Mercer,Monmouth,Morris,Ocean,Passaic,Somerset,Sussex,Union,andWarrencounties,New Jersey;MonroeandPikecounties,Pennsylvania;andFairfieldCounty,Bridgewater,Canaan,Cornwall,Kent, NewMilford,NorthCanaan,Roxbury,Salisbury,Sharon,Warren,andWashingtontownships,includingthe citiesofCornwallBridge,FallsVillage,Lakeville,MarbleDale,NewPreston,Salisbury,andWashingtonDepot inLitchfieldCounty,andAnsonia,BeaconFalls,Derby,Milford,Oxford,andSeymourtownshipsinNew HavenCounty,allinConnecticut. 9 Depositandmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsinthesummaryof depositsdataasofJune30,2010,andarebasedoncalculationsinwhichthedepositsofthriftinstitutionsare includedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethe potentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743(1984).Thus,the Boardregularlyhasincludedthriftinstitutiondepositsinthemarketsharecalculationona50percentweighted basis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 10 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(‘‘DOJ’’)hasinformedtheBoardthat abankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHImorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontal

LegalDevelopments:FirstQuarter,2011 105 Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesintheMetroNewYorkbankingmarket. Onconsummation,thebankingmarketwouldremainunconcentrated,asmeasuredbythe HHI,andnumerouscompetitorswouldremaininthebankingmarket.11 TheDOJhasadvisedtheBoardthatconsummationof theproposalisnotlikelytohavea significantlyadversecompetitiveeffectintheMetroNewYorkbankingmarket.TheBoard alsohasreceivednoobjectiontotheproposalfromanyfederalbankingagency. Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinanyrelevantbankingmarket.Accordingly,theBoardhasdeterminedthat competitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesandbanksinvolvedintheproposaland certainothersupervisoryfactors.12TheBoardhascarefullyconsideredthesefactorsin lightof allthefactsof record,includingsupervisoryandexaminationinformationreceived fromtherelevantfederalandstatesupervisorsof theorganizationsinvolvedintheproposal andotheravailablefinancialinformation,includinginformationprovidedbyFNFGroup. Inevaluatingfinancialfactorsinexpansionproposalsbybankingorganizations,theBoard reviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-onlyand consolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.Inassessingfinancialfactors,theBoardconsistentlyhasconsidered capitaladequacytobeespeciallyimportant.TheBoardalsoevaluatesthefinancialconditionof thecombinedorganizationatconsummation,includingitscapitalposition,asset quality,andearningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardhasconsideredcarefullytheproposalunderthefinancialfactors.FNFGroup, NewAlliance,andtheirsubsidiarydepositoryinstitutionsarewellcapitalizedandwould remainsoonconsummationof theproposal.Theproposedtransactionisstructuredasa partialshareexchangeandapartialcashpurchaseof shares.FNFGroupwilluseexisting resourcestofundthecashpurchaseof shares.13Basedonitsreviewof therecord,the BoardalsofindsthatFNFGrouphassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of FNFGroup,NewAlliance,andtheirsubsidiarydepositoryinstitutions,includingassess- MergerGuidelines,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/ August/10-at-938.html. 11 FNFGroupoperatesthe207thlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately$91million,whichrepresentlessthan1percentofmarketdeposits.NewAlliancecontrols$339million indeposits,whichrepresentslessthan1percentofmarketdeposits.Afterconsummation,FNFGroupwould becomethe109thlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately$430 million,whichrepresentlessthan1percentofmarketdeposits.TheHHIwouldremainunchangedforthe MetroNewYorkbankingmarket. 12 12U.S.C.§1842(c)(2)and(3). 13 FNFGrouphasissuedalmost$1billionincommonequitysincelate2008.

106 FederalReserveBulletin|June2011 mentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the Boardhasconsidereditssupervisoryexperiencesandthoseof theotherrelevantbank supervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankinglaw,includinganti-money-launderinglaws.FNFGroupanditssubsidiary depositoryinstitutionareconsideredtobewellmanaged.TheBoardalsohasconsideredFNFGroup’splansforimplementingtheproposal,includingtheproposedmanagementafterconsummationof theproposal. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalareconsistentwithapproval,asaretheothersupervisoryfactorsunderthe BHCAct.14 ConvenienceandNeedsandCRAPerformanceConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(‘‘CRA’’).15 TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (‘‘LMI’’)neighborhoods,inevaluatingbankexpansionaryproposals. TheBoardhasconsideredcarefullyallthefactsof record,includingreportsof examinationof theCRAperformancerecordsof thesubsidiarybanksof FNFGroupandNewAlliance,datareportedbyFNFGroupandNewAllianceundertheHomeMortgageDisclosureAct(‘‘HMDA’’),16otherinformationprovidedbyFNFGroup,confidential supervisoryinformation,andpubliccommentsreceivedontheproposal.TheBoard receivedseveralcommentsexpressingconcernthattheacquisitionwouldreducetheavailabilityof credittoLMIindividuals,smallbusinesses,andhomebuyersinNewHaven. CommentersalsoexpressedconcernsaboutFNBank’soverallCRArecordanditslending recordtominorities. A.CRAPerformanceEvaluation AsprovidedintheCRA,theBoardevaluatestherecordof performanceof aninstitution inlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformance recordsof therelevantinstitutions.Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepre- 14 AcommenterexpressedconcernaboutthelevelofcompensationandseverancepaidtoNewAlliancemanagementanditsboardofdirectors.Compensationpaidinthepasttoofficialsofaninstitutionbeingacquiredis notafactorrelatedtothefinancialresourcesoftheapplicant,whichisthefocusofthestandardsofreview undertheBHCAct.TheBoardhasreviewedthefinancialresourcesoftheapplicantinlightofthefinancial conditionofNewAlliance.TheBoardalsoreviewedtheseveranceproposalinthecontextofthefinancialconditionofNewAllianceandtheBoard’sguidanceonincentivecompensation.Asnotedabove,FNFGrouphas sufficientresourcestocompletethetransactionasproposedandwillremainwellcapitalizedafterconsummationoftheproposal.Moreover,theinterestsofNewAlliancemanagementanditsboardhavebeendisclosedto theshareholdersofbothNewAllianceandFNFGroup. 15 12U.S.C.§2903;12U.S.C.§1842(c)(2). 16 12U.S.C.§2801etseq.

LegalDevelopments:FirstQuarter,2011 107 sentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceunder theCRAbyitsappropriatefederalsupervisor.17 FNBankreceiveda‘‘satisfactory’’ratingundertheCRAatitsmostrecentperformance evaluationbytheOfficeof ThriftSupervision(‘‘OTS’’),18asof March12,2007(‘‘2007 Evaluation’’).19TheFederalDepositInsuranceCorporationratedNewAllianceBank‘‘outstanding’’afteritsmostrecentCRAevaluation,asof December8,2008.FNFGrouphas representedthat,aftertheacquisitionof NewAllianceBank,thecombinedorganization willofferanexpandedrangeof additionalmiddle-marketlendingproductsandenhanced cash-managementservices,includinginthecommunitiesservedbyNewAllianceBank.20 CRAPerformanceof FNBank.Inthe2007Evaluation,examinersconsideredFNBank’s overalllendingperformancetobeacceptable.Examinersreportedthatthebank’sdistributionof HMDA-reportablemortgageloansamongareasof differentincomelevelswasreasonable,andtheycommendedFNBankforusingflexibleandinnovativemortgageloan programstohelpmakecreditavailabletoLMIindividualsandbusinesseswithinitsassessmentareas.Inaddition,examinersreportedthatthebank’spracticeof extendingloansto businesseswithgrossannualrevenues$1millionorless,aswellasmakingloansinsmall dollaramounts,wasexcellentthroughoutitsassessmentareas.Examinersalsonotedinthe 2007EvaluationthatFNBank’slevelof communitydevelopmentlendingwasverygood. Duringtheevaluationperiod,FNBankmademorethan5,000smallbusinessloans21totaling$830.4millionandwasoneof thelargestSmallBusinessAdministrationlendersin westernNewYork.FNBank’scommunitydevelopmentlendingduringtheevaluation periodtotaledapproximately$151million.Sincethe2007Evaluation,FNBankhasmaintainedareasonablelevelof homemortgage,smallbusiness,andcommunitydevelopment lending.In2009,thebankoriginatedmorethan4,200HMDA-reportablehomemortgage loanstotalingapproximately$618.4millionandmorethan3,100smallbusinessloanstotaling$449.3millionthroughoutitsassessmentareas.FNFGrouphasstatedthatFNBank extendedmorethan$506millionincommunitydevelopmentloans,originated$89million inmultifamilyloans,andextendedmorethan$1billioninsmallbusinessloanssince2007. Tocomplementitscommunitydevelopmentandmultifamilylendingactivities,FNBankis anactiveparticipantwiththeFederalHomeLoanBankof NewYorkinprovidinggrant fundingtononprofithousingagenciesthatdevelopaffordablehousing.FNBankalsohas 17 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 18 FNBankwasafederalsavingsbankthatconvertedtoanationalbankonApril9,2010. 19 Theevaluationperiodinthe2007Evaluationwas2004–2006.OnecommenterassertedthatFNFGroup’spreviousacquisitionshadresultedinadeclineintheCRAperformanceoftheacquireddepositoryinstitutions, specificallycitingadeclineintheAlbany-Schenectady-Troy,NewYorkMetropolitanStatisticalArea.FNF GroupenteredtheAlbany-Schenectady-Troymarketwithtwoacquisitionsin2004and2005.TheBoardnotes thattheevaluationperiodcoveredFNFGroup’sinitialentryintotheAlbany-Schenectady-Troymarketand thatFNBankwouldnothavehadsufficienttimetoimplementitsprogramsintheareabeforetheexamination. The2007EvaluationnotesthattheacquisitionsgreatlyexpandedFNBank’soperations,resultinginsignificantchangestothebank’sbusinessprofile. 20 OnecommenterrequestedthatFNBanksetforthadefinitiveplantoensurethatitwouldcontinuetoservethe creditneedsofthecommunitiesservedbyNewAlliance.FNFGrouphasstatedthatitdoesnotplananyreductioninproductsorservicesavailabletoNewAlliance’scommunities.FNBankalsohassetforthanenhanced CRAplanforthecombinedorganization.TheBoardconsistentlyhasstatedthatneithertheCRAnorthefederalbankingagencies’CRAregulationsrequiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganizationandthattheenforceabilityofanysuchthird-partypledges,initiatives,andagreementsaremattersoutsidetheCRA.SeeBankofAmericaCorporation,90FederalReserve Bulletin217,232–33(2004).Instead,theBoardfocusesontheexistingCRAperformancerecordofanapplicantandtheprogramsthatanapplicanthasinplacetoservethecreditneedsofitsassessmentareasatthetime theBoardreviewsaproposalundertheconvenienceandneedsfactor. 21 Inthiscontext,‘‘smallbusinessloans’’areloanswithoriginalamountsof$1millionorlessthataresecuredby nonfarm,nonresidentialpropertiesorarecommercialandindustrialloanstoborrowersintheUnitedStates.

108 FederalReserveBulletin|June2011 providedfundingfor29affordablehousingprojectsthroughoutitsassessmentareas,totaling$6.6million,tobuildmorethan600unitsof affordablehousing.FNBankisaqualifiedparticipantforprogramsconductedbythePennsylvaniaHousingFinanceAgencyand hastripleditsvolumeinfederalandstatemortgageprograms(suchasFederalHousing Administration,VeteransAffairs,andNewYorkandPennsylvaniaHousingFinance Agencyprograms)byincreasingitspercentageof loansoriginatedundersuchprograms from6.4percentof totalloansin2007tomorethan19percentin2009. Inthe2007Evaluation,examinersreportedthatFNBankconsistentlydemonstrated strongperformanceundertheinvestmenttest,notingthatitsperformancewasoutstanding inthemajorityof itsassessmentareas.22FNBankrepresentsthatitbeganparticipatingin low-income-housingtaxprogramsin2010andhascommitted$25milliontowardsuchprograms.Thebankinvestedinanonprofitorganizationthatpromoteshousinggrowthin economicallychallengedareasaswellasapartmentsthatqualifyforlow-income-housing taxcredits. ExaminerscommendedFNBank’sserviceperformancethroughoutitsassessmentareasin the2007Evaluation.Examinersreportedthatthebank’sretaildeliverysystemsweregenerallygoodandthatitsdistributionof branchesamonggeographiesof differentincomelevelswasadequate.23ExaminersalsocommendedFNBankforitscommunitydevelopment services,whichtypicallyrespondedtotheneedsof thecommunitiesservedbythebank throughoutitsassessmentareas. CRAPerformanceof NewAllianceBank.Asnoted,NewAllianceBankreceivedanoverall ‘‘outstanding’’ratinginits2008Evaluation(‘‘NewAlliance2008Evaluation’’).24Underthe lendingtest,NewAllianceBankreceiveda‘‘highsatisfactory’’rating,andtheexaminers reportedthatthebank’sdistributionof loansamongborrowersof differentincomelevels showedexcellentresponsivenesstothecreditneedsof LMIborrowersandsmallbusinesses. Theyreportedthatthebank’soveralllendinglevelsreflectedgoodresponsivenesstoits assessmentareas’creditneeds. ExaminersreportedthatNewAllianceBankwasaleaderinmakingcommunitydevelopmentloans.Duringtheevaluationperiod,thebankoriginated70communitydevelopment loanstotaling$102.2million.Examinersnotedthatthequalityandquantityof suchlendingreflectedahighdegreeof responsivenesstotheeconomicdevelopment,affordable housing,andcommunityserviceneedsof theassessmentareas. NewAllianceBankreceivedan‘‘outstanding’’ratingundertheinvestmenttestinthe NewAlliance2008Evaluation.ExaminerscommendedNewAllianceBank’sleadershiprole inprovidingasignificantlevelof qualifiedcommunitydevelopmentinvestmentsandgrants throughoutitsassessmentareas.Examinersalsocommendedthebank’sextensiveuseof innovativeinvestmentstosupportcommunitydevelopmentinitiatives. IntheNewAlliance2008Evaluation,thebankreceivedan‘‘outstanding’’ratingunderthe servicetest.ExaminersfoundthatNewAllianceBank’sserviceswereaccessibletoallportionsof theassessmentareasandthatthebankprovidedgoodaccesstobankingservices forLMIcommunities.Examinersalsoreportedthatthebank’semployees,officers,and 22 OnecommenterexpressedconcernaboutFNBank’samountofcharitabledonations.FNBankrepresented thatithasarecordofprovidingsignificantcorporatephilanthropicdonationsinallthecommunitiesitserves. TheBoardnotesthatneithertheCRAnortheagencies’implementingrulesrequireinstitutionstoengagein charitablegiving. 23 Sincetheevaluationperiod,FNBankaddedfivebranchestoLMIcensustracts. 24 TheevaluationperiodintheNewAlliance2008Evaluationwas2005–2008.

LegalDevelopments:FirstQuarter,2011 109 directorshavebeenactiveinprovidingcommunitydevelopmentservicestocommunity organizationsandindividualsandinprovidingfinancialeducationtoarearesidentsand businesses. B.HMDAandFairLendingRecord TheBoardalsohasconsideredthelendingdatareportedunderHMDA25for2007,2008, and2009by,andthefairlendingrecordsof,FNBankandNewAllianceBankinlightof a publiccommentontheproposal.Onecommenteralleged,basedon2008and2009HMDA data,thatFNBank’slendingtoAfricanAmericanborrowerslaggedbehindthelending recordsof otherlendersinseveralof theassessmentareasservedbythebank.ThecommenteralsocriticizedthelendingbyNewAllianceBanktoAfricanAmericansandHispanicsincertainassessmentareas. AlthoughtheHMDAdatamightreflectcertaindisparitiesintheratesof loanapplications, originations,anddenialsamongmembersof differentracialorethnicgroupsincertain localareas,theyprovideaninsufficientbasisbythemselvesonwhichtoconcludewhether ornotFNBankandNewAllianceBankareexcludingorimposinghighercostsonany grouponaprohibitedbasis.TheBoardrecognizesthatHMDAdataalone,evenwiththe recentadditionof pricinginformation,provideonlylimitedinformationaboutthecovered loans.26HMDAdata,therefore,havelimitationsthatmakethemaninadequatebasis, absentotherinformation,forconcludingthataninstitutionhasengagedinillegallending discrimination. Accordingly,theBoardhastakenintoaccountotherinformation,includingexamination reportsthatprovideon-siteevaluationsof compliancewithfairlendinglawsbyFNF Group,NewAlliance,andtheirsubsidiaries.Inaddition,theBoardhasconsideredinformationprovidedbyFNFGroupaboutitscompliance-risk-managementsystems. TheBoardpreviouslyhasreviewedFNFGroup’srecordandconcludedthatithastaken stepstoensurecompliancewithfairlendingandotherconsumerprotectionlawsandregulations.27TheBoardfoundthatFNFGrouphadpoliciesandprocedurestohelpensure compliancewithallfairlendingandconsumerprotectionlawsapplicabletoitslending activities,andthosepoliciesandprocedureswillapplytothecombinedinstitutiononconsummationof theproposal.FNFGroup’scomplianceprogramincludesannualtrainingof lendingpersonnel,regularfairlendinganalyses,andoversightandmonitoringof consumer lendingfunctions.FNFGrouprepresentedtotheBoardthatitperformsquarterlyloanfile assessmentstomonitorcompliancewithlendinglawsandregulations.Inaddition,mortgageloanapplicationsslatedfordenialundergoasecondreviewtoensurecompleteand carefultreatmentof loanapplicantsandtopreventdiscriminatorylendingpractices.FN Bankalsoimplementedaformalcomplaint-resolutionprocessmanagedbythebank’svice presidentforcustomerrelations. 25 TheBoardhasreviewedtheHMDAandCRAdatareportedbyFNBankandNewAllianceBank.Eachbank’s lendinginitscombinedassessmentareas,itsheadquarters’assessmentarea(theBuffalo,NewYorkMetropolitanStatisticalAreaforFNBankandtheNewHaven,ConnecticutMetropolitanStatisticalAreaforNewAllianceBank),aswellasassessmentareasofinteresttothecommenters,werereviewed. 26 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenot availablefromHMDAdata. 27 FirstNiagaraFinancialGroup,Inc.,96FederalReserveBulletinB7(2010).

110 FederalReserveBulletin|June2011 Basedonareviewof theentirerecordandforthereasonsdiscussedabove,includingthe consultationswiththeappropriatesupervisors,theBoardhasconcludedthatconsiderationsrelatingtoconvenienceandneedsandtheCRAperformancerecordsof FNBank andNewAllianceBankareconsistentwithapprovalof theproposal.28 Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationundersection3of theBHCActshouldbe,andherebyis,approved.29Inreachingits conclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitis requiredtoconsiderundertheBHCAct.TheBoard’sapprovalisspecificallyconditioned oncompliancebyFNFGroupwithalltheconditionsimposedinthisorderandallthe commitmentsmadetotheBoardinconnectionwiththeapplicationandonthereceiptof allotherrequiredregulatoryapprovalsfortheproposal.TheseconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithits findingsanddecisionand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuch periodisextendedforgoodcausebytheBoardortheFederalReserveBankof NewYork, actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveMarch31,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin.Absentandnotvoting:GovernorWarsh. RobertdeV.Frierson DeputySecretaryof theBoard The Goldman Sachs Group, Inc. New York, New York OrderApprovingRetentionof Sharesof aBank TheGoldmanSachsGroup,Inc.(‘‘Goldman’’),afinancialholdingcompanywithinthe meaningof theBankHoldingCompanyAct(‘‘BHCAct’’),hasrequestedtheBoard’s 28 Somecommentersexpressedconcernthattheproposedacquisitionwouldresultinalossofjobs.Theeffectof aproposedtransactiononemploymentinacommunityisnotamongthefactorsthattheBoardisauthorized toconsiderundertheBHCAct,andthefederalbankingagencies,courts,andtheCongressconsistentlyhave interpretedtheconvenienceandneedsfactortorelatetotheeffectofaproposalontheavailabilityandquality ofbankingservicesinacommunity.See,e.g.,WellsFargo&Company,82FederalReserveBulletin445,457 (1996). 29 SomecommentersalsorequestedthattheBoardholdapublicmeetingorhearingontheproposal.Section3(b) oftheBHCActdoesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriate supervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialofthe application(12CFR225.16(e)).TheBoardhasnotreceivedsucharecommendationfromtheappropriate supervisoryauthorities.Underitsregulations,theBoardalsomay,initsdiscretion,holdapublicmeetingor hearingonanapplicationtoacquireabankifameetingorhearingisnecessaryorappropriatetoclarifyfactualissuesrelatedtotheapplicationandtoprovideanopportunityfortestimony(12CFR262.3(e)and 262.25(d)).TheBoardhasconsideredcarefullythecommenters’requestsinlightofallthefactsofrecord.In theBoard’sview,thecommentershavehadampleopportunitytosubmitviewsand,infact,submittedwritten commentsthattheBoardhasconsideredcarefullyinactingontheproposal.TherequestsfailtoidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionthatwouldbeclarifiedbyapublicmeetingor hearing.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublicmeeting orhearingisnotrequiredorwarrantedinthiscase.Accordingly,therequestsforapublicmeetingorhearing ontheproposalaredenied.

LegalDevelopments:FirstQuarter,2011 111 approvalundersection3of theBHCAct1toretain9.8percentof theoutstandingcommonstockof AvenueFinancialHoldings,Inc.(‘‘Avenue’’)andtherebyindirectlyretain votingsharesof AvenueBank,bothof Nashville,Tennessee.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(74FederalRegister48,970(2009)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct.3 Goldman,withtotalconsolidatedassetsof approximately$911billion,engagesininvestmentandcommercialbanking,securitiesunderwritinganddealing,assetmanagement, trading,andotheractivitiesbothintheUnitedStatesandoverseas.Goldmancontrols GoldmanSachsBankUSA(‘‘GSBank’’),NewYork,NewYork,astatememberbankthat operatesbranchesinNewYorkandSaltLakeCity,Utah.GSBankhastotalassetsof approximately$89billionandcontrolsdepositsof approximately$32billion.4Avenue Bank,withtotalassetsof approximately$589million,controlsdepositsof $480million andoperatesonlyinTennessee.5 NoncontrollingInvestment Goldmanhasstatedthatitdoesnotproposetocontrolorexerciseacontrollinginfluence overAvenueandthatitsinvestmentinAvenueispassive.6Inthislight,Goldmanhas agreedtoabidebycertaincommitmentssubstantiallysimilartothoseonwhichtheBoard haspreviouslyreliedindeterminingthataninvestingbankholdingcompanywouldnotbe abletoexerciseacontrollinginfluenceoveranotherbankholdingcompanyorbankfor purposesof theBHCAct(‘‘PassivityCommitments’’).7Forexample,Goldmanhascommittednottoexerciseorattempttoexerciseacontrollinginfluenceoverthemanagement orpoliciesof Avenueoranyof itssubsidiaries;nottoseekoracceptmorethanonerepresentativeontheboardof directorsof Avenueoranyof itssubsidiaries;andnottohaveany officer,employee,oragentinterlockswithAvenueoranyof itssubsidiaries.ThePassivity 1 12U.S.C.§1842. 2 AvenueBank’spredecessorwasPlantersBankofTennessee,MauryCity,Tennessee.Avenuewasformedin 2006,acquiredthebankin2007,changeditsnametoAvenueBank,andmoveditsheadquarterstoNashville. GoldmanholdsthesharesofAvenuethroughanindirectsubsidiary,GoldmanSachsInvestmentPartnersMasterFund,L.P.,aCaymanIslandslimitedpartnership.ThefundacquiredthesharesinAvenue’sprivateequity offeringasapassiveinvestment. 3 AcommenternotedthattheBoardwaivedpublicnoticeofGoldman’sapplicationtobecomeabankholding companyinSeptember2008.TheBoard’sorderapprovingtheapplicationexplainsthebasisforthiswaiver. TheGoldmanSachsGroup,Inc.,94FederalReserveBulletinC101(2008)(‘‘GoldmanOrder’’). 4 AssetanddepositdataareasofDecember31,2010. 5 InactingonGoldman’sapplicationtobecomeabankholdingcompany,theBoarddeterminedthatemergency conditionsexistedthatjustifiedtheBoard’sexpeditiousaction.GoldmanOrder,C101.InlightofthoseemergencyconditionsandGoldman’sstatusasaminorityinvestorinAvenue,GoldmanwaspermittedtofilearetroactiveapplicationtoretaintheAvenueshares. 6 Althoughtheacquisitionoflessthanacontrollinginterestinabankorbankholdingcompanyisnotanormal acquisitionforabankholdingcompany,therequirementinsection3(a)(3)oftheBHCActthattheBoard’s approvalbeobtainedbeforeabankholdingcompanyacquiresmorethan5percentofthevotingsharesofa banksuggeststhatCongresscontemplatedtheacquisitionbybankholdingcompaniesofbetween5percent and25percentofthevotingsharesofbanks.See12U.S.C.§1842(a)(3).Onthisbasis,theBoardpreviouslyhas approvedtheacquisitionbyabankholdingcompanyoflessthanacontrollinginterestinabankorbank holdingcompany.See,e.g.,PennBancshares,Inc.,92FederalReserveBulletinC37(2006)(acquisitionofupto 24.89percentofthevotingsharesofabankholdingcompany);S&TBancorpInc.,91FederalReserveBulletin 74(2005)(acquisitionofupto24.9percentofthevotingsharesofabankholdingcompany);BrooklineBancorp,MHC,86FederalReserveBulletin52(2000)(acquisitionofupto9.9percentofthevotingsharesofa bankholdingcompany). 7 Thesecommitmentsaresetforthintheappendix.

112 FederalReserveBulletin|June2011 Commitmentsalsoincludecertainrestrictionsonthebusinessrelationshipsof Goldman withAvenue. Basedontheseconsiderationsandalltheotherfactsof record,theBoardhasconcluded thatGoldmanwouldnotacquirecontrolof,orhavetheabilitytoexerciseacontrolling influenceover,Avenuethroughtheproposedretentionof Avenuevotingshares.TheBoard notesthattheBHCActrequiresGoldmantofileanapplicationandreceivetheBoard’s approvalbeforethecompanycoulddirectlyorindirectlyacquireadditionalsharesof AvenueorattempttoexerciseacontrollinginfluenceoverAvenue.8 CompetitiveConsiderations TheBoardhasconsideredcarefullythecompetitiveeffectsof theproposalinlightof allthe factsof therecord.Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anyattemptto monopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalso prohibitstheBoardfromapprovingabankacquisitionthatwouldsubstantiallylessen competitioninanyrelevantbankingmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobable effectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobe served.9 GoldmanandAvenuedonotcompetedirectlyinanyrelevantbankingmarket.Basedonall thefactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnot haveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesin anyrelevantbankingmarketandthatcompetitivefactorsareconsistentwithapproval of theproposal. Financial,Managerial,andSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesanddepositoryinstitutionsinvolvedinthe proposalandcertainothersupervisoryfactors.TheBoardhascarefullyconsideredthese factorsinlightof allthefactsof record,includingconfidentialsupervisoryandexaminationinformationreceivedfromtherelevantfederalandstatesupervisorsof theorganizationsinvolved,publiclyreportedandotherfinancialinformation,informationprovidedby Goldman,andpubliccommentsreceivedontheproposal. Inevaluatingthefinancialfactorsinexpansionproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandsignificantnonbankingoperations.Inthisevaluation,theBoardconsidersa varietyof information,includingcapitaladequacy,assetquality,andearningsperformance. Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobe especiallyimportant.TheBoardalsoevaluatesthefinancialconditionof theapplicant, includingitscapitalposition,assetquality,earningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardhascarefullyconsideredthefinancialfactorsof theproposal.Goldman,GS Bank,Avenue,andAvenueBankarewellcapitalized.Goldmanacquireditsownership 8 12U.S.C.§1842.See,e.g.,EmigrantBancorp,Inc.,82FederalReserveBulletin555(1996). 9 12U.S.C.§1842(c)(1).

LegalDevelopments:FirstQuarter,2011 113 interestinAvenuebeforebecomingabankholdingcompanyandusedexistingcash resourcestoeffecttheacquisition. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolved.The Boardhasreviewedtheexaminationrecordsof Goldman,Avenue,andtheirsubsidiary depositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesand thoseof otherrelevantbankingsupervisoryagencieswiththeorganizationsandtheir recordsof compliancewithapplicablebankinglawandwithanti-money-launderinglaws. OnApril16,2010,theSecuritiesandExchangeCommission(‘‘SEC’’)broughtacivil actionagainstGoldmanandoneof itsvicepresidentsforallegedlydefraudinginvestorsby misstatingandomittingkeyfactsaboutacollateralizeddebtobligation(‘‘CDO’’)transactionitmarketedin2007,beforebecomingabankholdingcompanyinSeptember2008. TheCDOtransactioninvolvedsubprimemortgages,andthemarketingoccurredas theU.S.housingmarketwasbeginningtodecline.OnJuly14,2010,Goldmansettledthe actionwiththeSEC.Aspartof thesettlement,GoldmanacknowledgedthatitsCDOmarketingmaterialscontainedincompleteinformation.Goldmanagreedtoasettlementpenaltyof $550millionandtocertainundertakingswithrespecttoitsbusinesspracticesfor theofferingof residentialmortgage-backedsecuritiesthatweredesignedtoensurethat writtenmarketingmaterialsforsuchofferingsarenotmisleadinganddonotcontainany materialmisstatement.10 TheBoardhasreviewedtheSECactionandsettlementandactionstakenbyGoldmanto improveitsrisk-managementprocesses.InMay2010,Goldmanannouncedthecreationof a‘‘BusinessStandardsCommittee’’toconductanoverallreviewof thefirm’sbusiness standards.InJanuary2011,thecommitteeconcludedaneight-monthreviewof Goldman’s businessstandardsandissuedareportof itsfindingsandrecommendedreforms,including reformsdesignedtoimprovethetransparencyof communicationanddisclosurewith regardtoGoldman’srisk-managementstructure,culture,andprocesses.Aspartof its ongoingsupervisionof Goldman’simplementationof risk-managementandregulatory compliancesystemssincebecomingabankholdingcompany,theBoardwillcontinueto assessGoldman’simplementationandmaintenanceof thecommittee’srecommendations anditsbusinessstandardsandrisk-managementpractices.11Inaddition,theBoardwill continuetoreviewGoldman’srisk-managementcontrolsandprocessesformonitoring investmentsinotherbankingorganizationsandforcomplyingwithallregulatoryrequirementsassociatedwithsuchinvestments. Basedonallthefactsof record,theBoardhasconcludedthatthefinancialandmanagerial resourcesandfutureprospectsof Goldman,Avenue,andtheirsubsidiariesareconsistent withapprovalof thisapplication,asaretheothersupervisoryfactorstheBoardmustconsiderundersection3of theBHCAct. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardalsomustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantinsureddepositoryinstitutionsunderthe 10 Sec.andExch.Comm’nv.Goldman,Sachs&Co.,10-CV-3229(BSJ)(S.D.N.Y.2010).Thetotalpenaltyincluded $250millioninrestitutiontoinvestorsand$300millioninpenaltiestotheSEC. 11 InconnectionwiththecontinuoussupervisionofGoldman’sregulatorycompliancesystems,Boardstaffisalso monitoringallnewdevelopmentsincertainongoinginvestigationsbyseveralstateauthoritiesregardingGoldman’sparticipationinmunicipalbondmarkets.

114 FederalReserveBulletin|June2011 CommunityReinvestmentAct(‘‘CRA’’).12TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccount arelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(‘‘LMI’’)neighborhoods,inevaluatingbanking proposals.13 TheBoardhasconsideredcarefullyallthefactsof record,includingthereportsof examinationof theCRAperformancerecordsof Goldman’ssubsidiaryinsureddepositoryinstitutionandAvenueBank,datareportedbyGoldmanandAvenueBankundertheHome MortgageDisclosureAct(‘‘HMDA’’),14aswellasotherinformationprovidedbyGoldman,confidentialsupervisoryinformation,andpubliccommentreceivedontheproposal. AcommenterexpressedconcernaboutGoldman’sinvolvementinsubprimelending, includingtheactivitiesof LittonLoanServicingL.P.(‘‘Litton’’),aloanservicingsubsidiaryof GSBank.Thecommenteralsoalleged,basedonHMDAdata,thatAvenueBank hadengagedindisparatetreatmentof minorityindividualsinhomemortgagelending. A.CRAPerformanceEvaluation AsprovidedintheCRA,theBoardhasconsideredtheconvenienceandneedsfactorin lightof theevaluationsbytheappropriatefederalsupervisorsof theCRAperformance recordof Goldman’sinsureddepositoryinstitution.Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocess becauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.15 GSBankwasformedinNovember2008throughthemergerof Goldman’sexistingUtah industrialbankintoitsNewYorklimited-purposetrustcompany,withthesurvivingorganizationdoingbusinessasGoldmanSachsBankUSA.GSBankhasnotbeenevaluated undertheCRAbytheFederalReserveBankof NewYork;however,itsindustrialbank predecessorwiththesamenamereceivedaCRAcompositeratingof ‘‘satisfactory’’atits mostrecentCRAperformanceevaluationbytheFederalDepositInsuranceCorporation (‘‘FDIC’’),asof June16,2008.AvenueBankreceivedan‘‘outstanding’’ratingatitsmost recentCRAperformanceevaluationbytheFDIC,asof June29,2010. B.HMDAandCompliancewithFairLendingandOtherConsumerProtectionLaws TheBoardhascarefullyconsideredthefairlendingrecordsandHMDAdataof Goldman andAvenueinlightof publiccommentsreceivedontheproposal.Thecommenteralleged, basedon2008HMDAdata,thatAvenueBankintheNashvilleMetropolitanStatistical Area(‘‘MSA’’)madeadisproportionatelysmallnumberof prime-rateloanstoAfrican Americanborrowersseekinghomemortgagerefinancingloans.TheBoard’sanalysisof the lending-relatedallegationsincludedareviewof 2008and2009HMDAdatareportedby AvenueBank,whichoriginatesprimeresidentialmortgageloans,andof thebank’s2008 and2009HMDAlendingdatainitscombinedCRAassessmentareas.16 12 12U.S.C.§§2901–2908;12U.S.C.§1842(c)(2). 13 12U.S.C.§2903. 14 12U.S.C.§§2801–2810. 15 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 16 Thebank’s2008combinedCRAassessmentareasconsistedofportionsoftheDavidsonandWilliamson countiesintheNashvilleMSA,ChesterCountyintheJackson,TennesseeMSA,andCrockettCounty,anon- MSATennesseecounty.

LegalDevelopments:FirstQuarter,2011 115 AlthoughtheHMDAdatamightreflectcertaindisparitiesintheratesof loanapplications, originations,denials,orpricingamongmembersof differentracialorethnicgroupsincertainlocalareas,theyprovideaninsufficientbasisbythemselvesonwhichtoconclude whetherornotAvenueBankisexcludingorimposinghighercostsonanyracialorethnic grouponaprohibitedbasis.TheBoardrecognizesthatHMDAdataalone,evenwiththe recentadditionof pricinginformation,provideonlylimitedinformationaboutthecovered loans.17HMDAdata,therefore,havelimitationsthatmakethemaninadequatebasis, absentotherinformation,forconcludingthataninstitutionhasengagedinillegallending discrimination. TheBoardisneverthelessconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlendingandbelievesthatalllendinginstitutionsareobligatedtoensurethattheir lendingpracticesarebasedoncriteriathatensurenotonlysafeandsoundlendingbutalso equalaccesstocreditbycreditworthyapplicantsregardlessof theirraceorethnicity.Moreover,theBoardbelievesthatallbankholdingcompaniesandtheiraffiliatesshouldconduct mortgagelendingoperationsthatarefreeof abusivelendingpracticesandincompliance withallconsumerprotectionlaws. Becauseof thelimitationsof HMDAdata,theBoardhasconsideredthesedatacarefully andtakenintoaccountotherinformation,includingexaminationreportsthatprovideonsiteevaluationsof compliancebyAvenue’ssubsidiaryinsureddepositoryinstitutionwith fairlendinglaws.TheBoardalsohasconsultedwiththeFDIC,AvenueBank’sprimary federalsupervisor.Inaddition,theBoardhasconsideredinformationprovidedbyAvenue aboutitscompliancerisk-managementsystems. Therecordof thisapplication,includingconfidentialsupervisoryinformation,indicates thatAvenueBankhastakenstepstoensurecompliancewithfairlendingandother consumerprotectionlawsandregulations.AvenueBank’sloanpoliciesincludeacomprehensivefairlendingpolicythatprohibitsAvenueBankanditsemployeesfromengagingin discriminatorylendingpractices.Thebank’slendingemployeesarerequiredtoparticipate intrainingthatincludescompliancewithfairlendinglawsandotherapplicablelawsand regulationsforaccepting,underwriting,andprocessingconsumercreditapplications. AvenueBank’screditcommitteereviewsmonthlyasummaryof everyconsumerloan applicationforadherencetofairlendingrequirements.Additionally,AvenueBankhiresan independentpartytoperformfairlendingcompliancereviews. Thecommenteralsoexpressedconcernaboutthesubprimelendingpracticesof Goldman andLitton.18Littonservicessubprimeloansoriginatedbythirdpartiesbutdoesnotoriginateorpurchaseanyresidentialmortgageloans.Italsohasnoroleinthelendingpractices of theresidentialmortgageoriginators.19GoldmanhasrepresentedthatLittonconducts qualitycontroltestingtoensurecompliancewithitsinternalpoliciesandprocedures,as 17 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenot availablefromHMDAdata. 18 ThecommenteralsoexpressedconcernaboutGoldman’sinvolvementinresidentialmortgagesecuritization. Goldmanhasrepresentedthatitdoesnotcurrentlymakewarehouseloanstooriginatorsofnontraditional mortgages,originatenontraditionalmortgages,orpurchasethemfromoriginatorsforpurposesofsecuritization.Goldmanalsorepresentedthatitdoesnotrefercustomerstoanysubprimemortgagelender. 19 ThecommenterexpressedconcernaboutsubprimeloansoriginatedbyFremontInvestmentandLoan(‘‘Fremont’’)thatthecommenterhasallegedwereacquiredbyLitton.Fremontwasasubprimelenderwhoseparent, FremontGeneral,filedforbankruptcyin2008.Littonacquiredtheservicingrightsforloansoriginatedby Fremontbutdidnotacquireownershipoftheloansandwasnotinvolvedinoriginatingthem.

116 FederalReserveBulletin|June2011 wellastheapplicableconsumerprotectionlawsandregulations,andreportstheresultsto Goldmanmonthly.Inaddition,Goldman’sinternalauditfunctionmonitorscomplianceby Littonandothersubsidiarieswithapplicableconsumerprotectionlaws. TheFederalReserveisconductinganin-depthreviewof practicesatLittonandotherlarge mortgageservicers,includingareviewof internalcontrolsandprocessesrelatedtoall aspectsof serviceroperations.TheFederalReservehassupervisoryauthorityoverbank holdingcompaniesandtheirnonbanksubsidiariesandmaytakesupervisoryorother actionsinconnectionwiththosereviews,astheBoarddeterminestobeappropriate.In addition,aspartof itssupervisoryprocess,theBoardwillcontinuetomonitortheoperationsof LittonaswellasotherGoldmansubsidiariestoensurethattheirprocessesand procedurescomplywithapplicableconsumerprotectionlawsandregulations. C.ConclusiononConvenienceandNeedsandCRAPerformance TheBoardhascarefullyconsideredallthefactsof record,includingevaluationsof the CRAperformancerecordsof GSBankandAvenueBank,informationprovidedbyGoldmanandAvenueBank,commentsreceivedontheproposal,andconfidentialsupervisory information.Basedonareviewof theentirerecord,includingthenoncontrollingnatureof theinvestment,theBoardconcludesthatconsiderationsrelatingtotheconvenienceand needsfactorandtheCRAperformancerecordsof therelevantinsureddepositoryinstitutionsareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyGoldmanwiththeconditionsimposedinthisorderandthecommitments madetotheBoardinconnectionwiththeapplication.20Forpurposesof thisaction,the conditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoard inconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Byorderof theBoardof Governors,effectiveMarch11,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin.Absentandnotvoting:GovernorWarsh. RobertdeV.Frierson DeputySecretaryof theBoard 20 ThecommenterrequestedthattheBoardholdapublicmeetingorhearingontheproposal.Section3ofthe BHCActdoesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisoryauthorityforthebanktobeacquiredmakesawrittenrecommendationofdenialoftheapplication.The Boardhasnotreceivedsucharecommendationfromthoseauthorities.Underitsrules,theBoardalsomay,in itsdiscretion,holdapublicmeetingorhearingonanapplicationtoacquireabankifnecessaryorappropriate toclarifymaterialfactualissuesrelatedtotheapplicationandtoprovideanopportunityfortestimony(12CFR 225.16(e),262.25(d)).TheBoardhasconsideredcarefullythecommenter’srequestinlightofallthefactsof record.Asnoted,thecommenterhadampleopportunitytosubmititsviewsand,infact,submittedwritten commentsthattheBoardhasconsideredcarefullyinactingontheproposal.Thecommenter’srequestfailsto demonstratewhywrittencommentsdonotpresentitsviewsadequatelyorwhyameetingorhearingotherwise wouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublicmeetingorhearingisnotrequiredorwarrantedinthiscase.Accordingly,therequestfora publicmeetingorhearingontheproposalisdenied.

LegalDevelopments:FirstQuarter,2011 117 Appendix PassivityCommitments TheGoldmanSachsGroup,Inc.(‘‘GoldmanSachs’’),NewYork,NewYork,anditssubsidiariesandaffiliates(collectively,the‘‘GoldmanSachsGroup’’),willnot,withoutthe priorapprovalof theBoardoritsstaff,directlyorindirectly: 1. Exerciseorattempttoexerciseacontrollinginfluenceoverthemanagementorpolicies of AvenueFinancialHoldingsInc.(‘‘AvenueFinancial’’),Nashville,Tennessee,orany of itssubsidiaries; 2. Haveorseektohavemorethanonerepresentativeof theGoldmanSachsGroupserve ontheboardof directorsof AvenueFinancialoranyof itssubsidiaries; 3. Permitanyrepresentativeof theGoldmanSachsGroupwhoservesontheboardof directorsof AvenueFinancialoranyof itssubsidiariestoserve(i)asthechairmanof theboardof directorsof AvenueFinancialoranyof itssubsidiaries,(ii)asthechairmanof anycommitteeof theboardof directorsof AvenueFinancialoranyof itssubsidiaries,(iii)asamemberof anycommitteeof theboardof directorsof Avenue Financialoranyof itssubsidiariesif theGoldmanSachsGrouprepresentativeoccupiesmorethan25percentof theseatsonthecommittee,or(iv)asamemberof any committeeof theboardof directorsof AvenueFinancialoranyof itssubsidiarieswith theauthoritytoactonbehalf of thefullboardof directorsbetweenformalmeetings; 4. Haveorseektohaveanyemployeeorrepresentativeof theGoldmanSachsGroup serveasanofficer,agent,oremployeeof AvenueFinancialoranyof itssubsidiaries; 5. TakeanyactionthatwouldcauseAvenueFinancialoranyof itssubsidiariestobecome asubsidiaryof GoldmanSachs; 6. Own,control,orholdwithpowertovotesecuritiesthat(whenaggregatedwithsecuritiesthattheofficersanddirectorsof theGoldmanSachsGroupown,control,orhold withpowertovote)represent25percentormoreof anyclassof votingsecuritiesof AvenueFinancialoranyof itssubsidiaries; 7. Ownorcontrolequityintereststhatwouldresultinthecombinedvotingandnonvotingequityinterestsof theGoldmanSachsGroupanditsofficersanddirectorstoequal orexceed25percentof thetotalequitycapitalof AvenueFinancialoranyof itssubsidiaries,exceptthat,if theGoldmanSachsGroupanditsofficersanddirectorsown, hold,orhavethepowertovotelessthan15percentof theoutstandingsharesof any classof votingsecuritiesof AvenueFinancial,theGoldmanSachsGroupanditsofficersanddirectorsmayownorcontrolequityinterestsgreaterthan25percent,butin nocasemorethan33.3percent,of thetotalequitycapitalof AvenueFinancialorany of itssubsidiaries; 8. Proposeadirectororslateof directorsinoppositiontoanomineeorslateof nominees proposedbythemanagementorboardof directorsof AvenueFinancialoranyof its subsidiaries; 9. EnterintoanyagreementwithAvenueFinancialoranyof itssubsidiariesthatsubstantiallylimitsthediscretionof AvenueFinancial’smanagementovermajorpoliciesand decisions,including,butnotlimitedto,policiesordecisionsaboutemployingandcompensatingexecutiveofficers;engaginginnewbusinesslines;raisingadditionaldebtor equitycapital;mergingorconsolidatingwithanotherfirm;oracquiring,selling,leasing,transferring,ordisposingof materialassets,subsidiaries,orotherentities; 10. Solicitorparticipateinsolicitingproxieswithrespecttoanymatterpresentedtothe shareholdersof AvenueFinancialoranyof itssubsidiaries; 11. Disposeorthreatentodispose(explicitlyorimplicitly)of equityinterestsof Avenue Financialoranyof itssubsidiariesinanymannerasaconditionorinducementof specificactionornon-actionbyAvenueFinancialoranyof itssubsidiaries;or 12. EnterintoanyotherbankingornonbankingtransactionswithAvenueFinancialor anyof itssubsidiaries,exceptthattheGoldmanSachsGroupmayestablishandmain-

118 FederalReserveBulletin|June2011 taindepositaccountswithAvenueFinancial,providedthattheaggregatebalanceof all suchdepositaccountsdoesnotexceed$500,000andthattheaccountsaremaintained onsubstantiallythesametermsasthoseprevailingforcomparableaccountsof persons unaffiliatedwithAvenueFinancial. ThetermsusedinthesecommitmentshavethesamemeaningsassetforthintheBank HoldingCompanyActof 1956(‘‘BHCAct’’),asamended,andtheBoard’sRegulationY. GoldmanSachsunderstandsthatthesecommitmentsconstituteconditionsimposedin writinginconnectionwiththeBoard’sfindingsanddecisionsinGoldmanSachs’sapplicationtoretain9.8percentof theoutstandingcommonstockof AvenueFinancial,pursuant tosection3(a)(3)of theBHCAct,and,assuch,maybeenforcedinproceedingsunder applicablelaw.GoldmanSachsfurtherunderstandsthatitgenerallymustfileanapplicationandreceivepriorapprovalof theBoard,pursuanttosection3(a)(3)of theBHCAct, foranysubsequentacquisitionof controlof votingsharesof AvenueFinancialthatwould resultinGoldmanSachs,directlyorindirectly,owningorcontrollingadditionalvoting sharesinexcessof 9.8percentof theoutstandingcommonsharesof AvenueFinancial. Orders Issued Under Sections 3 and 4 of the Bank Holding Company Act Chuo Mitsui Trust Holdings, Inc. Tokyo, Japan OrderApprovingtheAcquisitionof aBankHoldingCompanyandNoticetoEngagein NonbankingActivities ChuoMitsuiTrustHoldings,Inc.(‘‘CMTH’’),acorporationorganizedunderthelawsof Japan,hasrequestedtheBoard’sapprovalundersection3of theBankHoldingCompany Act(‘‘BHCAct’’)1tobecomeabankholdingcompanybyacquiringTheSumitomoTrust &BankingCo.,Ltd.(‘‘STB’’),Osaka,Japan,abankorganizedunderthelawsof Japan andabankholdingcompanyundertheBHCAct,therebyindirectlyacquiringSumitomo TrustandBankingCo.(U.S.A.)(‘‘STBUSA’’),Hoboken,NewJersey,awhollyownedsubsidiaryof STB.Inaddition,CMTHhasrequestedtheBoard’sapprovalundersections 4(c)(8)and4(j)of theBHCActandsection225.28of theBoard’sRegulationY2toretain aCMTHsubsidiaryandtoacquirenonbankingcompaniesof STBandtherebyengagein certainpermissiblenonbankingactivities.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(75FederalRegister80501(2010)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthinsections3and4of theBHCAct. 1 12U.S.C.§1842. 2 12U.S.C.§§1843(c)(8)and1843(j);12CFR225.28. 3 Thesenonbankingactivitiesareprovidingfinancialandinvestmentadvisoryactivities,inaccordancewithsection225.28(b)(6)oftheBoard’sRegulationY(12CFR225.28(b)(6)).Specifically,CMTHhasrequested approval(i)toretainindirectcontrolofallthevotingandequityinterestsofChuoMitsuiInvestments,Inc. (‘‘CMI’’),NewYork,NewYork,and(ii)toacquireindirectcontrolof(a)approximately99percentofthevotingandequityinterestsofNikkoAMAmericasHoldingCo.,Inc.(‘‘NAHC’’),NewYork,NewYork,awholly ownedsubsidiaryofNikkoAssetManagementCo.,Ltd.,Tokyo,ofwhichSTBdirectlyownsapproximately 99percentofthevotingandequityinterests,and(b)approximately99percentofthevotingandequityinterestsofNikkoAssetManagementAmericas,Inc.,NewYork,NewYork,awhollyownedsubsidiaryofNAHC (togetherwithNAHC,the‘‘NikkoU.S.Entities’’).STBhaspreviouslyreceivedapprovaltocontroltheNikko U.S.EntitiesandtherebyengageininvestmentadvisoryactivitiesintheUnitedStates.LetterdatedSeptember 29,2009,fromNatashaKosoff,StaffDirector,FederalReserveBankofNewYork,toWilliamJ.Sweet,Esq.

LegalDevelopments:FirstQuarter,2011 119 Thetransactionwillbeeffectedthroughanexchangeof shares(‘‘ShareExchange’’)after whichCMTHwillbecomethesoleshareholderof STBandtheindirectshareholderof all theoutstandingsharesof commonstockof STBUSA.Uponconsummationof theShare Exchange,CMTHwillchangeitsnametoSumitomoMitsuiTrustHoldings,Inc.4 CMTH,withtotalconsolidatedassetsof $161.1billion,isthesixthlargestbankinggroup inJapan.5Throughitssubsidiaries,CMTHprimarilyengagesintrustandbankingbusinessesandotherfinancialservicesinJapanandconductscertainassetmanagementoperationsintheUnitedStates,theUnitedKingdom,andHongKongSAR.TheChuoMitsui TrustandBankingCompany,Limited,Tokyo(‘‘CMTB’’),awhollyownedsubsidiaryof CMTH,accountsforasubstantialmajorityof CMTH’sassets.CMTBmaintainsarepresentativeofficeinNewYork,NewYork,6buthasnootherU.S.bankingoperations. STB,withtotalconsolidatedassetsof $245.6billion,isaregisteredbankholdingcompany thatprimarilyengagesintrustandbankingbusinessesandotherfinancialservicesinJapan andconductscommercialbanking,assetmanagementorcustodialoperationsintheUnited States,theUnitedKingdom,thePeople’sRepublicof China,HongKongSAR,Singapore, andLuxembourg.STBUSA,withtotalassetsof $1.3billion,isastate-charteredbankin NewJerseythatisinsuredbytheFederalDepositInsuranceCorporation.STBUSAoffers custodialandsecuritieslendingservicesprimarilyforJapaneseinstitutionalinvestorsand theiroverseasbranchesandaffiliates. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarkets.TheBHCActalsoprohibitstheBoardfrom approvingabankacquisitionthatwouldsubstantiallylessencompetitioninanyrelevant bankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedin thepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceand needsof thecommunitytobeserved.7 InadditiontooperatingSTBUSA,STBengagesinbankingoperationsintheUnitedStates throughabranchinNewYork,NewYork.CMTHdoesnotcurrentlycontrolaU.S. insureddepositoryinstitution.Basedonallthefactsof record,theBoardconcludesthat consummationof theproposalwouldnothaveanysignificantlyadverseeffectsoncompetitionandthatthecompetitivefactorsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesandbanksinvolvedintheproposaland certainothersupervisoryfactors.8TheBoardalsoreviewsthefinancialandmanagerial resourcesof theorganizationsinvolvedinaproposalundersection4of theBHCAct.9The 4 AsaresultoftheShareExchange,threeJapanesetrustbanks,STB,CMTB,andChuoMitsuiAssetTrustand BankingCompany,Limited,willbewhollyownedsubsidiariesofCMTH.CMTHandSTBintendthatthese threebankswillbemergedonApril1,2012,withSTBasthesurvivingentity.Thecombinedsubsidiarywillbe renamedSumitomoMitsuiTrustBank,Limited. 5 DataareasofDecember31,2010,unlessotherwisenoted. 6 SeeTheChuoMitsuiTrust&BankingCo.,Ltd.,86FederalReserveBulletin702(2000). 7 12U.S.C.§1842(c)(1). 8 12U.S.C.§1842(c)(2)and(3). 9 12CFR225.26(b).

120 FederalReserveBulletin|June2011 Boardhascarefullyconsideredthesefactorsinlightof allthefactsof record,including supervisoryandexaminationinformationreceivedfromtherelevantfederalandstate supervisorsof theorganizationsinvolved,andpubliclyreportedandotheravailableinformation,includinginformationprovidedbyCMTH.TheBoardalsohasconsultedwiththe JapaneseFinancialServicesAgency(‘‘FSA’’),theagencywithprimaryresponsibilityfor thesupervisionandregulationof Japanesebankingorganizations,includingCMTHand STB.10 Inevaluatingfinancialfactorsinproposalsinvolvingbankholdingcompanies,theBoard reviewsthefinancialconditionof theapplicantsandthetargetdepositoryinstitutions.In assessingfinancialresources,theBoardconsistentlyhasconsideredcapitaladequacytobe especiallyimportant.TheBoardalsoevaluatesthefinancialconditionof theproforma organization,includingitscapitalposition,assetquality,andearningsprospects,andthe impactof theproposedfundingof thetransaction. TheBoardhascarefullyconsideredtheproposalunderthefinancialfactors.Thecapital levelsof CMTHexceedtheminimumlevelsthatwouldberequiredundertheBaselCapital Accordandareconsideredtobeequivalenttothecapitallevelsthatwouldberequiredof a U.S.bankingorganization.Inaddition,STBUSAiswellcapitalizedandwouldremainso onconsummation.Basedonitsreviewof therecord,theBoardalsofindsthatCMTHhas sufficientfinancialresourcestoeffecttheproposal.Asnoted,theproposedtransactionis structuredasashareexchange. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecordsof STBUSA,includingassessmentsof itsmanagement,risk-managementsystems,andoperations.Asnoted,theBoardhasalsoconsultedwiththeFSA.Inaddition,theBoardhas considereditssupervisoryexperiencesandthoseof theotherrelevantbanksupervisory agencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebanking law,includinganti-money-launderinglaws. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe managerialresourcesandfutureprospectsof theorganizationsinvolvedareconsistentwith approval. Section3of theBHCActalsoprovidesthattheBoardmaynotapproveanapplication involvingaforeignbankunlessthebankissubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbytheappropriateauthoritiesinthebank’shomecountry.11 TheBoardhasdeterminedthatotherbanksinJapanweresubjecttohome-countrysupervisiononaconsolidatedbasis.12STBissupervisedbytheFSAonsubstantiallythesame termsandconditionsasthoseotherJapanesebanks.Basedonallthefactsof record,the 10 TheFSAapprovedCMTH’sapplicationtoacquireSTBonMarch1,2011. 11 12U.S.C.§1842(c)(3)(B).AsprovidedinRegulationY,theBoarddetermineswhetheraforeignbankissubject toconsolidatedhome-countrysupervisionunderthestandardssetforthinRegulationK.See12CFR 225.13(a)(4).RegulationKprovidesthataforeignbankwillbeconsideredsubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisiftheBoarddeterminesthatthebankissupervisedorregulated insuchamannerthatitshome-countrysupervisorreceivessufficientinformationontheworldwideoperations ofthebank,includingitsrelationshipwithanyaffiliates,toassessthebank’soverallfinancialconditionandits compliancewithlawsandregulation.See12CFR211.24(c)(1). 12 See,e.g.,MizuhoFinancialGroup,Inc.,89FederalReserveBulletin181(2003);MitsubishiTokyoFinancial Group,Inc.,87FederalReserveBulletin349(2001);SumitomoBankLtd.,83FederalReserveBulletin54(1997); andSumitomoBankLtd.,82FederalReserveBulletin369(1996).

LegalDevelopments:FirstQuarter,2011 121 BoardhasdeterminedthatSTBissubjecttocomprehensivesupervisiononaconsolidated basisbyitshome-countrysupervisor.13 Inevaluatingthisproposal,theBoardalsoconsideredwhetherCMTHissubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbyappropriateauthoritiesin itshomecountry.Thesystemof comprehensivesupervisionorregulationmayvary, dependingonthenatureof theacquiringcompanyandtheproposedinvestment.14As noted,theFSAisthesupervisorof Japanesebankingorganizations,includingholding companiessuchasCMTH.15Assuch,theFSAmayconductinspectionsof CMTHandits subsidiariesandrequireCMTHtosubmitreportsaboutitsoperationsonaconsolidated basis.TheFSAalsomayreviewtransactionsbetweenCMTHanditssubsidiariesandhas authoritytorequireCMTHtotakemeasuresnecessarytoensurethesafetyandsoundness of theCMTHorganization.Basedonallthefactsof record,theBoardhasdetermined thatCMTHissubjecttocomprehensivesupervisiononaconsolidatedbasisbyitsappropriatehome-countryauthoritiesforpurposesof thisapplication.16 Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalareconsistentwithapproval,asaretheothersupervisoryfactorsunderthe BHCAct.17 ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardisrequiredtoconsider theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved,18 including,whereapplicable,therecordsof performanceof therelevantinsureddepository institutionsundertheCommunityReinvestmentAct(‘‘CRA’’).19STBUSAisaspecial-pur- 13 TheBoardalsohaspreviouslyfoundthatCMTH’ssubsidiaryJapanesebankissubjecttocomprehensive supervisiononaconsolidatedbasisbyitshome-countrysupervisor.SeeTheChuoMitsuiTrust&BankingCo., Ltd.,86FederalReserveBulletin702(2000). 14 ChinaInvestmentCorporation,96FederalReserveBulletinB31(2010). 15 See,e.g.,MitsubishiUFJFinancialGroup,Inc.,95FederalReserveBulletinB34(2009);MitsubishiTokyoFinancialGroup,Inc.,87FederalReserveBulletin349(2001). 16 Section3oftheBHCActalsorequirestheBoardtodeterminethatanapplicanthasprovidedadequateassurancesthatitwillmakeavailabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseofits affiliatesthattheBoarddeemsappropriatetodetermineandenforcecompliancewiththeBHCAct(12U.S.C. §1842(c)(3)(A)).TheBoardhasreviewedtherestrictionsondisclosureintherelevantjurisdictionsinwhich CMTHoperatesandhascommunicatedwithrelevantgovernmentauthoritiesconcerningaccesstoinformation.Inaddition,CMTHhascommittedthat,totheextentnotprohibitedbyapplicablelaw,itwillmakeavailabletotheBoardsuchinformationontheoperationsofitsaffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliancewiththeBHCActandotherapplicablefederallaw.CMTHalsohascommitted tocooperatewiththeBoardtoobtainanywaiversorexemptionsthatmaybenecessarytoenableitsaffiliates tomakeanysuchinformationavailabletotheBoard.Inlightofthesecommitments,theBoardhasconcluded thatCMTHhasprovidedadequateassurancesofaccesstoanyappropriateinformationtheBoardmay request. 17 AcommenterassertedthatbothCMTHandSTBhavebeeninvolvedinthesubprimeandpredatorylending industriesintheUnitedStatesandthattheproposalcouldincreasesuchactivitiesinthecombinedorganization.NeitherCMTHnorSTBengagesinanyretaillendingactivitiesintheUnitedStates(includingsubprimelending).AlthoughbothJapanesebankingorganizationsincurredlossesbefore2009onsubprime-related investments,currentfinancialreportsshowthatbothCMTHandSTBsignificantlyreducedtheirholdingsin theseinvestments. ThecommenteralsomadeseveralallegationsthatareoutsidethelimitedstatutoryfactorsthattheBoardis authorizedtoconsiderwhenreviewinganapplicationundertheBHCAct.See,e.g.,TheRoyalBankofScotlandGroupplc,90FederalReserveBulletin87,88n.16(2004);TheRoyalBankofScotlandGroupplc,89Federal ReserveBulletin386,389n.26(2003);WesternBancshares,Inc.v.BoardofGovernors,480F.2d749(10thCir. 1973). 18 12U.S.C.§1842(c)(2). 19 12U.S.C.§2901etseq.

122 FederalReserveBulletin|June2011 posebankexemptfromperformanceevaluationsundertheCRA.20Uponconsummation of theproposal,STBUSAwouldcontinuetooperateasaspecial-purposebankandprovideglobalcustodyandsecuritieslendingservicesaspartof alargerorganization.Based onareviewof theentirerecord,theBoardhasconcludedthatconvenienceandneedsconsiderationsareconsistentwithapprovalof theproposal. NonbankingActivities CMTHalsohasfiledanoticeundersections4(c)(8)and4(j)of theBHCActtoretainits ownershipinterestinCMI,toindirectlyacquiretheNikkoU.S.Entities,andtoengagein nonbankingactivitiesthatarepermissibleforbankholdingcompanies.21TheBoardhas previouslydeterminedbyregulationthatthefinancialandinvestmentadvisoryactivities forwhichCMTHhasrequestedapprovalarecloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.22Aspartof itsevaluationof thepublicinterestfactorsunder section4(j)of theBHCAct,theBoardalsomustdeterminethattheoperationsof CMI andtheNikkoU.S.Entities‘‘canreasonablybeexpectedtoproducebenefitstothepublic, suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweigh possibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfair competition,conflictsof interests,orunsoundbankingpractices.’’23 TheBoardhasconsideredthecompetitiveeffectsof CMTH’sproposedretentionof CMI andacquisitionof STB’snonbankingsubsidiariesandactivitiesinlightof allthefactsof record.CMIandSTBbothengageinfinancialandinvestmentadvisoryservicesinthe UnitedStates.Thegeographicmarketforfinancialandinvestmentadvisoryservicesinthe UnitedStatesisregionalornationalinscope,withnumerouscompetitors.CMIandthe NikkoU.S.Entitiescompetedirectlyonlytoalimitedextent.Moreover,itisexpectedthat CMIwillbeliquidatedinthethirdquarterof 2011.Asaresult,theBoardfindsthatconsummationof theproposalwouldhaveaminimaleffectoncompetitionfortheseservices. Inaddition,theBoardhasreviewedthepublicbenefitsof theproposedacquisition.Consummationof theproposalwouldstrengthentheorganizationandwouldresultinbenefits tocurrentandfuturecustomersof theU.S.nonbankingoperations.Forthereasonsdiscussedabove,andbasedontheentirerecord,theBoardhasdeterminedthattheconductof theproposednonbankingactivitieswithintheframeworkof RegulationYandBoard precedentisnotlikelytoresultinsignificantlyadverseeffects,suchasundueconcentration of resources,decreasedorunfaircompetition,conflictsof interests,orunsoundbanking practices. Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalcanreasonablybeexpectedtoproducepublicbenefitsthatwouldoutweighanylikely adverseeffects.Accordingly,theBoardhasdeterminedthatthebalanceof thepublicbenefitsunderthestandardof section4(j)(2)of theBHCActisconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationandnoticeshouldbe,andherebyare,approved.Inreachingitsconclusion,the Boardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtocon- 20 12CFR345.11(c)(3). 21 12U.S.C.§§1843(c)(8)and1843(j). 22 12CFR225.28(b)(6). 23 12U.S.C.§1843(j)(2)(A).

LegalDevelopments:FirstQuarter,2011 123 siderundertheBHCAct.TheBoard’sapprovalisspecificallyconditionedoncompliance byCMTHwithallthecommitmentsmadetotheBoardinconnectionwiththeapplication andnoticeandonthereceiptof allotherrequiredregulatoryapprovalsfortheproposal. TheBoard’sapprovalof theproposednonbankingactivitiesissubjecttoalltheconditions setforthinRegulationY,includingthoseinsections225.7and225.25(c),24andtothe Board’sauthoritytorequiresuchmodificationorterminationof theactivitiesof abank holdingcompanyoranyof itssubsidiariesastheBoardfindsnecessarytoensurecompliancewith,andtopreventevasionof,theprovisionsof theBHCActandtheBoard’sregulationsandordersissuedthereunder.Theseconditionsandcommitmentsaredeemedtobe conditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecision and,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuch periodisextendedforgoodcausebytheBoardortheFederalReserveBankof NewYork, actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveMarch15,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin.Absentandnotvoting:GovernorWarsh. RobertdeV.Frierson DeputySecretaryof theBoard 24 12CFR225.7and225.25(c).

125 Federal Reserve BULLETIN October 2011 Vol. 97, No. 4 Legal Developments: Second Quarter, 2011 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act Hancock Holding Company Gulfport, Mississippi OrderApprovingtheAcquisitionof aBankHoldingCompany HancockHoldingCompany(“Hancock”),Gulfport,Mississippi,hasrequestedthe Board’sapprovalundersection3of theBankHoldingCompanyAct(“BHCAct”)1to acquireWhitneyHoldingCorporation(“Whitney”)andindirectlyacquireWhitney’s whollyownedsubsidiarybank,WhitneyNationalBank,bothof NewOrleans,Louisiana.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(76FederalRegister7211(February9,2011)).Thetimeforfilingcommentshasexpired,andtheBoardhasconsideredtheapplicationandallcommentsreceived inlightof thefactorssetforthintheBHCAct. Hancock,withtotalconsolidatedassetsof approximately$8.2billion,isthe110thlargest depositoryorganizationinUnitedStates,controllingapproximately$7.0billionindeposits. Hancockcontrolsthreesubsidiarybanks,HBLA,HBAL,andHancockBank,whichoperateinfourstates.3HancockisthethirdlargestdepositoryorganizationinMississippi,controllingdepositsof approximately$4.6billion,andthesixthlargestdepositoryorganizationinLouisiana,controllingdepositsof approximately$2.2billion. Whitney,withtotalconsolidatedassetsof approximately$11.8billion,isthe82ndlargest depositoryorganizationintheUnitedStates.WhitneyNationalBank,Whitney’sonlysubsidiarydepositoryinstitution,4operatesinAlabama,Florida,Louisiana,Mississippi,and Texas.Whitneyisthe4thlargestdepositoryorganizationinLouisiana,controllingdeposits of approximately$8.6billion,andthe53rdlargestdepositoryinstitutioninMississippi, controllingdepositsof approximately$155million. 1 12U.S.C.§1842. 2 HancockisafinancialholdingcompanywithinthemeaningoftheBHCAct.OnApril29,2011,theFederal DepositInsuranceCorporation(“FDIC”)approvedapplicationsfiledbyHancockundertheBankMergerAct(12 U.S.C.§1828(c))tomergeWhitneyNationalBankandHancock’ssubsidiarybank,HancockBankofAlabama (“HBAL”),Mobile,Alabama,intoanothersubsidiarybankofHancock,HancockBankofLouisiana(“HBLA”), BatonRouge,Louisiana.Thatsameday,theFDICalsoapprovedanapplicationfiledbyHancockundertheBank MergerActtosellandtransfertoHancockBank,Gulfport,theFloridaandAlabamabranchesofHBLAacquired inthemergerofWhitneyNationalBank,HBAL,andHBLA. 3 HBLAoperatesinLouisiana;HBALoperatesinAlabama;andHancockBankoperatesinFloridaandMississippi. 4 Forpurposesofthisorder,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,andsavings associations.

126 FederalReserveBulletin|October2011 Onconsummationof theproposal,Hancockwouldbecomethe55thlargestdepository organizationintheUnitedStates,withtotalconsolidatedassetsof approximately$20billion.Hancockwouldcontroldepositsof approximately$16.2billion,whichrepresentless than1percentof thetotalamountsof depositsof insureddepositoryinstitutionsinthe UnitedStates.InMississippi,Hancockwouldremainthethirdlargestdepositoryorganization,controllingdepositsof approximately$4.7billion,whichrepresentapproximately10 percentof depositsof insureddepositoryinstitutionsinthestate.InLouisiana,Hancock wouldbecomethelargestdepositoryorganization,controllingdepositsof approximately $10.8billion,whichrepresentapproximately25percentof depositsof insureddepository institutionsinthestate.InAlabama,Hancockwouldbecomethe16thlargestdepository organization,controllingdepositsof approximately$673million,whichrepresentlessthan 1percentof depositsof insureddepositoryinstitutionsinthestate.InFlorida,Hancock wouldbecomethe26thlargestdepositoryorganization,controllingdepositsof approximately$2.6billion,whichrepresentlessthan1percentof depositsof insureddepository institutionsinthestate.InTexas,Hancockwouldbecomethe64thlargestdepositoryorganization,controllingdepositsof $740million,whichrepresentlessthan1percentof depositsof insureddepositoryinstitutionsinthestate. InterstateAnalysis Section3(d)of theBHCActallowstheBoardtoapproveanapplicationbyabankholding companytoacquirecontrolof abanklocatedinastateotherthanthebankholdingcompany’shomestateif certainconditionsaremet.Forpurposesof theBHCAct,thehome stateof HancockisMississippi,5andWhitneyislocatedinAlabama,Florida,Louisiana, Mississippi,andTexas.6 Basedonareviewof allthefactsof record,includingrelevantstatestatutes,theBoard findsthattheconditionsforaninterstateacquisitionenumeratedinsection3(d)of the BHCActaremetinthiscase.7Inlightof allthefactsof record,theBoardispermittedto approvetheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations TheBHCActprohibitstheBoardfromapprovingaproposalthatwouldresultina monopolyorthatwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitstheBoardfrom approvingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbanking market,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthe publicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneeds of thecommunitytobeserved.8 5 Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofallbankingsubsidiariesofsuch companywerethelargestonJuly1,1966,orthedateonwhichthecompanybecameabankholdingcompany, whicheverislater(12U.S.C.§1841(o)(4)(C)). 6 Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersabanktobelocatedinthestatesinwhich thebankischarteredorheadquarteredoroperatesabranch(12U.S.C.§§1841(o)(4)–(7),1842(d)(1)(A),and 1842(d)(2)(B)). 7 12U.S.C.§§1842(d)(1)(A)–(B)and1842(d)(2)–(3).Hancockisadequatelycapitalizedandadequatelymanaged, asdefinedbyapplicablelaw.WhitneyNationalBankhasbeeninexistenceandoperatedfortheminimum periodoftimerequiredbyapplicablestatelawsandformorethanfiveyears.See12U.S.C.§1842(d)(1)(B)(i)– (ii).Onconsummationoftheproposal,Hancockwouldcontrollessthan10percentofthetotalamountof depositsofinsureddepositoryinstitutionsintheUnitedStates(12U.S.C.§1842(d)(2)(A)).Inaddition,Hancockwouldcontrollessthan30percent,ortheapplicablepercentageestablishedunderstatelaw,ofthetotal amountofdepositsofinsureddepositoryinstitutionsintherelevantstates.See12U.S.C.§1842(d)(2)(B)–(C). Allotherrequirementsofsection3(d)oftheBHCActwouldbemetonconsummationoftheproposal. 8 12U.S.C.§1842(c)(1).

LegalDevelopments:SecondQuarter,2011 127 Thesubsidiarydepositoryinstitutionsof HancockandWhitneycompetedirectlyinnine bankingmarkets,locatedinAlabama,Florida,Mississippi,andLouisiana.TheBoardhas reviewedcarefullythecompetitiveeffectsof theproposalineachof thesebankingmarkets inlightof allthefactsof recordandthepubliccommentsontheproposal.9Inparticular, theBoardhasconsideredthenumberof competitorsthatwouldremaininthebanking markets,therelativesharesof totaldepositsindepositoryinstitutionsinthemarkets (“marketdeposits”)controlledbyHancock’sinsureddepositoryinstitutionsandWhitney NationalBank,10theconcentrationlevelsof marketdepositsandtheincreaseinthoselevelsasmeasuredbytheHerfindahl–HirschmanIndex(“HHI”)undertheDepartmentof JusticeMergerGuidelines(“DOJBankMergerGuidelines”),11andothercharacteristicsof themarkets.Inaddition,theBoardhasconsideredcommitmentsmadebyHancocktothe Boardtoreducethepotentialthattheproposalwouldhaveadverseeffectsoncompetition bydivestingeightWhitneybranches,accountingforatotalof approximately$202million indeposits,thatoperateintwobankingmarkets,oneinMississippiandoneinLouisiana. A.BankingMarketswithinEstablishedGuidelines Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsof theDOJBankMergerGuidelinesinsixof thebankingmarketsinwhich Hancock’ssubsidiarydepositoryinstitutionsandWhitneyNationalBankdirectlycompete.12Onconsummationof theproposal,onemarketwouldremainhighlyconcentrated, threemarketswouldremainmoderatelyconcentrated,andtwowouldremainunconcentrated,asmeasuredbytheHHI.ThechangeinHHIintheonehighlyconcentratedmarket wouldbesmallandconsistentwithBoardprecedentandthethresholdsintheDOJBank MergerGuidelines.Ineachof thebankingmarkets,numerouscompetitorswouldremain. B.CertainBankingMarketswithDivestitures Afteraccountingforthebranchdivestitures,13consummationof theacquisitionwouldbe consistentwithBoardprecedentandthethresholdsintheDOJBankMergerGuidelinesin 9 Onecommenterexpressedgeneralconcernsaboutthecompetitiveeffectsofthisproposalandtheeffectsit mighthaveonconsumerchoicesforbankingservices. 10 DepositandmarketsharedataareasofJune30,2010,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.Inrecognitionthatthriftinstitutionshavebecome,orhavethe potentialtobecome,significantcompetitorsofcommercialbanks,theBoardregularlyhasincludedthrift depositsinthemarketconcentrationandmarketsharecalculationsona50percentweightedbasis.See,e.g., FirstHawaiian,Inc.,77FederalReserveBulletin52,55(1991). 11 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontalMerger Guidelines,theDOJhasconfirmedthatitsmergerguidelines,whichwereissuedin1995,werenotchanged. PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/10-at- 938.html. 12 Thesebankingmarketsandtheeffectsoftheproposalontheirconcentrationsofbankingresourcesare describedinAppendixA. 13 Hancockhascommittedthat,notlaterthan60daysafterconsummatingtheproposedacquisition,itwill executeanagreementfortheproposeddivestitureintheBiloxi,Mississippi,andWashingtonParish,Louisiana, bankingmarkets,consistentwiththisorder,withoneormorepurchasersdeterminedbytheBoardtobecompetitivelysuitable.HancockhasacknowledgedthatdivestitureofabranchintheWashingtonParishmarket mustbemadetoacompetitoroutsidethemarket.Hancockalsohascommittedtocompletethedivestiture within180daysafterconsummationoftheproposedmerger.Inaddition,Hancockhascommittedthat,ifitis unsuccessfulincompletingtheproposeddivestiturewithinsuchtimeperiod,itwilltransfertheunsoldbranch toanindependenttrusteewhowillbeinstructedtosellthebranchtoanalternatepurchaserorpurchasersin accordancewiththetermsofthisorderandwithoutregardtoprice.BoththetrusteeandanyalternatepurchasermustbedeemedacceptabletotheBoard.SeeBankAmericaCorporation,78FederalReserveBulletin338 (1992);UnitedNewMexicoFinancialCorporation,77FederalReserveBulletin484(1991).

128 FederalReserveBulletin|October2011 theBiloxi,Mississippi,andWashingtonParish,Louisiana,bankingmarkets.14Although bothmarketswouldremainhighlyconcentrated,theHHIwouldincreasenomorethan112 pointsintheBiloximarketandnomorethan181pointsintheWashingtonParishmarket. Inaddition,14otherdepositoryinstitutionswouldoperateintheBiloximarketand4other depositoryinstitutionswouldoperateintheWashingtonParishmarket. C.TangipahoaBankingMarket IntheTangipahoabankingmarket(“TangipahoaMarket”),15Hancockoperatesthethird largestdepositoryinstitution,controllingdepositsof approximately$174million,which representapproximately14percentof marketdeposits.Whitneyoperatesthefourthlargest depositoryinstitutioninthemarket,controllingdepositsof approximately$108million, whichrepresentapproximately8percentof marketdeposits.Onconsummationof the mergertheproposal,Hancockwouldbecomethesecondlargestdepositoryinstitutionin themarket,controllingdepositsof approximately$282million,whichrepresent approximately22percentof marketdeposits.TheHHIwouldincrease228pointsto1842. SeveralfactorsindicatethattheincreaseinconcentrationintheTangipahoaMarket,as measuredbytheHHIandHancock’smarketshare,overstatesthepotentialcompetitive effectsof theproposalinthemarket.Afterconsummationof theproposal,14othercommercialbankandthriftcompetitorswouldremaininthemarket.TheBoardhasalsoconsideredthecompetitiveinfluenceof twoactivecommunitycreditunionsintheTangipahoa Market.Bothcreditunionsofferawiderangeof products,operateatleastonestreet-level branch,andhavebroadmembershipcriteriathatincludemostof theresidentsinTangipahoaMarket.16TheBoardhasconcludedthattheactivitiesof suchcreditunionsexertcompetitiveinfluencethatmitigates,inpart,thepotentialeffectsof theproposal.17 D.Viewsof OtherAgenciesandConclusiononCompetitiveConsiderations TheDOJalsohasconductedadetailedreviewof thepotentialcompetitiveeffectsof the proposalandhasadvisedtheBoardthat,inlightof theproposeddivestitures,consummationof theproposalwouldnotlikelyhaveasignificantlyadverseeffectoncompetitionin anyrelevantbankingmarket.18Inaddition,theappropriatebankingagencieshavebeen affordedanopportunitytocommentandhavenotobjectedtotheproposal. Basedontheseandotherfactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly,basedonallthefactsof recordandsubjecttocompletionof theproposeddivestitures,theBoardhasdetermined thatcompetitiveconsiderationsareconsistentwithapproval. 14 Thesebankingmarketsandtheeffectsoftheproposalontheirconcentrationsofbankingresourcesare describedinAppendixB. 15 TheTangipahoaMarketisdefinedasTangipahoaParish,Louisiana,excludingthecityofKentwood. 16 TheBoardpreviouslyhasconsideredthecompetitivenessofcertainactivecreditunionsasamitigatingfactor. See,e.g.,ThePNCFinancialServicesGroup,Inc.,93FederalReserveBulletinC65(2007);RegionsFinancial Corporation,93FederalReserveBulletinC16(2007);WachoviaCorporation,92FederalReserveBulletinC183 (2006);F.N.B.Corporation,90FederalReserveBulletin481(2004). 17 Thesecreditunionscontrolapproximately$38millionindepositsinthemarketthat,ona50percentweighted basis,representapproximately3percentofmarketdeposits.Withthesedepositsweightedat50percent,Hancockwouldcontrolapproximately21percentofthemarketdeposits,andtheHHIwouldincrease215pointsto 1742. 18 HancockhascommittedtotheBoardthatitwillcomplywithitsdivestitureagreementwithDOJdatedApril1, 2011.

LegalDevelopments:SecondQuarter,2011 129 Financial,Managerial,andFutureProspectsandSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesanddepositoryinstitutionsinvolvedinthe proposalandcertainothersupervisoryfactors.19TheBoardhasconsideredthosefactorsin lightof allthefactsof record,includingconfidentialsupervisoryandexaminationinformationfromtherelevantfederalandstatesupervisorsof theorganizationsinvolved,publiclyreportedandotherfinancialinformation,informationprovidedbyHancock,andpubliccommentsreceivedontheproposal.20 Inevaluatingfinancialfactorsinexpansionproposalsbybankingorganizations,theBoard reviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-onlyand consolidatedbasis,aswellasthefinancialconditionof thesubsidiarybanksandsignificant nonbankingoperations.TheBoardalsoevaluatesthefinancialconditionof thecombined organization,includingitscapitalposition,assetquality,andearningsprospects,andthe impactof theproposedfundingof thetransaction.Inassessingfinancialfactors,theBoard consistentlyhasconsideredcapitaladequacytobeespeciallyimportant. TheBoardhascarefullyconsideredthefinancialfactorsof thisproposal.Hancockandits subsidiarydepositoryinstitutionsarewellcapitalizedandwouldremainsoonconsummationof theproposal.WhitneyandWhitneyNationalBankcurrentlyarewellcapitalized. Theproposedtransactionisstructuredasashareexchange.Basedonitsreviewof the record,theBoardconcludesthatHancockhassufficientfinancialresourcestoeffectthe proposal. TheBoardhasalsoconsideredthemanagerialresourcesof theapplicant,includingthe proposedmanagementof theorganization.TheBoardhasreviewedtheexamination recordsof Hancockanditssubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas considereditssupervisoryexperiencesandthoseof theotherrelevantbanksupervisory agencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebanking law,includinganti-money-launderinglaws.Hancockanditssubsidiarydepositoryinstitutionsareconsideredtobewellmanaged.TheBoardalsohasconsideredHancock’splans of implementingtheproposal,includingtheproposedmanagementafterconsummationof theproposal.Inaddition,theBoardhasconsideredthefutureprospectsof theorganizationsinvolvedintheproposalinlightof financialandmanagerialresourcesandtheproposedbusinessplan. Basedonallthefactsof record,theBoardconcludesthatconsiderationrelatingtothe financialandmanagerialresourcesandfutureprospectsof theproposalareconsistentwith approval,asaretheothersupervisoryfactorsundertheBHCAct. 19 12U.S.C.§1842(c)(2)and(3). 20 OnecommenterexpressedconcernaboutalawsuitfiledbyWhitneyshareholdersagainstWhitney,itsboardof directors,andHancockthatalleges,amongotherthings,breachoffiduciarydutytoshareholdersbydirectors andconflictsofinterestinselectingHancockoveranotherpotentialacquirer.Thelitigationisinitspreliminary stages,andnowrongdoinghasbeenadjudicated.Thecommenter,citingapressreport,alsoassertedthatWhitney’sboardofdirectorsshouldhaveselectedanothercompany’scompetingbid,describedonlyas“Company A”inHancock’sfilingswiththeSecuritiesandExchangeCommission. TheBoardhasconsideredtheseconcernsinitsreviewofHancock’sproposalandotherinformationrelatingto thefinancialandmanagerialfactorstheBoardmustconsiderundersection3oftheBHCAct.

130 FederalReserveBulletin|October2011 ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardisrequiredtoconsider theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved andtakeintoaccounttherecordsof therelevantinsureddepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).21TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccount arelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity, includinglowandmoderate-incomeneighborhoods,inevaluatingexpansionaryproposals.22 A.CRAPerformanceEvaluations AsprovidedintheCRA,theBoardhasconsideredtheconvenienceandneedsfactorin lightof theevaluationsbytheappropriatefederalsupervisorof theCRAperformance recordsof Hancock’sinsureddepositoryinstitutions.Aninstitution’smostrecentCRA performanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.23 HBLA,HBAL,andHancockBankreceived“satisfactory”ratingsattheirmostrecent CRAperformanceevaluationsbytheFDIC,asof January4,2010,March30,2009,and June11,2007,respectively.WhitneyNationalBankreceivedan“outstanding”ratingatits mostrecentCRAperformanceevaluationbytheOfficeof theComptrollerof theCurrency,asof February7,2007.Hancockhasrepresentedthataftertheacquisition,thecombinedorganizationwillofferthesameorsubstantiallysimilarproductsandservicesasare currentlyofferedbytherespectiveorganizations. B.HMDAandFairLendingRecord TheBoardhasconsideredcarefullyallthefactsof record,includingreportsof examinationof theCRAperformancerecordsof Hancock’ssubsidiaryinsureddepositoryinstitutionsandWhitneyNationalBank,datareportedbyHancockandWhitneyunderthe HomeMortgageDisclosureAct(“HMDA”),24otherinformationprovidedbyHancock, confidentialsupervisoryinformation,andpubliccommentreceivedontheproposal.A commenteralleged,basedon2009HMDAdata,thatHancock’ssubsidiarydepositoryinstitutionsdeniedthehomemortgageloanapplicationsbyAfricanAmericanand Hispanicborrowersmorefrequentlythanthosebynonminorityapplicationsincertain metropolitanstatisticalareas(“MSAs”).25 AlthoughtheHMDAdatamightreflectcertaindisparitiesintheratesof loanapplications, originations,denial,orpricingamongmembersof differentracialorethnicgroupsincertainlocalareas,theyprovideaninsufficientbasisbythemselvesonwhichtoconclude whetherornotHancockisexcludinganyracialorethnicgrouponaprohibitedbasis.The BoardrecognizesthatHMDAdataalone,evenwiththerecentadditionof pricinginforma- 21 12U.S.C.§§2901etseq. 22 12U.S.C.§2903. 23 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 24 12U.S.C.§§2801etseq. 25 TheBoardreviewedHMDAdatafor2008and2009forHancock’sinsureddepositoryinstitutionsintheircombinedassessmentareasandtheindividualMSAscitedinthecomment.

LegalDevelopments:SecondQuarter,2011 131 tion,provideonlylimitedinformationaboutthecoveredloans.26HMDAdata,therefore, havelimitationsthatmakethemaninadequatebasis,absentotherinformation,forconcludingthataninstitutionhasengagedinillegallendingdiscrimination. TheBoardisneverthelessconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlendingandbelievesthatalllendinginstitutionsareobligatedtoensurethattheir lendingpracticesarebasedoncriteriathatensurenotonlysafeandsoundlendingbutalso equalaccesstocreditbycreditworthyapplicantsregardlessof theirraceorethnicity.Moreover,theBoardbelievesthatallbankholdingcompaniesandtheiraffiliatesmustconduct theirmortgagelendingoperationswithoutanyabusivelendingpracticesandincompliance withallconsumerprotectionlaws. Becauseof thelimitationsof HMDAdata,theBoardhasconsideredthesedataandtaken intoaccountotherinformation,includingexaminationreportsthatprovideon-siteevaluationsof compliancewithfairlendinglawsbyHancock’ssubsidiaryinsureddepository institutions.TheBoardalsohasconsultedwiththeFDIC,theprimaryfederalsupervisorof Hancock’ssubsidiarybanks.Inaddition,theBoardhasconsideredinformationprovided byHancockaboutitsfairlendingpolicies,procedures,andpractices. Therecordof thisapplication,includingconfidentialsupervisoryinformation,indicates thatHancockhastakenstepstoensurecompliancewithfairlendingandotherconsumer protectionlawsandregulations.Hancockalsorepresentsthatitssubsidiarybankshave suchcompliancepoliciesandproceduresinplace.Specifically,Hancock’ssubsidiarybanks maintainafairlendingcomplianceprogramthatincludescentralizedunderwritingof consumercreditandmortgageapplicationstoensureconsistencyandminimizesubjectivity inreachingcreditdecisions.Moreover,allmortgageapplicationdenialsandexceptionsto Hancock’scompliancepoliciesandproceduresaresubjecttoadditionalreview.Hancock alsoprovidesannualfairlendingtrainingforallitsemployeesandhasprovidedadditional trainingforitscomplianceandlendingstaff.Hancockregularlyconductsinternalauditsof itsfairlendingprograms,includingindependentthird-partyanalysisof HMDAandCRA lendingpatterns.Hancockanticipatesthatthefairlendingprogramof theresultingbank willbeacombinationof thefairlendingcomplianceprogramsof Hancock’ssubsidiary banksandWhitneyNationalBank. TheBoardalsohasconsideredtheHMDAdatainlightof otherinformation,includingthe overallperformancerecordsof thesubsidiarybanksof HancockandWhitneyNational BankundertheCRA.Theseestablishedeffortsandrecordsof performancedemonstratethat theinstitutionsareactiveinhelpingtomeetthecreditneedsof theirentirecommunities. C.ConclusiononConvenienceandNeedsandCRAPerformance TheBoardhasconsideredcarefullyallthefactsof record,includingreportsof examinationof theCRArecordsof thesubsidiarybanksof Hancock,informationprovidedby Hancock,publiccommentsreceivedontheproposal,andconfidentialsupervisoryinformation,includingrecordsof compliancewithconsumerlawsandregulations.27Hancock representedthatitwouldbeabletoofferabroaderarrayof bankingproductsandservices tothecustomersservedbyWhitneyNationalBank.Inaddition,consummationof thepro- 26 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenot availablefromHMDAdata. 27 Thecommenteralsoexpressedgeneralconcernthattheproposalwouldhave“anti-consumereffects.”

132 FederalReserveBulletin|October2011 posalwouldallowthecombinedorganizationtocontinuetoprovidecreditandotherfinancialservicesinsupportof theconvenienceandneedsof thecommunitiesservedbyWhitneyNationalBank.Basedonareviewof theentirerecord,theBoardconcludesthat considerationsrelatingtotheconvenienceandneedsfactorandtheCRAperformance recordsof therelevantinsureddepositoryinstitutionsareconsistentwithapprovalof the transaction. Conclusion Basedontheforegoing,andinlightof allthefactsof record,theBoardhasdetermined thattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,the Boardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderundertheBHCActandotherapplicablestatutes.28TheBoard’sapprovalisspecificallyconditionedoncompliancebytheapplicantwiththeconditionsinthisorderandall thecommitmentsmadetotheBoardinconnectionwiththeproposal.29Forpurposesof thistransaction,thesecommitmentsandconditionsaredeemedtobeconditionsimposed inwritingbytheBoardinconnectionwithitsfindingsanddecisionand,assuch,maybe enforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuch periodisextendedforgoodcausebytheBoardorbytheFederalReserveBankof Atlanta, actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveMay13,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard 28 ThecommenterrequestedthattheBoardextendthecommentperiodontheproposal.Aspreviouslynoted,the Boardhasaccumulatedasignificantrecordinthiscase,includingreportsofexamination,confidentialsupervisoryinformation,publicreportsandinformation,andconsiderablepubliccomment.IntheBoard’sview,the commenterhashadampleopportunitytosubmititsviews,asdiscussedabove,and,infact,hasprovidedsubstantialwrittensubmissionsthattheBoardhascarefullyconsideredinactingontheproposal.Moreover,the BHCActandRegulationYrequiretheBoardtoactonproposalssubmittedunderthoseprovisionswithincertaintimeperiods.Basedonareviewofallthefactsofrecord,theBoardhasconcludedthattherecordinthis caseissufficienttowarrantactionatthistimeandthatfurtherdelayinconsideringtheproposal,extensionof thecommentperiod,ordenialoftheproposalonthegroundsdiscussedabove,includinginformationalinsufficiency,isnotwarranted. 29 ThecommenteralsorequestedthattheBoardholdapublicmeetingorhearingontheproposalonthebranch closingsandthelossofservicethatwouldresult.Hancockhasnotrepresentedthatitwillcloseanybranchand hasstatedthatanybranchclosingsthatmayoccurinthefuturewouldbelimitedtobranchesthatareinvery closeproximitytoeachother.Moreover,federalbankinglawprovidesaspecificmechanismforaddressing branchclosings.Federallawrequiresaninsureddepositoryinstitutiontoprovidenoticetothepublicandtothe appropriatefederalsupervisoryagencybeforeclosingabranch.See12U.S.C.§1831r-1;JointPolicyStatement RegardingBranchClosings,64FederalRegister34844(June29,1999). Section3oftheBHCActdoesnotrequiretheBoardtoholdapublichearingonanapplicationunlessthe appropriatesupervisoryauthorityforthebanktobeacquiredmakesawrittenrecommendationofdenialof theapplication.TheBoardhasnotreceivedsucharecommendationfromasupervisoryauthority.Underits rules,theBoardalsomay,initsdiscretion,holdapublicmeetingorhearingonanapplicationtoacquirea bankifnecessaryorappropriatetoclarifymaterialfactualissuesrelatedtotheapplicationandtoprovidean opportunityfortestimony(12CFR225.16(e),262.3(e),and262.25(d)).TheBoardhasconsideredcarefullythe commenter’srequestinlightofallthefactsofrecord.Asnoted,thecommenterhadampleopportunitytosubmitviewsandsubmittedwrittencommentsthattheBoardhascarefullyconsidered.Thecommenter’srequest failstodemonstratewhywrittencommentsdonotpresentitsviewsadequatelyorwhyameetingorhearing otherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoard hasdeterminedthatapublicmeetingorhearingisnotrequiredorwarrantedinthiscase.Accordingly,the requestforapublicmeetingorhearingontheproposalisdenied.

LegalDevelopments:SecondQuarter,2011 133 AppendixA HancockandWhitneyBankingMarketsConsistentwithBoardPrecedentandDOJBankingMerger GuidelineswithoutDivestitures Amountof MarketDeposit Remaining Bank Rank Deposits Shares ResultingHHI ChangeinHHI Numberof (dollars) (percent) Competitors MobileArea,Alabama—MobileCountyandthetownsofBayMinette,Daphne,Fairhope,Loxley,PointClear,Robertsdale,Silverhill,SpanishFort, andSummerdale,allinBaldwinCounty. HancockPre-Consummation 9 165.5mil. 2.1 1612 17 24 Whitney 7 316.5mil. 4.0 HancockPost-Consummation 6 482.0mil. 6.1 FortWaltonBeachArea,Florida—OkaloosaandWaltoncountiesandthewesternhalfofHolmesCounty,includingthetownofPoncedeLeon. HancockPre-Consummation 9 167.9mil. 4.0 755 22 24 Whitney 14 118.5mil. 2.8 HancockPost-Consummation 5 286.4mil. 6.8 PensacolaArea,Florida—EscambiaandSantaRosacounties. HancockPre-Consummation 7 275.0mil. 5.1 1199 42 18 Whitney 8 223.1mil. 4.1 HancockPost-Consummation 4 498.1mil. 9.2 BatonRougeArea,Louisiana—Ascension,EastBatonRouge,Iberville,Livingston,andWestBatonRougeParishes;thenorthernhalfof AssumptionParish,includingthetownsofNapoleonville,PierrePart,andPlattenville;andthetownofUnioninSaintJamesParish. HancockPre-Consummation 4 1.2bil. 8.3 2100 89 41 Whitney 5 789.0mil. 5.4 HancockPost-Consummation 3 2.0bil. 13.6 NewOrleansArea,Louisiana—Jefferson,Orleans,Plaquemines,SaintBernard,SaintCharles,SaintJohntheBaptist,andSaintTammany Parishes;andSaintJamesParish,excludingthetownofUnion. HancockPre-Consummation 12 455.7mil. 1.7 1653 51 37 Whitney 3 4.1bil. 15.0 HancockPost-Consummation 2 4.5bil. 16.7 LafayetteArea,Louisiana—Acadia,excludingthetownofMermentau;Lafayette,SaintLandry,andVermilionParish,excludingthetownof Gueydan;andtheportionofSaintMartinParishnorthofIberiaParish. HancockPre-Consummation 25 74.0mil. 1.0 786 10 41 Whitney 5 392.2mil. 5.3 HancockPost-Consummation 4 466.2mil. 6.2 Note:DataareasofJune30,2010.Allamountsofdepositsareunweighted.Allrankings,marketdepositshares,andHHIsarebasedonthrift institutiondepositsweightedat50percent. AppendixB HancockandWhitneyBankingMarketsConsistentwithBoardPrecedentandDOJBankingMerger GuidelinesAfterDivestitures Amountof MarketDeposit Remaining Bank Rank Deposits Shares ResultingHHI ChangeinHHI Numberof (dollars) (percent) Competitors Biloxi,Mississippi—HarrisonandHancockcountiesandthecityofOceanSpringsinJacksonCounty. Pre-Divestiture HancockPre-Consummation 1 1.7bil. 46 2973 383 14 Whitney 6 155mil. 4.1 HancockPost-Consummation 1 1.9bil. 50.2 Post-Divestiture 2703 ≤112 (ifsoldto (ifsoldto HancockPost-Consummation 1 1.7bil. 46 in-market in-market 14 purchaser(s)) purchaser(s)) or2591 or0 155mil. (ifsoldto (ifsoldto (AllWhitney out-of-market out-of-market BranchesDivested 6 Branches) 4.1 purchaser(s)) purchaser(s)) (continuedonnextpage)

134 FederalReserveBulletin|October2011 AppendixB—continued HancockandWhitneyBankingMarketsConsistentwithBoardPrecedentandDOJBankingMerger GuidelinesAfterDivestitures—continued Amountof MarketDeposit Remaining Bank Rank Deposits Shares ResultingHHI ChangeinHHI Numberof (dollars) (percent) Competitors WashingtonParish,Louisiana—WashingtonParish. Pre-Divestiture HancockPre-Consummation 1 149.1mil. 29.2 2885 797 4 Whitney 4 69.8mil. 13.7 HancockPost-Consummation 1 218.9mil. 42.8 Post-Divestiture HancockPost-Consummation 1 172.2mil. 33.7 2269 181 4 46.7mil. BranchDivestedtoOut-of-MarketPurchaser* 5 (1branch) 9.1 Note:DataareasofJune30,2010.Allamountsofdepositsareunweighted.Allrankings,marketdepositshares,andHHIsarebasedonthrift institutiondepositsweightedat50percent. *Hancockhascommittedtodivestthebranchtoanout-of-marketpurchaser. ConcurringStatementbyGovernorTarullo IapprovetheapplicationaspresentedbasedoninformationreceivedbytheBoardindicatingthattheinstitutionthatproposestopurchasethebranchestobedivestedintheBiloxi areaiscompetitivelysuitable. Mitsubishi UFJ Financial Group, Inc. Tokyo, Japan OrderApprovingAcquisitionof InterestsinaBankHoldingCompanyandCertain NonbankingSubsidiaries MitsubishiUFJFinancialGroup,Inc.(“MUFG”),aforeignbankingorganizationthatisa financialholdingcompanyforpurposesof theBankHoldingCompanyAct(“BHCAct”), hasrequestedtheBoard’sapprovalundersection3of theBHCAct1toacquireupto24.9 percentof thevotingsharesof MorganStanley,NewYork,NewYork,andtherebyindirectlyacquireaninterestinMorganStanley’ssubsidiarybanks,MorganStanleyBank, NationalAssociation(“MSBank”),SaltLakeCity,Utah;andMorganStanleyPrivate Bank,NationalAssociation(“MSPB”),Purchase,NewYork.Inaddition,MUFGhas requestedtheBoard’sapprovaltoacquireinterestsinthenonbankingoperationsof MorganStanleythatareengagedinactivitiesdescribedinsection4(k)of theBHCAct.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(76FederalRegister17,418(2011)).Thetimeforfilingcommentshas expiredandtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. MUFG,withtotalconsolidatedassetsof approximately$2.5trillionasof March31,2011, isthelargestbankingorganizationinJapan.MUFGownstheBankof Tokyo-Mitsubishi UFJ,Ltd.(“BTMU”)andMitsubishiUFJTrustandBankingCorporation(“MUTB”), bothof Tokyo.BTMUoperatesbranches,agencies,andrepresentativeofficesinseveral 1 12U.S.C.§1842. 2 Thisnoticeisrequiredundersection163(b)oftheDodd-FrankWallStreetReformandConsumerProtection Act(“Dodd-FrankAct”).

LegalDevelopments:SecondQuarter,2011 135 states.3ItalsocontrolsBankof Tokyo-MitsubishiUFJTrustCompany(“BTMUT”),New York,NewYork,andUnionBanCalCorporationanditssubsidiarybank,UnionBank, N.A.(“UnionBank”),bothof SanFrancisco.MUTBoperatesabranchandcontrolsMitsubishiUFJTrust&BankingCorporation(U.S.A.)(“MUTBUSA”),bothof NewYork, NewYork.MUFGcontrolsdepositsof approximately$60billion,whichrepresentless than1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthe UnitedStates.4 MorganStanley,withtotalconsolidatedassetsof approximately$836billion,engagesin investmentbanking,securitiesunderwritinganddealing,assetmanagement,trading,and otheractivitiesintheUnitedStatesandabroad.5MorganStanleycontrolsMSBank, whichoperatesonebranchinUtah,withtotalassetsof approximately$68.6billionand depositsof approximately$56.7billion.Inaddition,MorganStanleycontrolsMSPB,with totalassetsof approximately$7.4billionanddepositsof approximately$6.4billion.6 In2008,theBoardapprovedMUFG’sacquisitionof upto24.9percentof thevoting sharesof MorganStanley.7MUFGconsummateditsinitialinvestmentinMorganStanley in2008bypurchasingtwodifferentseriesof preferredstock,oneof whichisconvertible intocommonstock.Subsequently,MUFGacquiredadditionalcommonstock.MUFGis currentlydeemedtoown19.23percentof MorganStanley’svotingshares.8MUFGnow intendstoconvertallof itsoutstandingconvertiblepreferredstockinMorganStanleyto commonshares,afterwhichMUFGwouldownapproximately22.4percentof Morgan Stanley’svotingshares.Inaddition,MUFGisseekingauthoritytoacquire,fromtimeto time,additionalsharesof MorganStanleypursuanttoaninvestoragreementinorderto maintainaspecificlevelof ownershipinMorganStanley.9 NoncontrollingInvestment MUFGhasstatedthatitdoesnotproposetocontrolorexerciseacontrollinginfluence overMorganStanleyandthatitsinvestmentinMorganStanleywillcontinuetobeapassiveinvestment.10MUFGhasagreedtocontinuetoabidebycertaincommitmentsit 3 BTMUoperatesbranchesinCalifornia,Illinois,NewYork,andWashington;agenciesinGeorgiaandTexas; andrepresentativeofficesintheDistrictofColumbia,Kentucky,Minnesota,NewJersey,andTexas. 4 DepositdataforMUFG’ssubsidiarybanksareasofMarch31,2011. 5 AssetdataforMorganStanleyandassetanddepositdataforMSBankandMSPBareasofMarch31,2011. 6 Inaddition,MorganStanleyholdsanoncontrolling9.9percentinterestinabankholdingcompany,Chinatrust FinancialHoldingCompany,Ltd.,Taipei,Taiwan,andanationalbank,HeraldNationalBank,NewYork, NewYork.SeeMorganStanley,95FederalReserveBulletinB86andB93(2009). 7 MitsubishiUFJFinancialGroup,Inc.,95FederalReserveBulletinB34(2009)(“MitsubishiUFJ”). 8 TheauthoritytomaketheinitialandadditionalinvestmentsexpiredApril6,2011. 9 TheinvestoragreementbetweenMUFGandMorganStanleywouldprovideMUFGwithboth(i)preemptive rightstoparticipateincertainsecuritiesofferingsand(ii)theauthoritytoacquireadditionalsharesofMorgan Stanleyintheopenmarketuptotheownershiplevelitwouldacquireonconsummationoftheconversion transaction.MUFGwillneedtopreserveacertainownershipleveltoaccountforitsinvestmentinMorgan StanleyusingtheequitymethodofaccountingandtocomplywithitscommitmenttotheBoardtomaintain itsinvestmentatacertainlevel.MUFGmadethatcommitmentinconnectionwithitsrequesttohaveasecond directorrepresentativeontheboardofdirectorsofMorganStanleywithoutbeingdeemedtoexerciseacontrollinginfluenceoverthatcompany. 10 Althoughtheacquisitionoflessthanacontrollinginterestinabankorbankholdingcompanyisnotanormal acquisitionforabankholdingcompany,therequirementinsection3(a)(3)oftheBHCActthattheBoard’s approvalbeobtainedbeforeabankholdingcompanyacquiresmorethan5percentofthevotingsharesofa banksuggeststhatCongresscontemplatedtheacquisitionbybankholdingcompaniesofbetween5percent and25percentofthevotingsharesofbanks.See12U.S.C.§1842(a)(3).Onthisbasis,theBoardpreviously hasapprovedtheacquisitionbyabankholdingcompanyoflessthanacontrollinginterestinabankorbank holdingcompany.See,e.g.,ChinaInvestmentCorporation,96FederalReserveBulletinB31(2010)(acquisition ofupto10percentofthevotingsharesofabankholdingcompany);MitsubishiUFJ,supra,(acquisitionofup to24.9percentofthevotingsharesofabankholdingcompany);BrooklineBancorp,MHC,86FederalReserve

136 FederalReserveBulletin|October2011 providedin2008,11whicharesimilartothosepreviouslyreliedonbytheBoardindeterminingthataninvestingcompanywouldnotbeabletoexerciseacontrollinginfluenceover anotherbankholdingcompanyforpurposesof theBHCAct.Forexample,MUFGcommittednottoexerciseorattempttoexerciseacontrollinginfluenceoverthemanagement orpoliciesof MorganStanleyoranyof itssubsidiaries.Thecommitmentsalsoincluded certainrestrictionsonthebusinessrelationshipsof MUFGwithMorganStanley. InconnectionwiththeBoard’sdecisionin2008,MUFGcommittedtohavenomorethan onerepresentativeserveontheboardof directorsof MorganStanleyoritssubsidiaries. Aftertheproposedconversionof convertiblepreferredsharestocommonshares,MUFG wouldhavetworepresentativesservingontheboardof directorsof MorganStanley.The BoardconsideredcarefullythepotentialfortheproposedchangeinMUFG’svotingpower onMorganStanley’sboardtocreatetheabilityof MUFGtoexerciseacontrollinginfluenceoverMorganStanleyforpurposesof theBHCAct.Inreachingitsdeterminationthat theincreasedvotingpowerwouldnothavesuchaneffect,theBoardconsideredthesize, composition,andexpertiseof themembersof theMorganStanleyboardof directorsand thefactthatamajorityof themembersof theboardwouldcontinuetobeindependentof management,MUFG,andotherinvestors.TheBoardalsoconsideredthatMUFGrepresentativeswouldrepresentlessthan15percentof thetotalmembershipof theboardand thatneitherMUFGrepresentativewouldbeabletosecondamotionofferedbytheother MUFGrepresentative.Inaddition,anMUFGrepresentativewouldbeabletocastonly onevoteonanycommitteeorsubcommitteeof theboard.TheBoardalsoreliedoncertain commitmentsmadebyMUFGwithrespectto,amongotherthings,maintainingthelevel of itsvotinginvestmentinMorganStanleyandusingreasonablebesteffortstoassistMorganStanleyshouldMorganStanleydecidetoseekadditionalfundingfromothersources.12 Basedonthesefactsandcommitments,theBoardhasdeterminedthatitwouldnotatthis timeinitiateacontrolproceedinginthiscasebasedonthestructureof theproposedinvestment.TheBoardnotesthattheBHCActwouldrequireMUFGtofileanapplicationand receivetheBoard’sapprovalbeforeMUFGmaydirectlyorindirectlyacquireadditional sharesof MorganStanleyabovetheproposedinvestmentlevelorattempttoexerciseacontrollinginfluenceoverMorganStanleyoranyof itssubsidiaries.13 CompetitiveConsiderations TheBoardhasconsideredcarefullythecompetitiveeffectsof theproposalinlightof allthe factsof record.Section3of theBHCActprohibitstheBoardfromapprovingaproposal thatwouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolize thebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitsthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.14 Bulletin52(2000)(acquisitionofupto9.9percentofthevotingsharesofabankholdingcompany);Mansura Bancshares,Inc.,79FederalReserveBulletin37(1993)(acquisitionof9.7percentofthevotingsharesofabank holdingcompany). 11 MUFGprovidedpassivitycommitmentsin2008inconnectionwiththeBoard’sapprovalofitsapplicationto acquireupto24.9percentofthevotingsharesofMorganStanley.SeeMitsubishiUFJ,supra. 12 SeeBoardlettertoH.RodginCohen,Esq.,datedApril22,2011. 13 12U.S.C.§1842.See,e.g.,EmigrantBancorp,Inc.,82FederalReserveBulletin555(1996). 14 12U.S.C.§1842(c)(1).

LegalDevelopments:SecondQuarter,2011 137 TheBoardpreviouslyhasstatedthatonecompanyneednotacquirecontrolof another companytolessencompetitionbetweenthemsubstantially.15TheBoardhasfoundthat noncontrollinginterestsindirectlycompetingdepositoryinstitutionsmayraiseserious questionsundertheBHCActandhasstatedthatthespecificfactsof eachcasewilldeterminewhethertheminorityinvestmentinacompanywouldbeanticompetitive.16Because thesubsidiaryinsureddepositoryinstitutionsof MUFGandMorganStanleycompete directlyinthemetropolitanNewYork-NewJersey-Pennsylvania-Connecticut(“MetroNew York”)bankingmarket,17theBoardreviewedcarefullythecompetitiveeffectsof theproposalintheMetroNewYorkbankingmarketinconnectionwiththeapprovalgranted MUFGin2008.Inparticular,theBoardconsideredthenumberof competitorsthatwould remaininthebankingmarket,therelativesharesof totaldepositsindepositoryinstitutions inthemarket(“marketdeposits”)controlledbyMUFGandMorganStanley,andtheconcentrationlevelof marketdepositsandtheincreaseinthelevelasmeasuredbythe Herfindahl–HirschmanIndex(“HHI”)undertheDepartmentof JusticeMergerGuidelines(“DOJGuidelines”). Inconnectionwiththecurrentapplication,theBoardhasagainconsideredthefactsrelated totherelevantbankingmarketsandhasdeterminedthatconsummationof thisproposalis consistentwithBoardprecedent18andwithinthethresholdsof theDOJGuidelinesinthe MetroNewYorkbankingmarket.19Onconsummation,theMetroNewYorkbanking marketwouldremainmoderatelyconcentrated,andnumerouscompetitorswouldremain inthemarket.20 TheDOJalsohasreviewedtheproposalandhasadvisedtheBoardthatitdoesnotbelieve thatMUFG’sownershipinterestinMorganStanleyislikelytohaveasignificantadverse effectoncompetitioninanyrelevantbankingorothermarket.Inaddition,theappropriate bankingagencieshavebeenaffordedanopportunitytocommentandhavenotobjectedto theproposal. Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration 15 Seee.g.,SunTrustBanks,Inc.,76FederalReserveBulletin542(1990). 16 Seee.g.,BOKFinancialCorp.,81FederalReserveBulletin1052,1053-54(1995). 17 TheMetroNewYorkbankingmarketincludesBronx,Dutchess,Kings,Nassau,NewYork,Orange,Putnam, Queens,Richmond,Rockland,Suffolk,Sullivan,Ulster,andWestchestercountiesinNewYork;Bergen,Essex, Hudson,Hunterdon,Middlesex,Monmouth,Morris,Ocean,Passaic,Somerset,Sussex,Union,andWarren countiesandthenorthernportionofMercerCountyinNewJersey;MonroeandPikecountiesinPennsylvania,andFairfieldCountyandportionsofLitchfieldandNewHavencountiesinConnecticut. 18 DepositandmarketsharedataareasofJune30,2010,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,Midwest FinancialGroup,75FederalReserveBulletin386,387(1989);NationalCityCorporation,70FederalReserveBulletin743,744(1984).TheBoardregularlyhasincludedthriftinstitutiondepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52,55(1991). 19 UndertheDOJGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIisunder1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepostmergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthatabankmergeror acquisitiongenerallywillnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects) unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan200points. AlthoughtheDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontalMergerGuidelines, theDOJhasconfirmedthattheDOJBankMergerGuidelines,whichwereissuedin1995,werenot changed.DOJpressrelease(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/10-at-938.html. 20 Onconsummation,theHHIwouldremainunchangedat1299,and273insureddepositoryinstitutioncompetitorswouldremainintheMetroNewYorkbankingmarket.ThedepositsofMUFGandMorganStanley,ona combinedbasis,wouldrepresentlessthan1percentofmarketdeposits.

138 FederalReserveBulletin|October2011 of resourcesinanyrelevantbankingmarketandthatcompetitiveconsiderationsareconsistentwithapproval.21 Financial,Managerial,andOtherSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesanddepositoryinstitutionsinvolvedinthe proposalandcertainothersupervisoryfactors.TheBoardhasconsideredthesefactorsin lightof allthefactsof record,includingsupervisoryandexaminationinformationfrom variousU.S.bankingsupervisorsof theinstitutionsinvolved,publiclyreportedandother financialinformation,andinformationprovidedbyMUFG.Inaddition,theBoardhas consultedwiththeJapaneseFinancialServicesAgency(“FSA”),theagencywithprimary responsibilityforthesupervisionandregulationof Japanesebankingorganizations,includingMUFG. Inevaluatingfinancialfactorsinexpansionproposalsbybankingorganizations,theBoard reviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-onlyand consolidatedbasis,aswellasthefinancialconditionof thesubsidiarybanksandsignificant nonbankingoperations.TheBoardalsoevaluatesthefinancialconditionof theproforma organization,includingitscapitalposition,assetquality,andearningsprospects,andthe impactof theproposedfundingof thetransactions.Inassessingfinancialfactors,the Boardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant. TheBoardhascarefullyconsideredthefinancialfactorsof theproposal.Thecapitallevels of MUFGexceedtheminimumlevelsthatwouldberequiredundertheBaselCapital Accordandareconsideredtobeequivalenttothecapitallevelsthatwouldberequiredof a U.S.bankingorganization.Inaddition,thesubsidiarydepositoryinstitutionsinvolvedin theproposalarewellcapitalizedandwouldremainsoonconsummation.Basedonits reviewof therecord,theBoardfindsthatMUFGhassufficientfinancialresourcesto effecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolved.The Boardhasreviewedtheexaminationrecordsof MUFGanditssubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthoseof other relevantbankingsupervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankinglaw,includinganti-money-launderinglaws.Basedonallthe factsof record,theBoardhasconcludedthatconsiderationsrelatingtothemanagerial resourcesandfutureprospectsof theorganizationsinvolvedareconsistentwithapproval.22 21 Competitiveconsiderationsinnonbankingmarketsaresetforthinthediscussiononnonbankingactivities. 22 AcommenterassertedthatrecentlyannouncedlossesatajointventurebetweenMUFGandMorganStanley reflectpoorlyonMUFG’smanagerialcapacityanditsabilitytoavoidpredatorylending.MUFGhasreviewed managementandcontrolsatthejointventureandhasstrengtheneditsrisk-managementframework.Inaddition,MUFGhasincreasedtheamountofcapitalheldbythejointventure.Thereappearstobenorelationship betweenthelossesatthejointventure,whichengagesinsecuritiesactivitiesinJapan,andpredatorylending,as assertedbythecommenter. ThecommenteralsoreferredtonewsreportsregardingMorganStanley’smortgageservicer,SaxonMortgage Services,Inc.,withrespecttoaclassactionlawsuitinvolvingtheHomeAffordableModificationProgramand alawsuitundertheServicemembersCivilReliefAct.Inaddition,thecommenterreferredtoasettlementby MorganStanleywiththeOfficeoftheAttorneyGeneraloftheCommonwealthofMassachusettsregarding allegedlyunfairresidentialmortgageloans.Asnotedabove,MUFGdoesnotcontroltheoperationsofMorgan Stanleyandcannotexerciseacontrollinginfluenceoveritsmanagement.Moreover,aspartofitsongoing supervisionofMorganStanley,theBoardmonitorsthestatusofgovernmentinvestigations,consultsasneeded withrelevantregulatoryauthorities,andperiodicallyreviewsMorganStanley’sliabilityfrommateriallitigation.

LegalDevelopments:SecondQuarter,2011 139 Section3of theBHCActalsoprovidesthattheBoardmaynotapproveanapplication involvingaforeignbankunlessthebankissubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbytheappropriateauthoritiesinthebank’shomecountry.23 TheFSAistheprimarysupervisorof Japanesebankingorganizations.TheBoardpreviouslyhasdeterminedthatBTMUandMUTBaresubjecttocomprehensivesupervisionon aconsolidatedbasisbytheirhome-countrysupervisor.24Inthatdetermination,theBoard tookintoaccounttheFSA’ssupervisoryauthoritywithrespecttoMUFG(operatingatthe timeasMitsubishiTokyoFinancialGroup,Inc.)anditsnonbankingsubsidiaries.25Based onthisfindingandallthefactsof record,theBoardhasconcludedthatBTMUand MUTBcontinuetobesubjecttocomprehensivesupervisiononaconsolidatedbasisby theirhome-countrysupervisor.Asnoted,theFSAistheprimarysupervisorof Japanese bankingorganizations,includingholdingcompaniessuchasMUFG.26TheFSAmayconductinspectionsof MUFGanditssubsidiariesandrequireMUFGtosubmitreports aboutitsoperationsonaconsolidatedbasis.TheFSAalsomayreviewtransactions betweenMUFGanditssubsidiariesandhasauthoritytorequireMUFGtotakemeasures necessarytoensurethesafetyandsoundnessof theMUFGorganization.Basedonallthe factsof record,theBoardhasdeterminedthatMUFGissubjecttocomprehensivesupervisiononaconsolidatedbasisbyitsappropriatehome-countryauthoritiesforpurposesof thisapplication.27 Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedare consistentwithapproval,asaretheothersupervisoryfactorsundertheBHCAct. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity Finally,thecommenterraisedallegationsthatareoutsidethelimitedstatutoryfactorsthattheBoardisauthorizedtoconsiderwhenreviewinganapplicationundertheBHCAct.See,e.g.,TheRoyalBankofScotland Groupplc,90FederalReserveBulletin87,88n.16(2004);TheRoyalBankofScotlandGroupplc,89Federal ReserveBulletin386,389n.26(2003);WesternBancshares,Inc.v.BoardofGovernors,480F.2d749(10thCir. 1973). 23 12U.S.C.§1842(c)(3)(B).AsprovidedinRegulationY,theBoarddetermineswhetheraforeignbankissubject toconsolidatedhome-countrysupervisionunderthestandardssetforthinRegulationK.See12CFR 225.13(a)(4).RegulationKprovidesthataforeignbankwillbeconsideredsubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisiftheBoarddeterminesthatthebankissupervisedorregulated insuchamannerthatitshome-countrysupervisorreceivessufficientinformationontheworldwideoperations ofthebank,includingitsrelationshipwithanyaffiliates,toassessthebank’soverallfinancialconditionandits compliancewithlawsandregulations.See12CFR211.24(c)(1). 24 SeeMitsubishiTokyoFinancialGroup,Inc.,87FederalReserveBulletin349(2001).Atthattime,BTMUwas namedTheBankofTokyo-Mitsubishi,Ltd.andMUTBwasnamedTheMitsubishiTrustandBanking Corporation. 25 Id. 26 See,e.g.,ChuoMitsuiTrustHoldings,Inc.,(OrderdatedMarch15,2011). 27 Section3oftheBHCActalsorequirestheBoardtodeterminethatanapplicanthasprovidedadequateassurancesthatitwillmakeavailabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseofits affiliatesthattheBoarddeemsappropriatetodetermineandenforcecompliancewiththeBHCAct(12U.S.C. §1842(c)(3)(A)).TheBoardhasreviewedtherestrictionsondisclosureintherelevantjurisdictionsinwhich MUFGoperatesandhascommunicatedwithrelevantgovernmentauthoritiesconcerningaccesstoinformation.Inaddition,MUFGpreviouslyhascommittedthat,totheextentnotprohibitedbyapplicablelaw,itwill makeavailabletotheBoardsuchinformationontheoperationsofitsaffiliatesthattheBoarddeemsnecessary todetermineandenforcecompliancewiththeBHCAct,theInternationalBankingAct,andotherapplicable federallaws.MUFGalsopreviouslyhascommittedtocooperatewiththeBoardtoobtainanywaiversor exemptionsthatmaybenecessarytoenableitsaffiliatestomakesuchinformationavailabletotheBoard.In lightofthesecommitments,theBoardhasconcludedthatMUFGhasprovidedadequateassurancesofaccess toanyappropriateinformationtheBoardmayrequest.

140 FederalReserveBulletin|October2011 ReinvestmentAct(“CRA”).28TheCRArequiresthefederalfinancialsupervisoryagencies toencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,and requirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevant depositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-incomeneighborhoods,inevaluatingbankexpansionaryproposals.29 TheBoardhascarefullyconsideredtheconvenienceandneedsfactorandtheCRAperformancerecordsof therelevantinsureddepositoryinstitutions.MUFG’ssubsidiarybanks eachreceived“outstanding”or“satisfactory”ratings,30andMSBankreceivedan“outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheOCC,asof January 25,2010.31Inaddition,consummationof theproposalwouldstrengthenthefinancial resourcesof MorganStanleybyconvertingpreferredstocktovotingcommonsharesand betterenableitsdepositoryinstitutionsubsidiariestoprovideservicestoandtoassistin meetingthecreditneedsof theircommunities. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingto convenienceandneedsof thecommunitiestobeservedandtheCRAperformancerecords of therelevantdepositoryinstitutionsareconsistentwithapprovalof theproposal. NonbankingActivities MorganStanleyengagesinnonbankingactivitiesthatarefinancialinnatureasdescribed insection4(k)(4)of theBHCAct.32Section4(k)(6)of theBHCActgenerallypermits financialholdingcompaniessuchasMUFGtoacquiresharesof companiesthatconduct activitiesthatarefinancialinnaturewithoutpriorBoardapproval.33Section163(b)of the Dodd-FrankAct,however,containsanexceptiontothisrulethatrequirespriorBoard approvalof anacquisitionbyabankholdingcompanywithassetsof $50billionormore of sharesof anycompanywithassetsof atleast$10billionthatisengagedinactivities describedinsection4(k)of theBHCAct.MUFGandMorganStanleyexceedthoseasset thresholdsand,accordingly,theproposalrequirestheBoard’spriorapproval. Inreviewinganoticeundersection163(b)of theDodd-FrankAct,theBoardisrequiredto considerthestandardslistedinsection4(j)(2)of theBHCAct.34Accordingly,theBoard hasconsideredcarefullywhethertheproposedacquisition“canreasonablybeexpectedto producebenefitstothepublic,suchasgreaterconvenience,increasedcompetition,orgains inefficiency,thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,orunsoundbankingpractices.”35Inaddition,theBoardhasconsideredtheextenttowhichtheproposedacquisition 28 12U.S.C.§1842(c)(2);12U.S.C.§§2901etseq. 29 12U.S.C.§2903. 30 ThemostrecentCRAperformanceevaluationsofitsinsureddepositorysubsidiariesareasfollows:(1)Union Bank(“outstanding”)bytheOfficeoftheComptrolleroftheCurrency(“OCC”)asofJune2009;(2)BTMUT (“outstanding”)bytheFederalDepositInsuranceCorporation(“FDIC”)asofJuly2010;and(3)MUTBUSA (“satisfactory”)bytheFDICasofDecember2006. 31 MSBankbecameanationalbankonSeptember23,2008,onitsconversionfromaUtah-charteredindustrial bank.MSPBbecameanationalbankonJuly1,2010,onitsconversionfromalimited-purposesavingsassociationthatwasnotsubjecttotheCRA.MSPBhasnotyetbeenevaluatedundertheCRAbytheOCC. 32 12U.S.C.§1843(k)(4). 33 12U.S.C.§1843(k)(6). 34 TheDodd-FrankAct§163(b)(4). 35 12U.S.C.§1843(j)(2).

LegalDevelopments:SecondQuarter,2011 141 “wouldresultingreaterormoreconcentratedriskstoglobalorUnitedStatesfinancialstabilityortheUnitedStateseconomy.”36 Aspartof itsreviewof thefactorsenumeratedinsection4(j)(2)of theBHCAct,the Boardhasconsideredcarefullythefinancialandmanagerialresourcesof thecompanies involved,theeffectof theproposaloncompetitionintherelevantmarkets,andthepublic benefitsof theproposal.Aspreviouslynoted,theBoardhasconcluded,basedonitsreview of therecord,thatconsiderationsrelatingtothefinancialandmanagerialresourcesof the organizationsinvolvedintheproposalareconsistentwithapproval. Inaddition,theBoardcarefullyconsideredthecompetitiveeffectsof MUFG’sproposed acquisitionof additionalvotingsharesof MorganStanley.IntheUnitedStates,MUFG’s operationsconsistprimarilyof commercialbankingthroughitsretailbankingsubsidiaryin California.MorganStanleydoesnotengageinretailbankingtoanysignificantextent. Moreover,MorganStanleyengagesextensivelyinnonbankfinancialactivities.MUFGhas alimitedpresenceinsuchactivitiesintheUnitedStates.Asaresult,evenif MUFGwereto beconsideredtocontrolMorganStanley,acombinationof thetwofirmswouldbe unlikelytoraisecompetitiveissues.Theproposedmarginalincreaseinthepercentageof MorganStanley’ssharesthatwouldbeheldbyMUFGwouldhavenosignificantcompetitiveeffectsinanyrelevantmarket.Asaresult,theBoardexpectsthatconsummationof the proposalwouldhaveademinimiseffectoncompetitionfortheseservices. TheBoardalsohasreviewedcarefullythepublicbenefitsandpossibleadverseeffectsof the proposal.Therecordindicatesthatconsummationof theproposalwouldstrengthenMorganStanley’scapitalpositionandallowMorganStanleytobetterserveitscustomers.For thereasonsdiscussedabove,andbasedonallthefactsof record,theBoardhasdetermined thatconsummationof theproposalisnotlikelytoresultinsignificantadverseeffects,such asundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests, orunsoundbankingpractices,andthatconsummationof theproposalcanreasonablybe expectedtoproducepublicbenefitsthatwouldoutweighanylikelyadverseeffects.Accordingly,theBoardhasdeterminedthatthebalanceof publicbenefitsisconsistentwith approval. Asrequiredbysection163(b)of theDodd-FrankAct,theBoardalsohasconsideredthe extenttowhichtheproposedacquisitionwouldresultingreaterormoreconcentratedrisks toglobalorUnitedStatesfinancialstabilityortotheUnitedStateseconomy.Initsreview underthisfactor,theBoardhasconsideredwhethertheproposalwouldresultinamaterial increaseinriskstofinancialstability,duetoanincreaseinthesizeof theacquirerorinthe extentof theinterconnectednessof thefinancialsystem,orinareductionintheavailability of substituteprovidersof criticalfinancialproductsorservices.Asdiscussedabove, MUFGhasstatedthatitdoesnotproposetocontrolorexerciseacontrollinginfluence overMorganStanleyandwouldneedBoardapprovalbeforeacquiringcontrolorexercisingacontrollinginfluence.Consummationof thisproposalwouldnotresultinasignificantdecreaseintheavailabilityof substituteprovidersof criticalfinancialservicesorasignificantincreaseinthesizeof MUFGbecauseMUFGwillnotcontrolMorganStanley. Forthesamereason,andbecausetheincreaseinMUFG’sandMorganStanley’seconomic exposuretoeachotherwouldberelativelysmall,thisproposalwillnotresultinasignificantincreaseintheinterconnectednessof thefinancialsystem.Asaresult,theBoardhas concludedthatthechangeintherisktoglobalorUnitedStatesfinancialstabilityortothe UnitedStateseconomyassociatedwiththistransactionwouldbeinconsequential.Based 36 TheDodd-FrankAct§163(b)(4).

142 FederalReserveBulletin|October2011 onallthefactsorrecord,theBoardconcludesthattheconsiderationsunderthisfactorare consistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheproposalshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.37TheBoard’sapprovalisspecificallyconditioned oncompliancebyMUFGwithallthecommitmentsmadetoandreliedonbytheBoardin connectionwiththeapplication.38Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwith itsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorder.Theconversiontransactionmustbeconsummatednolaterthanthree monthsaftertheeffectivedateof thisorder,unlesssuchperiodisextendedforgoodcause bytheBoardortheFederalReserveBankof SanFrancisco(“ReserveBank”),actingpursuanttodelegatedauthority.Subjecttotheconversiontransactionbeingconsummated withinthatthree-monthperiod,MUFGmayacquireadditionalsharesupto24.9percent of thevotingsharesof MorganStanleywithinoneyearaftertheeffectivedateof this order,suchperiodsubjecttoextensionforgoodcausebytheBoardortheReserveBank, actingpursuanttodelegatedauthority.39 Byorderof theBoardof Governors,effectiveJune14,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard 37 ThecommenterrequestedthattheBoardextendthecommentperiodontheproposal.IntheBoard’sview,the commenterhashadampleopportunitytosubmititsviewsand,infact,hasprovidedwrittensubmissionsthat theBoardhascarefullyconsideredinactingontheproposal.Moreover,theBHCActandRegulationYrequire theBoardtoactonproposalssubmittedunderthoseprovisionswithincertaintimeperiods.Basedonareview ofallthefactsofrecord,theBoardhasconcludedthattherecordinthiscaseissufficienttowarrantactionat thistimeandthatfurtherdelayinconsideringtheproposal,extensionofthecommentperiod,ordenialofthe proposalonthegroundsdiscussedabove,isnotwarranted. 38 ThecommenteralsorequestedthattheBoardholdapublichearingontheproposal.Section3oftheBHCAct doesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisory authorityforthebanktobeacquiredmakesawrittenrecommendationofdenialoftheapplication.TheBoard hasnotreceivedsucharecommendationfromtheappropriatesupervisoryauthorities.Underitsrules,the Boardalsomay,initsdiscretion,holdapublicmeetingorhearingonanapplicationtoacquireabankifnecessaryorappropriatetoclarifythefactualissuesrelatedtotheapplicationandtoprovideanopportunityfortestimony(12CFR223.16(e),262.25(d)).Asnotedabove,MUFGwillnotbeacquiringcontrolofMorganStanleyoritsdepositoryinstitutions,andthecommenter’srequestfailstodemonstratewhywrittencommentsdo notpresentitsviewsadequatelyorwhyameetingorhearingotherwisewouldbenecessaryorappropriate.For thesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublicmeetingorhearingis notrequiredorwarrantedinthiscase.Accordingly,therequestforapublicmeetingorhearingontheproposal isdenied. 39 NofurtherapprovalwouldberequiredforMUFGtoacquiresharestocomplywithitscommitmenttothe Boardtomaintainaninvestmentinatleast20percentofthevotingcommonequityofMorganStanleyandto useitsreasonablebesteffortstohonoraBoardrequesttoprovideadditionalcapitaltopreservethemaximum levelofownershipoftotalequityofMorganStanleythatMUFGachievedbeforethedateoftheBoard’s request.SeeBoardlettertoH.RodginCohen,Esq.,supra.

LegalDevelopments:SecondQuarter,2011 143 United Bankshares, Inc. Charleston, West Virginia OrderApprovingtheAcquisitionof aBankHoldingCompany UnitedBankshares,Inc.(“United”)anditswhollyownedsubsidiary,UBCHoldingCompany,Inc.(“UBC”),bothof Charleston,haverequestedtheBoard’sapprovalundersection 3of theBankHoldingCompanyAct(“BHCAct”)1toacquireCentraFinancialHoldings, Inc.(“Centra”)anditssubsidiarybank,CentraBank,Inc.(“CentraBank”),bothof Morgantown,andallof WestVirginia.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(76FederalRegister20350(2011)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheapplicationandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. United,withtotalconsolidatedassetsof approximately$7.2billion,isthe92ndlargest insureddepositoryorganizationintheUnitedStates,controlling$5.7billionindeposits.3 Unitedcontrolstwosubsidiarybanks,UnitedBank,Inc.(“UB-WV”),Parkersburg,West Virginia,andUnitedBank(“UB-VA”),Fairfax,Virginia,thatoperateinWestVirginia, Maryland,Ohio,Virginia,andtheDistrictof Columbia.4Unitedisthe2ndlargestdepositoryorganizationinWestVirginia,controllingdepositsof approximately$2.9billion, whichrepresent10.1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate.Unitedisthe19thlargestdepositoryorganizationinMaryland,controllingdepositsof approximately$479.2million,whichrepresentlessthan1percentof the totalamountof depositsof insureddepositoryinstitutionsinthestate. Centra,withtotalconsolidatedassetsof $1.3billion,controlsCentraBank,whichoperates inWestVirginia,Maryland,andPennsylvania.CentraBankisthe9thlargestinsured depositoryinstitutioninWestVirginia,the71stlargestinsureddepositoryinstitutionin Maryland,andthe99thlargestinsureddepositoryinstitutioninPennsylvania,controlling depositsof $718.5million,$116.4million,and$341.0million,respectively. Onconsummationof theproposal,Unitedwouldbecomethe81stlargestdepositoryorganizationintheUnitedStates,withtotalconsolidatedassetsof approximately$8.6billion. Unitedwouldcontroldepositsof approximately$6.8billion,whichrepresentlessthan1 percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnited States.InWestVirginia,Unitedwouldremainthe2ndlargestdepositoryorganization,controllingdepositsof approximately$3.6billion(approximately12.6percentof depositsof insureddepositoryinstitutionsinthestate);inMaryland,itwouldremainthe19thlargest depositoryorganization,controllingdepositsof approximately$595.6million(lessthan1 percentof depositsof insureddepositoryinstitutionsinthestate);andinPennsylvania,it wouldbecomethe99thlargestdepositoryorganization,controllingdepositsof approxi- 1 12U.S.C.§1842. 2 Specifically,UnitedhasrequestedthatCentraanditsfoursecond-tierholdingcompanies,CentraFinancial Corporation-Hagerstown,Inc.;CentraFinancialCorporation-Martinsburg,Inc.;CentraFinancialCorporation-Morgantown,Inc.;andCentraFinancialCorporation-Uniontown,Inc.,allofMorgantown,mergewith andintoUBC. 3 DepositdataareasofJune30,2010,updatedtoreflectmergersthroughApril23,2011.Inthiscontext,insured depositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks.Nationaldeposit dataandrankingsareasofDecember31,2010. 4 UB-WVoperatesinWestVirginiaandOhio.UB-VAoperatesinMaryland,Virginia,andtheDistrictof Columbia.

144 FederalReserveBulletin|October2011 mately$341.0million(lessthan1percentof depositsof insureddepositoryinstitutionsin thestate). InterstateAnalysis Section3(d)of theBHCActallowstheBoardtoapproveanapplicationbyabankholding companytoacquirecontrolof abanklocatedinastateotherthanthebankholdingcompany’shomestateif certainconditionsaremet.Forpurposesof theBHCAct,thehome stateof UnitedisWestVirginia,5andCentraislocatedinWestVirginia,Maryland,and Pennsylvania.6Basedonareviewof allthefactsof record,includingrelevantstatestatutes, theBoardfindsthattheconditionsforaninterstateacquisitionenumeratedinsection3(d) of theBHCActaremetinthiscase.7 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopoly.TheBHCActalsoprohibitstheBoardfromapprovingaproposedbank acquisitionthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.8 UnitedandCentrahavesubsidiarydepositoryinstitutionsthatcompetedirectlyintwo WestVirginiabankingmarkets:theMartinsburgandtheMorgantownbankingmarkets. TheBoardhasreviewedcarefullythecompetitiveeffectsof theproposalinthesebanking marketsinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarkets,therelativesharesof total depositsindepositoryinstitutionsinthemarkets(“marketdeposits”)controlledbyUnited andCentra,9theconcentrationlevelsof marketdepositsandtheincreaseinthoselevelsas measuredbytheHerfindahl–HirschmanIndex(“HHI”)undertheDepartmentof Justice MergerGuidelines(“DOJGuidelines”),10andothercharacteristicsof themarkets. 5 Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofallbankingsubsidiariesofsuch companywerethelargestonJuly1,1966,orthedateonwhichthecompanybecameabankholdingcompany, whicheverislater(12U.S.C.§1841(o)(4)(C)). 6 Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersabanktobelocatedinthestatesinwhich thebankischarteredorheadquarteredoroperatesabranch(12U.S.C.§§1841(o)(4)–(7)and1842(d)(1)(A)and 1842(d)(2)(B)). 7 12U.S.C.§§1842(d)(1)(A)–(B)and1842(d)(2)–(3).Unitedisadequatelycapitalizedandadequatelymanaged, asdefinedbyapplicablelaw.CentraBankhasbeeninexistenceandoperatedfortheminimumperiodoftime requiredbyapplicablestatelawsandformorethanfiveyears.See12U.S.C.§1842(d)(1)(B)(i)–(ii).Onconsummationoftheproposal,Unitedwouldcontrollessthan10percentofthetotalamountofdepositsofinsured depositoryinstitutionsintheUnitedStates(12U.S.C.§1842(d)(2)(A)).Unitedalsowouldcontrollessthan30 percentof,andlessthantheapplicablestatedepositcapfor,thetotalamountofdepositsininsureddepository institutionsintherelevantstates(12U.S.C.§1842(d)(2)(B)-(D)).Allotherrequirementsofsection3(d)ofthe BHCActwouldbemetonconsummationoftheproposal. 8 12U.S.C.§1842(c)(1). 9 DepositandmarketsharedataareasofJune30,2010,updatedtoreflectmergersthroughApril23,2011. 10 UndertheDOJGuidelines,amarketisconsideredunconcentratedifthepostmergerHHIisunder1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepostmergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthatabankmergeror acquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects) unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHImorethan200points.Although theDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontalMergerGuidelines,theDOJhas confirmedthatitsguidelinesforbankmergersoracquisitions,whichwereissuedin1995,werenotchanged. PressRelease,DepartmentofJustice(August19,2010),availableat www.justice.gov/opa/pr/2010/August/10-at-938.html.

LegalDevelopments:SecondQuarter,2011 145 A.BankingMarketwithinEstablishedGuidelines Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe DOJGuidelinesintheMartinsburgbankingmarket.11Onconsummationof theproposal, themarketwouldremainmoderatelyconcentrated,asmeasuredbytheHHI.Thechange intheHHIinthemarketwouldbeconsistentwithBoardprecedentandthethresholdsin theDOJGuidelines,andanumberof competitorswouldremain.12 B.BankingMarketWarrantingSpecialScrutiny Thestructuraleffectsthatconsummationof theproposalwouldhaveontheMorgantown bankingmarket13warrantadetailedreviewbecausetheconcentrationlevelonconsummationwouldexceedthethresholdlevelsintheDOJGuidelines.UBWVisthesixthlargest insureddepositoryinstitutionintheMorgantownbankingmarket,controllingdepositsof approximately$184.3million,whichrepresentapproximately8.1percentof themarket deposits.CentraBankisthelargestdepositoryinstitutioninthemarket,controllingdepositsof approximately$535.4million,whichrepresentapproximately23.6percentof market deposits.Onconsummation,theHHIinthismarketwouldincrease383points,from1719 to2102,andtheproformamarketshareof thecombinedentitywouldbeapproximately 31.7percent. TheBoardhasconsideredcarefullywhetherotherfactorseithermitigatethecompetitive effectsof theproposalorindicatethattheproposalwouldhaveasignificantlyadverse effectoncompetitionintheMorgantownbankingmarket.14Severalfactorsindicatethat theincreaseinconcentrationintheMorgantownbankingmarket,asmeasuredbytheHHI andmarketshare,overstatesthepotentialcompetitiveeffectsof theproposalinthemarket. Afterconsummationof theproposal,eightothercommercialbankcompetitorswould remain,somewithasignificantpresenceinthemarket.Thesecondlargestbankcompetitorinthemarketwouldcontrol22percentof marketdeposits,andthreeotherbankcompetitorsinthemarketeachwouldcontrolbetween9percentand17percentof market deposits. Inaddition,theBoardhasevaluatedthecompetitiveinfluenceof twoactivecommunity creditunionsintheMorgantownbankingmarket:TheUnitedFederalCreditUnion (“UnitedCreditUnion”),Morgantown,andFairmontFederalCreditUnion(“Fairmont CreditUnion”),Fairmont.Bothcreditunionsofferawiderangeof products,operateat leastonestreet-levelbranch,andhavebroadmembershipcriteriathatincludemostof the residentsintheMorgantownbankingmarket.15Moreover,FairmontCreditUnionisasig- 11 TheMartinsburgbankingmarketisdefinedasBerkeleyCounty,WestVirginia,excludingtheportionofthat countyincludedintheHagerstownRandMcNallyMarketingArea(“RMA”). 12 UB-WVwouldbethesecondlargestdepositoryinstitutioninthemarket,controllingdepositsof$218.4million,whichwouldrepresentapproximately20.9percentofmarketdeposits.TheHHIwouldincrease25points to1764. 13 TheMorgantownbankingmarketisdefinedastheMorgantownRMAandthenonRMAportionsofMonongaliaandPrestoncounties,WestVirginia. 14 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsBankCorp.,84FederalReserveBulletin129(1998). 15 TheBoardpreviouslyhasconsideredthecompetitivenessofcertainactivecreditunionsasamitigatingfactor. See,e.g.,ThePNCFinancialServicesGroup,Inc.,93FederalReserveBulletinC65(2007);RegionsFinancial Corporation,93FederalReserveBulletinC16(2007);WachoviaCorporation,92FederalReserveBulletinC183 (2006);andF.N.B.Corporation,90FederalReserveBulletin481(2004).

146 FederalReserveBulletin|October2011 nificantsourceof commercialloans,16andcompetitionfromthatcreditunionclosely approximatescompetitionfromacommercialbank.Accordingly,theBoardhasconcluded thatdepositscontrolledbythisinstitutionshouldbeweightedat100percentinmarketsharecalculations.17TheBoardhasalsoconcludedthattheactivitiesof suchcreditunions exertacompetitiveinfluencethatmitigates,inpart,thepotentialeffectsof theproposal.18 Inaddition,therecordof recententryintotheMorgantownbankingmarketindicatesthe market’sattractivenessforentry.TheBoardnotesthatfivedepositoryinstitutionshave enteredthemarketdenovosince2000.Otherfactorsindicatethatthemarketremains attractiveforentry.From2003to2008,theMorgantownbankingmarket’spopulation grewtwiceasfastasothermetropolitanareasinWestVirginia,andthemarket’sannualizedratesof depositgrowthandincomegrowthexceededtheaveragesforotherurban areasinWestVirginiaandtheaveragesforallmetropolitanareasintheUnitedStates. C.Viewof OtherAgenciesandConclusiononCompetitiveConsiderations TheDOJalsohasconductedadetailedreviewof thepotentialcompetitiveeffectsof the proposalandhasadvisedtheBoardthatconsummationwouldnotlikelyhaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the appropriatebankingagencyhasbeenaffordedanopportunitytocommentandhasnot objectedtotheproposal. Basedontheseandotherfactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly,basedonallthefactsof record,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andOtherSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesandbanksinvolvedintheproposaland certainothersupervisoryfactors.19TheBoardhascarefullyconsideredthesefactorsin lightof allthefactsof record,includingsupervisoryandexaminationinformationreceived fromtherelevantfederalandstatesupervisorsof theorganizationsinvolvedintheproposal,andotheravailablefinancialinformation,includinginformationprovidedbyUnited. Inevaluatingfinancialfactorsinexpansionproposalsbybankingorganizations,theBoard reviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-onlyand consolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and 16 FairmontCreditUnionhasaratioofcommercialandindustrialloanstoassetsofapproximately6percent, whichiscomparabletotheratioforsomecommercialbanksinthemarketandgreaterthantheratioforsome thriftinstitutionsthattheBoardhaspreviouslyfoundtobefullcompetitorsofcommercialbanks. 17 TheBoardhaspreviouslyindicatedthatitmayconsiderthecompetitivenessofathriftinstitutionatalevel greaterthan50percentofdepositswhenappropriate.See,e.g.,BanknorthGroup,Inc.,75FederalReserveBulletin703(1989).Asnoted,FairmontCreditUnion’scommercial-loan-to-assetratioishigherthantheratiofor manythriftinstitutionsthathavebeenweightedat100percentinpastBoardorders.See,e.g.,ThePNCFinancialServicesGroup,Inc.,supra. 18 Thesecreditunionscontrolapproximately$68.1millionindepositsinthemarketthat,ona50percent weightedbasisforUnitedCreditUnionanda100percentweightedbasisforFairmontCreditUnion,represent approximately2.6percentofmarketdeposits.Accountingfortherevisedweightingsofthesedeposits,United wouldcontrolapproximately30.9percentofmarketdeposits,andtheHHIwouldincrease363pointsto1996. 19 12U.S.C.§1842(c)(2)and(3).

LegalDevelopments:SecondQuarter,2011 147 earningsperformance.Inassessingfinancialfactors,theBoardconsistentlyhasconsidered capitaladequacytobeespeciallyimportant.TheBoardalsoevaluatesthefinancialconditionof thecombinedorganizationatconsummation,includingitscapitalposition,asset quality,andearningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardhasconsideredcarefullytheproposalunderthefinancialfactors.United,Centra,andtheirsubsidiarydepositoryinstitutionsarewellcapitalizedandwouldremainso onconsummationof theproposal.Theproposedtransactionisstructuredasashare exchange.Basedonitsreviewof therecord,theBoardalsofindsthatUnitedhassufficient financialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of United,Centra,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas considereditssupervisoryexperiencesandthoseof theotherrelevantbanksupervisory agencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebanking law,includinganti-money-launderinglaws.Unitedanditssubsidiarydepositoryinstitutionsareconsideredtobewellmanaged.TheBoardalsohasconsideredUnited’splansfor implementingtheproposal,includingtheproposedmanagementafterconsummationof theproposal.Inaddition,theBoardhasconsideredthefutureprospectsof theorganizationsinvolvedintheproposalinlightof thefinancialandmanagerialresourcesandthe proposedbusinessplan. Basedonallthefactsof record,theBoardconcludesthatconsiderationrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalareconsistentwithapproval,asaretheothersupervisoryfactorsunderthe BHCAct. ConvenienceandNeedsandCRAPerformanceConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).20TheBoardhascarefullyconsideredtheconvenienceand needsfactorandtheCRAperformancerecordsof UB-WV,UB-VA,andCentraBankin lightof allthefactsof record.AsprovidedintheCRA,theBoardevaluatestherecordof performanceof aninstitutioninlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.21UBWV,UB-VA,and CentraBankreceived“satisfactory”ratingsattheirmostrecentexaminationsforCRAperformancebytheFederalReserveBankof Richmond(UB-WVandUB-VA)andtheFederalDepositInsuranceCorporation(CentraBank),asof February2,2009,February2, 2009,andJuly16,2008,respectively.Basedonareviewof theentirerecord,theBoardhas concludedthatconsiderationsrelatingtoconvenienceandneedsconsiderationsandthe CRAperformancerecordsof UB-WV,UB-VA,andCentraBankareconsistentwith approvalof theproposal. 20 12U.S.C.§§2901etseq.;12U.S.C.§1842(c)(2). 21 TheInteragencyQuestionsandAnswersRegardingCommunityReinvestmentprovidethataninstitution’s mostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocess becauseitrepresentsadetailed,onsiteevaluationoftheinstitution’soverallrecordofperformanceunderthe CRAbyitsappropriatefederalsupervisor.75FederalRegister11642at11665(2010).

148 FederalReserveBulletin|October2011 Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationundersection3of theBHCActshouldbe,andherebyis,approved.Inreachingits conclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitis requiredtoconsiderundertheBHCAct.TheBoard’sapprovalisspecificallyconditioned oncompliancebyUnitedwithalltheconditionsimposedinthisorderandallthecommitmentsmadetotheBoardinconnectionwiththeapplicationandonreceiptof allother requiredregulatoryapprovalsfortheproposal.Theseconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuch periodisextendedforgoodcausebytheBoardortheFederalReserveBankof Richmond, actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveJune20,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard Orders Issued Under Sections 3 and 4 of the Bank Holding Company Act Bank of Montreal Toronto, Canada OrderApprovingtheAcquisitionof aBankHoldingCompanyandNoticetoEngagein NonbankingActivities Bankof Montreal,Toronto,Canada,anditssubsidiaries,HarrisFinancialCorp.(“HFC”), HarrisBankcorp,Inc.(“HBI”),andMikeMergerSub,LLC(“InterimSub”),allof Chicago,Illinois(collectively,“Applicants”),haverequestedtheBoard’sapprovalunder section3of theBankHoldingCompanyAct(“BHCAct”)1toacquireMarshall&Ilsley Corporation(“M&I”),Milwaukee,anditstwosubsidiarybanks,M&IMarshall&Ilsley Bank(“M&IBank”),Milwaukee,andM&IBankof Mayville,Mayville,allof Wisconsin.2 Inaddition,ApplicantshaverequestedtheBoard'sapprovalundersections4(c)(8)and4(j) of theBHCActandsection225.24of theBoard'sRegulationYtoacquireM&I’ssubsidiarysavingsbank,M&IBankFSB(“M&ISavingsBank”),LasVegas,Nevada,andother nonbankingsubsidiariesof M&Iandtherebyengageinactivitiesinaccordancewithsection225.28(b)of theBoard’sRegulationY.3HarrisBankalsohasgivennoticeundersec- 1 12U.S.C.§1842.ApplicantsalsohaverequestedtheBoard’sapprovaltoholdandexerciseoptionsthatallow BankofMontrealtopurchaseupto19.7percentofM&I’soutstandingcommonstock,ifcertaineventsoccur. TheoptionswouldexpireonconsummationofM&I’smergerwithInterimSub. 2 BankofMontreal,HFC,andHBIarefinancialholdingcompanieswithinthemeaningoftheBHCAct. InterimSubisbeingestablishedtofacilitatetheM&Iacquisition.InterimSubhasrequestedtheBoard’s approvalundersection3oftheBHCActtobecomeabankholdingcompanythroughthemergerofM&Iwith andintoInterimSub.InterimSubwouldthenmergewithandintoHFC. 3 12U.S.C.§§1843(c)(8)and(j);12CFR225.24and28(b).SeeAppendixAforalistofthesesubsidiariesand theirrespectiveactivities.ApplicantsalsoproposetoacquirecertainotherM&Isubsidiariesinaccordancewith

LegalDevelopments:SecondQuarter,2011 149 tion25of theFederalReserveAct(“FRA”)andsection211.3of RegulationKinorderto continuetooperateM&IBank’sforeignbranchintheCaymanIslands.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(76FederalRegister10,595(2011)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthintheBHCAct. Bankof Montreal,withtotalconsolidatedassetsequivalentto$436billion,isthe4thlargestdepositoryorganizationinCanada.5Bankof MontrealoperatesbranchesinNewYork CityandChicago,anagencyinHouston,andthroughHFCandHBI,controlsHarris Bank,HarrisBankArizona,andHarrisCentralNationalAssociation(“HarrisCentral”), Roselle,Illinois.HFC,withtotalconsolidatedassetsof $74billion,isthe29thlargest depositoryorganizationintheUnitedStates,controlling$30.5billionindeposits.6Harris BankoperatesinIllinois,Indiana,andWisconsin;andHarrisBankArizonaoperatesin Arizona,Florida,andWashington.HarrisCentraloperatesonlyinIllinois.HFCisthe3rd largestdepositoryorganizationinIllinois,controllingdepositsof approximately$26.8billion.InIndiana,HFCisthe15thlargestdepositoryorganization,controllingdepositsof approximately$1.8billion,andinWisconsin,itisthe10thlargestdepositoryorganization, controllingdepositsof approximately$1.4billion.InArizona,HFCisthe18thlargest depositoryorganization,controllingdepositsof approximately$407million,andin Florida,itisthe214thlargestdepositoryorganization,controllingdepositsof approximately$114million. M&Ihastotalconsolidatedassetsof approximately$49.7billion,anditssubsidiary insureddepositoryinstitutionsoperateinninestates.7M&Iisthe326thlargestdepository organizationinIllinois,controllingdepositsof approximately$98million.InIndiana, M&Iisthe13thlargestdepositoryorganization,controllingdepositsof approximately $1.87billion,andinWisconsin,itisthelargestdepositoryorganization,controllingdepositsof approximately$24.16billion.InArizona,M&Iisthe6thlargestdepositoryorganization,controllingdepositsof approximately$2.66billion,andinFlorida,itisthe33rdlargestdepositoryorganization,controllingdepositsof approximately$1.65billion. Onconsummationof theproposal,HFCwouldbecomethe22ndlargestdepositoryorganizationintheUnitedStatesintermsof assets,withtotalconsolidatedassetsof approximately$126.2billion.HFCwouldcontroldepositsof approximately$70billion,whichrepresentapproximately1percentof thetotalamountof depositsof insureddepository institutionsintheUnitedStates.InIllinois,HFCwouldremainthe3rdlargestdepository organization,controllingdepositsof approximately$26.9billion,whichrepresentapproximately7.5percentof thetotalamountof depositsof insureddepositoryinstitutionsinthe section4(k)oftheBHCAct,12U.S.C.§1843(k).Aspartofthisproposal,HFCwouldpurchaseallofM&I’s preferredsharesandassociatedwarrantsacquiredbytheDepartmentoftheTreasuryunderTreasury’sCapital PurchaseProgram. 4 12U.S.C.§§601-604a;12CFR211.3.M&IBankandM&ISavingsBankwouldbecontributedbyHFCto HBI.M&ISavingsBankwouldthenconvertintoanationalbank,andM&IBank,theformerM&ISavings Bank,andTheHarrisBank,NationalAssociation(“HarrisBankArizona”),Scottsdale,Arizona,wouldmerge intoHarrisNationalAssociation(“HarrisBank”),Chicago.BankofMontrealhasfiledtherequiredapplicationswiththeOfficeoftheComptrolleroftheCurrency(“OCC”)andtheOfficeofThriftSupervision (“OTS”)toeffectthosetransactions. 5 CanadianassetandrankingdataareasofApril30,2011,andarebasedontheexchangerateasofthatdate. 6 AssetdataareasofMarch31,2011,andnationwidedepositrankingdataareasofJune30,2010.Statewide depositandrankingdataareasofJune30,2010,andreflectmergeractivityasofMarch29,2011. 7 M&IBankoperatesinArizona,Florida,Illinois,Indiana,Kansas,Minnesota,Missouri,andWisconsin.M&I BankofMayvillealsooperatesinWisconsin.Inaddition,M&ISavingsBankoperatesinNevada,Minnesota, andWisconsin.

150 FederalReserveBulletin|October2011 state(“statedeposits”).HFCwouldalsobecomethe5thlargestdepositoryorganizationin Indiana,controllingdepositsof approximately$3.67billion(approximately3.7percentof statedeposits);inWisconsin,itwouldbecomethelargestdepositoryorganization,controllingdepositsof approximately$25.6billion(approximately20.2percentof statedeposits); inArizona,itwouldbecomethe6thlargestdepositoryorganization,controllingdepositsof approximately$3.1billion(approximately3.6percentof statedeposits);andinFlorida,it wouldbecomethe31stlargestdepositoryorganization,controllingdepositsof approximately$1.76billion(lessthan1percentof statedeposits). InterstateAnalysis Section3(d)of theBHCActallowstheBoardtoapproveanapplicationbyabankholding companytoacquirecontrolof abanklocatedinastateotherthanthebankholdingcompany’shomestateif certainconditionsaremet.Forpurposesof theBHCAct,thehome stateof ApplicantsisIllinois,8andM&I’ssubsidiarybanksarelocatedineightstates.9 Basedonareviewof allthefactsof record,includingrelevantstatestatutes,theBoard findsthattheconditionsforaninterstateacquisitionenumeratedinsection3(d)of the BHCActaremetinthiscase.10Inlightof allthefactsof record,theBoardispermittedto approvetheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations TheBHCActprohibitstheBoardfromapprovingaproposalthatwouldresultina monopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitstheBoardfromapproving abankacquisitionthatwouldsubstantiallylessencompetitioninanyrelevantbanking market,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedin thepublicinterestbyitsprobableeffectinmeetingtheconvenienceandneedsof thecommunitytobeserved.11TheBoardalsomustconsiderthecompetitiveeffectsof aproposal toacquireasavingsassociationunderthepublicbenefitsfactorof section4of theBHC Act. ApplicantsandM&Ihavesubsidiarydepositoryinstitutionsthatcompetedirectlyinthirteenbankingmarkets,includingmarketsinArizona,Florida,Indiana,andWisconsin.The Boardhasreviewedcarefullythecompetitiveeffectsof theproposalineachof thesebankingmarketsinlightof allthefactsof record.Inparticular,theBoardhasconsideredthe numberof competitorsthatwouldremaininthebankingmarkets,therelativesharesof totaldepositsindepositoryinstitutions(“marketdeposits”)controlledbyApplicantsand 8 See12U.S.C.§1842(d).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater. 9 Forpurposesofsection3(d),theBoardconsidersabanktobelocatedinthestatesinwhichthebankischarteredorheadquarteredoroperatesabranch(12U.S.C.§§1841(o)(4)–(7)and1842(d)(1)(A)and(d)(2)(B)). M&I’ssubsidiarybanksarelocatedinArizona,Florida,Illinois,Indiana,Kansas,Minnesota,Missouri,and Wisconsin. 10 12U.S.C.§§1842(d)(1)(A)–(B)and1842(d)(2)–(3).Applicantsareadequatelycapitalizedandadequatelymanaged,asdefinedbyapplicablelaw.M&I’stwosubsidiarybankshavebeeninexistenceandoperatedforthe minimumperiodoftimerequiredbyapplicablestatelawsandformorethanfiveyears.See12U.S.C.§ 1842(d)(1)(B)(i)–(ii).Onconsummationoftheproposal,Applicantswouldcontrollessthan10percentofthe totalamountofdepositsofinsureddepositoryinstitutionsintheUnitedStates(12U.S.C.§1842(d)(2)(A)). Applicantswouldalsocontrollessthan30percentof,andlessthantheapplicablestatedepositcapfor,thetotal amountofdepositsofinsureddepositoryinstitutionsintherelevantstates(12U.S.C.§1842(d)(2)(B)–(D)).All otherrequirementsofsection3(d)oftheBHCActwouldbemetonconsummationoftheproposal. 11 12U.S.C.§1842(c)(1).

LegalDevelopments:SecondQuarter,2011 151 M&Iinthemarkets,12theconcentrationlevelsof marketdepositsandtheincreasesin thoselevelsasmeasuredbytheHerfindahl–HirschmanIndex(“HHI”)undertheDepartmentof JusticeMergerGuidelines(“DOJGuidelines”),13andothercharacteristicsof the markets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJGuidelinesinallthirteenbankingmarkets.14Onconsummation, eachof thebankingmarketswouldeitherremainunconcentratedormoderatelyconcentratedasmeasuredbytheHHI,ortheHHIwouldincreaselessthan200points.Inaddition,numerouscompetitorswouldremaininallthebankingmarkets. TheDOJhasconductedadetailedreviewof thepotentialcompetitiveeffectsof theproposalandhasadvisedtheBoardthatconsummationof thetransactionwouldnotlikely haveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentand havenotobjectedtotheproposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyof thebankingmarketswhereApplicantsandM&Icompetedirectlyorin anyotherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesanddepositoryinstitutionsinvolvedinthe proposalandcertainothersupervisoryfactors.TheBoardalsoreviewsfinancialand managerialresourcesof theorganizationsinvolvedinaproposalundersection4of the BHCAct.15TheBoardhascarefullyconsideredthesefactorsinlightof allthefactsof record,includingconfidentialsupervisoryandexaminationinformationfromtheU.S. bankingsupervisorsof theinstitutionsinvolved,andpubliclyreportedandotherfinancial information,includinginformationprovidedbyApplicants.16TheBoardalsohascon- 12 Depositandmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsinthesummaryof depositsdataasofJune30,2010,adjustedtoreflectmergersandacquisitionsasofFebruary11,2011,andare basedoncalculationsinwhichthedepositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitors ofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCity Corporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftinstitution depositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991).ThedepositsofM&ISavingsBankareweightedat100percentbecausethe thriftinstitutionisownedbyacommercialbankingorganization.See,e.g.,NorwestCorporation,78Federal ReserveBulletin452(1992). 13 UndertheDOJGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIislessthan1000, moderatelyconcentratedifthepostmergerHHIisbetween1000and1800,andhighlyconcentratedifthepostmergerHHIismorethan1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthatabank mergeroracquisitiongenerallywillnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHImorethan200 points.AlthoughtheDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontalMerger Guidelines,theDOJhasconfirmedthatitsguidelinesforbankmergersoracquisitions,whichwereissuedin 1995,werenotmodified.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/ opa/pr/2010/August/10-at-938.html. 14 Definitionsofthebankingmarketsandtheeffectsoftheproposalonconcentrationsofbankingresourcesin themarketsaredescribedinAppendixB. 15 12CFR225.26(b). 16 SomecommentersexpressedconcernsaboutthecompensationtobepaidtocertainmanagementatM&IBank inlightofM&I’sparticipationinTreasury’sCapitalPurchaseProgram.Asnoted,M&I’spreferredsharesheld

152 FederalReserveBulletin|October2011 sultedwiththeOfficeof theSuperintendentof FinancialInstitutions(“OSFI”),theagency withprimaryresponsibilityforthesupervisionandregulationof Canadianbanks,includingBankof Montreal. Inevaluatingthefinancialresourcesinexpansionproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiaryinsured depositoryinstitutionsandsignificantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.Inassessingfinancialresources,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant.TheBoardalsoevaluatesthefinancial conditionof thecombinedorganizationatconsummation,includingitscapitalposition, assetquality,andearningsprospects,andtheimpactof theproposedfundingof the transaction. TheBoardhascarefullyconsideredthefinancialresourcesof theorganizationsinvolvedin theproposal.Thecapitallevelsof Bankof Montrealexceedtheminimumlevelsthatwould berequiredundertheBaselCapitalAccordandarethereforeconsideredtobeequivalentto thecapitallevelsthatwouldberequiredof aU.S.bankingorganization.Inaddition,the subsidiarydepositoryinstitutionsinvolvedintheproposalarewellcapitalizedandwould remainsoonconsummation.Basedonitsreviewof therecord,theBoardfindsthatApplicantshavesufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolved.The Boardhasreviewedtheexaminationrecordsof Applicants,M&I,andtheirsubsidiary depositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesand thoseof otherrelevantbankingsupervisoryagencies,includingtheOCCandtheOTS, withtheorganizationsandtheirrecordsof compliancewithapplicablebankingandantimoney-launderinglaws.TheBoardalsohasconsideredApplicants’plansforimplementing theacquisition,includingtheproposedmanagementafterconsummation. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalareconsistentwithapproval,asaretheothersupervisoryfactors.17 Section3of theBHCActalsoprovidesthattheBoardmaynotapproveanapplication involvingaforeignbankunlessthebankissubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbytheappropriateauthoritiesinthebank’shomecountry.18 byTreasuryundertheprogramwillbefullyredeemedaspartofthisproposal.Inaddition,theBoardhas reviewedthefinancialandmanagerialfactorsinthisproposal,includingthecompensationnotedbycommenters,inthecontextofthefinancialandmanagerialconditionoftheApplicants,M&I,andtheresulting organization. 17 Section3oftheBHCActalsorequirestheBoardtodeterminethatanapplicanthasprovidedadequateassurancesthatitwillmakeavailabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseofits affiliatesthattheBoarddeemsappropriatetodetermineandenforcecompliancewiththeBHCAct(12U.S.C. §1842(c)(3)(A)).TheBoardhasreviewedtherestrictionsondisclosureintherelevantjurisdictionsinwhich BankofMontrealoperatesandhascommunicatedwithrelevantgovernmentauthoritiesconcerningaccessto information.Inaddition,BankofMontrealhascommittedthat,totheextentnotprohibitedbyapplicablelaw, itwillmakeavailabletotheBoardsuchinformationontheoperationsofitsaffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliancewiththeBHCAct,theInternationalBankingAct,andotherapplicablefederallaws.BankofMontrealalsohascommittedtocooperatewiththeBoardtoobtainanywaiversor exemptionsthatmaybenecessarytoenableitsaffiliatestomakesuchinformationavailabletotheBoard.Based onallfactsofrecord,theBoardhasconcludedthatBankofMontrealhasprovidedadequateassurancesof accesstoanyappropriateinformationtheBoardmayrequest. 18 12U.S.C.§1842(c)(3)(B).AsprovidedinRegulationY,theBoarddetermineswhetheraforeignbankissubject toconsolidatedhomecountrysupervisionunderthestandardssetforthinRegulationK.See12CFR

LegalDevelopments:SecondQuarter,2011 153 Asnoted,theOSFIistheprimarysupervisorof Canadianbanks,includingBankof Montreal.TheBoardpreviouslyhasdeterminedthatBankof Montrealissubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshome-countrysupervisor.19Basedonthis findingandallthefactsof record,theBoardhasconcludedthatBankof Montrealcontinuestobesubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshome-country supervisor. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardisrequiredtoconsider theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved andtotakeintoaccounttherecordsof therelevantinsureddepositoryinstitutionsunder theCommunityReinvestmentAct(“CRA”).20TheBoardmustalsoreviewtherecordsof performanceundertheCRAof therelevantinsureddepositoryinstitutionswhenactingon anoticeundersection4of theBHCActtoacquirevotingsecuritiesof aninsuredsavings association.21TheCRArequiresthefederalfinancialsupervisoryagenciestoencourage insureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesin whichtheyoperate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-and moderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.22 TheBoardhasconsideredcarefullyallthefactsof record,includingevaluationsof the CRAperformancerecordsof insureddepositorysubsidiariesof HFCandM&I,data reportedbyHFCandM&IundertheHomeMortgageDisclosureAct(“HMDA”),23other informationprovidedbyApplicants,confidentialsupervisoryinformation,andpubliccommentsreceivedontheproposal.Althoughsomecommentersprovidedpositivecomments abouttheCRAperformanceof thedepositoryinstitutionsubsidiariesof Applicantsand M&Iincertainmarkets,thesamecommentersalsoexpressedoppositiontotheapplicationsandnoticesandrequestedthattheBoardnotapprovetheproposalunlessHFCmade specificCRAcommitmentsincertainMetropolitanStatisticalAreas(“MSAs”).Other commentersassertedthatApplicantsandM&Ihadnotadequatelyservedthecreditand investmentneedsof itsLMIcommunities.Commentersalsoexpressedconcernthatthe proposalmightreducetheavailabilityof credittoLMIneighborhoodsandcommunitiesof color.CommentersallegedthatM&IBankandHarrisBankhadnotservedthecredit needsof minoritiesandhadengagedindisparatetreatmentof minoritiesintheirlending activitiesincertainmarkets.Acommenteralsoexpressedconcernsthatthebranching recordsof M&IBankandHarrisBankinpredominantlyminoritycensustractswerenot proportionatetothepercentageof thepopulationresidinginthosetractsintheMilwaukee MSA.24 225.13(a)(4).RegulationKprovidesthataforeignbankwillbeconsideredsubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisiftheBoarddeterminesthatthebankissupervisedorregulated insuchamannerthatitshomecountrysupervisorreceivessufficientinformationontheworldwideoperations ofthebank,includingitsrelationshipwithanyaffiliates,toassessthebank’soverallfinancialconditionandits compliancewithlawsandregulations.See12CFR211.24(c)(1). 19 SeeBankofMontreal,91FederalReserveBulletinC14(2005)and80FederalReserveBulletin925(1994). 20 12U.S.C.§2901etseq.;12U.S.C.§1842(c)(2). 21 See,e.g.,NorthForkBancorporation,Inc.,86FederalReserveBulletin767(2000). 22 12U.S.C.§2903. 23 12U.S.C.§2801etseq. 24 ApplicantsindicatethattheirbranchnetworkintheMilwaukeeMSAisprincipallytheresultoftheirentryinto thatmarketin2008throughacquisitions.ApplicantsfurthernotethattheacquisitionofM&IwouldsignificantlyexpandtheirbranchnetworkinpredominantlyminoritytractsintheMilwaukeeMSA.

154 FederalReserveBulletin|October2011 A.CRAPerformanceEvaluations AsprovidedintheCRA,theBoardhasreviewedtheconvenienceandneedsfactorinlight of theevaluationsbytheappropriatefederalsupervisorsof therelevantinsureddepository institutions’CRAperformancerecords.Aninstitution'smostrecentCRAperformance evaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseit representsadetailed,on-siteevaluationof theinstitution'soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.25 HFC’ssubsidiarybankseachreceiveda“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheOCC.26M&IBankandM&ISavingsBankreceivedan“outstanding”and“satisfactory”CRAperformancerating,respectively,attheirmostrecent evaluationsbytherelevantfederalsupervisors.27Applicantshaverepresentedthat,onconsummationof theproposedmergerof M&IBank,theformerM&ISavingsBank,and HarrisBankArizonaintoHarrisBank,HarrisBankwouldselectelementsfromeachbank tomeettheneedsof thecommunitiesthatthecombinedorganizationwouldserve.28 CRAPerformanceof HarrisBank.InHarrisBank’sCRAevaluation,29examinersconsideredthebank’soverallratingtobe“satisfactory,”withlendingperformancerated“high satisfactory.”Examinersreportedthatthebank’sgeographicdistributionof HMDAloans andsmallloanstobusinesseswereadequateandthatthe bank’slendingactivityreflectedexcellentresponsivenesstothecreditneedsof itsassessmentarea,consideringitssize,resources,andthemarketfordepositsandloansintheChicagoassessmentarea.Examinersalsonotedthatduringtheevaluationperiod,HarrisBank made112communitydevelopmentloanstotaling$172millionandthatitscommunity developmentlendingaddressedtheneedforaffordablehousing,economicdevelopment, andcommunityservices,andsupportedeffortstostabilizeandrevitalizethecommunity. Duringtheevaluationperiod,HarrisBankmademorethan26,000smallbusinessloans totalingmorethan$2.6billioninitsassessmentareasandinparticular,470smallbusiness loanstotaling$84.8millionintheMilwaukeeassessmentarea.30Examinersalsonotedthat thebank’sdistributionof smallloanstobusinessesof differentrevenuesizeswasexcellent. 25 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11,642at11,665 (2010). 26 ThemostrecentCRAperformanceevaluationsforHarrisBankandHarrisBankArizonawereasofJuly1, 2009.HarrisCentralisaspecial-purposebankexemptfromperformanceevaluationsundertheCRA(12CFR 345.11(c)(3)). 27 ThemostrecentCRAperformanceevaluationsforHarrisBankandHarrisBankArizonawereasofJuly1, 2009.HarrisCentralisaspecial-purposebankexemptfromperformanceevaluationsundertheCRA(12CFR 345.11(c)(3)). 28 SeveralcommentersrequestedthatApplicantscommittoundertakecertainactivitiesinthecommunitiesApplicantswillserveonconsummationoftheproposal,includingactivitiesrelatedtohomelendingandforeclosure, economicdevelopment,consumerlendingandservices,communitydevelopment,andphilanthropy.Applicants havestatedthattheyplantoexplorenewmethodsandapproachestoenhancethelevelofservicesprovidedto thecommunitiestheyserve.TheBoardconsistentlyhasstatedthatneithertheCRAnorthefederalbanking agencies’CRAregulationsrequiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganizationandthattheenforceabilityofanysuchthird-partypledges,initiatives,andagreementsaremattersoutsidetheCRA.SeeBankofAmericaCorporation,90FederalReserveBulletin217,23233 (2004).Instead,theBoardfocusesontheexistingCRAperformancerecordofanapplicantandtheprograms thatanapplicanthasinplacetoservethecreditneedsofitsassessmentareasatthetimetheBoardreviewsa proposalundertheconvenienceandneedsfactor.Inaddition,theBoardnotesthatneithertheCRAnorthe agencies’implementingrulesrequireinstitutionstoengageincharitablegiving. 29 TheevaluationperiodwasJanuary1,2006,throughJune30,2009. 30 Inthiscontext,“smallbusinessloans”areloanswithoriginalamountsof$1millionorlessthataresecuredby nonfarm,nonresidentialpropertiesorarecommercialandindustrialloanstoborrowersintheUnitedStates. CommentersallegedthatthesmallbusinesslendingperformanceofHarrisBankin2009wasworsewhencomparedtoalllenderswithrespecttoloanslessthan$100,000intheMilwaukeeMSA.TheApplicantsnotethat

LegalDevelopments:SecondQuarter,2011 155 Thebankreceiveda“highsatisfactory”ratingintheinvestmenttest.Examinersnotedthat HarrisBankexhibitedagoodlevelof responsivenesstocreditandcommunitydevelopmentneedsandthatthebankmadequalifiedinvestmentswithinitsassessmentareas throughequity-equivalentinvestments,purchasesof securities,cashcontributions,and grantstotalingalmost$166millionduringtheevaluationperiod. Thebankalsoreceiveda“highsatisfactory”ratingintheservicetest.Examinersnotedthat thebankhasanadequatedistributionof deliverysystemsthatarereasonablyaccessibleto individualsandgeographiesof differentincomelevelsintheChicagoassessmentarea. WithinLMIgeographies,thebankopenedsixofficesandclosedoneduringtheevaluation period.Examinersnotedthatthebank’sstrategyduringmuchof theevaluationperiod placedanemphasisonopeningofficesinLMIgeographies,whichimprovedaccesstothe bank’sofficesinthosegeographies.Thebankalsooffersvariousalternativesystemsfor deliveringretailbankingservices. CRAPerformanceof HarrisBankArizona.HarrisBankArizonareceivedanoverall“satisfactory”ratinginits2009evaluation.31Underthelendingtest,HarrisBankArizona receiveda“highsatisfactory”rating,andexaminersreportedthatthelendinglevelsdemonstratedexcellentresponsivenesstothecreditneedsof thebank’sassessmentareas.Examinersalsonotedthatthebank’sgeographicdistributionof loanswasconsideredadequate, withagoodlevelof lendingtoborrowersof differentincomelevels. HarrisBankArizonareceivedan“outstanding”ratingundertheinvestmenttestandexaminersreportedthatthebankhadanexcellentlevelof qualifiedinvestmentactivityand communitydevelopmentlendingwithinitsassessmentareas. HarrisBankArizonareceiveda“lowsatisfactory”ratingundertheservicetestandexaminersreportedthatthebankhadanadequategeographicdistributionof bankoffices. CRAPerformanceof M&IBank.Asnoted,M&IBankreceivedanoverall“outstanding” ratinginits2009evaluation.32Underthelendingtest,M&IBankreceiveda“highsatisfactory”rating,andtheexaminersreportedthatthedistributionof loanstosmallbusinesses wasgood.Duringtheevaluationperiod,M&IBankmade32,600smallbusinessloans totalingalmost$6.8billionthroughoutitsassessmentareas,with19,600smallbusiness loanstotaling$3.9billiontobusinessesinWisconsin.33Examinersreportedthatthebank’s lendingactivityreflectedgoodresponsivenesstocreditneedsthroughoutthebank’s assessmentareas. ExaminersreportedthatM&IBankwasaleaderinmakingcommunitydevelopmentloans andmadeextensiveuseof innovativeandflexiblelendingpractices.During2007and2008, M&IBankoriginated551communitydevelopmentloanstotalingapproximately$1.4bilthebank’sperformanceinsmallbusinesslendingisconsistentwithitspeers.Moreover,thereisnostandardfor thepercentageofsmallbusinessloansinamountsof$100,000orlessthatareportinginstitutionisrequiredto make. 31 TheevaluationperiodwasJanuary1,2006,throughJune30,2009. 32 TheevaluationperiodwasJanuary1,2007,throughDecember31,2008.SeveralcommentersexpressedconcernsthatM&IBankmightnotcontinuetomaintainits“outstanding”CRAratingafterconsummationofthe proposal.ApplicantsnotethatM&IBankhasreceivedacompositeCRAratingof“outstanding”initsnine previousCRAevaluations.ApplicantshavealsostatedthattheywillreviewtheirandM&I’scurrentproducts andserviceswithaviewtowardselectingelementsfromeachtomeetthecreditneedsofthecommunitiesthat thecombinedorganizationwillserve. 33 OnecommenterallegedthatM&IBank’ssmallbusinesslendingin2009wasworsewhencomparedtoalllenderswithrespecttoloanslessthan$100,000intheMilwaukeeMSA.Aspreviouslynoted,thereisnostandard forthepercentageofsmallbusinessloansinamountsof$100,000orlessthatareportinginstitutionisrequired tomake.

156 FederalReserveBulletin|October2011 lioninitsassessmentareas.Themajorityof thoseloanswereforaffordablehousingand economicdevelopmentprojects. M&IBankreceivedan“outstanding”ratingundertheinvestmenttest.Examinersnoted thatthebankhadanexcellentlevelof qualifiedcommunitydevelopmentinvestmentsand grantsandoftenservedinaleadershipposition,particularlywithrespecttothoseinvestmentsnotroutinelyprovidedbyprivateinvestors.Examinerscommendedthebankfor exhibitingexcellentresponsivenesstocreditandcommunitydevelopmentneeds. M&IBankalsoreceivedan“outstanding”ratingundertheservicetest.Examinersfound thatM&IBank’sretaildeliverysystemswereaccessibletoallportionsof itsassessment areasandthatbankingservicesandbusinesshoursweretailoredtotheconvenienceand needsof thoseareas,whichincludedLMIcensustractsandindividuals.Examinersnoted thatbankingservicesandbusinesshoursweretailoredtomeettheconvenienceandneeds of thebank’sassessmentareas,includingLMIareas. CRAPerformanceof M&ISavingsBank.M&ISavingsBankreceivedanoverall“satisfactory”ratinginits2008evaluation.34Underthelendingtest,M&ISavingsBankreceiveda “lowsatisfactory”rating.Examinersreportedthatalthoughthesavingsbank’soveralllendingactivitieswerestrong,themajorityof itsHMDAandsmallbusinessloansweremade outsideitstwoassessmentareasandthatthelendinglevelsreflectedadequateresponsivenesstotheassessmentareas’creditneeds.Examinersreportedthatthesavingsbankgeneratedaverystrongvolumeof communitydevelopmentloansthatprovidedacounterbalanceforlimitedHMDAloanactivitywithinitsassessmentareas. M&ISavingsBankreceivedan“outstanding”ratingundertheinvestmenttest.Examiners foundasubstantialamountof qualifiedinvestmentsandnotedthatwhenallthoseinvestmentswereconsidered,thetotalamountwas173percentof theamountinthepreceding examinationandrepresentedapproximately1.2percentof theinstitution’sassets. M&ISavingsBankreceiveda“lowsatisfactory”ratingundertheservicetest.Examiners notedthatthesavingsbankhadlimiteddeposit-takingofficesandderivedamajorportion of itsfundingfrombrokers.Communitydevelopmentserviceswereconsideredtobe adequate.Examinersalsoreportedthatthesavingsbankofferedvariousbankingservices, includingfreeATMtransactions,directtelephonebanking,andelectroniconlinebanking. B.HMDAandFairLendingRecords TheBoardhascarefullyconsideredtheHMDAdatafor2008,2009,andpreliminarydata for2010reportedbyHFC’sandM&I’sinsureddepositoryinstitutions,intheirrespective combinedassessmentareasandintheMSAsof concerntothecommenters,35andthefair lendingrecordsof HFCandM&I,inlightof publiccommentsreceivedontheproposal. Severalcommentersalleged,basedonHMDAdatareportedin2009,thatHFCandM&I hadnotadequatelyservedthecreditneedsof theirLMIcommunitiesorhadengagedin disparatetreatmentof minorityindividualsinhomemortgagelending. HMDAlendingdataforHFC’sdepositoryinstitutionsin2008and2009intheircombined assessmentareasweregenerallyconsistentwiththeaggregatelendingbyallreportinglend- 34 TheevaluationperiodwasJanuary1,2005,throughDecember31,2007. 35 ForHFC,theMSAsofconcerntothecommentersincludetheMSAsforChicago,Illinois;Gary,Indiana;and Milwaukee,Wisconsin.ForM&I,thecommentersexpressedconcernabouttheAppleton,EauClaire,Madison,andMilwaukeeMSAsinWisconsin;theIndianapolisMSAinIndiana;theOrlandoMSAinFlorida;the PhoenixMSAinArizona;andtheSt.LouisMSAinMissouri.

LegalDevelopments:SecondQuarter,2011 157 ersintherelevantassessmentareas(“aggregatelenders”)withrespecttothepercentageof theirloanstoAfricanAmericansandinpredominantlyminoritycensustractsbutlagged theaggregatelendersintheirlendinginLMIcensustractsinbothyears.However,the banks’lendingexceededtheaggregatelendersinloanstoHispanicborrowersandinloans toLMIindividualsgenerally.ThedenialratestoAfricanAmericansrelativetowhiteapplicants(denialdisparityratiosor“DDR”)inthecombinedassessmentareas,inIllinois (HFC’shomestate),andinChicagospecificallywereconsistentwith,orlowerthan,the aggregatelenders’DDRsin2008and2009.ForHispanicborrowers,theDDRwasgenerallyconsistentwiththeaggregatelendersinbothyearsinthoseareas.TheBoardhasalso reviewedpreliminary2010HMDAdataandnotesasignificantdecreaseinthevolumeof applicationsandloansforHFC’sdepositoryinstitutionsandtheindustryasawhole duetoaweakhousingmarket.ThisdeclineappearstohavehadagreatereffectinpredominantlyminorityandLMIgeographies. TheHMDA-reportablelendingdatafor2008forM&I’sdepositoryinstitutionsintheir combinedassessmentareasgenerallylaggedaggregatelendersinlendingtoAfricanAmericansandHispanics,inpredominantlyminoritycensustracts,andtoLMIindividuals.In 2009,HMDA-reportablelendingdataweregenerallyconsistentwiththedataforaggregate lenderswithrespecttothepercentageof itsloanstoAfricanAmericansandHispanicsand inLMIcensustractsbutlaggedaggregatelendersinthepercentageof loanstoLMIindividualsandinpredominantlyminoritycensustracts.TheDDRforAfricanAmericans relativetowhiteapplicantsinthecombinedassessmentareaswashigherthanforaggregate lendersin2008butwaslargelyconsistentwithaggregatelendersin2009.ForHispanicborrowers,theDDRwaslargelyconsistentwithaggregatelendersinbothyears. Severalcommenterswereparticularlyconcernedaboutthe2009HMDAdataforM&I’s andHFC’sdepositoryinstitutionsintheMilwaukeeMSA.WithrespecttoM&I,thelendingperformanceslightlyexceededthatof aggregatelenderswithrespecttothepercentage of itsloanstoAfricanAmericansandHispanics,inpredominantlyminoritycensustracts, andinLMIcensustracts.Thedepositoryinstitutionswereslightlyhigherthanaggregate lenderswithrespecttotheirpercentageof loanstoLMIindividuals.TheDDRforAfrican AmericansintheMSAwaslowerthanaggregatelendersin2009butwashigherforHispanicsinthesameyear.TheBoardhasalsoreviewedpreliminary2010HMDAdatainthe MilwaukeeMSAandnotessignificantimprovementsinlendingtoAfricanAmericansand Hispanics,inpredominantlyminoritycensustracts,inLMIcensustracts,andtoLMI individuals. TheHMDA-relatedlendingperformanceof HFC’sdepositoryinstitutionsintheMilwaukeeMSAin2009wasconsistentwithorexceededthatof aggregatelenderswithrespectto thepercentageof loanstoHispanics,inpredominantlyminoritycensustracts,inLMI tracts,andtoLMIindividualsbutlaggedaggregatelenderswithrespecttothepercentage of loanstoAfricanAmericans.TheDDRsforAfricanAmericansandHispanicsinthe MSAwerelowerthantheaggregatelendersin2009. AlthoughtheHMDAdatamightreflectcertaindisparitiesintheratesof loanapplications, originations,anddenialsamongmembersof differentracialorethnicgroupsincertain localareas,theyprovideaninsufficientbasisbythemselvesonwhichtoconcludewhether ornotHFCisexcludingorimposinghighercostsonanygrouponaprohibitedbasis.The BoardrecognizesthatHMDAdataalone,evenwiththerecentadditionof pricinginformation,provideonlylimitedinformationaboutthecoveredloans.36HMDAdata,therefore, 36 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In

158 FederalReserveBulletin|October2011 havelimitationsthatmakethemaninadequatebasis,absentotherinformation,forconcludingthataninstitutionhasengagedinillegallendingdiscrimination. TheBoardisneverthelessconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlendingandbelievesthatalllendinginstitutionsareobligatedtoensurethattheir lendingpracticesarebasedoncriteriathatensurenotonlysafeandsoundlendingbutalso equalaccesstocreditbycreditworthyapplicantsregardlessof theirraceorethnicity. Becauseof thelimitationsof HMDAdata,theBoardhasconsideredthesedatacarefully andtakenintoaccountotherinformation,includingexaminationreportsthatprovideonsiteevaluationsof compliancewithfairlendinglawsbyHFC,M&I,andtheirsubsidiaries. TheBoardalsohasconsultedwiththeOCCaboutthefairlendingcompliancerecordsof HarrisBankandHarrisBankArizonaandwiththeOTSaboutthefairlendingcompliance recordof M&ISavingsBank.Inaddition,theBoardhasconsideredinformationprovided byApplicantsabouttheircompliance-risk-managementsystems. Therecordof thisproposal,includingconfidentialsupervisoryinformation,indicatesthat HFChastakenstepstoensurecompliancewithfairlendingandotherconsumerprotection laws.Applicantshaveinplaceaformalfairlendingpolicyandprogramthatapplytotheir U.S.operations,includingthoseoperationsinvolvedinhomemortgageandsmallbusiness lending.Applicantsprovideinternalcompliancetraining.Theirbankmanagement,line-ofbusiness,andcompliancestaffsattendoutsideconferencesandseminarsandotherfair lendingandconsumerprotectiontrainingsessions.Applicantshaveindicatedthatthecombinedinstitutionwillcontinuetohavesuchpoliciesandproceduresonconsummationof theproposal.InthefairlendingreviewsconductedatthemostrecentCRAexaminations of HFC’sandM&I’sdepositoryinstitutions,theappropriatefederalsupervisoryagency didnotreportanyevidenceof illegalcreditdiscrimination. TheBoardalsohasconsideredtheHMDAdatainlightof otherinformation,includingthe overallperformancerecordsof thesubsidiarybanksof ApplicantsandM&Iunderthe CRA.Theirestablishedeffortsandrecordsof performancedemonstratethattheinstitutionsareactiveinhelpingtomeetthecreditneedsof theirentirecommunitiesandarenot excludingindividualsorgeographiesonaprohibitedbasis. C.ConclusiononConvenienceandNeedsandCRAPerformance TheBoardhasconsideredcarefullyallthefactsof record,includingreportsof examinationof theCRArecordsof theinstitutionsinvolved,informationprovidedbyApplicants, publiccommentsreceivedontheproposal,andconfidentialsupervisoryinformation. Applicantsrepresentthattheproposalwouldresultinincreasedcreditavailabilityand accesstoabroaderarrayof financialproductsandservicesforcustomersof thecombined organization.Basedonareviewof theentirerecord,andforthereasonsdiscussedabove, theBoardconcludesthatconsiderationsrelatingtotheconvenienceandneedsfactorand theCRAperformancerecordsof therelevantinsureddepositoryinstitutionsareconsistent withapprovalof theproposal.37 addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenot availablefromHMDAdata. 37 Acommenterexpressedconcernthattheproposedacquisitionwouldresultinalossofjobs.Theeffectofa proposedtransactiononemploymentinacommunityisnotamongthefactorsthattheBoardisauthorizedto considerundertheBHCAct,andthefederalbankingagencies,courts,andtheCongressconsistentlyhave interpretedtheconvenienceandneedsfactortorelatetotheeffectofaproposalontheavailabilityandquality ofbankingservicesinacommunity.See,e.g.,WellsFargo&Company,82FederalReserveBulletin445,457 (1996).

LegalDevelopments:SecondQuarter,2011 159 NonbankingActivities Asnotedabove,Applicantsalsohavefiledanoticeundersections4(c)(8)and4(j)of the BHCActtoacquirecertainnonbankingsubsidiariesof M&I,includingM&ISavings Bank,andtoengageinanumberof othernonbankingactivitiesthatarepermissiblefor bankholdingcompaniesunderRegulationY,includingfinancialandinvestmentadvisory activities,agencytransactionalservices,trustcompanyfunctions,activitiesrelatedto extendingcredit,communitydevelopmentactivities,andextendingcreditandservicing loans.38TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof asavings associationbyabankholdingcompany,andtheothernonbankingactivitiesforwhich Applicantshaverequestedapproval,arecloselyrelatedtobankingforpurposesof section 4(c)(8)of theBHCAct.39 Aspartof itsevaluationof thepublicinterestfactorsundersection4(j)of theBHCAct, theBoardalsomustdeterminethatApplicants’proposedacquisitionof M&I’snonbankingsubsidiaries“canreasonablybeexpectedtoproducebenefitstothepublic...thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedor unfaircompetition,conflictsof interests,orunsoundbankingpractices.”40Aspartof its evaluationof thesefactors,theBoardhasconsideredthefinancialconditionandmanagerialresourcesof Applicants,theirsubsidiaries,andthecompaniestobeacquired,aswellas theeffectof theproposedtransactiononthoseresources.Forthereasonsdiscussedabove, andbasedonallthefactsof record,theBoardconcludesthatfinancialandmanagerial considerationsareconsistentwithapproval. TheBoardalsohasreviewedthecompetitiveeffectsof Applicants’proposedacquisitionof M&I’snonbankingdepositorysubsidiary,M&ISavingsBank.Forthereasonsstatedearlier,andbasedonallthefactsof record,consummationof thisproposalwouldbeconsistentwithBoardprecedentandDOJGuidelinesinthebankingmarketswhereApplicants’ subsidiarybanksandM&ISavingsBankcompetedirectly. Inaddition,ApplicantsandM&Icompetedirectlyininvestmentadvisoryservices,trust andcustodialservices,andcommunitydevelopmentservices.Thegeographicmarketsfor eachof thesenonbankingactivitiesareregionalornationalinscope,exceptthemarketfor communitydevelopment,whichislocal.Therecordinthiscaseindicatesthatthereare numerousprovidersof eachof theseservicesandthatApplicants’andM&I’slevelsof participationinthoseactivitiesarerelativelysmall.Basedonallthefactsof record,theBoard concludesthatconsummationof theproposednonbankingacquisitionsisnotlikelyto haveanysignificantlyadversecompetitiveeffects. TheBoardalsohasreviewedcarefullythepublicbenefitsof theproposedacquisitionof M&I’snonbanksubsidiaries.Applicantshaveindicatedthattheexpandedgeographic scopeof theirnonbankingoperationswouldprovideaddedconveniencetocurrentand futurecustomersof ApplicantsandM&Iandthatcustomersof bothinstitutionswould haveaccesstoabroaderarrayof productsandservices. Forthereasonsdiscussedabove,andbasedontheentirerecord,theBoardhasdetermined thattheconductof theproposednonbankingactivitieswithintheframeworkof RegulationYandBoardprecedentisnotlikelytoresultinadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,orunsound 38 12U.S.C.§§1843(c)(8)and1843(j);see12U.S.C.§1843(i). 39 12CFR225.28(b)(1),(2),(4),(5),(6),(7),and(12).SeeAppendixA. 40 12U.S.C.§1843(j)(2)(A).

160 FederalReserveBulletin|October2011 bankingpractices,thatwouldoutweighthepublicbenefitsof theproposal,suchas increasedcustomerconvenienceandgainsinefficiency.Accordingly,basedonallthefacts of record,theBoardhasdeterminedthatthebalanceof thepublicbenefitsunderthestandardof section4(j)(2)of theBHCActisconsistentwithapproval. Conclusion Basedontheforegoing,andinlightof allthefactsof record,theBoardhasdetermined thattheapplicationsandnotices41shouldbe,andherebyare,approved.42Inreachingits conclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitis requiredtoconsiderundertheBHCActandotherapplicablestatutes.TheBoard’s approvalisspecificallyconditionedoncompliancebyApplicantswiththeconditionsinthis orderandallthecommitmentsmadetotheBoardinconnectionwiththeproposal.For purposesof thisaction,thesecommitmentsandconditionsaredeemedtobeconditions imposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionand,assuch, maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unless suchperiodisextendedforgoodcausebytheBoardorbytheFederalReserveBankof Chicago,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveJune20,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDukeand Tarullo.Abstainingfromthisaction:GovernorRaskin. RobertdeV.Frierson DeputySecretaryof theBoard AppendixA Applicantsproposetoengageinthefollowingnonbankingactivities: 1. Acquiringandholdingloans,inaccordancewithsection225.28(b)(1)of theBoard’s RegulationY(12CFR225.28(b)(1)); 2. Engaginginactivitiesrelatedtoextendingcredit,includingrealestatesettlementservicing,inaccordancewithsection225.28(b)(2)(viii)of theBoard’sRegulationY(12CFR 225.28(b)(2)(viii)); 41 HarrisBankalsohasgivennoticepursuanttosection25oftheFRA,12U.S.C.§§601604a,andsection211.3 ofRegulationK,12CFR211.3,toacquiretheCaymanIslandsbranchofM&IBank.TheBoardhasconsideredthefactorsitisrequiredtoconsiderwhenreviewinganoticetoestablishabranchundersection25of theFRAand,basedonallthefactsofrecord,findsthesefactorstobeconsistentwithapproval. 42 SeveralcommentersrequestedthattheBoardholdapublicmeetingorhearingontheproposal.Section3(b)of theBHCActdoesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriate supervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialofthe application(12CFR225.16(e)).TheBoardhasnotreceivedsucharecommendationfromtheappropriate supervisoryauthorities.TheBoard’sregulationsprovideforahearingundersection4oftheBHCActifthere aredisputedissuesofmaterialfactthatcannotberesolvedinsomeothermanner(12CFR225.25(a)(2)). Underitsregulations,theBoardalsomay,initsdiscretion,holdapublicmeetingorhearingonanapplication toacquireabankifnecessaryorappropriatetoclarifyfactualissuesrelatedtotheapplicationandtoprovide anopportunityfortestimony(12CFR262.3(3)and262.25(d)).TheBoardhasconsideredcarefullythecommenters’requestsinlightofallthefactsofrecord.IntheBoard’sview,thecommentershadampleopportunity tosubmitviewsand,infact,submittedwrittencommentsthattheBoardhasconsideredcarefullyinactingon theproposal.TherequestsfailtoidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionthat wouldbeclarifiedbyapublicmeetingorhearing.Forthesereasons,andbasedonallthefactsofrecord,the Boardhasdeterminedthatapublicmeetingorhearingisnotrequiredorwarrantedinthiscase.Accordingly, therequestsforapublicmeetingorhearingontheproposalaredenied.

LegalDevelopments:SecondQuarter,2011 161 3. Operatingasavingsassociation,inaccordancewithsection225.28(b)(4)(ii)of the Board’sRegulationY(12CFR225.28(b)(4)(ii)); 4. Engagingintrustcompanyfunctions,inaccordancewithsection225.28(b)(5)of the Board’sRegulationY(12CFR225.28(b)(5)); 5. Engaginginfinancialandinvestmentadvisoryactivities,inaccordancewithsection 225.28(b)(6)of theBoard’sRegulationY(12CFR225.28(b)(6)); 6. Providingagencytransactionalservices,inaccordancewithsection225.28(b)(7)(i)of theBoard’sRegulationY(12CFR225.28(b)(7)(i));and 7. Engagingincommunitydevelopmentactivities,inaccordancewithsection 225.28(b)(12)of theBoard’sRegulationY(12CFR225.28(b)(12)). AppendixB BankofMontrealandM&IBankingMarketsConsistentwithBoardPrecedentandDOJGuidelines Amountof MarketDeposit Remaining Bank Rank Deposits Shares ResultingHHI ChangeinHHI Numberof (dollars) (percent) Competitors Arizona Phoenix—includesthePhoenixmetropolitanarea,includingbranchesinthePhoenixRanallyMetropolitanArea(“RMA”)andFountainHills,Gold Canyon,andMaricopa. BankofMontrealPre-Consummation 14 378.44mil. 0.64 1,842 5 60 M&I 4 2138.57mil. 3.61 BankofMontrealPost-Consummation 4 2517.01mil. 4.25 Tucson—includestheTucsonmetropolitanarea,includingbranchesintheTucsonRMAandGreenValley. BankofMontrealPre-Consummation 17 28.87mil. 0.25 1,703 2 18 M&I 6 353.06mil. 3.04 BankofMontrealPost-Consummation 6 381.92mil. 3.29 Florida Naples—includesthecountyofCollier,excludingthetownofImmokalee. BankofMontrealPre-Consummation 28 53.3mil. 0.51 933 1 38 M&I 14 141.99mil. 1.37 BankofMontrealPost-Consummation 13 195.29mil. 1.88 Sarasota—includesthecountiesofManateeandSarasota,excludingthatportionofSarasotaCountythatisbotheastoftheMyakkaRiverand southofInterstate75,whichincludesthetownofNorthPort;thepeninsularportionofthecountyofCharlottewestoftheMyakkaRiver(currently includesEnglewoodBeach,NewPointComfort,GroveCity,CapeHaze,Rotonda,RotondaWestandPlacida);andGasparillaIsland(thetownof BocaGrande)inthecountyofLee(allinFlorida). BankofMontrealPre-Consummation 42 22.52mil. 0.13 939 1 46 M&I 8 568.73mil. 3.41 BankofMontrealPost-Consummation 8 591.25mil. 3.54 Indiana Indianapolis—includesthecountiesofBoone,Hamilton,Hancock,Hendricks,Johnson,Marion,Morgan,andShelby;andGreentownshipinthe countyofMadison(allinIndiana). BankofMontrealPre-Consummation 11 495.29mil. 1.68 1,364 20 52 M&I 5 1791.2mil. 6.07 BankofMontrealPost-Consummation 4 2286.49mil. 7.75 Wisconsin GreenBay—includesthecountiesofBrownandKewaunee;Morgan,Abrams,Pensaukee,Chase,andLittleSuamicotownshipsinthecountyof Oconto;AngelicaandMapleGrovetownshipsinthecountyofShawano;OneidatownshipinthecountyofOutagamie;andCooperstowntownship inthecountyofManitowoc(allinWisconsin). BankofMontrealPre-Consummation 21 10.86mil. 0.13 3,343 2 21 M&I 2 829.85mil. 9.64 BankofMontrealPost-Consummation 2 840.71mil. 9.76 LaCrosse—includesthecountyofLaCrosse;thetownofGlencoeinthecountyofBuffalo;thetownsofArcadia,Preston,Ettrick,andGaleinthe countyofTrempealeau;thetownsofCurran,Springfield,Franklin,NorthBend,andMelroseinthecountyofJackson(allinWisconsin);thecounty ofHouston;andHonier,Richmond,PleasantHill,NewHartford,andDresbachtownshipsinthecountyofWinona(allinMinnesota). BankofMontrealPre-Consummation 22 14.07mil. 0.57 767 8 25 M&I 6 177.95mil. 7.17 BankofMontrealPost-Consummation 6 192.02mil. 7.74 (continuedonnextpage)

162 FederalReserveBulletin|October2011 AppendixB—continued BankofMontrealandM&IBankingMarketsConsistentwithBoardPrecedentandDOJ Guidelines—continued Amountof MarketDeposit Remaining Bank Rank Deposits Shares ResultingHHI ChangeinHHI Numberof (dollars) (percent) Competitors Madison—includesthecountyofDane,excludingtheeasterntieroftownships(York,Medina,Deerfield,Christiana,andAlbion);andDekorra, Lowville,Otsego,FountainPrairie,Columbus,Hampden,Leeds,Arlington,Lodi,andWestPointtownshipsinthecountyofColumbia(allin Wisconsin). BankofMontrealPre-Consummation 19 179.97mil. 1.48 768 54 41 M&I 1 2217.29mil. 18.22 BankofMontrealPost-Consummation 1 2397.26mil. 19.7 Milwaukee—includesthecountiesofMilwaukee,Ozaukee,andWaukesha;EastTroytownshipinthecountyofWalworth;Waterford,Norway,and RaymondtownshipsinthecountyofRacine;IxoniatownshipinthecountyofJefferson;andPolk,Jackson,Richfield,andGermontowntownships inthecountyofWashington(allinWisconsin). BankofMontrealPre-Consummation 7 804.9mil. 1.76 1886 114 59 M&I 1 14713.13mil. 32.26 BankofMontrealPost-Consummation 1 15518.03mil. 34.03 SaukCounty—includesthecountyofSauk;WestfordandWillowtownshipsinthecountyofRichland;WyomingandArenatownshipsinthe countyofIowa;andNewporttownshipinthecountyofColumbia(allinWisconsin). BankofMontrealPre-Consummation 4 167.67mil. 10.74 1639 215 16 M&I 5 156.33mil. 10.01 BankofMontrealPost-Consummation 2 324mil. 20.75 Shawano—includesthecountyofMenominee;thecountyofShawano,excludingAngelica,MapleGrove,Hutchins,Aniwa,Birnamwood, Wittenberg,andGermaniatownships;andDupont,Larrabee,andMattesontownshipsinthecountyofWaupaca(allinWisconsin). BankofMontrealPre-Consummation 10 8.01mil. 1.27 1805 72 10 M&I 1 178.45mil. 28.33 BankofMontrealPost-Consummation 1 186.46mil. 29.6 SheboyganCounty—includesthecountyofSheboygan,excludingRussellandRhinetownships(allinWisconsin). BankofMontrealPre-Consummation 11 46.94mil. 2.54 1237 48 16 M&I 4 175.23mil. 9.48 BankofMontrealPost-Consummation 3 222.17mil. 12.02 WestBend—includesthecountyofWashington,excludingPolk,Jackson,Richfield,andGermantowntownships(allinWisconsin). BankofMontrealPre-Consummation 15 8.07mil. 0.56 1133 24 15 M&I 1 306.26mil. 21.42 BankofMontrealPost-Consummation 1 314.33mil. 21.98 Note:DepositdataareasofJune30,2010.Depositamountsareunweighted.Rankings,marketdepositshares,andHHIsarebasedonthrift institutiondepositsweightedat50percent(M&ISavingsBankat100percent). M&T Bank Corporation Buffalo, New York Manufacturers and Traders Trust Company Buffalo, New York OrderApprovingtheAcquisitionof aBankHoldingCompany,Mergerof Banks,and Establishmentof Branches M&TBankCorporation(“M&T”),Buffalo,NewYork,afinancialholdingcompany withinthemeaningof theBankHoldingCompanyAct(“BHCAct”),hasrequestedthe Board’sapprovalundersection3of theBHCAct1toacquireWilmingtonTrustCorporation(“Wilmington”)andtherebyindirectlyacquireitssubsidiarybank,WilmingtonTrust Company(“WTBank”),bothof Wilmington,Delaware.2M&Thasalsorequestedthe Board’sapprovalundersections4(c)(8)and4(j)of theBHCActtoacquireanindirect 1 12U.S.C.§1842. 2 M&Thasformedawhollyownedsubsidiary,MTBOne,Inc.(“MTBOne”),forpurposesofacquiringWilmington.MTBOnewillmergewithandintoWilmington,withWilmingtonsurvivingthemergerandbecominga

LegalDevelopments:SecondQuarter,2011 163 interestinWilmington’ssubsidiarysavingsassociation,WilmingtonTrustFSB (“WTFSB”),Baltimore,Maryland,andWilmington’ssubsidiarytrustcompany,WilmingtonTrustFiduciaryServiceCompany(“WTFSC”),Weehawken,NewJersey.3M&Talso proposestoacquirecertainothernonbankingsubsidiariesof Wilmingtoninaccordance withsection4(k)of theBHCAct.4 Inaddition,M&T’ssubsidiarystatememberbank,ManufacturersandTradersTrustCompany(“M&TBank”),Buffalo,hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct5(“BankMergerAct”)topurchasecertainassetsand assumecertainliabilitiesfromWTBankandWTFSB.M&TBankalsohasappliedunder section9of theFederalReserveAct(“FRA”)toestablishandoperatebranchesatthemain officeandbranchesof WTBankandatthebranchesof WTFSB.6 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(76FederalRegister2688(2011)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthintheBHCAct,theBankMergerAct,andtheFRA. M&T,withtotalconsolidatedassetsof $68.0billion,isthe29thlargestdepositoryorganizationintheUnitedStates,controlling$47.3billionindeposits.7M&Tcontrolstwosubsidiarybanks,M&TBankandM&TBank,NationalAssociation(“M&TBank,N.A.”), Oakfield,NewYork,thatoperateinsevenstatesandtheDistrictof Columbia.8M&Tis thesecondlargestdepositoryorganizationinMaryland,controllingdepositsof approximately$14.6billion.InPennsylvania,M&Tisthe6thlargestdepositoryorganization,controllingdepositsof $7.9billion,andinDelaware,M&Tisthe32ndlargestdepository organization,controllingdepositsof $16million. Wilmingtonhastotalconsolidatedassetsof approximately$11.0billionandisthe86th largestdepositoryorganizationintheUnitedStates,controlling$9.0billionindeposits. Wilmington’ssubsidiaryinsureddepositoryinstitutions,WTBankandWTFSB,9operate inDelaware,Florida,Maryland,andPennsylvania.InDelaware,Wilmingtonistheeighth largestdepositoryorganization,controllingdepositsof $6.6billion.Wilmingtonisthe15th largestdepositoryorganizationinMaryland,controllingdepositsof approximately$927 million.InPennsylvania,Wilmingtonisthe79thlargestdepositoryorganization,controllingdepositsof $460million.InFlorida,Wilmingtonisthe316thlargestdepositoryorganization,controllingdepositsof $8.8million. Onconsummationof theproposal,M&Twouldbecomethe27thlargestdepositoryorganizationintheUnitedStates,withtotalconsolidatedassetsof approximately$79billion. M&Twouldcontroldepositsof approximately$56.3billion,whichrepresentlessthan subsidiaryofM&T.ImmediatelyfollowingthemergerofMTBOneintoWilmington,FirstEmpireStateHoldingCompany,anintermediatebankholdingcompanywithintheM&Torganization,willmergewithandinto Wilmington,withWilmingtonsurvivingthemerger. 3 12U.S.C.§§1843(c)(8)and(j);12CFR225.24.TheBoardpreviouslyhasdeterminedbyregulationthatthe operationofasavingassociationandatrustcompanybyabankholdingcompanyiscloselyrelatedtobanking forthepurposesofsection4(c)(8)oftheBHCAct(12CFR225.28(b)(4)(ii)and(5)). 4 12U.S.C.§1843(k). 5 12U.S.C.§1828(c). 6 12U.S.C.§321. 7 Assetandnationwidedeposit-rankingdataareasofDecember31,2010.Statewidedepositandrankingdata areasofJune30,2010,andreflectmergeractivitythroughApril16,2010. 8 M&TBankoperatesinDelaware,Maryland,NewJersey,NewYork,Pennsylvania,Virginia,WestVirginia, andtheDistrictofColumbia.M&TBank,N.A.,operatesonlyinNewYork. 9 Forpurposesofthisorder,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,andsavingsassociations.

164 FederalReserveBulletin|October2011 1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnited States.InMaryland,M&Twouldremainthesecondlargestdepositoryorganization,controllingdepositsof approximately$15billion,whichrepresentapproximately13percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate.InPennsylvania,M&Twouldremainthesixthlargestdepositoryorganization,controllingdepositsof approximately$8.4billion,whichrepresentapproximately2.9percentof thetotalamount of depositsof insureddepositoryinstitutionsinthestate.InDelaware,M&Twould becometheeighthlargestdepositoryorganization,controllingdepositsof approximately $6.7billion,whichrepresentapproximately2.3percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate.InFlorida,M&Twouldbecomethe316thlargestdepositoryorganization,controllingdepositsof $8.8million,whichrepresentlessthan 1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate. InterstateAnalysis Section3(d)of theBHCActallowstheBoardtoapproveanapplicationbyabankholding companytoacquirecontrolof abanklocatedinastateotherthanthebankholdingcompany’shomestateif certainconditionsaremet.Forpurposesof theBHCAct,thehome stateof M&TisNewYork,10andWTBankislocatedinDelaware.11 Basedonareviewof allthefactsof record,includingrelevantstatestatutes,theBoard findsthattheconditionsforaninterstateacquisitionenumeratedinsection3(d)of the BHCActaremetinthiscase.12Inlightof allthefactsof record,theBoardispermittedto approvetheproposalundersection3(d)of theBHCAct. Section102of theRiegle-NealInterstateBankingandBranchingEfficiencyActof 1994 (“Riegle-NealAct”)authorizesabanktomergewithanotherbanklocatedinanotherstate undercertainconditionsunless,afterSeptember29,1994,andbeforeJune1,1997,the homestateof oneof thebanksinvolvedinthetransactionadoptedalawthatapplies equallytoallout-of-statebanksandexpresslyprohibitsmergertransactionsinvolvingoutof-statebanks.13Forpurposesof theRiegle-NealAct,thehomestateof M&TBankis NewYork,andthehomestateof WTBankisDelaware.14NeitherDelawarenorNewYork hasadoptedalawexpresslyprohibitingsuchinterstatemergers.M&TBankhasprovideda copyof itsBankMergerActapplicationtotherelevantstateagenciesandstatedthatithas compliedwithstatelaw.Theproposalalsocomplieswithalltheotherrequirementsof the Riegle-NealAct.15Accordingly,approvalof theproposedtransactionisconsistentwiththe Riegle-NealAct. 10 See12U.S.C.§1842(d).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater. 11 Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersabanktobelocatedinthestatesinwhich thebankischarteredorheadquarteredoroperatesabranch.See12U.S.C.§§1841(o)(4)–(7)and1842(d)(1)(A) and1842(d)(2)(B).WTBankoperatesonlyinDelaware. 12 12U.S.C.§§1842(d)(1)(A)–(B)and1842(d)(2)–(3).M&Tisadequatelycapitalizedandadequatelymanaged,as definedbyapplicablelaw.WTBankhasbeeninexistenceandoperatedfortheminimumperiodoftime requiredbyDelawarelawandformorethanfiveyears.See12U.S.C.§§1842(d)(1)(B)(i)–(ii).Onconsummation oftheproposal,M&Twouldcontrollessthan10percentofthetotalamountofdepositsofinsureddepository institutionsintheUnitedStates(12U.S.C.§1842(d)(2)(A)).M&Talsowouldcontrollessthan30percentof, andlessthantheapplicablestatedepositcapfor,thetotalamountofdepositsininsureddepositoryinstitutions intherelevantstates(12U.S.C.§§1842(d)(2)(B)–(D)).Allotherrequirementsofsection3(d)oftheBHCAct wouldbemetonconsummationoftheproposal. 13 See12U.S.C.§1831u. 14 See12U.S.C.§1831u(a)(4)and(g)(4). 15 See12U.S.C.§1831u.M&TBankisadequatelycapitalizedandadequatelymanaged,asdefinedintheRiegle- NealAct.Asnotedabove,onconsummationoftheproposal,M&TBankanditsaffiliatedinsureddepository institutionswouldcontrollessthan10percentofthetotalamountofdepositsininsureddepositoryinstitu-

LegalDevelopments:SecondQuarter,2011 165 CompetitiveConsiderations TheBHCActandtheBankMergerActprohibittheBoardfromapprovingaproposalthat wouldresultinamonopolyorwouldbeinfurtheranceof anattempttomonopolizethe businessof bankinginanyrelevantbankingmarket.BothstatutesalsoprohibittheBoard fromapprovingabankacquisitionthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.16Inaddition,theBoardmustconsider thecompetitiveeffectsof aproposaltoacquireasavingsassociationunderthepublicbenefitsfactorof section4(j)of theBHCAct.17 M&TandWilmingtonhavesubsidiarydepositoryinstitutionsthatcompetedirectlyinfive bankingmarkets:Baltimore,Maryland-Pennsylvania;Philadelphia,Pennsylvania-NewJersey;SussexCounty,Delaware;Salisbury,Delaware-Maryland;andWilmington,Delaware- Maryland.TheBoardhasreviewedcarefullythecompetitiveeffectsof theproposalineach of thesebankingmarketsinlightof allthefactsof record.Inparticular,theBoardhas consideredthenumberof competitorsthatwouldremaininthebankingmarkets,therelativesharesof totaldepositsindepositoryinstitutionsinthemarkets(“marketdeposits”) controlledbythesubsidiarydepositoryinstitutionsof M&TandbyWilmington,18the concentrationlevelsof marketdepositsandtheincreaseinthoselevelsasmeasuredbythe Herfindahl–HirschmanIndex(“HHI”)undertheDepartmentof JusticeMergerGuidelines(“DOJGuidelines”),19andothercharacteristicsof themarkets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJGuidelinesinallfivebankingmarkets.20Onconsummationof the proposal,onemarketwouldremainhighlyconcentrated,andfourmarketswouldremain moderatelyconcentrated,asmeasuredbytheHHI.ThechangeinHHIineachmarket wouldbeconsistentwithBoardprecedentandthethresholdsintheDOJGuidelines.In addition,numerouscompetitorswouldremaininallfivebankingmarkets. TheDOJhasconductedadetailedreviewof thepotentialcompetitiveeffectsof theproposalandhasadvisedtheBoardthatconsummationof thetransactionwouldnotlikely haveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.InadditionsintheUnitedStatesandlessthan30percentofthetotalamountofdepositsininsureddepositoryinstitutionsinDelaware,Maryland,andPennsylvania,respectively.Allotherrequirementsofsection102ofthe Riegle-NealActwouldalsobemetonconsummationoftheproposal. 16 12U.S.C.§§1842(c)(1)and1828(c)(5). 17 12U.S.C.§1843(j)(2)(A). 18 DepositandmarketsharedataareasofJune30,2010,adjustedtoreflectmergersandacquisitionsthrough March30,2011,andarebasedoncalculationsinwhichthedepositsofthriftinstitutionsareincludedat50percent,exceptforthedepositsofthriftinstitutionscontrolledbybankholdingcompanies,whichareweightedat 100percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialto become,significantcompetitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserve Bulletin386,387(1989);ProvidentCorporation,70FederalReserveBulletin743,744(1984).Thus,theBoard regularlyhasincludedthriftinstitutiondepositsinthemarketsharecalculationona50percentweightedbasis. See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52,55(1991). 19 UndertheDOJGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIisunder1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepostmergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthatabankmergeror acquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects) unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHImorethan200points.Although theDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontalMergerGuidelines,theDOJhas confirmedthattheDOJGuidelines,whichwereissuedin1995,werenotchanged.PressRelease,Department ofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/10-at-938.html. 20 Thosebankingmarketsandtheeffectsoftheproposalontheirconcentrationsofbankingresourcesare describedintheappendix.

166 FederalReserveBulletin|October2011 tion,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentand havenotobjectedtotheproposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyof thefivebankingmarketswherethesubsidiarydepositoryinstitutionsof M&TandWilmingtoncompetedirectlyorinanyotherrelevantdepositoryinstitution market.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andSupervisoryConsiderations Section3of theBHCActandtheBankMergerActrequiretheBoardtoconsiderthe financialandmanagerialresourcesandfutureprospectsof thecompaniesandbanks involvedintheproposalandcertainothersupervisoryfactors.21TheBoardalsoreviewsthe financialandmanagerialresourcesof thecompaniesinvolvedinanoticeundersection4of theBHCAct.22TheBoardhasconsideredthosefactorsinlightof allthefactsof record, includingconfidentialsupervisoryandexaminationinformationfromtherelevantfederal andstatesupervisorsof theorganizationsinvolvedintheproposalandotheravailable financialinformation,includinginformationprovidedbyM&TandWilmington. Inevaluatingfinancialfactorsinexpansionproposalsbybankingorganizations,theBoard reviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-onlyand consolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.Inassessingfinancialfactors,theBoardconsistentlyhasconsidered capitaladequacytobeespeciallyimportant.TheBoardalsoevaluatesthefinancialconditionof thecombinedorganizationatconsummation,includingitscapitalposition,asset quality,earningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardhasconsideredthefinancialfactorsof theproposalcarefully.M&Tanditssubsidiarydepositoryinstitutionsarewellcapitalizedandwouldremainsoonconsummation. WTBankisalsowellcapitalized.Theproposedtransactionisstructuredasashare exchange.Basedonitsreviewof therecord,theBoardfindsthatM&Thassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohascarefullyconsideredthemanagerialresourcesof theorganizations involvedintheproposedtransaction.TheBoardhasreviewedtheexaminationrecordsof M&T,Wilmington,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoard hasconsidereditssupervisoryexperiencesandthoseof otherrelevantbankingsupervisory agencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebanking lawandwithanti-money-launderinglaws.M&Tanditssubsidiarydepositoryinstitutions areconsideredtobewellmanaged.TheBoardalsohasconsideredM&T’splansforimplementingtheproposal,includingtheproposedmanagementafterconsummation. Inaddition,theBoardhasconsideredthefutureprospectsof theorganizationsinvolvedin theproposal.Aspartof thisevaluation,theBoardconsideredinformationregardinghow M&Twouldmanagetheintegrationof WilmingtonintoM&T.TheBoardalsoconsidered 21 12U.S.C.§§1842(c)(2)–(3)and1828(c)(5). 22 12U.S.C.§1843(j)(4)(A)–(B).

LegalDevelopments:SecondQuarter,2011 167 M&T’sexperienceinacquiringbankholdingcompaniesandsuccessfullyintegratingthem intoitsorganization.TherecordindicatesthatM&Thasthefinancialandmanagerial resourcestoserveasasourceof strengthtoWilmingtonanditssubsidiarydepositoryinstitutions. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalareconsistentwithapproval,asaretheothersupervisoryfactors. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandtheBankMergerAct,the Boardisrequiredtoconsidertheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedandtotakeintoaccounttherecordsof therelevantinsured depositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).23TheBoard mustalsoreviewtherecordsof performanceundertheCRAof therelevantinsured depositoryinstitutionswhenactingonanoticeundersection4of theBHCActtoacquire votingsecuritiesof aninsuredsavingsassociation.24 TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.25 TheBoardhasconsideredcarefullyallthefactsof record,includingevaluationsof the CRAperformancerecordsof M&TBankandWTBank,datareportedbyM&TBank undertheHomeMortgageDisclosureAct(“HMDA”),26otherinformationprovidedby M&T,confidentialsupervisoryinformation,andpubliccommentsreceivedontheproposal.SomecommenterscommendedM&TBankforitsrelationshipwithcommunity groupsandforcertainaspectsof itsCRAprogrambutalsomaderecommendationsfor M&TBanktoexpanditscommunitydevelopmentprograms.27Inaddition,othercommentersallegedthatM&Tdeniedhomemortgageloanapplicationsof AfricanAmerican orHispanicborrowersmorefrequentlythanthoseof nonminorityapplicantsincertain areas. A.CRAPerformanceEvaluations AsprovidedintheCRA,theBoardhasreviewedtheconvenienceandneedsfactorinlight of theevaluationsbytheappropriatefederalsupervisorof theCRAperformancerecordof therelevantinsureddepositoryinstitution.Aninstitution’smostrecentCRAperformance evaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseit 23 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 24 See,e.g.,NorthForkBancorporation,Inc.,86FederalReserveBulletin767(2000). 25 12U.S.C.§2903. 26 12U.S.C.§2801etseq. 27 TheBoardconsistentlyhasstatedthatneithertheCRAnorthefederalbankingagencies’CRAregulations requiredepositoryinstitutionstomakepledgesorenterintocommitments.See,e.g.,ThePNCFinancialServicesGroup,Inc.,94FederalReserveBulletinC38(2008);WachoviaCorporation,91FederalReserveBulletin77 (2005).Inaddition,theCRAdoesnotrequiredepositoryinstitutionstoofferspecifictypesofproductsorservices.TheBoardfocusesontheexistingCRAandfairlendingperformanceandcompliancerecordsofan applicantandtheprogramsthatanapplicanthasinplacetoservethecreditneedsofitsassessmentareaatthe timetheBoardreviewsaproposalundertheconvenienceandneedsfactor.

168 FederalReserveBulletin|October2011 representsadetailed,on-siteevaluationof theinstitution’soverallrecordof performance undertheCRAbyitsappropriatefederalsupervisor.28 M&TBankreceivedan“outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheFederalReserveBankof NewYork(“ReserveBank”),asof May12,2008 (“2008Evaluation”).29WTBankreceivedan“outstanding”ratingatitsmostrecentCRA performanceevaluationbytheFederalReserveBankof Philadelphia,asof July20,2009.30 CRAPerformanceof M&TBank. Inadditiontotheoverall“outstanding”ratingthat M&TBankreceivedinthe2008Evaluation,thebankreceivedseparateoverallratingsof “outstanding”or“satisfactory”inallthestatesandmultistatemetropolitanareas reviewed.31ExaminersreportedthatM&TBank’sgeographicdistributionof loanswas good.Theyalsostatedthatthebank’sdistributionof loanstoborrowersreflectedagood penetrationamongcustomersof differentincomelevelsandamongbusinessesof different revenuesizes.Inaddition,examinersnotedthatM&TBankofferedaFederalNational MortgageAssociationaffordablemortgageproductinallitsassessmentareasthathad resultedintheoriginationof almost1,000mortgagestotaling$89millionduringtheevaluationperiod. Inthe2008Evaluation,examinerscharacterizedM&TBankasaleaderinmakingcommunitydevelopmentloansinitsassessmentareas,reportingthatthebankmademorethan 455communitydevelopmentloanstotaling$1.96billionduringtheevaluationperiod. Examinersnotedthatthebank’scommunitydevelopmentlendingvolumegenerally exceededsimilarlysituatedbanksintheNewYork,Pennsylvania,andMarylandfull-scope assessmentareas. ExaminersratedM&TBank’soverallperformanceundertheinvestmenttestas“outstanding.”Qualifyingcommunitydevelopmentinvestmentstotaledmorethan$246million, representinganincreasefromitspreviousevaluation.Mostof theinvestmentswereconcentratedintheformof low-income-housingtaxcredits,whichhelptoprovideaffordable housingtoLMIborrowers,and86percentof thequalifiedcommunitydevelopmentinvestmentssupporteddevelopmentof affordablehousing. Inaddition,examinersconcludedthatthebank’sperformanceundertheservicetestwas “outstanding.”ExaminersfoundthattheM&TBank’sretaildeliverysystemswerereadily accessibletoallportionsof itsassessmentareas.Theyreportedthat20percentof M&T Bank’sbrancheswereinLMItractsandthat19percentof thebank’sautomatedteller machines(“ATMs”)wereinLMIareas,whichenhancedthebank’sperformanceunderthe servicetestinthosecommunities.ExaminersalsonotedthatM&TBank’scustomerscould useATMsownedbyinstitutionsthathadbusinessrelationshipswiththebankwithout payingafeeandthatsixof theATMswereinLMIareas.Inaddition,examinersindicated thatM&TBankwasaleaderinprovidingcommunitydevelopmentservicesthroughoutits assessmentareas,includingsponsoringandparticipatinginasignificantnumberof seminarsandpresentationsrelatingtoaffordablemortgages,smallbusinessassistance,and 28 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 29 M&T’sotherbanksubsidiary,M&TBank,N.A.receiveda“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheOfficeoftheComptrolleroftheCurrency,asofMay18,2009.WTFSCisnotan insureddepositoryinstitutionsubjecttotheCRA(12U.S.C.§2902(2)). 30 WTFSBreceiveda“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheOfficeofThrift Supervision,asofJuly20,2009. 31 ExaminersconsideredHMDA-relatedandCRA-reportablesmallbusinessloansthatwereoriginatedbetween January1,2006,andDecember31,2007.Examinersalsoreviewedcommunitydevelopmentloans,investments, services,andactivitiespertainingtotheservicetestforthesameperiod.

LegalDevelopments:SecondQuarter,2011 169 otherbankingeducation.Thesetypesof eventsprovidedtechnicalassistanceandtraining toLMIindividuals,communityorganizations,smallbusinesses,andhousingagencies. M&TindicatedthatM&TBank’sCRAstaff wouldworkwithWTBank’sCRAstaff to determinethemosteffectivewaystointegratetheCRAprogramsof thetwobanksgoing forward.Inrecognitionof thefactthatM&TBank’sassessmentareainDelawarewould significantlyexpandasaresultof theproposedacquisition,M&TplanstoretainWT Bank’sCRAofficertoprovideuninterrupted,inmarketprogramoversightandsupport. CRAPerformanceof WTBank. Asnoted,WTBankreceivedanoverall“outstanding”ratinginits2009evaluation.32Underthelendingtest,WTBankreceivedan“outstanding” rating,andtheexaminersreportedthatthebank’sgeographicdistributionof loans reflectedanexcellentpenetrationthroughoutitsassessmentareasandthattheoveralldistributionof loansamongborrowersof differentincomelevels,especiallyLMIborrowers, alsoshowedexcellentpenetrationgiventheeconomicanddemographicconsiderationsin theassessmentareas.Thedistributionof loansamongbusinessesof differentsizes,includingsmallbusinesses,alsoreflectedgoodpenetration.ExaminersnotedWTBank’sparticipationininnovativeandflexiblelendingprogramsthataddressedthespecificcreditneeds of LMIborrowersandsmallbusinessesinitsassessmentareas. ExaminersalsonotedthatWTBankmadeasignificantnumberof communitydevelopmentloansinitsassessmentareas.Duringtheevaluationperiod,thebankoriginatednine communitydevelopmentloanstotaling$16.3milliontofinancecommunitydevelopment initiativesof whichsevenloanstotaling$12.6millionsupportedaffordablehousing;one loanfor$3.7millionsupportedeconomicdevelopment;andoneloanfor$84,000supportedtheprovisionof communitydevelopmentservices. Thebankreceiveda“highsatisfactory”ratingundertheinvestmenttestintheWTBank 2009Evaluation.ExaminersfoundthatWTBankhadasignificantlevelof qualifiedcommunitydevelopmentinvestmentsandgrantsthroughoutitsassessmentareas.Investments of $24.7millionincludedsupportforaffordablehousing,andeconomicdevelopmentand fortheprovisionof communitydevelopmentservices. Inthe2009evaluation,WTBankreceivedan“outstanding”ratingundertheservicetest. Examinersfoundthatbranchdeliverysystems,aswellasalternativedeliverysystemssuch asATMs,telephone,andInternetbanking,wereaccessibletoessentiallyallportionof the bank’sassessmentareas.WTBank’sbankingservicesdidnotvaryinawaythatinconveniencedportionsof thebank’sassessmentareas,particularlyLMIcensustractsorborrowers.ExaminersnotedthatWTBankisaleaderinprovidingcommunitydevelopmentservices,includingdepositaccountsthatprovidedgreateraccesstobankingservicesforLMI borrowersandsmallbusinesses. B.HMDAandFairLendingRecord TheBoardhascarefullyconsideredthefairlendingrecordsandHMDAdataof M&Tin lightof publiccommentreceivedontheproposal.Commentersalleged,basedon2009 HMDAdata,thatM&Thaddeniedtheconventionalhomemortgageloanapplicationsof AfricanAmericanborrowersmorefrequentlythanthoseof nonminorityapplicantsinBuffaloandBaltimore.Thosecommentersalsoalleged,againbasedon2009HMDAdata,that M&Thaddeniedrefinancingloanapplicationsof Hispanicborrowersinthemetropolitan 32 TheevaluationincludesHMDA,smallbusinesslending,andsmallfarmlendingdatareportedfromJanuary1, 2007,throughDecember31,2008.

170 FederalReserveBulletin|October2011 areaencompassingNewYorkCitymorefrequentlythanthoseof nonminority applicants.33 AlthoughtheHMDAdatamightreflectcertaindisparitiesintheratesof loanapplications, originations,denials,orpricingamongmembersof differentracialorethnicgroupsincertainlocalareas,theyprovideaninsufficientbasisbythemselvesonwhichtoconclude whetherornotM&Tisexcludinganyracialorethnicgrouponaprohibitedbasis.The BoardrecognizesthatHMDAdataalone,evenwiththerecentadditionof pricinginformation,provideonlylimitedinformationaboutthecoveredloans.34HMDAdata,therefore, havelimitationsthatmakethemaninadequatebasis,absentotherinformation,forconcludingthataninstitutionhasengagedinillegallendingdiscrimination. TheBoardisneverthelessconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlendingandbelievesthatalllendinginstitutionsareobligatedtoensurethattheir lendingpracticesarebasedoncriteriathatensurenotonlysafeandsoundlendingbutalso equalaccesstocreditbycreditworthyapplicantsregardlessof theirraceorethnicity.Moreover,theBoardbelievesthatallbankholdingcompaniesandtheiraffiliatesmustconduct theirmortgagelendingoperationswithoutanyabusivelendingpracticesandincompliance withallconsumerprotectionlaws. Becauseof thelimitationsof HMDAdata,theBoardhasconsideredthesedatacarefully andtakenintoaccountotherinformation,includingexaminationreportsthatprovideonsiteevaluationsof compliancewithfairlendinglawsbyM&T’ssubsidiaryinsureddepositoryinstitutions.Inparticular,examinersdidnotfindanyevidencethatM&T’ssubsidiary depositoryinstitutionshadengagedinillegaldiscriminationorinanyotherillegalcredit practices.Inaddition,theBoardhasconsideredinformationprovidedbyM&Taboutits compliancerisk-managementsystems. Therecordof thisproposal,includingconfidentialsupervisoryinformation,indicatesthat M&Thastakenstepstoensurecompliancewithfairlendingandotherconsumerprotectionlawsandregulations.M&TrepresentsthatthelendingunitwithinM&TBank’sCentralizedComplianceDepartmentworksinconjunctionwithcompliancepersonnelto designanddocumentcompliancecontrolprocedures,monitorcompliancewithinassigned businessunits,providesupportwithnewproductsandbusinessinitiatives,designtest scripts,analyzefindingsanddevelopactionplans,determinerequirementsfornew orrevisedregulations,andmanageM&T’sFairBankingProgram. TheFairBankingProgramisacoordinatedandcomprehensiveeffortwithinM&TBank thatincludesoversight,training,procedures,monitoringandanalysis,andtesting.Inaddition,theprogramincludeseducationandtraining,anannualfairlendingaudit,andacomplaint-resolutionprocess.M&TBankalsoperformsasecondreviewof alldeniedresidentialmortgageapplicationstoensurethecorrectnessof theactiontaken.M&Thasstated thatallappropriatemeasureswillbetakentoensurethatWilmington’shomemortgage lendingactivitieswillbeintegratedintothepolicies,procedures,andpracticesof theCentralizedComplianceDepartment. 33 TheBoardreviewedHMDAdatafor2009forM&TBankinthetwomarkets,aswellasinitscombinedassessmentareaforalltypesofHMDA-reportablelendingonacombinedbasis. 34 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantthanotherinstitutionsattractanddonotprovideabasisfor anindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.Inaddition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenot availablefromHMDAdata.

LegalDevelopments:SecondQuarter,2011 171 TheBoardalsohasconsideredtheHMDAdatainlightof otherinformation,includingthe overallperformancerecordsof thesubsidiarybanksof M&TandWilmingtonunderthe CRA.Theseestablishedeffortsandrecordsof performancedemonstratethattheinstitutionsareactiveinhelpingtomeetthecreditneedsof theirentirecommunities. C.ConclusiononConvenienceandNeedsandCRAPerformance TheBoardhasconsideredcarefullyallthefactsof record,includingtheevaluationof the CRAperformancerecordsof theinstitutionsinvolved,informationprovidedbyM&T, publiccommentsreceivedontheproposal,andconfidentialsupervisoryinformation.M&T representsthattheproposalwillresultinincreasedcreditavailabilityandaccesstoa broaderrangeof financialservicesforcustomersof M&T’ssubsidiarydepositoryinstitutionsandWilmington’sformercustomers.Basedonareviewof theentirerecord,andfor thereasonsdiscussedabove,theBoardconcludesthatconsiderationsrelatingtotheconvenienceandneedsfactorandtheCRAperformancerecordsof therelevantinsureddepositoryinstitutionsareconsistentwithapprovalof theproposal. PublicBenefits Asnotedabove,M&Thasfiledanoticeundersections4(c)(8)and4(j)of theBHCActto acquireWTFSBandWTFSC,whichengageinactivitiesthattheBoardhasdeterminedby regulationaresocloselyrelatedtobankingastobeaproperincidenttheretoforpurposes of section4(c)(8)of theBHCAct.35 Aspartof itsevaluationof thepublicinterestfactorsundersection4(j)of theBHCAct, theBoardalsomustdeterminethattheproposedacquisitionsbyM&T“canreasonablybe expectedtoproducebenefitstothepublic,suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,orunsound bankingpractices.”36 Therecordindicatesthatconsummationof theproposalwouldcreateastrongerandmore diversifiedfinancialservicesorganizationandwouldprovidethecurrentcustomersof M&TandWilmingtonandfuturecustomersof thecombinedorganizationwithexpanded financialproductsandservices.Forthereasonsdiscussedabove,andbasedontheentire record,theBoardhasdeterminedthattheacquisitionof thesavingsassociationandtrust companywithintheframeworkof RegulationYandBoardprecedentisnotlikelytoresult insignificantlyadverseeffects,suchasundueconcentrationof resources,decreasedor unfaircompetition,conflictsof interests,orunsoundbankingpractices.Moreover,based onallthefactsof record,theBoardhasconcludedthatconsummationof theproposalcan reasonablybeexpectedtoproducepublicbenefitsthatwouldoutweighanylikelyadverse effects.Accordingly,theBoardhasdeterminedthatthebalanceof thepublicbenefitsunder thestandardof section4(j)(2)of theBHCActisconsistentwithapproval. OtherConsiderations M&TBankalsohasappliedundersection9of theFRAtoestablishandoperatebranches atthelocationsof themainofficeandbranchesof WTBankandatthebranchesof WTFSB.TheBoardhasassessedthefactorsitisrequiredtoconsiderwhenreviewingan 35 See12CFR225.28(b)(4)(ii)and(5). 36 12U.S.C.§1843(j)(2)(A).

172 FederalReserveBulletin|October2011 applicationundersection9of theFRAandfindsthosefactorstobeconsistentwith approval. Conclusion Basedontheforegoing,andinlightof allthefactsof record,theBoardhasdetermined thattheapplicationsundersection3of theBHCAct,theBankMergerAct,andtheFRA andthenoticeundersection4of theBHCActshouldbe,andherebyare,approved.In reachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderundertheBHCAct,theBankMergerAct,andtheFRA. TheBoard’sapprovalisspecificallyconditionedoncompliancebyM&TwiththeconditionsinthisorderandallthecommitmentsmadetotheBoardinconnectionwiththe applicationsandnoticeandonreceiptof allotherregulatoryapprovalsfortheproposal.37 TheBoard’sapprovalof theproposednonbankingactivitiesissubjecttoalltheconditions setforthinRegulationY,includingthoseinsections225.7and225.25(c),38andtothe Board’sauthoritytorequiresuchmodificationorterminationof theactivitiesof abank holdingcompanyoranyof itssubsidiariesastheBoardfindsnecessarytoensurecompliancewith,andtopreventevasionof,theprovisionsof theBHCActandtheBoard’sregulationsandordersissuedthereunder.Forpurposesof thisproposal,thesecommitments andconditionsaredeemedtobeconditionsimposedinwritingbytheBoardinconnection withitsfindingsanddecisionand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuch periodisextendedforgoodcausebytheBoardorbytheReserveBank,actingpursuantto delegatedauthority. Byorderof theBoardof Governors,effectiveApril26,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDukeand Tarullo.Abstainingfromthisaction:GovernorRaskin. RobertdeV.Frierson DeputySecretaryof theBoard 37 SomecommentersrequestedthattheBoardholdapublicmeetingorhearingontheproposal.Section3ofthe BHCActdoesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisoryauthorityforthebanktobeacquiredmakesawrittenrecommendationofdenialoftheapplication.The Boardhasnotreceivedsucharecommendationfromasupervisoryauthority.TheBoard’sregulationsprovide forahearingundersection4oftheBHCActiftherearedisputedissuesofmaterialfactthatcannotbe resolvedinsomeothermanner.See12CFR225.25(a)(2).Underitsregulations,theBoardalsomay,initsdiscretion,holdapublicmeetingorhearingonanapplicationtoacquireabankifameetingorhearingisnecessaryorappropriatetoclarifyfactualissuesrelatedtotheapplicationandtoprovideanopportunityfortestimony.See12CFR262.3(e)and262.25(d).TheBoardhasconsideredcarefullythecommenters’requestsin lightofallthefactsofrecord.IntheBoard’sview,thecommentershadampleopportunitytosubmitviews and,infact,submittedwrittencommentsthattheBoardhasconsideredcarefullyinactingontheproposal.TherequestsfailtoidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionthatwould beclarifiedbyapublicmeetingorhearing.Forthesereasons,andbasedonallthefactsofrecord,theBoard hasdeterminedthatapublicmeetingorhearingisnotrequiredorwarrantedinthiscase.Accordingly,the requestsforapublicmeetingorhearingontheproposalaredenied. 38 12CFR225.7and225.25(c).

LegalDevelopments:SecondQuarter,2011 173 Appendix M&TandWilmingtonBankingMarketsConsistentwithBoardPrecedentandDOJGuidelines Amountof MarketDeposit Remaining Bank Rank Deposits Shares ResultingHHI ChangeinHHI Numberof (dollars) (percent) Competitors Wilmington,DE—includesNewCastleCounty,Delaware;andCecilCounty,Maryland. M&TPre-Consummation 17 37mil. 9.2 4612 1 19 Wilmington 2 5.3bil. 0.1 M&TPost-Consummation 2 5.3bil. 9.3 Baltimore,MD-PA—includesBaltimore,MD-PARanallyMetropolitanArea(“RMA”);thenon-RMAportionsofHarfordandCarrollcounties, Maryland(excludingtheWashington,DC-MD-VARMAportion);andBaltimore,Maryland. M&TPre-Consummation 2 11.7bil. 23.5 1659 88 72 Wilmington 9 927mil. 1.9 M&TPost-Consummation 2 12.6bil. 25.4 Philadelphia—includesBucks,Chester,Delaware,MontgomeryandPhiladelphiacounties,Pennsylvania;andBurlington,Camden,Cumberland, Gloucester,andSalemcounties,NewJersey. M&TPre-Consummation 21 648mil. 0.5 1175 0 122 Wilmington 29 460mil. 0.4 M&TPost-Consummation 15 1.1bil. 0.9 Salisbury,MD-DE—includestheSalisbury,Maryland-DelawareRMA;andthenon-RMAportionofWicomicoCounty,Maryland. M&TPre-Consummation 5 152.8mil. 10.3 1268 37 12 Wilmington 11 26.4mil. 1.79 M&TPost-Consummation 5 178.8mil. 12.1 Sussex,DE—includesSussexCounty,Delaware(excludingthecityofMilfordandtheSalisbury,MD-DERMAportion). M&TPre-Consummation 13 15.9mil. 0.6 1768 35 13 Wilmington 1 817mil. 30.4 M&TPost-Consummation 1 833mil. 31.0 Note:DataareasofJune30,2010.Depositamountsareunweighted.Allrankings,marketdepositshares,andHHIsarebasedonthrift institutiondepositsweightedat50percent,exceptforthedepositsofthriftinstitutionscontrolledbybankholdingcompanies,whichare weightedat100percent. Orders Issued Under International Banking Act Bank of Communications Co., Ltd. Shanghai, People’s Republic of China OrderApprovingEstablishmentof aBranch Bankof CommunicationsCo.,Ltd.(“BOCOM”),Shanghai,People’sRepublicof China,a foreignbankwithinthemeaningof theInternationalBankingAct(“IBA”),hasapplied undersection7(d)of theIBA1toestablishalimitedfederalbranchinSanFrancisco,California.TheForeignBankSupervisionEnhancementActof 1991,whichamendedtheIBA, providesthataforeignbankmustobtaintheapprovalof theBoardtoestablishabranchin theUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinSanFrancisco,California(The Recorder,March9,2009).Thetimeforfilingcommentshasexpired,andtheBoardhas consideredallcommentsreceived. BOCOM,withtotalassetsof approximately$599billion,isthefifthlargestbankin China.2Thegovernmentof Chinaownsapproximately43.8percentof BOCOM’sshares.3 1 12U.S.C.§3105(d). 2 AssetandrankingdataareasofDecember31,2010.

174 FederalReserveBulletin|October2011 TheHongkongandShanghaiBankingCorporationLimited,HongKong,People’sRepublicof China,asubsidiaryof HSBCHoldingsplc,London,England,owns19percentof thesharesof BOCOM.Noothershareholderownsmorethan5percentof thesharesof BOCOM. BOCOMengagesprimarilyincorporateandretailbankingandtreasuryoperations throughoutChina,includingHongKongandMacau.OutsideChina,BOCOMoperates branchesinJapan,Singapore,SouthKorea,andGermanyandarepresentativeofficeinthe UnitedKingdom.IntheUnitedStates,BOCOMoperatesafederalbranchinNewYork. BOCOMwouldmeettherequirementsforaqualifyingforeignbankingorganizationunder RegulationK.4 TheproposedSanFranciscobranchwouldengageinwholesaledeposittaking,lending, tradefinance,andotherbankingservices.Asalimitedbranch,itwouldbeprohibitedfrom acceptingdepositsfromsourcesotherthanthosepermittedbysection5of theIBAand section25Aof theFederalReserveAct.5 UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhethertheforeignbank(1)engagesdirectlyinthe businessof bankingoutsidetheUnitedStates;(2)hasfurnishedtheBoardwiththeinformationitneedstoassesstheapplicationadequately;and(3)issubjecttocomprehensive supervisiononaconsolidatedbasisbyitshome-countrysupervisors.6TheBoardalsoconsidersadditionalstandardsassetforthintheIBAandRegulationK.7 TheIBAincludesalimitedexceptiontothegeneralstandardrelatingtocomprehensive, consolidatedsupervision.8Thisexceptionprovidesthat,if theBoardisunabletofindthat aforeignbankseekingtoestablishabranch,agency,orcommerciallendingcompanyis 3 TheMinistryofFinanceofthePeople’sRepublicofChinaownsapproximately26.5percent,andtheNational CouncilforSocialSecurityFundofthePeople’sRepublicofChina(“NCSFF”)ownsapproximately11.4percentofBOCOM’stotaloutstandingshares.HKSCCNomineesLimited,anindirect,whollyownedsubsidiary ofHongKongExchangesandClearingLimited,holdsNCSFF’ssharesasitsregisterednominee.Theremaining6percentiswidelyheldamongstate-ownedenterprises. 4 12CFR211.23(a). 5 BOCOM’shomestateisNewYork.Undersection5oftheIBA,aforeignbankmayestablishabranchoutside itshomestateifthebranchlimitsitsdeposit-takingtothatofanEdgecorporationoperatingundersection 25AoftheFederalReserveAct(12U.S.C.§3103(a)(7)(A)).Undersection25AoftheFederalReserveAct,an EdgecorporationmayreceivedepositsoutsidetheUnitedStatesandonlysuchdepositswithintheUnited Statesthatareincidentaltoorforthepurposeofcarryingouttransactionsinforeigncountries(12U.S.C.§ 615(a)).RegulationKdefinestheextentofpermissibledeposit-takingactivitiesofEdgecorporations(12CFR 211.6(a)(1)). 6 12U.S.C.§3105(d)(2);12CFR211.24.Inassessingthisstandard,theBoardconsiders,amongotherindiciaof comprehensive,consolidatedsupervision,theextenttowhichthehome-countrysupervisors(i)ensurethatthe bankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide;(ii)obtaininformation ontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,audit reports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetweenthebankandits affiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedona worldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;(v)evaluateprudentialstandards,suchascapitaladequacyandriskassetexposure,on aworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’sdetermination. 7 12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2)–(3).Theadditionalstandardssetforthinsection7oftheIBA andRegulationKincludethefollowing:whetherthebank’shome-countrysupervisorhasconsentedtothe establishmentoftheoffice;thefinancialandmanagerialresourcesofthebank;whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthebank’soperationswiththeBoard;whetherthebank anditsU.S.affiliatesareincompliancewithU.S.law;theneedsofthecommunity;thebank’srecordofoperation.TheBoardmayalsotakeintoaccount,inthecaseofaforeignbankthatpresentsarisktothestabilityof theUnitedStates,whetherthehomecountryoftheforeignbankhasadopted,orismakingdemonstrableprogresstowardadopting,anappropriatesystemoffinancialregulationforthefinancialsystemofsuchhome countrytomitigatesuchrisk(12U.S.C.§3105(d)(3)(E)). 8 12U.S.C.§3105(d)(6).

LegalDevelopments:SecondQuarter,2011 175 subjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbytheappropriateauthoritiesinitshomecountry,theBoardmayneverthelessapprovetheapplication providedthat(i)theappropriateauthoritiesinthehomecountryof theforeignbankare activelyworkingtoestablisharrangementsfortheconsolidatedsupervisionof suchbank; and(ii)allotherfactorsareconsistentwithapproval.9Indecidingwhethertoexerciseits discretiontoapproveanapplicationunderauthorityof thisexception,theBoardmustalso considerwhethertheforeignbankhasadoptedandimplementedprocedurestocombat moneylaundering.10TheBoardalsomaytakeintoaccountwhetherthehomecountryof theforeignbankisdevelopingalegalregimetoaddressmoneylaunderingorisparticipatinginmultilateraleffortstocombatmoneylaundering.11Thatisthestandardappliedby theBoardinthiscase. Asnotedabove,BOCOMengagesdirectlyinthebusinessof bankingoutsidetheUnited States.BOCOMalsohasprovidedtheBoardwithinformationnecessarytoassessthe applicationthroughsubmissionsthataddresstherelevantissues. TheBoardiscontinuingtoworkactivelywiththeappropriatesupervisoryauthoritiesin Chinatounderstandtheirsystemfortheconsolidatedsupervisionof BOCOMandother majorChinesebanks.Thosediscussionsareconstructiveandongoing.Basedonallthe factsof record,theBoardhasdeterminedthatBOCOM’shome-countrysupervisory authorityis,ataminimum,activelyworkingtoestablisharrangementsfortheconsolidated supervisionof BOCOMandthatconsiderationsrelatingtothestepstakenbyBOCOM anditshomejurisdictiontocombatmoneylaunderingareconsistentwithapprovalunder thisstandard.TheBoardhasapprovedapplicationsfromotherChinesebankstoestablish U.S.branchesunderthisstandard.12 TheChinaBankingRegulatoryCommission(“CBRC”)istheprincipalsupervisory authorityof BOCOM,includingitsforeignsubsidiariesandaffiliates.13TheCBRChasthe authoritytolicensebanks,regulatetheiractivities,andapproveexpansion,bothdomesticallyandabroad.TheCBRChasnoobjectiontoBOCOM’sestablishmentof theproposed branch.ItsupervisesandregulatesBOCOM,includingitssubsidiariesandforeignoperations,throughacombinationof targetedon-siteexaminationsandcontinuousconsolidatedoff-sitemonitoring.Sinceitsestablishmentin2003,theCBRChasenhancedexisting supervisoryprogramsanddevelopednewpoliciesandproceduresdesignedtocreatea frameworkfortheconsolidatedsupervisionof banksinChina. On-siteexaminationsbytheCBRCcover,amongotherthings,themajorareasof operations:corporategovernanceandseniormanagementresponsibilities;capitaladequacy; assetstructureandassetquality(includingstructureandqualityof loans);off-balancesheetactivities;earnings;liquidity;liabilitystructureandfundingsources;expansionary plans;internalcontrols(includingaccountingcontrolsandadministrativesystems);legal compliance;accountingsupervisionandinternalauditing(includingaccountingcontrols andadministrativesystems);andanyotherareasdeemednecessarybytheCBRC. 9 12U.S.C.§3105(d)(6)(A). 10 12U.S.C.§3105(d)(6)(B). 11 Id. 12 SeeChinaMerchantsBankCo.,Ltd.,94FederalReserveBulletinC24(2008);IndustrialandCommercialBankof China,Limited,94FederalReserveBulletinC114(2008);andChinaConstructionBankCorporation,95Federal ReserveBulletinB54(2009). 13 BeforeApril2003,thePeople’sBankofChina(“PBOC”)actedbothasChina’scentralbankanditsprimary bankingsupervisor,includingoversightofanti-money-launderingmatters.InApril2003,theCBRCwasestablishedastheprimarybankingsupervisorandassumedthemajorityofthePBOC’sregulatoryfunctions.The PBOCmaintaineditsrolesasChina’scentralbankandtheprimarysupervisorforanti-money-laundering matters.

176 FederalReserveBulletin|October2011 Off-sitemonitoringisconductedthroughthereviewof requiredannual,semiannual,quarterly,ormonthlyreportson,amongotherthings,assetquality,capitaladequacy,liquidity, riskmanagement,corporategovernance,affiliatetransactions,andinternalcontrols. BOCOMisrequiredtobeauditedannuallybyanaccountingfirmapprovedbythePBOC, andtheresultsaresharedwiththeCBRCandthePBOC.Thescopeof therequiredaudit includesareviewof BOCOM’sfinancialstatements,assetquality,andinternalcontrols. TheCBRCmayorderaspecialauditatanytime.Inaddition,inconnectionwithitslisting ontheShanghaiandHongKongstockexchanges,BOCOMisrequiredtohaveexternal auditsconductedunderbothInternationalFinancialReportingStandardsandgenerally acceptedaccountingpracticesunderChineselaw.BOCOMisrequiredtopublishitsfinancialstatementsannually.BOCOMconductsinternalauditsof itsofficesandoperations, includingitsoverseasoperations,generallyonanannualschedule.Theinternalaudit resultsaresharedwiththeCBRC,thePBOC,andBOCOM’sexternalauditors.Theproposedbranchwouldbesubjecttointernalaudits. Chineselawsimposevariousprudentiallimitationsonbanks,includinglimitsontransactionswithaffiliatesandonlargeexposures.TheCBRCisauthorizedtorequireanybankto provideinformationandtoimposesanctionsforfailuretocomplywithsuchrequests.The CBRCalsohasauthoritytoimposeadministrativepenalties,includingwarnings,fines,and removalfromoffice,forviolationsof applicablelawsandrules.Criminalviolationsare transferredtothejudicialauthoritiesforinvestigationandprosecution. Inrecentyears,theChinesegovernmenthasenhanceditsanti-money-launderingregime.In 2005,ittookinitialstepstoadoptananti-money-launderinglaw,thePRCAnti-Money LaunderingLaw(“AMLLaw”).TheAMLLawandtworelatedrules,theRulesforAnti- MoneyLaunderingbyFinancialInstitutions(“AMLRules”)andtheAdministrativeRules fortheReportingof Large-ValueandSuspiciousTransactionsbyFinancialInstitutions (“LVT/STRRules”)wereenactedinOctober2006andDecember2006,respectively.The AMLLawandAMLRulesbecameeffectiveonJanuary1,2007,andtheLVT/STRRules becameeffectiveonMarch1,2007.Together,thelawandtworelatedrulesestablisharegulatoryinfrastructuretoassistChina’santi-money-launderingefforts. AnAnti-MoneyLaunderingBureau(“AMLBureau”)wasestablishedwithinthePBOCin 200314tocoordinateanti-money-launderingeffortsatthePBOCandamongotheragencies.TheAMLBureaualsosupervisedthecreationof theChinaAnti-MoneyLaundering MonitoringandAnalysisCenter(“AMLCenter”)inSeptember2004.TheAMLCenter collects,monitors,analyzes,anddisseminatessuspicioustransactionreportsandlargevaluetransactionreports.TheAMLCentersendssuspicioustransactionreportstothe AMLBureauforfurtherinvestigation.ThePBOCissuedadditionalrulesin2007and2008 providingclarificationof,orfurtherstrengtheningtheimplementationof,operatingprocedures,customerduediligenceandriskclassification,recordkeeping,AMLmonitoringand reportingof suspicioustransactionstotheAMLCenter,andtheinternationalremittance agencybusiness.ChinaimproveditsAMLregimein2009byamendingitscriminallaw tofurthercriminalizemoneylaunderingactivitiesandotherfinancialcrimes. Chinaparticipatesininternationalforathataddressthepreventionof moneylaundering andterroristfinancing.Chinaisamemberof theFinancialActionTaskForce(“FATF”)15 andisapartytothe1988U.N.ConventionAgainsttheIllicitTrafficof NarcoticsandPsy- 14 TheAMLBureauconductsadministrativeinvestigationsandhandlesviolationsofAMLRules.MoneylaunderingcasesarereferredtotheMinistryofPublicSecurity,China’smainlawenforcementbody,forinvestigationandprosecution. 15 ChinabecameamemberofFATFinJune2007.

LegalDevelopments:SecondQuarter,2011 177 chotropicSubstances,theU.N.ConventionAgainstTransnationalOrganizedCrime,the U.N.ConventionAgainstCorruption,andtheU.N.InternationalConventionfortheSuppressionof theFinancingof Terrorism. Asnoted,thePBOCisChina’sprimarysupervisorforanti-money-launderingmatters. LiketheCBRC,thePBOCsupervisesandregulatesBOCOMthroughacombinationof on-siteexaminationsandoff-sitemonitoring.OnsiteexaminationsfocusonBOCOM’s compliancewithanti-money-launderinglawsandrules,includingtheAMLLaw,AML Rules,andLVT/STRRules.Off-sitemonitoringisconductedthroughthereviewof periodicreports.Inperformingitsresponsibilities,thePBOCmayrequireanybanktoprovide informationandcanimposeadministrativepenaltiesforviolationsof applicablelawsand rules. ThePBOCovertimehasincreasedrequirementsforitssupervisedinstitutions.In2008,the PBOCpromulgatedanoticerequiringthedesignationof achief AMLcomplianceofficer asahigh-levelmanagertoensuretheprovisionof adequateAMLresourcesandtimely flowof informationtoemployeeswithAMLresponsibilitythroughouttheinstitution.The samenoticealsorequiredtheriskratingof customers,amongotherimprovementsinAML controls.ThePBOCrequiresthefilingof reportsonsuspiciousactivitiesandcertainother transactions,anditrecentlyhasdevelopedapolicyof encouragingitssupervisedinstitutionstomovefromprescriptivecriteriatowardsamorerisk-basedandsubjectivemethod of suspiciousactivitydetectionandreporting.Inaddition,banksarerequiredtoestablisha customeridentificationsysteminaccordancewithapplicablerulesjointlypromulgatedby thePBOCandthethreefunctionalfinancialservicesregulators,16torecordtheidentitiesof customersandinformationrelatingtoeachtransaction,andtoretainretailtransaction documentsandbooks.BOCOMhaspoliciesandprocedurestocomplywithChineselaws andrulesregardinganti-money-laundering.BOCOMrepresentsthatithastakenadditionalstepsonitsowninitiativetocombatmoneylaunderingandotherillegalactivities. BOCOMstatesthatithasimplementedmeasuresconsistentwiththerecommendationsof theFATFandthatithasputinplacepolicies,procedures,andcontrolstoensureongoing compliancewithallstatutoryandregulatoryrequirements,includingdesignatingantimoney-launderingcompliancepersonnelandconductingroutineemployeetrainingatall BOCOMbranches.BOCOM’scompliancewithanti-money-launderingrequirementsis monitoredbythePBOCandbyBOCOM’sinternalandexternalauditors. TheBoardhasalsoconsideredcarefullythefinancialandmanagerialfactorsinthiscase. Chinahasadoptedrisk-basedcapitalstandardsthatareconsistentwiththoseestablished bytheBaselCapitalAccord(“Accord”).BOCOM’scapitalisinexcessof theminimum levelsthatwouldberequiredbytheAccordandisconsideredequivalenttocapitalthat wouldberequiredof aU.S.bankingorganization.Managerialandotherfinancial resourcesof BOCOMareconsistentwithapproval,andBOCOMappearstohavetheexperienceandcapacitytosupporttheproposedbranch.Inaddition,BOCOMhasestablished controlsandproceduresfortheproposedbranchtoensurecompliancewithU.S.law.In particular,BOCOMhasstatedthatitwillapplystrictanti-money-launderingpoliciesand proceduresatthebranchconsistentwithU.S.lawandregulationandwillestablishaninternalcontrolsystematthebranchconsistentwithU.S.requirementstoensurecompliance withthosepoliciesandprocedures. WithrespecttoaccesstoinformationaboutBOCOM’soperations,theBoardhasreviewed therestrictionsondisclosureinrelevantjurisdictionsinwhichBOCOMoperatesandhas 16 ThoseregulatorsaretheCBRC,ChinaSecuritiesRegulatoryCommission,andChinaInsuranceRegulatory Commission.

178 FederalReserveBulletin|October2011 communicatedwithrelevantgovernmentauthoritiesregardingaccesstoinformation. BOCOMhascommittedtomakeavailabletotheBoardsuchinformationontheoperationsof BOCOMandanyof itsaffiliatesthattheBoarddeemsnecessarytodetermineand enforcecompliancewiththeIBA,theBankHoldingCompanyAct,andotherapplicable federallaw.Totheextentthattheprovisionof suchinformationtotheBoardmaybeprohibitedbylaworotherwise,BOCOMhascommittedtocooperatewiththeBoardtoobtain anynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesfordisclosure of suchinformation.Inlightof thesecommitmentsandotherfactsof record,andsubject totheconditiondescribedbelow,theBoardhasdeterminedthatBOCOMhasprovided adequateassurancesof accesstoanynecessaryinformationthattheBoardmayrequest. Chinahasmadeprogresstowardadoptingasystemof financialregulationforitsfinancial systemtomitigatetherisktofinancialstabilityfromitsbanks.ThePBOC,CBRC,other financialsupervisoryagencies,andotheragenciesinChinahavetakenjointmeasuresto strengthenandimprovemacroeconomicmanagement,promotefinancialreform,and maintainfinancialstability.Chinahasestablishedasystemof preliminaryindicatorsfor monitoringfinancialstability,developedmethodologyandoperationalframeworksfor monitoringfinancialrisks,andpublishedanannualChinaFinancialStabilityReportsince 2005.TheCBRChasestablishedmechanismstocooperatewithsupervisoryauthoritiesin atleast25othercountriesforthesupervisionof cross-borderbanking.Inaddition,the PBOCandCBRCofficiallyjoinedtheBaselCommitteeonBankingSupervisiononbehalf of Chinaandsincetheiraccession,haveactivelyparticipatedintherevisionof BaselIIand inworkinggroups.Chinaalsoisactiveintheongoingworkof theFinancialStability Board. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyBOCOM, aswellasthetermsandconditionssetforthinthisorder,BOCOM’sapplicationtoestablishabranchisherebyapproved.Shouldanyrestrictionsonaccesstoinformationonthe operationsoractivitiesof BOCOManditsaffiliatessubsequentlyinterferewiththe Board’sabilitytoobtaininformationtodetermineandenforcecompliancebyBOCOMor itsaffiliateswithapplicablefederalstatutes,theBoardmayrequireterminationof anyof BOCOM’sdirectorindirectactivitiesintheUnitedStates,orinthecaseof anysuch operationlicensedbytheOfficeof theComptrollerof theCurrency(“OCC”),recommend terminationof suchoperation.Approvalof thisapplicationalsoisspecificallyconditioned oncompliancebyBOCOMwiththecommitmentsmadeinconnectionwiththisapplicationandwiththeconditionsinthisorder.17Thecommitmentsandconditionsreferredto aboveareconditionsimposedinwritingbytheBoardinconnectionwiththisdecisionand maybeenforcedinproceedingsunder12U.S.C.§1818againstBOCOManditsaffiliates. Byorderof theBoardof Governors,effectiveApril8,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard 17 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedbranchparallelsthecontinuingauthority oftheOCCtolicenseofficesofaforeignbank.TheBoard’sapprovalofthisapplicationdoesnotsupplantthe authorityoftheOCCtolicensetheproposedofficeofBOCOMinaccordancewithanytermsorconditions thatitmayimpose.

LegalDevelopments:SecondQuarter,2011 179 Bank of Taiwan Taipei, Taiwan OrderApprovingEstablishmentof aBranch Bankof Taiwan,Taipei,Taiwan(“Bank”),aforeignbankwithinthemeaningof theInternationalBankingAct(“IBA”),hasappliedundersection7(d)of theIBA1toupgradeits existingstate-licensedagencytoastate-licensedbranchinNewYork,NewYork.TheForeignBankSupervisionEnhancementActof 1991,whichamendedtheIBA,providesthata foreignbankmustobtaintheapprovalof theBoardtoestablishabranchintheUnited States. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinNewYork,NewYork(NewYork Post,December30,2010).Thetimeforfilingcommentshasexpired,andtheBoardhas consideredallcommentsreceived. Bank,withtotalassetsof approximately$135billion,isthelargestcommercialbankinTaiwan.2TaiwanFinancialHoldingsCo.,Ltd.,whichiswhollyownedbyTaiwan’sMinistryof Finance,ownsallof Bank’sshares.Bankoffersarangeof commercial,investment,and retailbankingproducts.OutsideTaiwan,BankoperatesbranchesinHongKong,Johannesburg,London,Singapore,andTokyoandarepresentativeofficeinShanghai.Inadditiontoitscurrentstate-licensedagency,Bankoperatesastate-licensedbranchinLosAngeles,California.3Bankmeetstherequirementsforaqualifyingforeignbankingorganization underRegulationK.4 Theproposedbranchwouldcontinuethecurrentactivitiesof theNewYorkagency,which includefinancing,syndicatedlending,purchasingandholdingsecurities,remittances,and foreignexchangetrading,andwouldcommenceengaginginwholesaledeposit-taking. UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhethertheforeignbank(1)engagesdirectlyinthe businessof bankingoutsidetheUnitedStates;(2)hasfurnishedtheBoardwiththeinformationitneedstoassesstheapplicationadequately;and(3)issubjecttocomprehensive supervisiononaconsolidatedbasisbyitshome-countrysupervisors.5TheBoardalsoconsidersadditionalstandardsassetforthintheIBAandRegulationK.6 1 12U.S.C.§3105(d). 2 AssetandrankingdataareasofMarch31,2011. 3 Bank’shomestateisCalifornia.Undersection5oftheIBA,aforeignbankmayupgradeanagencyoutsideits homestatetoabranchifsuchanupgradeispermittedunderstatelawandallotherfactorsareconsistentwith approval(12U.S.C.§3103(a)(7)(B)). 4 12CFR211.23(a). 5 12U.S.C.§3105(d)(2);12CFR211.24.Inassessingthisstandard,theBoardconsiders,amongotherindiciaof comprehensive,consolidatedsupervision,theextenttowhichthehome-countrysupervisors(i)ensurethatthe bankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide;(ii)obtaininformation ontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,audit reports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetweenthebankandits affiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedona worldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacyandriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’s determination. 6 12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2)–(3).Theadditionalstandardssetforthinsection7oftheIBA andRegulationKincludethefollowing(1)whetherthebank’shome-countrysupervisorhasconsentedtothe establishmentoftheoffice;thefinancialandmanagerialresourcesofthebank;(2)whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimeinplaceinthehomecountrytoaddress

180 FederalReserveBulletin|October2011 Asnotedabove,Bankengagesdirectlyinthebusinessof bankingoutsidetheUnited States.BankalsohasprovidedtheBoardwithinformationnecessarytoassesstheapplicationthroughsubmissionsthataddresstherelevantissues. Withrespecttosupervisionbyhome-countryauthorities,theBoardpreviouslyhasdeterminedthatotherbanksinTaiwanaresubjecttohome-countrysupervisiononaconsolidatedbasisbytheFinancialSupervisoryCommission(“FSC”),whichhasprimaryresponsibilityfortheregulationof financialinstitutionsinTaiwan.7Bankissupervisedbythe FSConsubstantiallythesametermsandconditionsasthoseotherbanks.Basedonallthe factsof record,ithasbeendeterminedthatBankcontinuestobesubjecttocomprehensive supervisiononaconsolidatedbasisbyitshome-countrysupervisor. Theadditionalstandardssetforthinsection7of theIBAandRegulationKhavealsobeen takenintoaccount.8TheFSChasnoobjectiontotheestablishmentof theproposed branch. TheBoardhasalsoconsideredcarefullythefinancialandmanagerialfactorsinthiscase. Taiwanhasadoptedrisk-basedcapitalstandardsthatareconsistentwiththoseestablished bytheBaselCapitalAccord(“Accord”).Bank’scapitalisinexcessof theminimumlevels thatwouldberequiredbytheAccordandisconsideredequivalenttocapitalthatwouldbe requiredof aU.S.bankingorganization.Managerialandotherfinancialresourcesof Bank alsoareconsistentwithapproval,andBankappearstohavetheexperienceandcapacityto supporttheproposedbranch.Inaddition,Bankhasestablishedcontrolsandprocedures fortheproposedbranchtoensurecompliancewithU.S.law. Taiwanhasenactedlawsandregulationstodetermoneylaunderingthatareconsistent withFinancialActionTaskForcerecommendations.Moneylaunderingisacriminal offenseinTaiwan,andfinancialinstitutionsarerequiredtoestablishinternalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughout theirworldwideoperations.Bankhaspoliciesandprocedurestocomplywiththeselaws andregulations,andBank’scompliancewithapplicablelawsandregulationsismonitored bygovernmentalentitiesresponsibleforanti-money-launderingcompliance. WithrespecttoaccesstoinformationaboutBank’soperations,theBoardhasreviewedthe restrictionsondisclosureinrelevantjurisdictionsinwhichBankoperatesandhascommunicatedwithrelevantgovernmentauthoritiesregardingaccesstoinformation.Bankhas committedtomakeavailabletotheBoardsuchinformationontheoperationsof Bankand anyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliance withtheIBA,theBankHoldingCompanyAct,andotherapplicablefederallaw.Tothe extentthattheprovisionof suchinformationtotheBoardmaybeprohibitedbylawor otherwise,BankhascommittedtocooperatewiththeBoardtoobtainanynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesfordisclosureof suchinformation.Inlightof thesecommitmentsandotherfactsof record,andsubjecttothecondition moneylaundering,andwhetherthehomecountryisparticipatinginmultilateraleffortstocombatmoneylaundering;(3)whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthebank’s operationswiththeBoard;and(4)whetherthebankanditsU.S.affiliatesareincompliancewithU.S.law;the needsofthecommunity;thebank’srecordofoperation.TheBoardmayalsotakeintoaccount,inthecaseof aforeignbankthatpresentsarisktothestabilityoftheUnitedStates,whetherthehomecountryoftheforeign bankhasadopted,orismakingdemonstrableprogresstowardadopting,anappropriatesystemoffinancial regulationforthefinancialsystemofsuchhomecountrytomitigatesuchrisk(12U.S.C.§3105(d)(3)(E)). 7 See,e.g.,IndustrialBankofTaiwanCo.,Ltd.,93FederalReserveBulletinC62(2007).Bankwasfoundtobe subjecttocomprehensivesupervisiononaconsolidatedbasisbytheMinistryofFinanceandtheCentralBank ofChinain1993.BankofTaiwan,79FederalReserveBulletin541(1993). 8 See,supra,note6.

LegalDevelopments:SecondQuarter,2011 181 describedbelow,theBoardhasdeterminedthatBankhasprovidedadequateassurancesof accesstoanynecessaryinformationthattheBoardmayrequest. Taiwanhasmadeprogresstowardadoptingasystemof financialregulationforitsfinancial systemtomitigatetherisktofinancialstabilityfromitsbanks.TheFSCandtheTaiwanese governmenthavetakenanumberof measurestostrengthentheoverallfinancialsupervisoryregime.Thesemeasuresincluderequiringfinancialinstitutionstoimprovethemanagementof assetsandliabilitiesandtransparencyof financialinformation.Financialinstitutionsarealsorequiredtoimprovecorporategovernance,internalcontrols,andinternal auditsystems.TheFSCalsohasimplementedregulationsgoverningpromptcorrective actionandmarket-exitmechanismsfortroubledfinancialinstitutionsandhastightenedthe anti-money-launderingregimeforthefinancialsector.TheFSChasestablishedmechanismstocooperatewithsupervisoryauthoritiesinothercountriesforthesupervisionof cross-borderbanking,anditactivelyparticipatesintheactivitiesof international organizations. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyBank,as wellasthetermsandconditionssetforthinthisorder,Bank’sapplicationtoestablisha branchisherebyapproved.Shouldanyrestrictionsonaccesstoinformationontheoperationsoractivitiesof BankanditsaffiliatessubsequentlyinterferewiththeBoard’sability toobtaininformationtodetermineandenforcecompliancebyBankoritsaffiliateswith applicablefederalstatutes,theBoardmayrequireterminationof anyof Bank’sdirect orindirectactivitiesintheUnitedStates.Approvalof thisapplicationalsoisspecifically conditionedoncompliancebyBankwiththecommitmentsmadeinconnectionwiththis applicationandwiththeconditionsinthisorder.9Thecommitmentsandconditions referredtoaboveareconditionsimposedinwritingbytheBoardinconnectionwiththis decisionandmaybeenforcedinproceedingsunder12U.S.C.§1818againstBankandits affiliates. Byorderof theBoardof Governors,effectiveJune27,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. JenniferJ.Johnson Secretaryof theBoard 9 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedbranchparallelsthecontinuingauthority ofthestateofNewYorktolicenseofficesofaforeignbank.TheBoard’sapprovalofthisapplicationdoesnot supplanttheauthorityofthestateofNewYorkanditsagent,theNewYorkStateBankingDepartment,to licensetheproposedbranchofBankinaccordancewithanytermsorconditionsthattheNewYorkState BankingDepartmentmayimpose.

183 Federal Reserve BULLETIN November 2011 Vol. 97, No. 5 Legal Developments: Third Quarter, 2011 Order Issued under Bank Holding Company Act Order Issued under Section 3 of the Bank Holding Company Act Comerica Incorporated Dallas, Texas Comerica Bank Dallas, Texas OrderApprovingtheAcquisitionof aBankHoldingCompany,Mergerof Banks,and Establishmentof Branches ComericaIncorporated,Dallas,Texas(“Comerica”),afinancialholdingcompanywithin themeaningof theBankHoldingCompanyAct(“BHCAct”),hasrequestedtheBoard’s approvalundersection3of theBHCAct1toacquireSterlingBancshares,Inc.(“Sterling”) andtherebyindirectlyacquireitssubsidiarybank,SterlingBank,bothof Houston,Texas. Inaddition,Comerica’ssubsidiarystatememberbank,ComericaBank,Dallas,has requestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct2 (“BankMergerAct”)tomergewithSterlingBank,withComericaBankasthesurviving entity.ComericaBankalsohasappliedundersection9of theFederalReserveAct (“FRA”)toretainandoperatebranchesatthelocationsof SterlingBank’smainofficeand branches.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(76FederalRegister14,010(2011)).4AsrequiredbytheBankMerger Act,areportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStates AttorneyGeneral,andacopyof therequestwasprovidedtotheappropriatebanking agency.Thetimeforfilingcommentshasexpired,andtheBoardhasconsideredtheapplicationsandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHC Act,theBankMergerAct,andtheFRA.5 Comerica,withtotalconsolidatedassetsof approximately$55.2billion,isthe32ndlargest depositoryorganizationintheUnitedStates,controllingdepositsof approximately$41.1 billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured 1 12U.S.C.§1842. 2 12U.S.C.§1828(c). 3 12U.S.C.§321. 4 12CFR262.3(b). 5 TheBoardreceived44commentssupportingtheproposaland2commentsopposingtheproposal.

184 FederalReserveBulletin|November2011 depositoryinstitutionsintheUnitedStates.6Comericacontrolstwosubsidiarybanks, ComericaBankandComericaBank&Trust,NationalAssociation,AnnArbor,Michigan, whichoperateinfivestates.7InTexas,Comericaisthe11thlargestdepositoryorganization,controllingdepositsof approximately$5.2billion. Sterlinghastotalconsolidatedassetsof approximately$5.1billionandSterlingBankoperatesonlyinTexas.Sterlingisthe14thlargestdepositoryorganizationintheTexas,controllingdepositsof approximately$4.1billion. Onconsummationof thisproposal,Comericawouldremainthe32ndlargestdepository organizationintheUnitedStates,withtotalconsolidatedassetsof approximately$60.3billion.Comericawouldcontroldomesticdepositsof approximately$45.3billion,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutions intheUnitedStates.InTexas,Comericawouldbecomethe7thlargestdepositoryorganization,controllingdepositsof approximately$9.3billion,whichrepresentapproximately1.9 percentof depositsof insureddepositoryinstitutionsinthestate. InterstateAnalysis Section3(d)of theBHCActallowstheBoardtoapproveanapplicationbyabankholding companytoacquirecontrolof abanklocatedinastateotherthanthebankholdingcompany’shomestateif certainconditionsaremet.Forpurposesof theBHCAct,thehome stateof ComericaisMichigan,8andSterlingislocatedinTexas.9 Basedonareviewof allthefactsof record,includingrelevantstatestatutes,theBoard findsthattheconditionsforaninterstateacquisitionenumeratedinsection3(d)aremetin thiscase.10Inlightof allthefactsof record,theBoardispermittedtoapprovetheproposal undersection3(d)of theBHCAct. CompetitiveConsiderations TheBHCActandtheBankMergerActprohibittheBoardfromapprovingaproposalthat wouldresultinamonopolyorwouldbeinfurtheranceof anattempttomonopolizethe businessof bankinginanyrelevantbankingmarket.BothstatutesalsoprohibittheBoard fromapprovingabankacquisitionthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyout- 6 NationwideassetanddepositdataareasofMarch31,2011.Inthiscontext,insureddepositoryinstitutions includeinsuredcommercialbanks,savingsbanks,andsavingsassociations. 7 ComericaBankoperatesinArizona,California,Florida,Michigan,andTexas.ComericaBank&Trust, NationalAssociationoperatesonlyinMichigan. 8 See12U.S.C.§1842(d).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater. 9 Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersabanktobelocatedinthestatesinwhich thebankischarteredorheadquarteredoroperatesabranch.See12U.S.C.§§1841(o)(4)–(7)and1842(d)(1)(A) and1842(d)(2)(B). 10 12U.S.C.§§1842(d)(1)(A)–(B)and1842(d)(2)–(3).Comericaisadequatelycapitalizedandadequatelymanaged,asdefinedbyapplicablelaw.SterlingBankhasbeeninexistenceandoperatedfortheminimumperiodof timerequiredbyTexaslawandformorethanfiveyears.See12U.S.C.§1842(d)(1)(B)(i)–(ii).Onconsummationoftheproposal,Comericawouldcontrollessthan10percentofthetotalamountsofdepositsofinsured depositoryinstitutionsintheUnitedStates(12U.S.C.§1842(d)(2)(A)).Comericaalsowouldcontrollessthan 30percentof,andlessthantheapplicablestatedepositcapfor,thetotalamountofdepositsininsureddepositoryinstitutionsintherelevantstate(12U.S.C.§1842(d)(2)(B)–(D)).Allotherrequirementsofsection3(d)of theBHCActwouldbemetonconsummationoftheproposal.

LegalDevelopments:ThirdQuarter,2011 185 weighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.11 ComericaandSterlinghavesubsidiarydepositoryinstitutionsthatcompetedirectlyinthe Dallas,FortWorth,andHoustonbankingmarkets,allinTexas.TheBoardhasreviewed carefullythecompetitiveeffectsof theproposalineachof thesebankingmarketsinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitors thatwouldremaininthebankingmarkets,therelativesharesof totaldepositsininsured depositoryinstitutionsinthemarkets(“marketdeposits”)controlledbyComericaBank andSterlingBank,12theconcentrationlevelof marketdepositsandtheincreaseinthose levels,asmeasuredbytheHerfindahl–HirschmanIndex(“HHI”)undertheDepartmentof JusticeMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”),13and othercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesinallthreebankingmarkets.14Onconsummation,onebankingmarketwouldremainunconcentrated,onebankingmarketwould remainmoderatelyconcentrated,andonebankingmarketwouldremainhighlyconcentrated,asmeasuredbytheHHI.ThechangeintheHHIineachmarketwouldbeconsistentwithBoardprecedentandthethresholdsintheDOJBankMergerGuidelines.Inaddition,numerouscompetitorswouldremainineachbankingmarket. TheDOJhasconductedadetailedreviewof thepotentialcompetitiveeffectsof theproposalandhasadvisedtheBoardthatconsummationof thetransactionwouldnotlikely haveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentand havenotobjectedtotheproposal. Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinanyof thebankingmarketswherethesubsidiarydepositoryinstitutionsof ComericaandSterlingcompetedirectlyorinanyotherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwith approval. 11 12U.S.C.§§1842(c)(1)and1828(c)(5). 12 DepositandmarketsharedataareasofJune30,2010,adjustedtoreflectmergersandacquisitionsthrough March31,2011,andarebasedoncalculationsinwhichthedepositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome, significantcompetitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin 386(1989);NationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhas includedthriftinstitutiondepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,First Hawaiian,Inc.,77FederalReserveBulletin52(1991). 13 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHImorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontal MergerGuidelines,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.PressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10at-938.html. 14 Thosebankingmarketsandtheeffectsoftheproposalontheconcentrationsofbankingresourcesare describedintheappendix.

186 FederalReserveBulletin|November2011 Financial,Managerial,andOtherSupervisoryConsiderations Section3of theBHCActandtheBankMergerActrequiretheBoardtoconsiderthe financialandmanagerialresourcesandfutureprospectsof thecompaniesanddepository institutionsinvolvedintheproposalandcertainothersupervisoryfactors.15TheBoardhas consideredthesefactorscarefullyinlightof allthefactsof record,includingconfidential supervisoryandexaminationinformationfromtherelevantfederalandstatesupervisorsof theorganizationsinvolvedintheproposal,andpubliclyreportedandotherfinancialinformation,includinginformationprovidedbyComericaandSterling.16 Inevaluatingfinancialfactorsinexpansionproposalsbybankingorganizations,theBoard reviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-onlyand consolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.Inassessingfinancialfactors,theBoardhasconsideredcapital adequacytobeespeciallyimportant.TheBoardalsoevaluatesthefinancialconditionof thecombinedorganizationatconsummation,includingitscapitalposition,assetquality, andearningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardhasconsideredtheproposalcarefullyunderthefinancialfactors.Comerica, Sterling,andtheirsubsidiarydepositoryinstitutionsarewellcapitalizedandwouldremain soonconsummationof theproposal.Theproposedtransactionisstructuredasashare exchange.Basedonitsreviewof therecord,theBoardfindsthatComericahassufficient financialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Comerica,Sterling,andtheirsubsidiarydepositoryinstitutions,includingassessments of theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoard hasconsidereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisory agencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebanking andanti-money-launderinglaws.Comericaanditssubsidiarydepositoryinstitutions areconsideredtobewellmanaged.TheBoardalsohasconsideredComerica’splansfor implementingtheproposal,includingtheproposedmanagementafterconsummation.In addition,theBoardhasconsideredthefutureprospectsof theorganizationsinvolvedin theproposalinlightof financialandmanagerialresourcesandtheproposedbusinessplan. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalareconsistentwithapproval,asaretheothersupervisoryfactors.17 ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandtheBankMergerAct,the Boardisrequiredtoconsidertheeffectsof theproposalontheconvenienceandneedsof 15 12U.S.C.§§1842(c)(2)–(3)and1828(c)(5). 16 AcommenterexpressedconcernthatconsummationoftheproposalcouldeliminateitsabilitytobringalawsuitagainstSterlingorSterlingBankandpursuecomplaintswithotheragencies.Thejurisdictionofthecourts andofotheragenciesisamatterbeyondthestatutoryfactorstheBoardisauthorizedtoconsider.SeeWestern Bancshares,Inc.v.BoardofGovernors,480F.2d749(10thCir.1973). 17 AcommenterexpressedconcernaboutlawsuitsbySterlingshareholdersregardingtheproposal.Thoselawsuits havebeendismissed.

LegalDevelopments:ThirdQuarter,2011 187 thecommunitiestobeservedandtotakeintoaccounttherecordsof therelevantinsured depositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).18 TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.19 TheBoardhasconsideredcarefullyallthefactsof record,includingevaluationsof the CRAperformanceof SterlingBankandComerica’ssubsidiarybanks,datareportedby ComericaundertheHomeMortgageDisclosureAct(“HMDA”),20otherinformationprovidedbyComerica,confidentialsupervisoryinformation,andpubliccommentreceivedon theproposal.TheBoardreceivedanumberof commentscommendingComericaforits lendingandCRAactivities,butonecommentercriticizedtheperformanceof Comerica andSterlinginmeetingthecreditneedsof borrowersinLMIareasinHouston. A.CRAPerformanceEvaluation AsprovidedintheCRA,theBoardhasconsideredtheconvenienceandneedsfactorin lightof theevaluationsbytheappropriatefederalsupervisorof theCRAperformance recordof therelevantinsureddepositoryinstitutions.Aninstitution’smostrecentCRA performanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.21 ComericaBankreceivedan“outstanding”ratingatitsmostrecentCRAperformance evaluationbytheFederalReserveBankof Dallas(“ReserveBank”),asof August16,2010 (“2010Evaluation”).22SterlingBankreceiveda“satisfactory”ratingatitsmostrecent CRAperformanceevaluationbytheFederalDepositInsuranceCorporation,asof February4,2009(“2009Evaluation”).ComericahasrepresentedthatComericaBank’scurrent CRAprogramwillbeimplementedatthecombinedorganizationfollowingconsummation of theproposal. CRAPerformanceof ComericaBank.Inadditiontotheoverall“outstanding”ratingthat ComericaBankreceivedinthe2010Evaluation,itreceivedseparateoverallratingsof “outstanding”or“satisfactory”inallthestatesreviewed.23Examinerscharacterizedasexcellent 18 12U.S.C.§2901etseq.;12U.S.C.§1842(c)(2). 19 12U.S.C.§2903. 20 12U.S.C.§2801etseq. 21 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 22 Comerica’sothersubsidiaryinsureddepositoryinstitution,ComericaBank&Trust,NationalAssociation,isa trustcompanythatdoesnotgrantcredittothepublicintheordinarycourseofitsbusinessand,accordingly,is notsubjecttotheCRA.See12CFR25.11(c)(3). 23 TheevaluationperiodwasfromJanuary1,2008,throughDecember31,2009.Inadditiontoreviewing HMDA-reportablelending,CRA-reportablelending,andcommunitydevelopmentlending,examiners reviewedComericaBank’shomeequitylendingatitsrequestbecausethebankhadelectedtocollectdata aboutsuchlending.See12CFR228.22(a)(1).Asoftheendoftheevaluationperiod,loanstobusinesses accountedforalmost72percentofthebank’sloanportfolioandresidentialrealestateloansaccountedforless than7percent.Asaresult,examinersgavethegreatestweightinthe2010EvaluationtoCRA-reportableand communitydevelopmentlending.

188 FederalReserveBulletin|November2011 thebank’soverallperformanceinprovidingsmallbusinessloans24inLMIcensustractsin itsassessmentareas.25Theyalsostatedthatthebank’soveralldistributionof smallbusiness loanstobusinessesof differentsizeswasgood.WithrespecttoComericaBank’shome mortgagelending,examinersreportedthattheoverallgeographicdistributionanddistributiontoborrowersof differentincomelevelsof thoseloansweregood. Examinersnotedthatthebankoffersgovernmentandproprietarylendingprogramsto helpmeetthecreditneedsof LMIborrowersandsmaller,newerbusinesses.Microbusiness loansandSmallBusinessAdministration(“SBA”)loansaccountedformorethan$102millionand$34million,respectively,of thelendingactivityduringtheevaluationperiod. Examinersfoundthatthebankhadmadearelativelyhighlevelof communitydevelopment loansthroughoutitsserviceareaduringtheevaluationperiod,totalingmorethan$464 million.26 Inthe2010Evaluation,thebankreceivedanoverall“outstanding”ratingundertheinvestmenttest.Examinersreportedthatthebankinvestedmorethan$143millioninlowincome-housingtaxcreditfundstoaddressaffordablehousingneedsinthebank’sassessmentareas.Bankalsomademorethan$10.8millionincommunitydevelopmentgrants anddonationsinsupportof affordablehousing,smallbusinessdevelopment,andorganizationsservingLMIareasandindividuals.27 Thebankreceivedanoverall“outstanding”ratingundertheservicetestinthe2010Evaluation.Examinersreportedthatthebank’sproductsandservicesweregenerallyaccessible toallbusinessesandindividualsintheassessmentareas.28ExaminerscharacterizedComericaBankasaleaderinprovidingcommunitydevelopmentservices,includingfinancial literacy,affordablehousingseminars,andeconomicdevelopmentactivities.29 CRAPerformanceof SterlingBank.Inthe2009Evaluation,SterlingBankwasrated“low satisfactory”underthelendingtest.30Inthebank’sHoustonassessmentarea,examiners reportedthatSterlingBank’sdistributionof smallbusinessloansamongcensustractsof differentincomelevelswasreasonableincomparisontothatof lendersintheaggregate,as wasitsdistributionof smallbusinessloanstobusinessesof differentsizes.31Examiners 24 Inthiscontext,asmallbusinessloanisaloanwithanoriginalamountof$1millionorlessthatissecuredby nonfarm,nonresidentialpropertyorisacommercialorindustrialloantoaborrowerintheUnitedStates. 25 Examinersreportedthattheextentofthebank’ssmallbusinesslendinginLMIcensustractsintheHouston areaduringtheevaluationperiodcomparedveryfavorablywiththatoflendersintheaggregate.Lendingdata forlendersintheaggregaterepresentthecumulativelendingforallfinancialinstitutionsthathavereported smallbusinesslendingdatainaparticulararea. 26 ComericaBankoriginatedfourcommunitydevelopmentloanstotaling$1.6millionintheHoustonareaduring theevaluationperiod.Examinerscharacterizedthisamountoflendingasalowlevelofactivity,giventheneed forandtheopportunitiestomakesuchloans. 27 Examinerscharacterizedthebank’slevelofcommunitydevelopmentinvestmentinitsHoustonassessment areaasexcellentbynotingthatthebankinvestedmorethan$14millioninlow-income-housingtaxcreditprojectsintheareaduringtheevaluationperiod. 28 Examinersconcludedthatthebank’sbranchesandATMsarereasonablyaccessibletoindividualsandcensus tractsofdifferentincomelevelsinthebank’sHoustonassessmentarea.Inaddition,examinersstatedthatthe bank’srecordofopeningandclosingbrancheswithinitsHoustonassessmentareahadnotadverselyaffected accessibilityofservicestoLMIindividualsandcensustracts. 29 The2010Evaluationreportedthatthebankprovidedarelativelyhighlevelofcommunitydevelopmentservices initsHoustonassessmentareaduringtheevaluationperiod. 30 TheevaluationincludedHMDA-reportableandsmallbusinesslendingfor2006,2007,and2008.Theevaluationperiodwithrespecttocommunitydevelopmentloans,investments,andserviceswasfromNovember24, 2005,toFebruary24,2008.TheHoustonassessmentareaaccountedformorethan75percentofthebank’s depositsandmorethan70percentofthebank’sloanoriginationsduringtheevaluationperiod. 31 Duringtheevaluationperiod,SterlingBankmadesignificantlymoresmallbusinessloansthanhomemortgage loans.Accordingly,examinersplacedmoreweightonthebank’ssmallbusinesslendinginevaluatingperformanceunderthelendingtest.

LegalDevelopments:ThirdQuarter,2011 189 statedthatinthisassessmentarea,thebankdemonstratedastrongdistributionof home purchaseloansamongcensustractswithdifferentincomelevelsbuthadapoordistributionof homepurchaseloansamongborrowersof differentincomelevels.32 Examinerscharacterizedthebank’sparticipationinspecializedloanprogramsinitsHoustonassessmentareaasgood,notingthatthebankoriginated200SBAloanstotalingmore than$118million.SterlingBank’slevelof communitydevelopmentlendingintheHouston assessmentareawasdescribedbyexaminersassatisfactoryoverall,andtheynotedthatthe bankoriginated21communitydevelopmentloanstotalingmorethan$33million. Thebankreceivedanoverall“highsatisfactory”ratingundertheinvestmenttestinthe 2009Evaluation.Thebank’squalifiedinvestmentsinitsHoustonassessmentareatotaled $17.1millionduringtheevaluationperiod,andexaminersreportedthatthebankroutinely madegrantsanddonationstoorganizationsthatpromotedcommunitydevelopment. Inthe2009Evaluation,SterlingBankreceivedanoverall“outstanding”ratingunderthe servicetest.Examinersdescribedthebankasdemonstratingoutstandingresponsiveness withrespecttoservicesintheHoustonassessmentarea.Examinersstatedthatthebank’s branchnetworkintheassessmentareaprovidedreadyaccessibilitytobankproductsand servicesandincludedsevenfull-serviceofficesinmoderate-incomecensustracts.Thebank wascharacterizedbyexaminersasaleaderinprovidingcommunitydevelopmentservices intheHoustonassessmentarea.Examinersreportedthatthebanksupportedorganizationspromotingcommunitydevelopmentbyallowingitspersonneltoserveasboardmembersandtoconductfundraising,amongotherefforts. B.BranchClosings Onecommenterexpressedconcernthattheproposedmergerwouldleadtobranchclosures andadverselyaffectbankingservicesinLMIareas.Comericahasrepresentedthatithas notdecidedwhethertocloseanybranchesafterconsummationof theproposalbutthat anyclosuresthatdooccurwouldbeconsolidationsof brancheslocatedneareachother. TheBoardhasconsideredthatfederalbankinglawprovidesaspecificmechanismfor addressingbranchclosings.33Federallawrequiresaninsureddepositoryinstitutiontoprovidenoticetothepublicandtotheappropriatefederalsupervisoryagencybeforeclosinga branchandtoadoptapolicyregardingbranchclosures.Inthe2010Evaluation,examiners foundthatComericaBank’srecordof openingorclosingbrancheshadnotadversely affectedtheaccessibilityof thebank’sservicestoLMIareasorLMIindividuals.Inaddition,theBoardnotesthatitwillcontinuetoreviewthebranchclosingrecordof Comerica Bankinthecourseof conductingCRAperformanceevaluations. C.HMDAandFairLendingRecord TheBoardhascarefullyconsideredthefairlendingrecordsandHMDAdataof Comerica inlightof publiccommentreceivedontheproposal.Acommenteralleged,basedonpre- 32 Bycontrast,examinerscharacterizedComericaBank’sdistributionofHMDA-reportableloansinitsHouston assessmentareaasexcellent.Asnoted,ComericahasrepresentedthatComericaBankwillimplementitscurrentCRAprogramatthecombinedorganizationfollowingconsummationoftheproposal. 33 Section42oftheFederalDepositInsuranceAct,12U.S.C.§1831r-1,asimplementedbytheJointPolicyStatementRegardingBranchClosings(64FederalRegister34,844(1999)),requiresthatabankprovidethepublic withatleast30days’notice,andtheappropriatefederalsupervisoryagencyandcustomersofthebranchwith atleast90days’notice,beforethedateoftheproposedbranchclosings.Thebankalsoisrequiredtoprovide reasonsandothersupportingdatafortheclosure,consistentwiththeinstitution’swrittenpolicyforbranch closings.

190 FederalReserveBulletin|November2011 liminary2010HMDAdata,34thatComericamadehighcostmortgageloansdisproportionatelytoAfricanAmericanborrowersrelativetononminorityborrowers.35Thedata indicatethatof ComericaBank’sHMDA-reportableloanstominorityborrowersin2009, ahigherpercentagewerehighcostmortgageloansthanwasthecaseforlendersinthe aggregate.36 TheBoardisconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlending andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatensurenotonlysafeandsoundlendingbutalsoequalaccessto creditbycreditworthyapplicantsregardlessof theirraceorethnicity.Moreover,theBoard believesthatallbankholdingcompaniesandtheiraffiliatesmustconducttheirmortgage lendingoperationswithoutanyabusivelendingpracticesandincompliancewithallconsumerprotectionlaws. TheHMDAdataalsoindicatethatinComericaBank’sMichiganassessmentareasin 2009,whichaccountedforasubstantialmajorityof thebank’smortgagelendinginthat year,minorityborrowersrepresentedahigherpercentageof ComericaBank’sloanoriginationsthanwasthecaseforlendersintheaggregate.37Inaddition,theBoardnotesthatof thebank’sHMDAreportableloanstominorityborrowersin2009,fewerthan13percent werehighcostmortgageloans. AlthoughtheHMDAdatamightreflectcertaindisparitiesintheratesof loanapplications, originations,denials,orpricingamongmembersof differentracialorethnicgroupsincertainlocalareas,theyprovideaninsufficientbasisbythemselvesonwhichtoconclude whetherornotComericaisexcludinganyracialorethnicgrouponaprohibitedbasis.The BoardrecognizesthatHMDAdataalone,evenwiththeadditionof pricinginformation, provideonlylimitedinformationaboutthecoveredloans.38TheHMDAdata,therefore, havelimitationsthatmakethemaninadequatebasis,absentotherinformation,forconcludingthataninstitutionhasengagedinillegallendingdiscrimination. Becauseof thelimitationsof HMDAdata,theBoardhasconsideredthesedatacarefully andtakenintoaccountotherinformation,includingexaminationreportsthatprovideonsiteevaluationsof compliancewithfairlendinglawsbyComericaBank.Inthe2010Evaluation,examinersreportedthattheydidnotfindanyevidencethatComericaBankhad engagedinillegaldiscriminationorinanyotherillegalcreditpractices.Inaddition,the BoardhasconsideredinformationprovidedbyComericaaboutitscompliancerisk-managementsystems. Therecordof thisapplication,includingconfidentialsupervisoryinformation,indicates thatComericahastakenstepstoensurecompliancewithfairlendingandotherconsumer 34 TheBoardreviewedHMDAdatafor2008,2009,andpreliminary2010dataforComericaBankinitsstatewide assessmentareasforCalifornia,Michigan,andTexas. 35 A“highcostmortgageloan”isamortgageloanwithanannualpercentageratethatequalsorexceedstheaverageprimeofferrateforacomparabletransactionby1.5percentagepointsifsecuredbyafirstlienonadwellingor3.5percentagepointsifsecuredbyasubordinatelien(12CFR203.4(a)(12). 36 Thelendingdataoftheaggregatelendersrepresentthecumulativelendingforallfinancialinstitutionsthat havereportedHMDAdatainaparticulararea. 37 In2009,mortgageloansinComericaBank’sMichiganassessmentareasaccountedforapproximately71percentofthebank’stotalHMDA-reportableloans.AggregateHMDAdatafor2010arenotyetavailable. 38 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenot availablefromHMDAdata.

LegalDevelopments:ThirdQuarter,2011 191 protectionlawsandregulations.ComericarepresentsthatComericaBankhassuchcompliancepoliciesandproceduresinplace,includingcentralizedunderwritingof mortgageloans tominimizeexceptionstolendingcriteria,andanadditionalreviewof mortgageapplicationdenials.Inaddition,ComericaBankusesthird-partyanalysisof mortgageunderwritingandpricing,includingregressionanddisparateimpactmodeling,andregularlyreviews HMDAdenialratiosandrate-spreaddistributions.Moreover,Comericahasstatedthat SterlingBank’soperationswillbeintegratedintoComericaBank’sexistingfairlendingcomplianceprogramafterconsummationof theproposal. TheBoardalsohasconsideredtheHMDAdatainlightof otherinformation,includingthe overallperformancerecordsof ComericaBankandSterlingBankundertheCRA.These establishedeffortsandrecordsof performancedemonstratethattheinstitutionsareactive inhelpingtomeetthecreditneedsof theirentirecommunities. D.ConclusiononConvenienceandNeedsandCRAPerformance TheBoardhasconsideredcarefullyallthefactsof record,includingreportsof examinationof theCRArecordsof ComericaBankandSterlingBank,informationprovided byComerica,publiccommentsreceivedontheproposal,andconfidentialsupervisory information,includingrecordsof compliancewithconsumerlawsandregulations.Comericahasrepresentedthatconsummationof theproposalwouldallowittoofferthefull rangeof itscurrentproductsandservicestoSterling’scustomers. Basedonareviewof theentirerecord,andforthereasonsdiscussedabove,theBoardhas concludedthatconsiderationsrelatingtotheconvenienceandneedsfactorandtheCRA performancerecordsof therelevantinsureddepositoryinstitutionsareconsistentwith approvalof theproposal. OtherConsiderations ComericaBankalsohasappliedundersection9of theFRAtoestablishandoperate branchesatthelocationsof themainofficeandbranchesof SterlingBank.TheBoardhas assessedthefactorsitisrequiredtoconsiderwhenreviewinganapplicationundersection9 of theFRAandfindsthosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.39Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder 39 AcommenterrequestedthattheBoardholdapublicmeetingorhearingontheproposal.Section3(b)ofthe BHCActdoesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication (12CFR225.16(e)).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsregulations,theBoardalsomay,initsdiscretion,holdapublicmeetingorhearingonan applicationtoacquireabankifameetingorhearingisnecessaryorappropriatetoclarifyfactualissuesrelated totheapplicationandtoprovideanopportunityfortestimony(12CFR262.3(e)and262.25(d)).TheBoard hasconsideredcarefullythecommenter’srequestinlightofallthefactsofrecord.IntheBoard’sview,the commenterhashadampleopportunitytosubmitviewsand,infact,submittedwrittencommentsthatthe Boardhasconsideredcarefullyinactingontheproposal.Therequestfailstoidentifydisputedissuesoffact thatarematerialtotheBoard’sdecisionthatwouldbeclarifiedbyapublicmeetingorhearing.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublicmeetingorhearingisnot requiredorwarrantedinthiscase.Accordingly,therequestforapublicmeetingorhearingontheproposalis denied.

192 FederalReserveBulletin|November2011 theBHCAct,theBankMergerAct,andtheFRA.40TheBoard’sapprovalisspecifically conditionedoncompliancebyComericaandComericaBankwiththeconditionsinthis orderandallthecommitmentsmadetotheBoardinconnectionwiththeproposal.For purposesof thisproposal,thesecommitmentsandconditionsaredeemedtobeconditions imposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionand,assuch, maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuch periodisextendedforgoodcausebytheBoardorbytheReserveBank,actingpursuantto delegatedauthority. Byorderof theBoardof Governors,effectiveJuly13,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard Appendix ComericaandSterlingBankingMarketsConsistentwithBoardPrecedentandDOJBankMerger Guidelines Amountof MarketDeposit Remaining Bank Rank Deposits Shares ResultingHHI ChangeinHHI Numberof (dollars) (percent) Competitors Dallas,Texas—includesDallasandRockwallcounties;thesoutheasternquadrantofDentonCounty,includingDentonandLewisville;the southwesternquadrantofCollinCounty,includingMcKinneyandPlano;thecommunitiesofForneyandTerrellinKaufmanCounty;andMidlothian, Waxahachie,andFerrisinEllisCounty. ComericaPre-Consummation 5 $3.29bil. 2.8 1972 1 129 Sterling 38 $230mil. 0.2 ComericaPost-Consummation 5 $3.52bil. 3.0 Houston,Texas—includesAustin,Brazoria,Chambers,FortBend,Galveston,Harris,Liberty,Montgomery,SanJacinto,andWallercounties. ComericaPre-Consummation 12 $1.4bil. 1.2 1507 5 108 Sterling 6 $3.3bil. 2.7 ComericaPost-Consummation 6 $4.7bil. 3.9 FortWorth,Texas—includesTarrant,Johnson,andWisecounties;ParkerCounty(excludingMineralWells);andthesouthwesternquadrantof DentonCounty,includingRoanoke. ComericaPre-Consummation 25 $171mil. .7 972 0 76 Sterling 61 $35mil. .1 ComericaPost-Consummation 16 $206mil. .8 Note:DataareasofJune30,2010.Alldepositamountsareunweighted.Allrankings,marketdepositshares,andHHIsarebasedonthrift institutiondepositsweightedat50percent. 40 OnecommenterrequestedthattheBoarddelayactionontheproposal.Asnoted,theBoardhasaccumulateda significantrecordinthiscase,includingreportsofexamination,confidentialsupervisoryinformation,public reportsandinformation,andpubliccomments.Thecommenterhashadampleopportunitytosubmititsviews and,infact,hasprovidedmultiplewrittensubmissionsthattheBoardhasconsideredcarefullyinactingonthe proposal.Basedonareviewofallthefactsofrecord,theBoardhasconcludedthattherecordinthiscaseis sufficienttowarrantactionatthistimeandthatnofurtherdelayinconsideringtheproposalisnecessary.

LegalDevelopments:ThirdQuarter,2011 193 Orders Issued under International Banking Act Banca Popolare di Vicenza S.C.p.A. Vicenza, Italy OrderApprovingEstablishmentof aRepresentativeOffice BancaPopolarediVicenzaS.C.p.A.(“Bank”),Vicenza,Italy,aforeignbankwithinthe meaningof theInternationalBankingAct(“IBA”),hasappliedundersection10(a)of the IBA1toestablisharepresentativeofficeinNewYork,NewYork.TheForeignBankSupervisionEnhancementActof 1991,whichamendedtheIBA,providesthataforeignbank mustobtaintheapprovalof theBoardtoestablisharepresentativeofficeintheUnited States. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinNewYorkCity(DailyNews,February24,2011).Thetimeforfilingcommentshasexpired,andallcommentsreceivedhave beenconsidered. BankisorganizedasacooperativebankunderItalianlawandhasapproximately60,000 shareholders.Bank’ssharesarewidelyheld,andeachshareholderholdslessthan1percent of thebank’sshares. Bank,withtotalconsolidatedassetsof approximately$50.9billion,2isthe11thlargest bankinItalybyassetsize.3Bankprovidesconsumerbankingandwholesalebankingservicestoprivateindividuals,professionals,andsmall-andmedium-sizedcompanies.Bank’s foreignoperationsincludeafinancialsubsidiaryinIrelandandfourrepresentativeoffices: twoinChina,oneinIndia,andoneinBrazil. TheproposedrepresentativeofficewouldserveasaliaisonbetweenBankanditscustomers.4Theofficewouldalsoconductresearchandassemblecreditinformationoncompanies;organizeseminars,workshops,andconventions;solicitbankingbusinessforBank; andassistitsclientsinobtainingbankingandotherservicesintheUnitedStates. InactingonanapplicationundertheIBAandRegulationKbyaforeignbanktoestablish arepresentativeoffice,theBoardmustconsiderwhethertheforeignbankdirectlyengages inthebusinessof bankingoutsideof theUnitedStatesandwhethertheforeignbankhas furnishedtotheBoardtheinformationitneedstoadequatelyassesstheapplication.5In addition,theBoardshalltakeintoaccountwhethertheforeignbankissubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshome-countrysupervisor.6TheBoard alsoconsidersadditionalstandardssetforthintheIBAandRegulationK.7 1 12U.S.C.§3107(a). 2 Unlessotherwiseindicated,dataareasofJune30,2011. 3 RankingdataareasofDecember31,2009. 4 Arepresentativeofficemayengageinrepresentationalandadministrativefunctionsinconnectionwiththe bankingactivitiesoftheforeignbank,includingsolicitingnewbusinessfortheforeignbank,conducting research,actingasaliaisonbetweentheforeignbank’sheadofficeandcustomersintheUnitedStates,performingpreliminaryandservicingstepsinconnectionwithlending,andperformingback-officefunctions.A representativeofficemaynotcontractforanydepositordeposit-likeliability,lendmoney,orengageinany otherbankingactivity(12CFR211.24(d)(1)). 5 12U.S.C.§3107(a)(2). 6 Id.;12CFR211.24(d)(2).Inassessingthesupervisionstandard,theBoardconsiders,amongotherindiciaof comprehensive,consolidatedsupervision,theextenttowhichthehome-countrysupervisor(i)ensuresthatthe bankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide;(ii)obtainsinformation

194 FederalReserveBulletin|November2011 Asnotedabove,Bankengagesdirectlyinthebusinessof bankingoutsidetheUnited States.BankalsohasprovidedtheBoardwithinformationnecessarytoassesstheapplicationthroughsubmissionsthataddresstherelevantissues. Withrespecttosupervisionbyhome-countryauthorities,theBoardpreviouslyhasdetermined,inconnectionwithapplicationsinvolvingotherbanksinItaly,thatthosebanks weresubjecttohome-countrysupervisiononaconsolidatedbasisbytheBankof Italy,the primaryregulatorof commercialbanksinItaly.8BankissupervisedbytheBankof Italy onsubstantiallythesametermsandconditionsasthoseotherbanks.Basedonallthefacts of record,includingtheaboveinformation,ithasbeendeterminedthatBankissubjectto comprehensivesupervisiononaconsolidatedbasisbyitshome-countrysupervisor.The Bankof Italyhasnoobjectiontotheproposedrepresentativeoffice. Withrespecttothefinancialandmanagerialresourcesof Bank,takingintoconsideration Bank’srecordof operationinthehomecountry,overallfinancialresources,andstanding withthehome-countrysupervisor,financialandmanagerialfactorsareconsistentwith approval.BankappearstohavetheexperienceandcapacitytosupporttheproposedrepresentativeofficeandhasestablishedcontrolsandprocedurestoensurecompliancewithU.S. law,aswellascontrolsandproceduresforitsworldwideoperationsgenerally. Italyisamemberof theFinancialActionTaskForceandsubscribestoitsrecommendationsonmeasurestocombatmoneylaundering.Inaccordancewiththoserecommendations,Italyhasenactedlawsandcreatedlegislativeandregulatorystandardstodeter moneylaundering,terroristfinancing,andotherillicitactivities.Moneylaunderingisa criminaloffenseinItaly,andcreditinstitutionsarerequiredtoestablishinternalpolicies, procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughout theirworldwideoperations.Bankhaspoliciesandprocedurestocomplywiththeselaws andregulationsthataremonitoredbygovernmentalentitiesresponsibleforanti-moneylaunderingcompliance. WithrespecttoaccesstoinformationaboutBank’soperations,therestrictionsondisclosureinrelevantjurisdictionsinwhichBankoperateshavebeenreviewedandrelevantgovernmentalauthoritieshavebeencommunicatedwithregardingaccesstoinformation.Bank hascommittedtomakeavailabletotheBoardsuchinformationontheoperationsof Bank andanyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,audit reports,orotherwise;(iii)obtainsinformationonthedealingswithandtherelationshipbetweenthebankand itsaffiliates,bothforeignanddomestic;(iv)receivesfromthebankfinancialreportsthatareconsolidatedona worldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;and(v)evaluatesprudentialstandards,suchascapitaladequacyandriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’s determination. 7 See12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2).Thesestandardsinclude(1)whetherthebank’shomecountrysupervisorhasconsentedtotheestablishmentoftheoffice;thefinancialandmanagerialresourcesof thebank;(2)whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimein placeinthehome-countrytoaddressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateraleffortstocombatmoneylaundering;(3)whethertheappropriatesupervisorsinthehomecountrymay shareinformationonthebank’soperationswiththeBoard;and(4)whetherthebankanditsU.S.affiliatesare incompliancewithU.S.law;theneedsofthecommunity;andthebank’srecordofoperation.SeealsoStandardCharteredBank,95FederalReserveBulletinB98(2009).TheBoardmayalso,inthecaseofaforeignbank thatpresentsarisktothestabilityoftheUnitedStates,takeintoaccount,totheextentappropriate,whether thehomecountryoftheforeignbankhasadopted,orismakingdemonstrableprogresstowardadopting, anappropriatesystemoffinancialregulationforthefinancialsystemofsuchhomecountrytomitigatesuch risk(12U.S.C.§3105(d)(3)(E)). 8 See,e.g.,BoardlettertoLuigiL.DeGhenghidatedSeptember25,2007(comprehensiveconsolidatedsupervisionforIntesaSanpaoloS.p.A.);BancadiRoma,S.p.A.,2002WL1848520(2002);BancaIntesa,S.p.A.,86 FederalReserveBulletin433(2000).

LegalDevelopments:ThirdQuarter,2011 195 ancewiththeIBA,theBankHoldingCompanyActof 1956,asamended,andotherapplicablefederallaw.TotheextentthatprovidingsuchinformationtotheBoardmaybeprohibitedbylaworotherwise,BankhascommittedtocooperatewiththeBoardtoobtain anynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesfordisclosure of suchinformation.Inaddition,subjecttocertainconditions,Bankof Italymayshare informationonBank’soperationswithothersupervisors,includingtheBoard.Inlightof thesecommitmentsandotherfactsof record,andsubjecttotheconditionsdescribed below,ithasbeendeterminedthatBankhasprovidedadequateassurancesof accesstoany necessaryinformationthattheBoardmayrequest. Informationrelevanttothestandardregardingrisktothestabilityof theUnitedStates financialsystemhasalsobeenreviewed.Inparticular,considerationhasbeengiventothe absoluteandrelativesizeof Bankinitshomecountry,thescopeof Bank’sactivities, includingthetypeof activitiesitproposestoconductintheUnitedStatesandthepotential forthoseactivitiestoincreaseortransmitfinancialinstability,andtheframeworkinplace forsupervisingBankinitshomecountry.Basedontheseandotherfactors,financialstabilityconsiderationsinthisproposalareconsistentwithapproval. Basedontheforegoingandallthefactsof record,andsubjecttocommitmentsmadeby BanktotheBoard,aswellasthetermsandconditionssetforthinthisorder,Bank’sapplicationtoestablishtherepresentativeofficeisherebyapprovedbytheDirectorof theDivisionof BankingSupervisionandRegulation,withtheconcurrenceof theGeneralCounsel, pursuanttoauthoritydelegatedbytheBoard.9Shouldanyrestrictionsonaccesstoinformationontheoperationsoractivitiesof Bankanditsaffiliatessubsequentlyinterferewith theBoard’sabilitytoobtaininformationtodetermineandenforcecompliancebyBankor itsaffiliateswithapplicablefederalstatutes,theBoardmayrequireterminationof anyof Bank’sdirectorindirectactivitiesintheUnitedStates.Approvalof thisapplicationalsois specificallyconditionedoncompliancebyBankwiththeconditionsimposedinthisorder andthecommitmentsmadetotheBoardinconnectionwiththisapplication.10Forpurposesof thisaction,thesecommitmentsandconditionsaredeemedtobeconditions imposedinwritingbytheBoardinconnectionwiththefindingsanddecisionhereinand, assuch,maybeenforcedinproceedingsunderapplicablelaw. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveSeptember27, 2011. RobertdeV.Frierson DeputySecretaryof theBoard The Bank of Fukuoka, Ltd. Fukuoka, Japan OrderApprovingEstablishmentof aRepresentativeOffice TheBankof Fukuoka,Ltd.(“Bank”),Fukuoka,Japan,aforeignbankwithinthemeaning of theInternationalBankingAct(“IBA”),hasappliedundersection10(a)of theIBA1to 9 12CFR265.7(d)(12). 10 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedrepresentativeofficeparallelsthecontinuingauthorityoftheStateofNewYorktolicenseofficesofaforeignbank.TheBoard’sapprovalofthis applicationdoesnotsupplanttheauthorityoftheStateofNewYorkoritsagent,theNewYorkStateBanking Department,tolicensetheproposedrepresentativeofficeofBankinaccordancewithanytermsorconditions thatitmayimpose. 1 12U.S.C.§3107(a).

196 FederalReserveBulletin|November2011 establisharepresentativeofficeinNewYork,NewYork.TheForeignBankSupervision EnhancementActof 1991,whichamendedtheIBA,providesthataforeignbankmust obtaintheapprovalof theBoardtoestablisharepresentativeofficeintheUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinNewYork,NewYork(NewYork DailyNews,October21,2010).Thetimeforfilingcommentshasexpired,andallcommentsreceivedhavebeenconsidered. Bank,withtotalassetsof approximately$117billion,isthe13thlargestbankinJapanby assetsize.2Bankengagesinarangeof commercialandretailbankingactivitiesthroughits 166domesticbranches.OutsideJapan,BankoperatesthreerepresentativeofficesinChina, includingoneinHongKong.BankiswhollyownedbyFukuokaFinancialGroup,Inc. (“FFG”),aJapanesefinancialholdingcompany,3andBankhasnooperationsinthe UnitedStates.4 TheproposedrepresentativeofficewouldactasaliaisonbetweenBankanditsU.S.customersandcorrespondentbanks.Theproposedrepresentativeofficewouldalsoengagein otherrepresentationalactivities,includinggatheringinformationandconductingresearch.5 InactingonanapplicationundertheIBAandRegulationKbyaforeignbanktoestablish arepresentativeoffice,theBoardmustconsiderwhether(1)theforeignbankhasfurnished totheBoardtheinformationitneedstoassesstheapplicationadequately;(2)theforeign bankandanyforeignbankparentengagedirectlyinthebusinessof bankingoutsideof the UnitedStates;and(3)theforeignbankandanyforeignbankparentaresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhome-countrysupervisor.6TheBoard mayalsoconsideradditionalstandardssetforthintheIBAandRegulationK.7 2 AssetandrankingdataareasofJune30,2011. 3 JapanTrusteeServicesBank,Ltd.,aJapanesetrustbank,owns7.37percentofthevotingstockofFFG.No othershareholderowns5percentormoreofthevotingsharesofFFG. 4 In1986,BankopenedarepresentativeofficeinNewYork,NewYork,thatwasconvertedtoabranchin1989 andclosedin1999. 5 Arepresentativeofficemayengageinrepresentationalandadministrativefunctionsinconnectionwiththe bankingactivitiesoftheforeignbank,includingsolicitingnewbusinessfortheforeignbank,conducting research,actingasaliaisonbetweentheforeignbank’sheadofficeandcustomersintheUnitedStates,performingpreliminaryandservicingstepsinconnectionwithlending,andperformingback-officefunctions.A representativeofficemaynotcontractforanydepositordeposit-likeliability,lendmoney,orengageinany otherbankingactivity(12CFR211.24(d)(1)). 6 12U.S.C.§3107(a)(2);12CFR211.24(d)(2).Inassessingthesupervisionstandard,theBoardconsiders,among otherindiciaofcomprehensive,consolidatedsupervision,theextenttowhichthehome-countrysupervisors(i) ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide;(ii)obtain informationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports, auditreports,orotherwise;(iii)obtaininformationonthedealingswithandtherelationshipbetweenthebank anditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidated onaworldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditionona worldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacyandriskasset exposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’s determination. 7 See12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2).Thesestandardsinclude(1)whetherthebank’shomecountrysupervisorhasconsentedtotheestablishmentoftheoffice;thefinancialandmanagerialresourcesof thebank;(2)whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimein placeinthehomecountrytoaddressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateraleffortstocombatmoneylaundering;(3)whethertheappropriatesupervisorsinthehomecountrymay shareinformationonthebank’soperationswiththeBoard;and(4)whetherthebankanditsU.S.affiliatesare incompliancewithU.S.law;theneedsofthecommunity;andthebank’srecordofoperation.SeealsoStandardCharteredBank,95FederalReserveBulletinB98(2009).TheBoardmayalso,inthecaseofaforeignbank thatpresentsarisktothestabilityoftheUnitedStates,takeintoaccount,totheextentappropriate,whether

LegalDevelopments:ThirdQuarter,2011 197 Asnotedabove,Bankengagesdirectlyinthebusinessof bankingoutsidetheUnited States.BankalsohasprovidedtheBoardwiththeinformationnecessarytoassessthe applicationthroughsubmissionsthataddresstherelevantissues. Withrespecttosupervisionbyhome-countryauthorities,theBoardhaspreviouslydetermined,inconnectionwithapplicationsinvolvingotherbanksinJapan,thatthosebanks weresubjecttohome-countrysupervisiononaconsolidatedbasisbytheirhome-country supervisor,Japan’sFinancialServicesAgency(“FSA”).8BankissupervisedbytheFSAon substantiallythesametermsandconditionsasthoseotherbanks.Basedonallthefactsof record,includingtheaboveinformation,ithasbeendeterminedthatBankissubjectto comprehensivesupervisiononaconsolidatedbasisbyitshome-countrysupervisor.The FSAhasnoobjectiontotheestablishmentof theproposedrepresentativeoffice. Withrespecttothefinancialandmanagerialresourcesof Bank,takingintoconsideration Bank’srecordof operationsinitshomecountry,itsoverallfinancialresources,andits standingwithitshome-countrysupervisor,financialandmanagerialfactorsareconsistent withapprovalof theproposedrepresentativeoffice.Bankappearstohavetheexperience andcapacitytosupporttheproposedrepresentativeofficeandhasestablishedcontrolsand proceduresfortheproposedrepresentativeofficetoensurecompliancewithU.S.law,as wellascontrolsandproceduresforitsworldwideoperationsgenerally. Japanisamemberof theFinancialActionTaskForceandsubscribestoitsrecommendationsonmeasurestocombatmoneylaunderingandinternationalterrorism.Inaccordance withthoserecommendations,Japanhasenactedlawsandcreatedlegislativeandregulatory standardstodetermoneylaundering,terroristfinancing,andotherillicitactivities.Money launderingisacriminaloffenseinJapan,andJapanesefinancialinstitutionsarerequiredto establishinternalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughouttheirworldwideoperations.Bankhaspoliciesandprocedurestocomplywiththeselawsandregulationsthataremonitoredbygovernmentalentitiesresponsibleforanti-money-launderingcompliance. WithrespecttoaccesstoinformationaboutBankoperations,therestrictionsondisclosure inrelevantjurisdictionsinwhichBankoperateshavebeenreviewedandrelevantgovernmentauthoritieshavebeencommunicatedwithregardingaccesstoinformation.Bankand FFGhavecommittedtomakeavailabletotheBoardsuchinformationontheoperationsof Bankandanyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforce compliancewiththeIBA,theBankHoldingCompanyActof 1956,asamended,andother applicablefederallaw.TotheextentthatprovidingsuchinformationtotheBoardmaybe prohibitedbylaworotherwise,BankandFFGhavecommittedtocooperatewiththe Boardtoobtainanynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesforthedisclosureof suchinformation.Inaddition,subjecttocertainconditions,the FSAmayshareinformationonBank’soperationswithothersupervisors,includingthe Board.Inlightof thesecommitmentsandotherfactsof record,andsubjecttotheconditiondescribedbelow,ithasbeendeterminedthatBankandFFGhaveprovidedadequate assurancesof accesstoanynecessaryinformationthattheBoardmayrequest. thehomecountryoftheforeignbankhasadopted,orismakingdemonstrableprogresstowardadopting,an appropriatesystemoffinancialregulationforthefinancialsystemofsuchhomecountrytomitigatesuchrisk (12U.S.C.§3105(d)(3)(E)). 8 See,e.g.,MitsubishiUFJFinancialGroup,Inc.,97FederalReserveBulletin10(2011)(orderdatedJune14,2011) and95FederalReserveBulletinB34(2009);ShizuokaBank,Ltd.,94FederalReserveBulletinC119(2008); eBANKCorporation,94FederalReserveBulletinC68(2008);TheWakashioBank,Limited,89FederalReserve Bulletin237(2003).

198 FederalReserveBulletin|November2011 Informationrelevanttothestandardregardingrisktothestabilityof theUnitedStates financialsystemhasalsobeenreviewed.Inparticular,considerationhasbeengiventothe absoluteandrelativesizeof Bankinitshomecountry,thescopeof Bank’sactivities, includingthetypeof activitiesitproposestoconductintheUnitedStatesandthepotential forthoseactivitiestoincreaseortransmitfinancialinstability,andtheframeworkinplace forsupervisingBankinitshomecountry.Basedontheseandotherfactors,financialstabilityconsiderationsinthisproposalareconsistentwithapproval. Basedontheforegoingandallthefactsof record,Bank’sapplicationtoestablishtheproposedrepresentativeofficeisherebyapprovedbytheDirectorof theDivisionof Banking SupervisionandRegulation,withtheconcurrenceof theGeneralCounsel,pursuantto authoritydelegatedbytheBoard.9Shouldanyrestrictionsonaccesstoinformationonthe operationsoractivitiesof BankanditsaffiliatessubsequentlyinterferewiththeBoard’s abilitytoobtaininformationtodetermineandenforcecompliancebyBankoritsaffiliates withapplicablefederalstatutes,theBoardmayrequireterminationof anyof Bank’sdirect orindirectactivitiesintheUnitedStates.Approvalof thisapplicationalsoisspecifically conditionedoncompliancebyBankwiththeconditionsimposedinthisorderandthe commitmentsmadetotheBoardinconnectionwiththisapplication.10Forpurposesof thisaction,thesecommitmentsandconditionsaredeemedtobeconditionsimposedin writinginconnectionwiththefindingsanddecisionhereinand,assuch,maybeenforced inproceedingsunderapplicablelaw. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveSeptember27, 2011. RobertdeV.Frierson DeputySecretaryof theBoard 9 12CFR265.7(d)(12). 10 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedrepresentativeofficeparallelsthecontinuingauthorityoftheStateofNewYorktolicenseofficesofaforeignbank.TheBoard’sapprovalofthis applicationdoesnotsupplanttheauthorityoftheStateofNewYorkoritsagent,theNewYorkStateBanking Department,tolicensetheproposedofficeofBankinaccordancewithanytermsorconditionsthatitmay impose.

199 Federal Reserve BULLETIN Index A United,143–144,146–148 UnitedFederalCreditUnion,145 Adjustableratemortgage(ARM),3,19–20,53, Whitney,125–134 56,86 Wilmington,162–163,165–167,170–171,173 AdministrativeRulesfortheReportingof BankSupervisionEnhancementAct,173,179, Large-ValueandSuspiciousTransactions 193,196 (LVT/STR),176 Behavioraleconomics,4 Affordablehousing,107–108,154,156,168–169, Bhutta,Neil,article,29–88 188 Brevoort,KennethP.,article,29–88 AmericanRecoveryandReinvestmentAct,66, 74 C Annualpercentagerate(APR),3,11–15,25,35, 47–48,50,53,57,62,78,84,190 Canner,GlennB.,article,29–88 Anti-MoneyLaundering Challenges,Caveats,andtheNeedforAdditional Act,bureau,compliance,law(s),Rulesfor Research,22–27 FinancialInstitutions,90,100,106,120, ChinaFinancialStabilityReport,178 129,138,147,175–177,180–181,186,197 Choice Anti-MoneyLaunderingMonitoringand Architecture,4,16,18 AnalysisCenter,176 Options,1,18 Associationof SuperannuationFundsof Structure,1,17–18 Australia,7–8 Collateralizeddebtobligation(CDO),113 Averageprimeofferrate(APOR),15,35,47, CommunityReinvestmentAct(CRA),74–77, 50–55,57,63,79–83,86,88,190 91,95–96,100,106–110,114,116,121–122, Avery,RobertB.,article,29–88 130–32,140,147,153–156,158,167–169, 171,187–189,191 B Consumer BankHoldingCompanyAct(BHCAct),orders Comprehension,6,8–10,27 issuedunder Decisions,decisionmaking,3–4,18–19,22,24, AvenueBank,111–118 27 BancoFinancierodeAhorros,92–93,95 Disclosure,-testeddisclosure,1–2,21,26 Bankof Montreal,148–149,152–153,161–162 Identificationnumber,56 Bankof Tokyo(SeeMitsubishi) Information,3,16,23 CajadeAhorrosValencia,Bancaja,92–95,97 Plannedbehaviors,8,10 CentraFinancial,143–144,147 Preferences,-specificpreferences,18,22 ChuoMitsuiTrust,118 Protection(s)Act/law/policy/statute,2,20, Comerica,183–192 22–23,29,74,84–85,96,109,114–116,131, FairmontFederalCreditUnion,145–146 134,158,170,190–191 FirstNationalBankof Starbuck,89 Testing,1,4–8,12,14,20,23,26–27 FirstNiagara,103,109 ConsumerCreditPanel,55–57,76 GoldmanSachs,110–118 ConsumerFinancialProtectionBureau(CFPB), Hancock,125–134,161 2,25,30,84–86 Harris,148–149,153–155,158,160,192 ConsumerHandbookforAdjustableRate JapaneseFSA,120–121,138–139,197 Mortgages,12 LittonLoanServicing,114–116 ConsumerPriceIndex,31 ManufacturersandTraders(M&T),162–173 ContinuingRoleof Governmentinthe MarshallandIlsley(M&I),148–162 MortgageMarket,The,58–74 MitsubishiUFJ(MUFJ),121,134–139,197 Convenienceandneedsof communities,90–91, MorganStanley,138,140–142 93,95,98–100,104,106,112–113,119,121, NewAlliance,103–110 126,130–132,136,139–140,144,147,150, Nikko,118,122 153,156,165,167,185–186 SKBHC,89–91 Credit Sterling,183–189,191–192 Card(s),2–7,9–12,14–15,18–19,21,23–27 SumitomoMitsui,118–120 Practices,illegal,170,190 UBC,143 Score(s),55–58,75–77,83,86 UnionBanCal(UnionBank),135,140 Union(s),4,16,30–33,87,128,145–146

200 FederalReserveBulletin|Index CreditCardRepaymentCalculator,23 FederalReserveBoardof NewYork CreditCircumstancesinNeighborhood ConsumerCreditPanel,55–57,76 StabilizationProgram(NSP) FederalTradeCommission(FTC),4,6,13,21, Neighborhoods,74–78 26,104,127,137,144,151,165,185 Financial D Market(s),3,4,13 Denialdisparityratio(s)(DDR),157 Product(s),1–3,6–7,10,18–20,24,27,100, Denialrates,31,48–49,51,58,76–78,81–85,157 141,158,171 Departmentof HousingandUrban Productsandservices,1,100,158,171 Development(HUD),4,6,24,67–68,74–75 Service(s),2–3,7–8,22,85,119–120,132,138, Departmentof JusticeBankMerger 141,145–146,167,171,177,197 CompetitiveReviewguidelines,104–105, FinancialActionTaskForce(FATF),176–177, 127,137,144,151,165 180,194,197 Departmentof VeteransAffairs(VA),30,39–42, FinancialConsumerAgencyof Canada,7 45,47–48,58–59,61,66,70–71,79 FinancialServicesAuthority(FSA),U.K.,7 DepositInsuranceFund,99 First-timehomebuyertaxcreditprogram,30,35, DifferencesinLendingOutcomesbyRace, 61 Ethnicity,andSexof theBorrower,78–84 FloridaOfficeof FinancialRegulation(FOFR), Disclosure(s) 98–99 Language,1,10 Foreclosure(s),36,38,74–77,154 Limitationsof,4,23,27 ForeignBankSupervisionEnhancementAct, Optin,18,23 173,179,193,196 Optout,6,16–18 FreddieMac,46,57 Policies,7,25 G Requirements,2,4 Statements,7,41 GinnieMae,45–46 Usabilityof,8,27 GoodFaithEstimate(GFE),6 Divisionof ConsumerandCommunityAffairs Government-sponsoredenterprise(s)(GSEs), (DCCA),1–2 45–46,55,59–74 Dodd-FrankWallStreetReformandConsumer Graceperiod,plainlanguagedefinition,11 ProtectionAct(Dodd-Frank),2,74,84–86, GreatRecession,45 134,140–141 H E Herfindahl-HirschmanIndex(HHI),104–105, EconomicStimulusAct,66 127–128,133–134,137,144–146,151, EffortstoCraftEffectiveDisclosures,4–8 161–162,165,173,185,192 ElectronicFundTransferAct,2,20 HigherEducationOpportunityAct,2 Hogarth,JeanneM.,article,1–27 F HomeAffordableRefinanceProgram,55 FarmServiceAgency(FSA),37,39,43,47,58, HomeEquityLine(s)of Credit(HELOCs),5, 59,61,66,79,87 18,21,43–44,58 FarmerMac,45–46 HomeMortgageDisclosureAct(HMDA), FederalCommunicationsCommission,20 29–36,38,41,44–45,47–49,51–55,58–59, FederalDepositInsuranceAct(BankMerger 63,67–68,71,75–86,95–96,106–107,109, Act),ordersissuedunder 114–115,130–131,153–154,156–158, Centennial,97–100 167–171,187–191 Gulf State,97–100 HomeOwnershipandEquityProtectionActof HomeBancshares,97–99 1994(HOEPA),13,15,48,50–51,54,88 FederalDepositInsuranceCorporation(FDIC), HousingandEconomicRecoveryAct(HERA), 97–100,114–115,125,130–131,140 66,68,74 FederalFinancialInstitutionsExamination I Council(FFIEC),29–32,35,41,47,50,53, 57,76,80,82,84–86,iii InteragencyFairLendingExaminations FederalHousingAdministration(FHA),29–31, Procedures,84 39–42,45,47–48,58–59,61,65–74,79 InternationalBankingAct,ordersissuedunder FederalHousingFinanceAgency(FHFA),55, BancaPopolarediVicenza,193 68 Bankof Communications(BOCOM), FederalRegister,16,25,89,92,95,103,107,111, 173–178 114,118,125,130,132,134,143,149,154, Bankof Fukuoka,195–196 168,183,187,189 Bankof Italy,194–195 FederalReserveAct(FRA),149,160,163, Bankof Spain,93–95 171–172,183,191–192 Bankof Taiwan,179–180 BaselCapitalAccord,94,120,138,152,177, 180

Index 201 BaselCommitteeonBankingSupervision,178 NeighborhoodStabilizationProgram(NSP),31, CajaMadrid,92–93 74–78 ChinaBankingRegulatoryCommission,175 Neutraltone,neutrality,1,4,16 FinancialSupervisoryCommission,180 FondodeReestructuracionOrdenada O Bancaria,93 Officeof theComptrollerof theCurrency HSBC,174 (OCC),91,93,95,140,149,152,154,158, ShanghaiBanking,174 178 TaiwanFinancial,179 Officeof theSuperintendentof Financial InternationalFinancialReportingStandards, Institutions(OSFI),152–153 176 Officeof ThriftSupervision(OTS),107,149, 152,158 K KeyFeaturesDocument,7 P PassivityCommitments,111,117,136 L Payment-to-income(PTI)ratio(s),63,65,73 Lending PersonalInvestmentAuthority,7 Applicationdenials,denialrates(See PrimaryMortgageMarketSurvey(PMMS),53, Mortgage) 79–80 Applicationrate/pricingdisparities,78,80,82, Privatemortgageinsurance(PMI),30,40–43,55, 96,109,115,130–131,157–158,170,190 60–61 Fair Profileof the2010MortgageMarket,31–58 Audit(s),compliance,enforcement,laws, record,risk,49,78,83–84,95–96,109, Q 114–115,130–131,156,158,167, Qualitative 169–170,189–191 Methods/methodology,research,studies, Homepurchase,30–31,35–37,52,61,75, testing,validation,4,6–11,11,24,26–27 77–79,81 Quantitative Juniorlien,34,41–45,49–50,52–55,58,60, Methods,research,studies,testing,validation, 76,87 1,4,6,8–10,26–27 Piggyback,41–44,60–61,75–77 Refinance,refinancing,11,15,29–31,34–37, R 39–51,54–61,63–65,67−71,73,79−85,114, Rating(s),CRAperformance 169 Highsatisfactory,108,154–155,169,189 LessonsLearnedfromBoardTesting,10–22 Lowsatisfactory,155–156,188 Loan-to-value(LTV)ratio(s),40,42,45,55, Outstanding,95,107–108,114,130,140, 60–61,83 154–156,168–169,187–189 Low-andmiddle-income(LMI) Satisfactory,91,100,107,114,130,140,147, Borrowers,censustracts,incomes, 154–156,168,187,189 neighborhoods,61–74,106,108,114,153, RealEstateSettlementProceduresAct,2 155–157,167–169,187–189 RegulationC,29,87 RegulationK,94,120,139,149,152–153,160, M 174,179–180,193,196 RegulationY,94,118,120,122–123,132,139, Merry,EllenA.,article,1–27 142,148,152,159–161,171–172 Metropolitanstatisticalarea(s)(MSA),30,32, Riegle-NealInterstateBankingandBranching 38–39,62,66,76–77,79,88,96,107,109, EfficiencyAct(Riegle-NealAct),98, 114,130,153,154–157 164–165 MortgageDisclosureImprovementAct,2 RuralHousingService(RHS),39,58–59,61,66, MortgageInsuranceCompaniesof America,41 79 Mortgage(s) Applicationdenials,denialrates,31,48–49,51, S 58,75–79,81–85,87,96,109–110,115–116, 130–131,157,160,170,190−191 SecuritiesandExchangeCommission(SEC),4, 6,18,113,129 Closed-end,5,11,19–20,25,56,58 SeniorLoanOfficerOpinionSurveyonBank Fixed-rate,3,19–20,36,53,55–57,79 LendingPractices,55 Markets,29,31,35–36,41,57–59 ShareE/exchange,105,119–120,129,147,166, Originations,30,35–36,45–46,49–52,54, 186 56–57,59,83,86,96,109,115,130,157, Shortsale(s),36,38 168,170,188,190 SmallBankHoldingCompanyPolicyStatement, Board’s,90 N SmallBusinessAdministration(SBA),107, NationalHousingAct,66 188–189

202 FederalReserveBulletin|Index Spillovereffect(s),74 U Standardization,standardizingdisclosures,1, U.N.ConventionagainstCorruption,177 18–20 U.N.ConventionagainsttheIllicitTrafficof NarcoticsandPsychotropicSubstances, T 176–177 Taxcredit(s)/program(s),low-incomehousing, U.N.ConventionagainstTransnational 108,168,188 OrganizedCrime,177 Thoughtfuldesign,1,12 U.N.InternationalConventionforthe TruthinLendingAct(TILA),truthinlending, Suppressionof theFinancingof Terrorism, 2,3,5,9–11,19–21,24,27 177 TruthinSavingsAct,2