Federal Reserve Bulletin, 2013-01

Federal Reserve Bulletin 2013 Compilation www.federalreserve.gov 0214 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM @FederalReserve Flickr.com/FederalReserve YouTube.com/FedReserveBoard Federal Reserve Bulletin 2013 Compilation

Federal Reserve Bulletin 2013 Compilation BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

ThisandotherFederalReserveBoardreportsandpublicationsareavailableonlineat www.federalreserve.gov/publications/default.htm. Toordercopiesof FederalReserveBoardpublicationsofferedinprint, seetheBoard’sPublicationOrderForm(www.federalreserve.gov/pubs/orderform.pdf) orcontact: PublicationsFulfillment MailStopN-127 Boardof Governorsof theFederalReserveSystem Washington,DC20551 (ph)202-452-3245 (fax)202-728-5886 (e-mail)Publications-BOG@frb.gov

iii Federal Reserve BULLETIN Contents Preface .................................................................................................................v MortgageMarketConditionsandBorrowerOutcomes:Evidencefromthe 2012HMDADataandMatchedHMDA–CreditRecordData ...............................1 NeilBhuttaandGlennB.Canner,of theDivisionof Researchand Statistics,preparedthisarticle.ShiraStolarskyandMadura Watanagaseprovidedresearchassistance. ConsumerExperienceswithCreditCards .............................................................59 GlennB.CannerandGregoryElliehausen,of theDivisionof Research andStatistics,preparedthisarticle.ShiraE.StolarskyandMadura Watanagaseprovidedresearchassistance. LegalDevelopments:FourthQuarter,2012 ..........................................................95 LegalDevelopments:FirstQuarter,2013 ............................................................129 LegalDevelopments:SecondQuarter,2013 ........................................................157 LegalDevelopments:ThirdQuarter,2013...........................................................159 Index .................................................................................................................181

v 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 werepublishedintheonlineBulletinin2010areincludedinthisprintcompilation. ThetablesthatappearedintheFinancialandBusinessStatisticssectionof theBulletin from1914through2003wereremovedandpublishedmonthlyasaseparateprintand onlinepublication,theStatisticalSupplementtotheFederalReserveBulletin,from2004to 2008.Effectivewiththepublicationof theDecember2008issue,theFederalReserveBoard discontinuedboththeprintandonlineversions. Themajorityof datapublishedintheStatisticalSupplementareavailableelsewhereonthe FederalReserveBoard’swebsiteatwww.federalreserve.gov/econresdata/statisticsdata.htm. TheBoardhascreatedawebpagethatprovidesadetailedlistof linkstothemostrecent dataonitssiteandlinkstootherdataprovidedbytheFederalReserveBankof NewYork, theU.S.Treasury,andtheFederalFinancialInstitutionsExaminationCouncil. OnlineaccesstotheBulletinisfree.Afreee-mailnotificationservice (www.federalreserve.gov/generalinfo/subscribe/notification.htm)isavailabletoalertsubscriberstothereleaseof articlesandordersintheBulletin,aswellaspressreleases,testimonies,andspeeches.Thenotificationmessageprovidesabrief descriptionandalinkto therecentposting. ‰ FederalReserveBulletin:www.federalreserve.gov/pubs/bulletin ‰ DatasourcesforthetablesinthediscontinuedStatisticalSupplementtotheFederal ReserveBulletin:www.federalreserve.gov/pubs/supplement/statsupdata/statsupdata.htm

1 Federal Reserve BULLETIN November 2013 Vol. 99, No. 4 Mortgage Market Conditions and Borrower Outcomes: Evidence from the 2012 HMDA Data and Matched HMDA–Credit Record Data NeilBhuttaandGlennB.Canner,of theDivisionof ResearchandStatistics,preparedthis article.ShiraStolarskyandMaduraWatanagaseprovidedresearchassistance. TheHomeMortgageDisclosureActof 1975(HMDA)requiresmostmortgagelending institutionswithofficesinmetropolitanareastodisclosetothepublicdetailedinformation abouttheirhome-lendingactivityeachyear.TheHMDAdataincludethedispositionof eachapplicationformortgagecredit;thetype,purpose,andcharacteristicsof eachhome mortgagethatlendersoriginateorpurchaseduringthecalendaryear;thecensus-tractdesignationsof thepropertiesrelatedtothoseloans;loanpricinginformation;personaldemographicandotherinformationaboutloanapplicants,includingtheirraceorethnicityand income;andinformationaboutloansales.1 HMDAwasenactedtohelpmembersof thepublicdeterminewhetherfinancialinstitutionsareservingthehousingneedsof theirlocalcommunitiesandtreatingborrowersand loanapplicantsfairly,provideinformationthatcouldfacilitatetheeffortsof publicentities todistributefundstolocalcommunitiesforthepurposeof attractingprivateinvestment, andhelphouseholdsdecidewheretheymaywanttodeposittheirsavings.2Thedatahave proventobevaluableforresearchandareoftenusedinpublicpolicydeliberationsrelated tothemortgagemarket. The2012HMDAdataconsistof informationpertainingtomorethan15.3millionapplicationsforhomeloansresultinginnearly9.8millionloansreportedby7,400homelenders, includingallof thenation’slargestmortgageoriginators.Together,thehome-purchase, refinance,andhome-improvementloansreportedrepresentmosthomelendingnationwide andthusarebroadlyrepresentativeof allsuchlendingintheUnitedStates.3 OnJuly21,2011,rulemakingresponsibilityforHMDAwastransferredfromtheFederal ReserveBoardtothenewlyestablishedConsumerFinancialProtectionBureau(CFPB).4 TheFederalFinancialInstitutionsExaminationCouncil(FFIEC)continuestoberespon- 1 AlistoftheitemsreportedunderHMDAfor2012isprovidedinappendixA.The2012HMDAdatareflectproperty locationsusingthecensus-tractgeographicboundariescreatedforthe2010decennialcensus.The2012HMDAdata donotreflectrecentupdatestothelistofmetropolitanstatisticalareas(MSAs)publishedbytheOfficeofManagementandBudget.ReporterswillusetheupdatedlistofMSAsinpreparingtheir2014HMDAdata.Forfurtherinformation,seeFederalFinancialInstitutionsExaminationCouncil(2013),“OMBAnnouncement—RevisedDelineations ofMSAs,”pressrelease,February28,www.ffiec.gov/hmda/OMB_MSA.htm. 2 AbriefhistoryofHMDAisavailableatFederalFinancialInstitutionsExaminationCouncil,“HistoryofHMDA,” webpage,www.ffiec.gov/hmda/history2.htm. 3 ItisestimatedthattheHMDAdatacoverabout90to95percentofFederalHousingAdministrationlendingand between75and85percentofotherfirst-lienhomeloans.SeeU.S.DepartmentofHousingandUrbanDevelopment, OfficeofPolicyDevelopmentandResearch(2011),“ALookattheFHA’sEvolvingMarketSharesbyRaceandEthnicity,”U.S.HousingMarketConditions(May),pp.6–12,www.huduser.org/portal/periodicals/ushmc /spring11/USHMC_1q11.pdf. 4 ForinformationabouttheConsumerFinancialProtectionBureau,seewww.consumerfinance.gov.

2 FederalReserveBulletin|November2013 sibleforcollectingtheHMDAdatafromreportinginstitutionsandfacilitatingpublic accesstotheinformation.5InSeptemberof eachyear,theFFIECreleasestothepublic summarydisclosuretablespertainingtolendingactivityfromthepreviouscalendaryear foreachreportinglenderaswellasaggregationsof home-lendingactivityforeachmetropolitanstatisticalarea(MSA)andforthenationasawhole.6TheFFIECalsomakesavailabletothepublicadatafilecontainingvirtuallyallof thereportedinformationforeach lendinginstitutionaswellasafilethatincludeskeydemographicandhousing-relateddata foreachcensustractdrawnfromcensussources.7 Onepurposeof thisarticle,similartothatof previousarticles,istodescribemortgagemarketactivityin2012andinprioryearsusingtheHMDAdata.8Notably,fortheir2012lending,coveredinstitutionsweredirectedtousethecensus-tractdefinitionscreatedforthe 2010decennialcensustoidentifypropertylocation,whereasintheprevious10years,census-tractdefinitionsbasedonthe2000censuswereused.Moreover,inpreparingpublicdisclosuresforthe2012HMDAdata,theFFIECusedcensus-tractpopulationandhousing characteristicsderivedfromthe2010decennialcensusandthe2006–10AmericanCommunitySurvey(ACS).9Becausemanycensustractshavechangedboundariesandhavehad substantialchangesintheirpopulationandhousingcharacteristicsoverthepastdecade, somecautionneedstobeexercisedwhencomparinglendingpatternsacrosscensustracts between2012andearlieryears.10 5 TheFFIEC(www.ffiec.gov)wasestablishedbyfederallawin1979asaninteragencybodytoprescribeuniform examinationprocedures,andtopromoteuniformsupervision,amongthefederalagenciesresponsibleforthe examinationandsupervisionoffinancialinstitutions.ThememberagenciesaretheBoardofGovernorsofthe FederalReserveSystem,theConsumerFinancialProtectionBureau,theFederalDepositInsuranceCorporation,theNationalCreditUnionAdministration,theOfficeoftheComptrolleroftheCurrency,andrepresentativesfromstatebanksupervisoryagencies.UnderagreementswiththeseagenciesandtheDepartmentof HousingandUrbanDevelopment,theFederalReserveBoardcollectsandprocessestheHMDAdata. 6 MSAshaveatleastoneurbanizedareaof50,000ormoreindividualsplusadjacentgeographiesthathavea highdegreeofeconomicandsocialintegrationwiththecoreareaasmeasuredbyinformationoncommuting patterns.MSAsarecomposedofentirecountiesandincludeabout85percentoftheU.S.population. ThedesignationofMSAsisnotstatic.Fromtimetotime,theOfficeofManagementandBudgetupdatesthe listandgeographicscopeofmetropolitanandmicropolitanstatisticalareas.SeeOfficeofManagementand Budget,“StatisticalProgramsandStandards,”webpage,www.whitehouse.gov/omb/inforeg_statpolicy#ms. Forthe2012data,theFFIECpreparedandmadeavailabletothepublic49,829MSA-specificHMDAreports onbehalfofreportinginstitutions.TheFFIECalsomakesavailabletothepublicsimilarreportsaboutprivate mortgageinsurance(PMI)activity.ThecostsincurredbytheFFIECtoprocesstheannualPMIdataandmake reportsavailabletothepublicarebornebythePMIindustry.AlloftheHMDAandPMIreportsareavailable ontheFFIEC’sreportswebsiteatwww.ffiec.gov/reports.htm. 7 TheonlyreporteditemsnotincludedintheHMDAdatamadeavailabletothepublicaretheloanapplication number,thedateoftheapplication,andthedateonwhichactionwastakenontheapplication. 8 SomelendersfileamendedHMDAreports,whicharenotreflectedintheinitialpublicdatarelease.Afinal HMDAdatasetreflectingthesechangesiscreatedtwoyearsfollowingtheinitialdatarelease.Thedatausedto preparethisarticlearedrawnfromtheinitialpublicreleasefor2012andfromthefinalHMDAdatasetfor yearspriortothat.Consequently,numbersinthisarticlefortheyears2011andearliermaydiffersomewhat fromnumberscalculatedfromtheinitialpublicreleasefiles. 9 The2000censusdistributedbothshort-andlong-formquestionnairestohouseholds.Thelong-formquestionnairecollectedmore-detailedinformationonpopulationandhousingcharacteristicsabouteachhousehold thantheshortform,andthelongformwasthesourceofseveralofthedetailedcharacteristicsofcensustracts madeavailabletothepublic.The2010censususedonlyashort-formquestionnaire;consequently,theFFIEC usesdatafromtheannualACStoidentifymanypopulationandhousingcharacteristicsofcensustracts. BecausetheannualACScoversarelativelysmallsampleofhouseholds,fiveyearsofaggregatedannualACS dataareneededtoprovidereliableestimatesofpopulationandhousingcharacteristicsatthecensus-tractlevel ofgeography.ThedisclosurereportspreparedbytheFFIECforthe2012datausethesameMSAdefinitions thatwereusedforthe2011datareports. 10 Foramorecompletediscussionofthepotentialeffectsoninterpretinglendingpatternsofthechangefromthe 2000tothe2010census-tractdelineations,seethesection“Transitiontothe2010CensusDataandRevised Census-TractBoundaries”inRobertB.Avery,NeilBhutta,KennethP.Brevoort,andGlennB.Canner(2012), “TheMortgageMarketin2011:HighlightsfromtheDataReportedundertheHomeMortgageDisclosure Act,”FederalReserveBulletin,vol.98(December),pp.1–46,www.federalreserve.gov/pubs/bulletin/2012/ articles/HMDA/default.htm.

MortgageMarketConditionsandBorrowerOutcomes 3 Inadditiontoourreviewof the2012HMDAdata,wepresenttheresultsof afirstlookat anewdatasetcomposedof HMDArecordsmatchedtoborrowers’creditrecords.The matcheddataprovideanopportunitytoexploremanyaspectsof homelendingthatthe HMDAdataalonecannotaddress.Inparticular,weareabletocomparethecreditcharacteristics(forexample,creditscores)atloanorigination,andsubsequentpaymentperformance,byvariousHMDAattributessuchasincome,minoritystatus,andtypeof lender. Also,becausethecreditrecorddataarelongitudinalandfollowindividualsratherthanjust theirmortgages,weareabletostudylong-termoutcomesof mortgageborrowersbeyond performanceontheirmortgage,suchaswhethercreditscoresrecoverafterdelinquencyata differentpacefordifferentdemographicgroups.Wefocusonloansmadein2006,which reflectlendingactivityattheheightof therecenthousingboom,andloansmadein2010, whichreflectthefarmoresubduedmarketconditionsthatwerestilllargelypresentin2012. Weexaminecreditprofilesatoriginationandsubsequentperformanceforbothvintages, andtheyrevealhowdramaticallythelendingenvironmenthaschanged. Ouranalysisof theannualHMDAdatayieldsseveralkeyfindings: ‰ Thenumberof mortgageoriginationsreportedintheHMDAdatafor2012increasedby about2.7millionto9.8million,or38percent,from2011,drivenbya54percentincrease inthenumberof refinanceloans. ‰ Home-purchaselendingincreasedatamoremodestpaceof 13percent.GovernmentbackedloansoriginatedunderprogramssuchastheFederalHousingAdministration (FHA)mortgageinsuranceprogramandtheDepartmentof VeteransAffairs(VA)loan guaranteeprogramcontinuetoplayamajorrole,accountingfornearly45percentof first-lien,owner-occupanthome-purchaseloans. ‰ Home-purchaselendingroseacrossallincomeandracialorethnicgroups,buttovarying degrees.High-income,aswellasnon-HispanicwhiteandAsian,groupspostedsignificantlylargergainsthanothergroups.Incontrast,theriseinrefinancelendingwasmore evenacrossgroups. ‰ Higher-pricedlending(aproxyforsubprimelending)remainedsubduedatabout3percentof allloans,downfromahighof about28percentin2006.Similartopatterns observedinthepast,blackandHispanic-whiteborrowersweremorelikely,andAsian borrowerslesslikely,toobtainhigher-pricedloansthanwerenon-Hispanicwhite borrowers. ‰ Asinpreviousyears,denialratesweresignificantlyhigherforblackandHispanic-white applicantscomparedwithAsianandnon-Hispanicwhiteapplicants.TheHMDAdata donotprovidesufficientinformationtodeterminetheextenttowhichthedifferencesin higher-pricedlendinganddenialsreflectillegaldiscrimination. Someof themainfindingsfromouranalysisof thematchedHMDA–creditrecorddataare asfollows: ‰ Thecreditscoresof blackandHispanic-whitemortgageborrowersatthetimeof loan originationtendtobelower,andtheirsubsequentdelinquencyrateshigher,compared withthoseof Asianandnon-Hispanicwhiteborrowers.Amonghome-purchaseborrowersin2006,forexample,wefindthatover20percentof blackandHispanic-whiteborrowersbecame60daysormorepastduewithintwoyearsof origination,comparedwith about7percentof non-Hispanicwhiteborrowersandabout6percentof Asianborrowers.Delinquencyishighlycorrelatedwithcreditscore,localareahousepricedeclines, andhigher-pricedloanstatus,butsubstantivedifferencesindelinquencyratesacross racialandethnicgroupsremainafteraccountingforthesevariables. ‰ Loanstolow-andmoderate-income(LMI)borrowersmadebybankinginstitutionsin

4 FederalReserveBulletin|November2013 2006withintheirCommunityReinvestmentAct(CRA)assessmentareas—loansthatthe CRAencourages—hadadelinquencyratethatwaslowerthanthatforallloanscombinedandlessthanone-fourththerateforallhigher-pricedloansof thesamevintage. ThesefindingsareinconsistentwiththenotionthattheCRAwasaprincipaldriverof themortgageandfinancialcrisis. ‰ Thecreditscoresof individualsobtainingamortgageweremuchhigherin2010thanin 2006,anddelinquencyrateson2010loansweremuchlowerthanthoseon2006loans. Weestimatethatthefractionof conventional(notgovernmentbacked)home-purchase loansoriginatedin2010thatbecame60daysormorepastduewithintwoyearsof originationwasjust0.5percent,aboutone-twentieththerateforthe2006vintage.Thedelinquencyrateon2010FHAandVAhome-purchaseloanswas5percent—significantly higherthanthaton2010conventionalloansbutlowerthanthaton2006FHAandVA loans.Increasesincreditscoresandreductionsindelinquencyweresubstantialacross borrowersof alldemographicgroups. ‰ Thematcheddataallowback-endpayment-to-income(PTI)ratiosformortgageborrowerstobeestimated.11Thefractionof borrowerswithanestimatedPTIratioabove 43percent—thethresholdlevelidentifiedinthequalifiedmortgageruleadoptedbythe CFPB—declinedbetween2006and2010.In2010,lower-incomeborrowersandblack andHispanic-whiteborrowersweremorelikelythanothergroupstohavePTIratios above43percent.Thatsaid,mosthome-purchaseloansin2010withPTIratiosabove 43percentweregovernmentbacked;underthecurrentregulations,suchloanscouldstill bequalifiedmortgagesdespiteexceedingthethreshold. ‰ Declinesincreditscoresandtheirsubsequentrecoverythrough2012forthosewho becamedelinquentonthemortgagestheytookoutin2006areverysimilaracrossracial andethnicgroups.Creditscorerecoveryoccursonlyoveralongperiodof time,onaverage,perhapsreflectingtheseverityof thefinancialstressfacedbydelinquentmortgage borrowers.Indeed,wealsofindthatthemajorityof thosewhobecamedelinquenton theirmortgageswerelateonatleastonenonmortgageaccount,suchascreditcardsor automobileloans.Therateof multipledelinquenciesislargelyinvariantacrossdemographicgroups. A Profile of the 2012 HMDA Data For2012,atotalof 7,400institutionsreportedontheirhome-lendingactivityunder HMDA:4,370bankinginstitutions;2,004creditunions;and1,026mortgagecompanies, 814of whichwerenotaffiliatedwithabankinginstitution(thesecompaniesarereferredto inthisarticleasindependentmortgagecompanies)(table1).Thenumberof reporting institutionsfluctuatessomefromyeartoyearbecauseof changesinreportingrequirements,primarilyrelatedtoincreasesintheminimumassetlevelusedtodeterminecoverage.12Mergers,acquisitions,andfailuresalsoaccountforsomeof theyear-over-year changes.Finally,periodicchangesinthenumberandgeographicfootprintsof metropolitanareasinfluencereportingovertime,asHMDA’scoverageislimitedtoinstitutionsthat haveatleastoneofficeinanMSA.For2012,thenumberof reportinginstitutionsfell 11 Asdiscussedlater,theestimatedPTIratiosfromthematcheddataarelikelytounderstatetheactualPTIused inunderwriting. 12 Forthe2013reportingyear(coveringlendingin2012),theminimumassetsizeforpurposesofcoveragewas $41million.TheminimumassetsizechangesfromyeartoyearwithchangesintheConsumerPriceIndexfor UrbanWageEarnersandClericalWorkers.SeetheFFIEC’sguidetoHMDAreportingatwww.ffiec.gov/ hmda/guide.htm.

MortgageMarketConditionsandBorrowerOutcomes 5 Table1.DistributionofreporterscoveredbytheHomeMortgageDisclosureAct,bytypeofinstitution, 2000–12 Number Depositoryinstitution Mortgagecompany Year Allinstitutions Banking Credit All Independent Affiliated1 All institution union 2000 4,721 1,691 6,412 981 332 1,313 7,725 2001 4,686 1,714 6,400 962 290 1,252 7,652 2002 4,698 1,799 6,497 986 310 1,296 7,793 2003 4,675 1,903 6,578 1,171 382 1,553 8,131 2004 4,962 2,030 6,992 1,317 544 1,861 8,853 2005 4,878 2,047 6,925 1,341 582 1,923 8,848 2006 4,846 2,037 6,883 1,334 685 2,019 8,902 2007 4,847 2,019 6,866 1,132 638 1,770 8,636 2008 4,855 2,026 6,881 957 550 1,507 8,388 2009 4,810 2,017 6,827 925 399 1,324 8,151 2010 4,677 2,041 6,718 848 371 1,219 7,937 2011 4,497 2,017 6,514 812 306 1,118 7,632 2012 4,370 2,004 6,374 814 212 1,026 7,400 Note:Hereandinallsubsequenttables,componentsmaynotsumtototalsbecauseofrounding. 1 Subsidiaryofadepositoryinstitutionoranaffiliateofabankholdingcompany. Source:Hereandinsubsequenttablesandfigures,exceptasnoted,FederalFinancialInstitutionsExaminationCouncil,datareportedunderthe HomeMortgageDisclosureAct(www.ffiec.gov/hmda). 3percentfrom2011,continuingadownwardtrendsince2006,whenHMDAcoverage includedjustover8,900lenders.13 Reporting Institutions by Size and Mortgage Lending Activity Althoughthenumberof home-lendinginstitutionscoveredbyHMDAislarge,most reportersaresmallasmeasuredbyassets,andmostreceivefewapplicationsandextendfew loans.For2012,56percentof thedepositoryinstitutions(bankinginstitutionsandcredit unions)coveredbyHMDAhadassetsunder$250million,and71percentof themreported informationonfewerthan100loans(dataderivedfromtable2).Amongalldepository institutions,50percentreportedonfewerthan100loans.Acrossdifferenttypesof lenders, mortgagecompaniestendtooriginatelargernumbersof loansonaper-reporterbasisthan theotherinstitutions(50percentof themortgagecompaniesreportedmorethan1,000 loans,ashareequaltomorethanfivetimesthatfordepositoryinstitutions). Intheaggregate,reportinginstitutionssubmittedinformationon15.3millionapplications forhomeloansof alltypesin2012,upabout30percentfromthetotalreportedfor2011 butfarbelowthe27.5millionapplicationsprocessedin2006,justbeforethehousingmarketdecline(dataderivedfromtable3.A).14Themajorityof loanapplicationsareapproved bylenders,andmostapprovedapplicationsresultinextensionsof credit.Insomecases,an applicationisapprovedbuttheapplicantdecidesnottotakeouttheloan;forexample,in 13 Seventeeninstitutionsceasedoperationspartwaythrough2012,werenotacquiredbyanotherreportinginstitution,anddidnothaveanyoftheir2012lendingactivityreported.Thesenonreportingcompaniesaccountedfor only0.08percentofthe2011loanapplicationrecordssubmittedunderHMDAand,consequently,likely extendedfewloansduringtheportionof2012inwhichtheywereoperating. 14 Intotal,the2012dataincludeabout477,000requestsforpreapproval,ofwhichabout182,000resultedinsubsequentloans.About149,000oftherequestsforpreapprovalweredeniedatthepreapprovalstage,andabout 65,000wereapprovedatthepreapprovalstagebythelenderbuttheconsumerdidnottakefurtheraction.

6 FederalReserveBulletin|November2013 Table2.Numberanddistributionofhomelenders,bytypeoflenderandbynumberofloans,2012 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 BankingInstitution Lessthan250 1,054 47.4 472 21.2 433 19.5 187 8.4 41 1.8 35 1.6 2,222 100 250–499 206 22.4 124 13.5 248 27.0 218 23.7 90 9.8 34 3.7 920 100 500–999 92 15.0 60 9.8 107 17.4 144 23.4 133 21.6 79 12.8 615 100 1,000ormore 53 9.0 25 4.2 47 7.9 67 11.3 93 15.7 307 51.9 592 100 All 1,405 32.3 681 15.7 835 19.2 616 14.2 357 8.2 455 10.5 4,349 100 CreditUnion Lessthan250 683 52.3 304 23.3 244 18.7 60 4.6 12 .9 2 .2 1,305 100 250–499 36 11.8 42 13.7 99 32.4 76 24.8 45 14.7 8 2.6 306 100 500–999 10 4.9 14 6.8 28 13.7 56 27.3 61 29.8 36 17.6 205 100 1,000ormore 1 .6 1 .6 6 3.4 19 10.6 44 24.6 108 60.3 179 100 All 730 36.6 361 18.1 377 18.9 211 10.6 162 8.1 154 7.7 1,995 100 Alldepositoryinstitutions Lessthan250 1,737 49.2 776 22.0 677 19.2 247 7.0 53 1.5 37 1.0 3,527 100 250–499 242 19.7 166 13.5 347 28.3 294 24.0 135 11.0 42 3.4 1,226 100 500–999 102 12.4 74 9.0 135 16.5 200 24.4 194 23.7 115 14.0 820 100 1,000ormore 54 7.0 26 3.4 53 6.9 86 11.2 137 17.8 415 53.8 771 100 All 2,135 33.7 1,042 16.4 1,212 19.1 827 13.0 519 8.2 609 9.6 6,344 100 Mortgagecompany2 All 104 10.4 45 4.5 88 8.8 129 12.9 138 13.8 497 49.7 1,001 100 Allinstitutions 2,239 30.5 1,087 14.8 1,300 17.7 956 13.0 657 8.9 1,106 15.1 7,345 100 1 Distributionsumshorizontally.Forexample,thesecondcolumn,firstrowshowsthat47.4percentofbankinginstitutionswithassetsofless than$250millionoriginatedlessthan50loansin2012. 2 Independentmortgagecompany,subsidiaryofadepositoryinstitution,oraffiliateofabankholdingcompany. 2012,nearly5percentof allapplicationswereapprovedbutnotacceptedbytheapplicant (datanotshownintables).Overall,about64percentof theapplicationssubmittedin2012 resultedinanextensionof credit(dataderivedfromtables3.Aand3.B),anincreaseof about4percentagepointsfrom2011. Thetotalnumberof loansreportedin2012,nearly9.8million(asshownintable3.B),was about38percentlargerthanthenumberreportedin2011.Althoughnotablylargerin2012 thanin2011,thenumberof reportedloansremainswellbelowthelevelsreachedinthe earlyandmiddle2000s.Forexample,in2001,nearly14millionloanswereextendedby reportinginstitutions. Inadditiontoinformationonnewloanextensions,theHMDAdataincludedetailsabout loanspurchasedbyreportinginstitutionsduringthereportingyear,althoughthepurchased loansmayhavebeenoriginatedatanypointintime.For2012,lendersreportedinformationonabout3.2millionloansthattheyhadpurchasedfromotherinstitutions,anincrease of about8percentfrom2011.Finally,lendersreportedonroughly213,000requestsfor preapprovalof home-purchaseloansthatdidnotresultinaloanorigination(asshownin table3.A);preapprovalsthatresultedinloansareincludedinthecountof loanextensions citedearlier. Home-Purchase and Refinance Lending Theriseinlendingactivityfrom2011to2012wasdrivenlargelybyasubstantialriseinrefinancelending.Home-purchaselendingwasupalmost13percentbutremainedatarela-

MortgageMarketConditionsandBorrowerOutcomes 7 Table3.HomeloanactivityoflendinginstitutionscoveredundertheHomeMortgageDisclosureAct, 2000–12 A.Applications,requestsforpreapproval,andpurchasedloans Number Applicationsreceivedforhomeloans,bytypeofproperty 1–4family Requestsfor Year preapproval2 Purchasedloans Total Multifamily1 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 4,216,589 9,982,768 831,504 26,141 216,865 4,301,021 19,574,888 2010 3,847,796 8,433,333 670,147 25,550 170,026 3,229,295 16,376,147 2011 3,630,284 7,390,690 686,788 35,048 185,943 2,944,662 14,873,415 2012 4,006,445 10,480,189 777,017 46,999 213,322 3,167,578 18,691,550 Note:Hereandinsubsequenttables,exceptasnoted,dataincludefirstandjuniorliens,one-tofour-familyhomes(site-builtandmanufactured properties),andowner-andnon-owner-occupantloans. 1 Amultifamilypropertyconsistsoffiveormoreunits. 2 Consistsofrequestsforpreapprovalthatweredeniedbythelenderorwereacceptedbythelenderbutnotactedonbytheborrower.Inthis article,applicationsaredefinedasbeingforaloanonaspecificproperty;theyarethusdistinctfromrequestsforpreapproval,whicharenot relatedtoaspecificproperty.Informationonpreapprovalrequestswasnotrequiredtobereportedbefore2004. n.a.Notavailable. tivelysubduedlevelof about2.7millionloans,whichisstillwellbelowthelevelachievedin 2000,letalonethelevelsachievedjustpriortotheGreatRecessionin2005and2006 (althoughthoselevelstendtobeinflatedbecausetheyincludedalargenumberof juniorlienhome-purchaseloans).Theincreaseinhome-purchaselendingfrom2011to2012is consistentwithareportedincreasefrom2011inthesalesof bothexistingandnew homes.15 Thevolumeof refinancelendingovertimegenerallyfollowsthepathof interestrates(typicallywithafairlyshortlag),expandingasmortgageratesdeclineandretrenchingwhen ratesincrease.Theinterestrateenvironmentoverthepastfewyearshasgenerallybeen quitefavorableforborrowerswhohavesoughttorefinance.Insomecases,individualshave beenabletorefinanceonmorethanoneoccasiontotakeadvantageof declininginterest rates.Thatsaid,manymortgageborrowershavenotbeenabletorefinance,eitherbecause theycouldnotmeettightenedcredit-history-relatedunderwritingstandardsorbecauseof collateral-relatedissues,includingsituationsinwhichtheoutstandingbalanceontheirloan exceededthehomevalue.16 15 AccordingtotheCommerceDepartment,salesofnewhomesincreasedabout20percentfrom2011levels,and, accordingtotheNationalAssociationofRealtors,salesofexistinghomeswereupabout9percent(seewww- .commerce.govandwww.realtor.org). 16 SeeananalysisofthefactorsinfluencingrefinanceactivityinRobertB.Avery,NeilBhutta,KennethP. Brevoort,andGlennB.Canner(2011),“TheMortgageMarketin2010:HighlightsfromtheDataReported undertheHomeMortgageDisclosureAct,”FederalReserveBulletin,vol.97(December),pp.1–60, www.federalreserve.gov/pubs/bulletin/2011/articles/HMDA/default.htm.

8 FederalReserveBulletin|November2013 Table3.HomeloanactivityoflendinginstitutionscoveredundertheHomeMortgageDisclosureAct, 2000–12 B.Loans Number Loans,bytypeofproperty Year 1–4family Total Multifamily1 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 2,792,939 5,772,078 389,981 18,974 8,973,972 2010 2,546,590 4,968,603 341,401 19,168 7,875,762 2011 2,416,854 4,311,870 339,427 27,111 7,095,262 2012 2,729,592 6,637,360 380,251 36,761 9,783,964 1 Seetable3.A,note1. TheHomeAffordableRefinanceProgram(HARP)wasestablishedin2009andassists homeownerswhohaveamortgageownedorguaranteedbyFannieMaeorFreddieMacin financingtheirmortgagedespitehavinglowornegativeequity.Inthefallof 2011,certain changesweremadetoHARPinordertoincreaseusageof theprogram,suchaslowering certainfeesandremovingthe125percentmaximumloan-to-valueratiothathadbeenin place.17 Comparedwith2011,thenumberof reportedrefinanceloansin2012wasupabout54percent,asmortgageinterestrateson30-yearhomeloansdroppedtowellbelow4percent duringthecourseof theyear(table3.Bandfigure1).ThepeakmonthforrefinanceissuancewasOctober,withnearly680,000loans,upfromabout440,000loansinJanuary,as showninfigure1.18RefinancesthroughHARPmorethandoubledin2012over2011,to 1,074,755from438,228.19 Non-Owner-Occupant Lending Mortgagesusedtofinancethepurchaseof non-owner-occupiedpropertiescaninclude purchasesof rentalpropertiesaswellasvacationandsecondhomes.TheHMDAdatahelp documenttheroleof suchlendingovertime,showingthatgrowthinnon-owner-occupant 17 FormoreinformationonchangestoHARPandeligibilityrequirements,seeFederalHousingFinance Agency(2012),RefinanceReport(Washington:FHFA,December),www.fhfa.gov/webfiles/25033/Dec12RefiReport .pdf. 18 Lendersreportthedateonwhichtheytookactiononanapplication.Fororiginations,the“actiondate”isthe closingdateordateoforiginationfortheloan.Thisdateisusedtocompiledataatthemonthlylevel.Generally,theinterestrateonaloanissetatanearlierpoint,knownasthe“lockdate.”Theinterestrateseriesinthe figureisconstructedfromtheresultsofasurveyofinterestratesbeingofferedbylenderstoprimeborrowers. Sincealoan’spricinglikelyreflectstheinterestrateavailableatthetimeofthelockdate,thetimingoftheloan volumeandinterestrateseriesmaybeslightlymisalignedinthefigure. 19 SeeFederalHousingFinanceAgency,RefinanceReport,innote17.

MortgageMarketConditionsandBorrowerOutcomes 9 lendingoutpacedthatinhome-pur- Figure1.Volumeofhome-purchaseandrefinance chaselendingoverallforone-to originationsandaverageprimeofferrate,bymonth, 2006–12 four-familyhomes(site-builtand manufacturedproperties)from Thousands of loans Percentage points 2000to2006(dataderivedfrom 800 7 APOR table4).Beginningin2007,non- (right scale) Refinance owner-occupanthome-purchase (left scale) lendingfellmoresharplythan 600 6 home-purchaselendingasawhole. Since2009,however,non-owner- 400 5 occupanthome-purchaselending hasgrownmorerobustlythan owner-occupantlending,withits 200 4 shareof home-purchaselending Ho ( m le e ft p s u c r a c le h ) ase growingfromjustunder12percent tonearly15percentin2011.From 0 3 2006 2007 2008 2009 2010 2011 2012 2011to2012,thenon-owner-occupantshareof home-purchaselend- Note:Thedataaremonthly.Loansarefirst-andsecond-lienmortgagesexclud- ingheldsteady. ingthoseformultifamilyhousing.Theaverageprimeofferrate(APOR)ispublishedweeklybytheFederalFinancialInstitutionsExaminationCouncil.Itisan estimateoftheannualpercentagerateonloansbeingofferedtohigh-quality Conventional versus primeborrowersbasedonthecontractinterestratesanddiscountpoints reportedbyFreddieMacinitsPrimaryMortgageMarketSurvey Government-Backed Loans (www.ffiec.gov/ratespread/newcalc.aspx). Althoughthetotalnumberof home-purchaseloanshasfallensubstantiallysincethemiddleof thepreviousdecade,virtuallyallof thedeclinehasinvolvedconventionallending;thevolumeof nonconventional home-purchaseloans(sometimesreferredtoasgovernment-backedloans)—including loansbackedbyinsurancefromtheFHAorbyguaranteesfromtheVA,theFarmService Agency(FSA),ortheRuralHousingService(RHS)—hasincreasedmarkedlysincethe mid-2000s.From2006to2009,thetotalnumberof reportedconventionalhome-purchase loansfell77percent,whilethenumberof nonconventionalhome-purchaseloansmore thantripled(asshownintable4).In2009,thevolumeof nonconventionalhome-purchase lendingreacheditshigh-watermark,andsuchlendingaccountedfornearly48percentof thetotal.Theincreaseinnonconventionallendingoverthisperiodreflectedseveralfactors, includingincreasedloan-sizelimitsallowedundertheFHAandVAlendingprogramsand reducedaccesstoconventionalloans(includingmore-stringentunderwritingandhigher prices),particularlythosethatallowedtheborrowertofinancemorethan80percentof the propertyvalue.20 Nonconventionallendingcontinuedtoplayanoutsizedroleinthehome-purchaseloan marketin2012,althoughitsshareof thetotalmarketcontinuedtofallfromits2009high. Overall,thenumberof nonconventionalhome-purchaseloansextendedin2012wasabout 2percenthigherthanin2011;however,thenonconventionalshareof thetotalhome-purchaseloanmarketslippedfromnearly43percentin2011to38percentin2012.21Among nonconventionallendingprograms,thenumberof reportedFHA-insuredhome-purchase loansfellabout2percentfrom2011,butthenumberof VA-guaranteedloansrose11percentandthosebackedbytheFSAortheRHSincreasednearly13percent(datanotshown intables). 20 Nonconventionalloansplayasmallroleincertainsegmentsofthehome-purchasemarket.Forexample,nonconventionalloansaccountedforlessthan1percentoftheloansextendedtonon-owneroccupantsforthepurchaseofahomein2012(dataderivedfromtable4). 21 Thenonconventionalshareofthehome-purchasemarketislargerifthefocusislimitedtoowner-occupied dwellings.For2012,thenonconventionalshareofowner-occupanthome-purchaselendingwas44percent.

10 FederalReserveBulletin|November2013 Table4.Homeloanapplicationsandhomeloansforone-tofour-familyproperties,byoccupancystatus ofhomeandtypeofloan,2000–12 Number Applications Loans Owneroccupied Non-owneroccupied Owneroccupied Non-owneroccupied Year Non- Non- Non- Non- Conventional conventional1 Conventional conventional1 Conventional conventional1 Conventional conventional1 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 2,017,982 1,966,335 442,409 6,711 1,174,648 1,323,966 290,560 3,765 2010 1,822,790 1,763,826 425,345 5,853 1,090,328 1,169,729 284,700 1,833 2011 1,791,526 1,558,447 461,481 4,768 1,076,446 1,025,827 313,138 1,443 2012 2,018,056 1,491,427 493,399 3,563 1,330,664 1,043,651 353,884 1,393 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 7,290,061 2,058,210 619,286 15,211 4,414,509 1,000,911 349,147 7,511 2010 6,325,488 1,449,925 642,401 15,519 3,948,746 655,574 356,183 8,100 2011 5,550,634 1,136,045 682,769 21,242 3,401,097 512,839 384,911 13,023 2012 7,742,152 1,640,334 1,032,851 64,852 5,054,553 919,372 621,804 41,631 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 743,968 28,536 58,754 246 349,993 11,256 28,568 164 2010 583,892 34,449 51,415 391 303,344 11,810 26,190 57 2011 581,023 38,194 60,763 6,808 293,735 14,392 27,768 3,532 2012 637,201 71,092 68,530 194 335,911 12,545 31,713 82 1 LoansinsuredbytheFederalHousingAdministrationorbackedbyguaranteesfromtheU.S.DepartmentofVeteransAffairs,theFarmService Agency,ortheRuralHousingService.

MortgageMarketConditionsandBorrowerOutcomes 11 Mostmortgagerefinancingsinvolveconventionalloans,butjustasnonconventionallendinghascometoplayanimportantroleinthehome-purchaselendingmarketoverthepast coupleof years,soitsroleintherefinancemarkethasalsobecomesignificant.In2007and earlieryears,nomorethan6percentof refinanceloanswerenonconventional.Sincethen, thenonconventionalshareof refinanceloanshasbeensubstantiallyhigher,increasingfrom 12percentin2011to14percentin2012asthenumberof reportednonconventionalrefinanceloansrosenearly83percentoverthesameperiod(asshownintable4).22Among nonconventionalloans,thosebackedbytheVAincreased90percentfrom2011,whilethose backedbyFHAinsuranceincreased78percent. Lending for Manufactured Homes Beginningwiththe2004HMDAdata,reportinginstitutionshavedistinguishedbetween loanssecuredbysite-builtpropertiesandthoserelatedtomanufacturedhomes.Manufacturedhomesareanimportantsegmentof thehousingmarket,accountingforabout8percentof allone-tofour-familyhousingunits.23Manufactured-homelendingdiffersalonga numberof dimensionsfromlendingonsite-builthomes,inpartbecausemostof thehomes aresoldwithoutlandandaretreatedaschattel-securedlending,whichtypicallycarries higherinterestratesandshortertermstomaturitythanthoseonloanstopurchasesitebuilthomes.24 Becausemanufacturedhomestypicallyarelessexpensivethansite-builthomes,theyprovidealow-costhousingoptionforhouseholdswithmoremoderateincomes.25The2012 HMDAdataindicatethatthemeanfirst-lien,owner-occupantloanamountextendedfor thepurchaseof amanufacturedhomein2012wasabout$67,000,comparedwithabout $220,000forasite-builthome,andthatthemeanincomeof borrowerspurchasingmanufacturedhomesthatyearwas$50,000,comparedwith$95,000forthoseborrowingtobuya site-builthome(datanotshownintables). TheHMDAdataindicatethattheannualvolumeof manufactured-homelendingfellmore than50percentfrom2006to2009,and,sincethen,thevolumeof suchlendinghasbeen relativelystable(table5).The2012datashowanincreaseinhome-purchaselendingfor manufacturedhomesof nearly6percentfrom2011,arateof increasethatisabouthalf thatforsite-builthomes.Asnoted,2012wasaverystrongyearforrefinancing,andthat activitycarriedovertothemanufactured-homeloanmarket,althoughtheincreaseinrefinancelendingfrom2011wasmuchsmallerforloansbackedbymanufacturedhomes(up about20percent)thanforthosebackedbysite-builtproperties(upabout54percent). The Private Mortgage Insurance Market Lenderstypicallyrequirethataborrowerseekingtopurchaseanowner-occupiedproperty makeadownpaymentof atleast20percentof ahome’svalueunlesstheborrowerobtains 22 Formore-detailedanalysisontheriseofgovernment-backedlendinginrecentyears,seeAveryandothers, “TheMortgageMarketin2011,”innote10. 23 Seethe2011AmericanHousingSurvey,whichisavailableontheU.S.CensusBureau’swebsiteat www.census.gov/housing/ahs/data/national.html. 24 Achattelmortgageloan(chattelloan)isaloanarrangementinwhichthelenderprovidescreditforthepurchaseofanasset,suchasamanufacturedhome,thatisnotconsideredafixedproperty.Inthesearrangements, thelenderholdsthecollateralforthedurationoftheloan.Oncethechattelloanisrepaid,thelienis extinguished. 25 SeeNAHBResearchCenter,Inc.(1998),FactoryandSite-BuiltHousing:AComparisonforthe21stCentury, reportpreparedfortheU.S.DepartmentofHousingandUrbanDevelopment,availableontheManufactured HousingInstitute’swebsiteatwww.manufacturedhousing.org/developer_resources/factory_vs_sitebuilt.

12 FederalReserveBulletin|November2013 Table5.Loansonmanufacturedhomes,byoccupancystatusofhomeandtypeofloan,2004–12 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 43,543 20,630 7,920 29 2010 44,856 17,086 7,655 29 2011 40,312 14,663 7,482 218 2012 44,697 14,005 7,705 24 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 37,001 21,768 6,002 73 2010 26,340 9,751 5,024 69 2011 25,299 8,919 4,765 161 2012 31,712 10,363 4,806 225 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 9,781 439 1,116 1 2010 8,012 427 999 2 2011 8,244 349 972 75 2012 8,814 251 1,026 0 1 Seetable4,note1. sometypeof third-partybacking,suchasprivateorgovernment-providedmortgageinsurance.Foraborrowerseekingaconventionalloanwithalowdownpayment,alendercan requirethattheborrowerpurchasemortgageinsurancefromaprivatemortgageinsurance (PMI)companytoprotectthelenderagainstdefault-relatedlossesuptoacontractually establishedpercentageof theprincipalamount.PMIcompeteswithFHAinsuranceand VAloanguarantees,and,consequently,thevolumeof PMIissuedinagivenyearreflects notonlythegeneralstateof thehousingmarketandpricingandunderwritingdecisionsby thePMIcompanies,butalsopricingandunderwritingdecisionsbytheFHAandVAas wellasloan-sizelimitsapplicabletothesegovernmentprograms.PMIalsocompeteswith lenderswillingtoextendjunior-lienloansusedinconjunctionwiththepurchaseof ahome (junior-lienlendingisdiscussedinthenextsection).

MortgageMarketConditionsandBorrowerOutcomes 13 ThefivecompaniesthatreporteddatatotheFFIECfor2012dominatethePMIindustry.26 For2012,thesePMIcompaniesreportedonnearly657,000applicationsformortgage insuranceleadingtotheissuanceof 546,000insurancepolicies,upfromabout409,000 applicationsand312,000policiesin2011(dataderivedfromtable6).Althoughrebounding from2011levels,reportedvolumesof PMIissuancein2012,asinrecentyears,havebeen substantiallysmallerthanlevelspriorto2009.ThelargereductioninPMIissuancereflects severalfactors,includingtighterunderwritingandhigherpricesadoptedbythePMIcompanies(largelyinresponsetoelevatedclaimsandlossesexperiencedduringtherecentrecessionandtheongoingrecovery)and,asnoted,anexpansionof government-backedlending.27 Overall,nearly60percentof thePMIpoliciesissuedin2012coveredhome-purchaseloans, andtheremaindercoveredrefinancemortgages(home-improvementloansareclassifiedas refinanceloansbythePMIreporters).Althoughthenumberof PMIpoliciesissued increasedforbothhome-purchaseandrefinancepurposesfrom2011to2012,theincrease onapercentagebasiswasnotablylargerforrefinancings,consistentwiththerelativelylarge increaseinconventionalrefinanceloansdescribedearlier.Virtuallyallof theapplications forPMIpoliciesissuedinvolvedloanstopurchasesite-builtproperties,andalmostallof theapplicationsforPMIrelatedtoowner-occupiedunits. ThedatareportedbythePMIindustryovertheyearshaveconsistentlyshownthatmost applicationsforinsuranceareapproved,aslendersareveryfamiliarwiththeunderwriting policiesof theinsurersandgenerallyarenotgoingtosubmitanapplicationthatisunlikely tobeapproved.Overall,about3percentof PMIapplicationsweredeniedin2012,down fromabout5percentin2011andover10percentin2010(datanotshownintables).28As withtheHMDAdata,PMIcompaniesreportthereasonfordenial.ThethreemostcommonlyreportedreasonscitedbythePMIcompaniesarerelatedtoissueswiththecollateral,theapplicants’debt-to-incomelevels,ortheircredithistories. Junior-Lien Lending Junior-lienloanscanbetakenouteitherinconjunctionwiththeprimarymortgage(apiggybackloan)orindependentlyof thefirst-lienloan.Piggybackloanscanbeusedbyborrowerstoavoidhavingtopayforprivateorgovernmentmortgageinsurance.Similarly,piggybackloanscanalsobeusedtoreducethesizeof thefirst-lienconventionalloantobe 26 In1993,theMortgageInsuranceCompaniesofAmerica,atradeassociation,askedtheFFIECtoprocessdata fromthelargestPMIcompaniesonapplicationsformortgageinsurance.Thesedatalargelymirrorthetypesof informationsubmittedbylenderscoveredbyHMDA.However,becausethePMIcompaniesdonotreceiveall oftheinformationaboutaprospectiveloanfromthelendersseekinginsurancecoverage,someitemsreported underHMDAarenotincludedinthePMIdata.Inparticular,loanpricinginformationandrequestsforpreapprovalareunavailableinthePMIdata.InthePMIdata,thereporteddispositionofanapplicationforinsurancereflectstheactionsofthePMIcompaniesor,inthecaseofawithdrawalofanapplication,theactionof thelender.Twofirmsthatreporteddatacoveringactivityin2011,RepublicMortgageInsuranceCompanyand PMIMortgageInsuranceCompany,didnotreportactivityfor2012,reflectingfinancialcircumstancesthat preventedthemfromunderwritingnewpolicies.Athirdinsurer,TriadGuarantyInsuranceCorporation,last reporteddataforactivityin2009.Twoadditionalmortgageinsurancecompaniesarerelativelyactiveissuersof newpolicies.EssentGuaranty,Inc.,isarelativelynewfirm(havingstartedoperationsin2010),andCMG MortgageInsuranceCompanyhastraditionallyspecializedinservingtheneedsofcreditunions;combined, thesetwofirmsaccountedforabout13percentofthedollarvolumeofPMIpolicieswrittenin2012. 27 ForamoredetailedanalysisofthedeclineinPMIissuance,seeRobertB.Avery,NeilBhutta,KennethP. Brevoort,andGlennB.Canner(2010),“The2009HMDAData:TheMortgageMarketinaTimeofLow InterestRatesandEconomicDistress,”FederalReserveBulletin,vol.96(December),pp.A39–A77, www.federalreserve.gov/pubs/bulletin/2010/articles/2009HMDA/default.htm.Foradditionalinformationabout thePMIindustryanditsfinancialcondition,seetheMortgageInsuranceCompaniesofAmerica’swebsiteat http://micadc.org. 28 Fortheotherapplicationsthatdidnotresultinapolicybeingwritten,eithertheapplicationwaswithdrawn, theapplicationfileclosedbecauseitwasnotcompleted,ortherequestwasapprovedbutnopolicywasissued.

14 FederalReserveBulletin|November2013 Table6.Privatemortgageinsuranceapplicationsandissuanceforone-tofour-familyproperties, byoccupancystatusofhomeandtypeofproperty,2000–12 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 0 2011 245,677 219 11,547 8 193,215 89 8,272 0 2012 371,729 382 15,475 22 316,272 197 12,214 9 B.Refinance2 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 2011 149,480 196 1,664 0 109,866 72 838 0 2012 266,100 333 2,514 5 216,029 155 1,575 1 1 Before2004,lendersdidnotdistinguishbetweensite-builtandmanufacturedhousinginreporting;totalsforsite-builtandmanufactured housingareshowninthe“Site-built”column. 2 Includeshome-improvementloans.Privatemortgageinsurancecompaniesdonotdistinguishbetweenrefinanceloansand home-improvementloansinreporting.Loantotalsarethesumofrefinanceandhome-improvementloans. n.a.Notavailable. withinthesizelimitsrequiredbyFreddieMacorFannieMaewithoutrequiringalarger downpaymentbytheborrowerontheprimaryloan. Junior-lienloansthataretakenoutindependentlyof afirstlienareusedforavarietyof purposes,includingtofinancehome-improvementprojects,torepayotherdebts,or,inthe caseof open-endedhomeequitylinesof credit,toprovideareadilyavailablesourceof creditthatcanbedrawnonatthetimetheborrowerneedsthefunds.Undertheregulations thatgovernHMDAreporting,manystandalonejunior-lienloansarenotreportedbecause eitherthelenderdoesnotknowthepurposeof theloanorthereasonscitedfortheloan

MortgageMarketConditionsandBorrowerOutcomes 15 arenotonesthattriggerareportingrequirement.29Nonetheless,theannualHMDAdata provideanopportunitytomonitorjunior-lienlendingrelatedtohomepurchasesorhome improvements. Intherun-uptotheGreatRecession,largenumbersof homebuyersusedjunior-lienloans tohelppurchasetheirhomes.In2006,closeto1.3millionjuniorliensusedforthepurchase of owner-occupiedpropertieswerereportedunderHMDA(table7).Thisnumberfellby morethanone-half in2007,droppedsharplyagainineachof thetwoensuingyears,and decreasedtoabout42,000orfewersuchloansannuallyfrom2010to2012.Morethan 1millionjunior-lienloansweretakenouttorefinanceloansbackedbyowner-occupied propertiesin2006,andthisnumberalsofellsubstantiallystartingin2007andcontinuedto fall,reachingalowpointof roughly73,000loansin2012. TheHMDAdataalsoincludeinformationonjunior-lienloansusedforhomeimprovement.In2012,about58,000junior-lienloanswereusedforsuchapurpose,downfrom about66,000reportedin2011.Boththe2011and2012totalsaresharplybelowthehistoricalhighmarkof nearly570,000reachedin2006. Loan Sales ForeachloanoriginationreportedunderHMDAinagivenyear,lendersreportwhether thatloanwassoldduringthesameyearandwhattypeof institutionpurchasedtheloan.30 Broadly,thesepurchasertypescanbebrokenintothosethataregovernmentrelated—GinnieMae,FannieMae,FreddieMac,andFarmerMac—andthosethatarenot.GinnieMae andFarmerMacfocusonloansbackeddirectlybygovernmentguaranteesorinsurance, whileFannieMaeandFreddieMacpurchaseconventionalloansthatmeetcertainloansizeandunderwritingstandards. Overall,about80percentof thefirst-lienhome-purchaseandrefinanceloansforone-to four-familypropertiesoriginatedin2012werereportedassoldduringtheyear(datanot shownintables).31Theshareof originationsthataresoldvariessomefromyeartoyear andbytypeandpurposeof loan(table8).32Forexample,71percentof theconventional loansextendedin2012forthepurchaseof owner-occupiedone-tofour-familydwellings weresoldthatyear.Incontrast,nearly94percentof thenonconventionalloansusedto purchaseowner-occupiedhomeswerereportedassoldin2012,withjustoveronethirdreportedassolddirectlytoagovernment-sponsoredenterprise(includingGinnie Mae).33 29 Unlessajuniorlienisusedforhomepurchaseorexplicitlyforhomeimprovements,ortorefinanceanexisting lien,itisnotreportedunderHMDA.Further,homeequitylinesofcredit,manyofwhicharejuniorliens,do nothavetobereportedintheHMDAdataregardlessofthepurposeoftheloan. 30 TheHMDAdatatendtounderstatetheimportanceofthesecondarymarket.HMDAreportersareinstructed torecordloanssoldinacalendaryeardifferentfromtheyearoriginatedasbeingheldinportfolio,leadingthe reportedloansalestounderstatetheproportionofeachyear’soriginationsthatareeventuallysold. 31 BecauseHMDAreportersareinstructedtoidentifyloansalesonlyifthesaleoccursinthesamecalendaryear astheorigination,loansmadetowardtheendoftheyeartendtohavealowincidenceofbeingreportedas sold.For2012,thefractionofloansoriginatedinthefirstninemonthsoftheyearthatwerereportedassold wasabout85percent. 32 SomeloansrecordedassoldintheHMDAdataaresoldtoaffiliatedinstitutionsandthusarenottruesecondary-marketsales.In2012,about3percentoftheloansrecordedassoldintheHMDAdataweresalesto affiliates. 33 Technically,GinnieMaedoesnotpurchasemortgages;rather,itprovidesguaranteesformortgage-backedsecuritiescomposedofgovernment-backedmortgages.Thedataindicatethatcommercialbankspurchasedabout 35percentofgovernment-backedhome-purchasemortgagesin2012.BanksmaythenputtheseloansintoGinnieMaesecuritiesorholdtheminportfolio.

16 FederalReserveBulletin|November2013 Table7.Homeloansforone-tofour-familyproperties,byoccupancystatusofhome,typeofloan,and lienstatus,2004–12 Number Owneroccupied Non-owneroccupied Conventional Nonconventional1 Conventional Nonconventional1 Year Firstlien Junior Unsecured2 Firstlien Junior Unsecured2 Firstlien Junior Unsecured2 Firstlien Junior Unsecured2 lien lien lien lien A.Homepurchase 2004 4,209,787 736,636 … 573,606 1,235 … 853,490 52,524 … 2,703 7 … 2005 4,520,3781,221,999 … 437,552 867 … 1,049,555 149,954 … 1,685 22 … 2006 4,013,1961,268,289 … 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 1,132,424 42,224 … 1,322,489 1,477 … 288,526 2,034 … 3,756 9 … 2010 1,049,990 40,338 … 1,168,343 1,386 … 283,017 1,683 … 1,821 12 … 2011 1,036,112 40,334 … 1,024,696 1,131 … 311,831 1,307 … 1,438 5 … 2012 1,289,516 41,148 … 1,042,472 1,179 … 352,604 1,280 … 1,384 9 … 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 4,347,3481,035,602 … 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 4,300,322 114,187 … 1,000,422 489 … 342,410 6,737 … 7,495 16 … 2010 3,860,760 87,986 … 655,334 240 … 350,458 5,725 … 8,092 8 … 2011 3,327,415 73,682 … 512,629 210 … 379,519 5,392 … 13,004 19 … 2012 4,981,604 72,949 … 919,183 189 … 616,610 5,194 … 41,620 11 … 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 166,865 84,414 98,714 8,197 2,541 518 19,961 3,193 5,414 99 28 37 2010 134,370 74,941 94,033 8,218 2,663 929 17,777 2,486 5,927 35 17 5 2011 129,851 60,423 103,461 7,116 2,949 4,327 18,491 2,257 7,020 64 45 3,423 2012 161,128 52,545 122,238 8,065 3,718 762 20,494 2,009 9,210 50 20 12 1 Seetable4,note1. 2 Dataonunsecuredloansarecollectedonlyforhome-improvementloansundertheHomeMortgageDisclosureAct. ...Notapplicable. Theshareof conventionalloansmadetonon-owneroccupantsthatarereportedassoldis smallerthanthatof suchloansmadetoowneroccupants.Also,thevastmajorityof conventionalloansextendedforthepurchaseof manufacturedhomesareheldinportfolio; onlyabout16percentof suchloansweresoldin2012(datanotshownintables). Borrower Incomes and Loan Amounts UnderHMDA,lendersreporttheloanamountappliedforandtheapplicantincomethat thelenderreliedoninmakingthecreditdecision,if incomewasconsideredinunderwrit-

MortgageMarketConditionsandBorrowerOutcomes 17 Table8.Distributionofhomeloansalesforone-tofour-familyproperties,byoccupancystatusofhome andtypeofloan,2000–12 Percent Owneroccupied Non-owneroccupied Conventional Nonconventional1 Conventional Nonconventional1 Year Memo:Share Memo:Share Memo:Share Memo:Share Sharesold soldtoGSEs2 Sharesold soldtoGSEs2 Sharesold soldtoGSEs2 Sharesold soldtoGSEs2 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 70.1 40.1 91.4 35.0 56.4 34.7 88.9 35.2 2010 69.7 37.0 92.7 29.7 30.3 34.8 91.7 24.1 2011 68.9 34.2 93.5 33.4 61.9 34.5 80.3 35.2 2012 70.7 39.3 93.7 34.6 60.8 38.4 78.6 24.6 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 79.4 52.8 89.7 37.9 61.2 40.1 93.5 36.0 2010 76.8 46.1 90.2 37.8 65.4 40.3 90.5 43.8 2011 72.7 46.4 91.3 49.8 66.4 43.5 89.5 57.6 2012 77.1 55.4 92.3 57.0 73.2 56.4 91.9 69.6 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 24.9 17.8 63.4 38.9 17.7 13.4 56.1 9.8 2010 21.2 13.2 60.6 34.7 18.3 12.6 47.4 28.1 2011 19.1 11.4 45.3 26.8 19.8 13.4 .3 .1 2012 21.7 14.1 60.1 24.6 19.3 13.4 48.8 8.5 1 Seetable4,note1. 2 Loanssoldtogovernment-sponsoredenterprises(GSEs)includethosewithapurchasertypeofFannieMae,FreddieMac,GinnieMae,or FarmerMac.

18 FederalReserveBulletin|November2013 Table9.Cumulativedistributionofhomeloans,byborrowerincomeandbypurposeandtypeofloan, 2012 Percent Homepurchase Refinance Upperboundof borrowerincome Memo: Memo: (thousandsofdollars)1 FHA VA Conventional2 Total Higher FHA VA Conventional2 Total Higher priced3 priced3 24 4.9 .9 2.7 3.2 8.6 4.1 2.2 2.5 2.5 9.8 49 41.2 21.0 23.8 28.9 47.4 26.2 16.9 16.5 17.0 39.0 74 69.5 53.7 45.4 53.6 71.1 55.3 43.7 36.9 37.9 65.4 99 85.3 74.8 61.7 70.1 83.0 75.7 65.2 55.5 56.7 81.1 124 92.8 86.8 73.4 80.6 89.0 87.3 80.1 69.9 71.0 89.5 149 96.3 93.1 81.2 86.9 92.5 93.1 88.5 79.5 80.3 93.6 199 98.8 97.9 89.7 93.2 95.6 97.7 95.9 89.6 90.1 96.8 249 99.5 99.3 93.7 96.0 97.1 99.0 98.4 94.0 94.4 98.0 299 99.7 99.7 95.8 97.4 97.9 99.5 99.3 96.2 96.4 98.6 Morethan299 100 100 100 100 100 100 100 100 100 100 Memo:Borrowerincome,byselectedloantype(thousandsofdollars)1 Mean 66.0 81.8 112.0 95.1 74.7 79.9 93.1 117.1 114.7 76.2 Median 56 71 81 70 52 70 81 91 90 59 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 ConventionalloansplussomeloansoriginatedwithaFarmServiceAgencyorRuralHousingServiceguarantee. 3 Higher-pricedloansarethosewithannualpercentagerates1.5percentagepointsormoreabovetheaverageprimeofferrateforloansofa similartypepublishedweeklybytheFederalFinancialInstitutionsExaminationCouncil. FHAFederalHousingAdministration. VADepartmentofVeteransAffairs. ing.Lendersdonotnecessarilycollectandreportloanapplicants’entireincome,becausein somecasesborrowershavemoreincomethanisneededtoqualifyfortheloan. Borrower Income Thevastmajorityof loanapplicationsandloansreportedunderHMDAincludeincome information.Forexample,in2012,incomeinformationwasnotreportedforlessthan 1percentof theborrowerspurchasingahomewithanonconventionalloanandfor3percentof thoseusingaconventionalloan(datanotshownintables).Incomeinformationis reportedlessoftenforrefinanceloans(about10percentof allsuchloans),particularly thosethatarenonconventional(about55percentof theFHAloansand68percentof the VAloans),mostlikelybecauseof streamlinedrefinanceprogramsthatdonotrequire currentincometobeconsideredinunderwriting. Whiletheavailableinformationonamountsborrowedandapplicantincomecanbeevaluatedinmanyways,wefocushereonpatternsbyloanproductandpurpose.Forhome-purchaseorrefinancelending,borrowersusingFHAandVAloanshavelowermeanor medianincomesthanborrowersusingotherloans,despitethefactthattheFHA(andVA) loanlimitswereincreasedsubstantiallyin2008,potentiallyallowingtheprogramtobeused muchmorewidelythanbytheLMIhouseholdsthathavebeenthetraditionalfocusof the program(table9).Althoughtheshareof FHAhome-purchaseborrowerswithincomes above$100,000hasroughlydoubledsince2007(theyearbeforetheincreaseinloanlimits) toabout15percent,themedianincomeof borrowersobtainingFHAhome-purchaseloans wasstillmorethan40percentlowerthanthatof borrowersgettingconventionalloans

MortgageMarketConditionsandBorrowerOutcomes 19 Table10.Cumulativedistributionofhomeloans,byloanamountandbypurposeandtypeofloan,2012 Percent Homepurchase Refinance Upperboundof loanamount (thousandsof Memo: Memo: dollars)1 FHA VA Conventional2 Total Higher FHA VA Conventional2 Total Higher priced3 priced3 24 .1 .0 .4 .2 2.5 .1 .0 .4 .3 3.8 49 1.6 .3 2.6 2.1 13.2 .9 .5 2.9 2.5 15.2 74 8.4 2.2 8.3 7.8 29.4 4.9 3.2 9.0 8.3 31.4 99 20.3 6.6 16.0 16.5 44.5 13.0 8.7 17.6 16.7 46.0 149 49.1 25.0 35.9 39.0 68.7 39.5 28.3 37.6 37.2 67.7 199 70.8 49.4 52.4 57.8 81.9 62.9 50.3 55.0 55.4 79.9 274 87.9 74.2 70.3 76.1 90.9 83.8 73.5 73.2 74.2 89.8 417 97.2 93.4 88.4 91.5 96.6 96.2 93.5 92.7 93.1 97.1 625 99.5 98.9 96.0 97.3 98.8 99.4 98.8 97.6 97.9 99.1 729 99.9 99.6 97.4 98.4 99.2 99.9 99.5 98.5 98.7 99.4 Morethan799 100 100 100 100 100 100 100 100 100 100 Memo:Loanamount(thousandsofdollars) Mean 173.7 227.6 242.9 220.2 142.4 193.2 226.3 223.3 220.6 141.5 Median1 151 201 190 176 110 169 199 183 183 107 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. (dataderivedfromtable9).Thelowdown-paymentrequirementsonFHA-insuredloans— theaverageloan-to-valueratioforFHAhome-purchaseloanswas96percentin2012— maybecontinuingtoattractborrowerswithmoremoderateincomes.34 Loan Amounts Unlikethedataonborrowerincomes,allapplicationsandloansreportedintheHMDA dataincludetheamountof theloanrequestedorextended.Loanamountsdifferacross loantypes,withFHAorVAloans,onaverage,beingnotablysmallerthanconventional loans(table10),althoughVAloansarenotablylargerthanFHAloans.Forexample,on average,home-purchaseloansbackedbyFHAinsuranceareonlyabout72percentthesize of conventionalhome-purchaseloans,andaboutone-half of FHAloansareforamounts under$150,000.However,anupwardshiftinthedistributionof loanamountsforboth FHAandVAhome-purchaseloanshasoccurredinthepastseveralyears,continuinginto 2012(dataforonly2012shownintables).Theshiftreflectsseveralfactors,includingthe higherloanlimitsallowedundertheseprograms. Application Disposition, Loan Pricing, and Status under the Home Ownership and Equity Protection Act Intable11,wecategorizeeveryloanapplicationreportedin2012into25distinctproduct categoriescharacterizedbytypeof loanandproperty,purposeof loan,andlienand 34 SeeU.S.DepartmentofHousingandUrbanDevelopment(2013),QuarterlyReporttoCongressonFHA Single-FamilyMutualMortgageInsuranceFundPrograms,FY2012Q4(Washington:HUD,April24),http:// portal.hud.gov/hudportal/documents/huddoc?id=fhartc_q4_2013.pdf.

20 FederalReserveBulletin|November2013 Table11.Dispositionofapplicationsforhomeloans,andoriginationandpricingofloans,bytypeof homeandtypeofloan,2012 Applications Typeofhomeandloan Acteduponbylender Numbersubmitted Number Numberdenied Percentdenied 1–4FAMILY Nonbusinessrelated1 Owneroccupied Sitebuilt Homepurchase Conventional Firstlien 1,736,554 1,533,418 209,626 13.7 Juniorlien 58,107 50,920 7,815 15.3 Governmentbacked Firstlien 1,459,682 1,285,907 209,570 16.3 Juniorlien 1,822 1,419 214 15.1 Refinance Conventional Firstlien 7,555,325 6,528,789 1,265,356 19.4 Juniorlien 114,490 106,068 30,025 28.3 Governmentbacked Firstlien 1,618,392 1,268,509 281,097 22.2 Juniorlien 329 240 48 20.0 Homeimprovement Conventional Firstlien 248,329 225,580 58,660 26.0 Juniorlien 115,480 107,699 50,724 47.1 Governmentbacked Firstlien 14,361 11,136 2,942 26.4 Juniorlien 10,977 8,395 4,442 52.9 Unsecured(conventionalorgovernmentbacked) 296,598 290,281 152,571 52.6 Manufactured Conventional,firstlien Homepurchase 221,091 215,086 120,425 56.0 Refinance 62,156 56,728 20,853 36.8 Other 71,902 63,333 22,922 36.2 Non-owneroccupied2 Conventional,firstlien Homepurchase 455,810 404,262 59,621 14.7 Refinance 994,283 845,957 211,487 25.0 Other 141,044 125,094 43,836 35.0 Businessrelated1 Conventional,firstlien Homepurchase 37,215 36,290 1,204 3.3 Refinance 38,438 37,083 2,213 6.0 Other 11,266 10,504 805 7.7 MULTIFAMILY3 Conventional,firstlien Homepurchase 14,714 13,735 1,308 9.5 Refinance 25,844 24,162 3,391 14.0 Other 6,441 6,039 809 13.4 Total 15,310,651 13,256,634 2,761,964 20.8 1 Business-relatedapplicationsandloansarethoseforwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantor co-applicantare“notapplicable”;allotherapplicationsandloansarenonbusinessrelated. 2 Includesapplicationsandloansforwhichoccupancystatuswasmissing. 3 Includesbusiness-relatedandnonbusiness-relatedapplicationsandloansforowner-occupiedandnon-owner-occupiedproperties.

MortgageMarketConditionsandBorrowerOutcomes 21 Table11.Dispositionofapplicationsforhomeloans,andoriginationandpricingofloans,bytypeof homeandtypeofloan,2012—continued Loansoriginated LoanswithAPORspreadabovethethreshold4 Typeofhome andloan Distribution,bypercentagepointsofAPORspread APORspread Number Number (percentagepoints) of Number Percent HOEPA- 5 covered 1.5–1.99 2–2.49 2.5–2.99 3–3.99 4–4.99 ormore Mean Median loans5 1–4FAMILY Nonbusinessrelated1 Owneroccupied Sitebuilt Homepurchase Conventional Firstlien 1,243,784 39,405 3.2 40.7 20.4 13.5 15.8 5.4 4.3 2.6 2.2 … Juniorlien 40,772 7,386 18.1 … … … 27.6 45.4 27.0 4.6 4.3 … Governmentbacked Firstlien 1,028,023 30,645 3.0 74.8 16.1 4.3 3.5 1.1 .2 1.9 1.7 … Juniorlien 1,174 34 2.9 … … … 5.9 26.5 67.7 5.3 5.3 … Refinance Conventional Firstlien 4,944,515 57,979 1.2 51.5 17.0 10.1 12.7 5.2 3.6 2.4 2.0 685 Juniorlien 70,791 9,631 13.6 … … … 29.5 41.7 28.9 4.7 4.3 167 Governmentbacked Firstlien 907,654 25,993 2.9 22.9 6.7 14.7 48.5 6.9 .4 3.0 3.2 42 Juniorlien 185 12 6.5 … … … 8.3 33.3 58.3 5.1 5.4 0 Homeimprovement Conventional Firstlien 157,350 10,179 6.5 30.6 17.8 13.5 20.0 9.3 9.0 3.0 2.6 328 Juniorlien 51,882 7,105 13.7 … … … 30.9 35.6 33.5 4.8 4.4 152 Governmentbacked Firstlien 7,437 1,098 14.8 18.4 7.0 14.4 53.3 5.2 1.7 3.0 3.2 4 Juniorlien 3,698 3,415 92.3 … … … 2.3 10.7 87.0 7.0 7.2 0 Unsecured (conventional orgovernment backed) 117,719 … … … … … … … … … … … Manufactured Conventional,firstlien Homepurchase 44,351 36,426 82.1 4.2 4.2 4.5 12.3 15.3 59.6 6.0 5.7 … Refinance 30,866 8,836 28.6 21.9 11.5 11.2 20.4 14.8 20.1 3.6 3.2 536 Other 34,549 5,988 17.3 37.2 15.5 7.6 14.3 15.1 10.4 3.1 2.4 192 Non-owneroccupied2 Conventional,firstlien Homepurchase 319,891 14,726 4.6 49.1 18.3 9.7 10.7 4.6 7.5 2.6 2.0 … Refinance 588,764 32,399 5.5 71.9 16.1 5.6 3.7 1.5 1.1 2.0 1.8 50 Other 76,152 3,211 4.2 25.1 9.6 6.9 19.4 25.2 13.7 3.5 3.6 19 Businessrelated1 Conventional,firstlien Homepurchase 34,094 673 2.0 25.0 23.0 27.2 17.4 5.2 2.2 2.6 2.6 … Refinance 34,069 503 1.5 22.5 27.6 18.3 22.9 6.6 2.2 2.7 2.5 6 Other 9,483 171 1.8 47.4 15.2 6.4 15.8 8.8 6.4 2.6 2.0 4 MULTIFAMILY3 Conventional,firstlien Homepurchase 11,757 137 1.2 36.5 27.7 12.4 16.1 5.8 1.5 2.4 2.1 0 Refinance 19,966 280 1.4 46.8 25.0 12.9 9.6 3.6 2.1 2.4 2.1 0 Other 5,038 24 .5 29.2 16.7 16.7 25.0 8.3 4.2 2.8 2.6 0 Total 9,783,964 296,256 3.0 39.0 13.0 8.4 16.2 9.6 13.9 3.2 2.4 2,185 4 Averageprimeofferrate(APOR)spreadisthedifferencebetweentheannualpercentagerateontheloanandtheAPORforloansofasimilar typepublishedweeklybytheFederalFinancialInstitutionsExaminationCouncil.Thethresholdforfirst-lienloansisaspreadof 1.5percentagepoints;forjunior-lienloans,itisaspreadof3.5percentagepoints. 5 LoanscoveredbytheHomeOwnershipandEquityProtectionActof1994(HOEPA),whichdoesnotapplytohome-purchaseloans. ...Notapplicable.

22 FederalReserveBulletin|November2013 owner-occupancystatus.Eachproductcategorycontainsinformationonthenumberof totalandpreapprovalapplications,applicationdenials,originatedloans,loanswithprices abovethereportingthresholdsestablishedbyHMDAreportingrulesforidentifying higher-pricedloans,loanscoveredbytheHomeOwnershipandEquityProtectionActof 1994(HOEPA),andthemeanandmedianaverageprimeofferrate(APOR)spreadsfor loansreportedashigherpriced. Disposition of Applications Asnoted,the2012HMDAdataincludeinformationonabout15.3millionloanapplications,nearly87percentof whichwereactedonbythelender(dataderivedfromtable11). Withrespecttothedispositionof applications,patternsof denialratesarelargelyconsistentwithwhathadbeenobservedinearlieryears.35In2012,denialratesonapplicationsfor home-purchaseloansarenotablylowerthanthoseobservedonapplicationsforrefinance orhome-improvementloans.Denialratesonapplicationsbackedbymanufacturedhousing aremuchhigherthanthoseonapplicationsbackedbysite-builthomes.Forexample,the denialrateforfirst-lienconventionalhome-purchaseloanapplicationsforowner-occupied site-builtpropertieswas13.7percentin2012,comparedwithadenialrateof 56percentfor suchapplicationsforowner-occupiedmanufacturedhomes. Undertheprovisionsof HMDA,reportinginstitutionsmaychoosetoreportthereasons theyprovideconsumerswhoseapplicationsareturneddown.Reportinginstitutionsmay citeuptothreereasonsforeachdeniedapplication,althoughmostof thosethatprovide thisinformationciteonlyonereason.Ananalysisof thereasonsfordenialprovidedtoprospectiveborrowerswhoseapplicationsforconventionalcreditforthepurchaseof owneroccupiedhomeswereturneddownfindsthatcollateral-relatedissuesanddebt-to-income considerationswerethetwocategoriesof reasonsthathavehadthelargestincreasessince 2006(datanotshownintables).Debt-to-incomeissueswerealsocitedsomewhatmore oftenforapplicationsforFHAorVAhome-purchaseloans,butcollateralwasthecategory thathadthelargestpercentageincrease. The Incidence of Higher-Priced Lending Price-reportingrulesunderHMDAsincelate2009definehigher-pricedfirst-lienloansas thosewithanannualpercentagerate(APR)of atleast1.5percentagepointsabovethe APORforloansof asimilartype(forexample,a30-yearfixed-ratemortgage).36The spreadforjunior-lienloansmustbeatleast3.5percentagepointsforsuchloanstobecon- 35 TheinformationprovidedinthetablesisidenticaltothatprovidedinanalysesofearlieryearsofHMDAdata. Comparisonsofthenumbersinthetableswiththoseintablesfromearlieryears,includingstatisticsondenial rates,canbemadebyconsultingthefollowingarticles:Averyandothers,“TheMortgageMarketin2011,”in note10;Averyandothers,“TheMortgageMarketin2010,”innote16;Averyandothers,“The2009HMDA Data,”innote27;andRobertB.Avery,NeilBhutta,KennethP.Brevoort,GlennB.Canner,andChristaN. Gibbs(2010),“The2008HMDAData:TheMortgageMarketduringaTurbulentYear,”FederalReserveBulletin,vol.96(April),pp.A169–A211,www.federalreserve.gov/pubs/bulletin/2010/articles/HMDA/default.htm. AlsoseeRobertB.Avery,KennethP.Brevoort,andGlennB.Canner(2008),“The2007HMDAData,”Federal ReserveBulletin,vol.94(December),pp.A107–A146,www.federalreserve.gov/pubs/bulletin/2008/articles/ hmda/default.htm;RobertB.Avery,KennethP.Brevoort,andGlennB.Canner(2007),“The2006HMDA Data,”FederalReserveBulletin,vol.93(December),pp.A73–A109,www.federalreserve.gov/pubs/bulletin/2007/ articles/hmda/default.htm;RobertB.Avery,KennethP.Brevoort,andGlennB.Canner(2006),“Higher-Priced HomeLendingandthe2005HMDAData,”FederalReserveBulletin,vol.92(September),pp.A123–A166, www.federalreserve.gov/pubs/bulletin/2006/hmda/default.htm;andRobertB.Avery,GlennB.Canner,andRobertE.Cook(2005),“NewInformationReportedunderHMDAandItsApplicationinFairLendingEnforcement,”FederalReserveBulletin,vol.91(Summer),pp.344–94,www.federalreserve.gov/pubs/bulletin/2005/ summer05_hmda.pdf. 36 Formoreinformationabouttherulechangesrelatedtohigher-pricedlendingandthewaysinwhichtheyaffect theincidenceofreportedhigher-pricedlendingovertime,seeAveryandothers,“The2009HMDAData,”in note27.

MortgageMarketConditionsandBorrowerOutcomes 23 sideredhigherpriced.TheAPOR,whichispublishedweeklybytheFFIEC,isanestimate of theAPRonloansbeingofferedtohigh-qualityprimeborrowersbasedonthecontract interestratesanddiscountpointsreportedbyFreddieMacinitsPrimaryMortgage MarketSurvey.37 Thedatashowthattheincidenceof higher-pricedlendingacrossallproductsin2012was about3percent,downabout70basispoints,or0.7percentagepoints,from2011(asshown intable11).Theincidencevariesacrossloantypes,products,andpurposes.First,among home-purchaseloans,conventionalloanstendtohaveahigherincidenceof higher-priced lendingthannonconventionalloans,althoughthedifferencehasnarrowedinrecentyears. In2012,amongfirst-lienhome-purchaseloansforsite-builthomes,3.2percentof conventionalloanshadAPRsabovetheprice-reportingthreshold,comparedwith3.0percentof nonconventionalloans.(Amongnonconventionalloans,thosebackedbyVAguarantees haveaparticularlylowincidenceof beinghigherpriced:In2012,onlyabout0.1percentof theVA-guaranteedfirst-lienhome-purchaseloanswerehigherpriced.) Second,withfewexceptions,first-lienloanshavealowerincidenceof higher-pricedlending thandojunior-lienloansforthesamepurposes.Forexample,in2012,theincidenceof higher-pricedlendingforconventionalfirst-lienrefinanceloanswas1.2percent,whereas forcomparablejunior-lienloansitwas13.6percent.Thisrelationshipisfounddespitethe factthatthethresholdforreportingajunior-lienloanashigherpricedis2percentage pointshigherthanitisforsoreportingafirst-lienloan.Third,manufactured-homeloans haveaveryelevatedincidenceof higher-pricedlending.For2012,82percentof theconventionalfirst-lienloansusedtopurchasemanufacturedhomeswerehigherpriced. TheHMDAdataalsoshowthattheincidenceof higher-pricedlendingisrelatedtoborrowerincomesandtheamountsborrowed,withborrowerswithlowerincomesandthose receivingsmallerloansbeingmorelikelytoobtainahigher-pricedloan.Forexample, 54percentof home-purchaseloanswereextendedtoborrowerswithincomesunder $75,000,whilesuchborrowersaccountfor71percentof allhigher-pricedhome-purchase loans(asshownintable9).Dataintable10indicatethat,acrossloanamounts,about 17percentof home-purchaseloanswereunder$100,000,whereasroughly45percentof higher-pricedhome-purchaseloanswereunderthatamount. Rate Spreads for Higher-Priced Loans In2012,themeanAPORspreadreportedforhigher-pricedfirst-lienconventionalloansfor thepurchaseof anowner-occupiedsite-builthomewasabout2.6percentagepoints,comparedwithabout1.9percentagepointsforhigher-pricedfirst-liennonconventionalloans usedforthesamepurpose(asshownintable11).Averagespreadsforfirst-lienconventionalandgovernment-backedrefinanceloanswere2.4percentagepointsand3.0percentagepoints,respectively.(In2011,theincidenceof higher-pricedlendingfornonconventionalrefinancingswasnearlythesameasitwasforconventionalrefinanceloans—about 2.5percent.) Itisworthnotingthatmostfirst-liennonconventionalloansforhomepurchasereportedas higherpricedin2012exceededtheHMDAprice-reportingthresholdsbyonlyasmall amount.Specifically,nearly75percentof thehigher-pricednonconventionalfirst-lien home-purchaseloanshadreportedspreadsbetween150and199basispointsabovethe threshold.Bycomparison,onlyabout41percentof thecomparableconventionalloans 37 SeeFreddieMac,“WeeklyPrimaryMortgageMarketSurvey(PMMS),”webpage,www.freddiemac.com/ pmms;andFederalFinancialInstitutionsExaminationCouncil,“FFIECRateSpreadCalculator,”webpage, www.ffiec.gov/ratespread/newcalc.aspx.

24 FederalReserveBulletin|November2013 reportedashigherpricedhadpricesthisclosetothemarginof reporting.Incontrast,the shareof higher-pricednonconventionalrefinancingloanswithpricesclosetothemarginof reporting(23percent)islessthanthatof higher-pricedconventionalrefinancingloanswith suchpricing(about52percent). Asexpected,consistentwiththehigherreportingthresholdof junior-lienlending,higherpricedjunior-lienloanproductshavehighermeanandmedianAPORspreadsthando higher-pricedfirst-lienloans.Higher-pricedloansformanufacturedhomesdifferfrom otherloanproductsinthattheygenerallyhavethehighestmeanspreads.In2012,thetypicalhigher-pricedconventionalfirst-lienloantopurchaseamanufacturedhomehada reportedspreadof about6.0percentagepoints,comparedwithanaveragespreadof roughly2.6percentagepointsforcomparablehigher-pricedloansforsite-builtproperties. HOEPA Loans TheHMDAdataindicatewhichloansarecoveredbytheprotectionsaffordedbyHOEPA. UnderHOEPA,certaintypesof mortgageloansthathaveinterestratesorfeesabovespecifiedlevelsrequireadditionaldisclosurestoconsumersandaresubjecttovariousrestrictionsonloanterms.38For2012,524lendersreportedextending2,185loanscoveredby HOEPA(asshownintable11;dataregardingthenumberof lendersnotshownintables). Incomparison,574lendersreportedon2,387loanscoveredbyHOEPAin2011.Inthe aggregate,HOEPA-relatedlendingmadeuplessthan0.03percentof allof theoriginations of home-securedrefinancingsandhome-improvementloansreportedfor2012(data derivedfromtables).39VeryfewHOEPAloansaresold:AmongthenewlyissuedloanscoveredbyHOEPAin2012,only5werereportedassoldtoasecondary-marketparticipant. Lending across Population Groups and Neighborhoods TheHMDAdatacanbeusedtotrackchangesinlendingactivityacrossdifferentpopulationgroupsandareas.Inthissection,weshowchangesinlending,from2011to2012,to borrowerssortedbyincome,raceandethnicity,andtheincomeorminoritypopulation characteristicsof theareaswheretheborrowersreside.40 Asnotedearlier,forpurposesof reportingthe2012HMDAdataandfacilitatingtheirdisseminationtothepublicbytheFFIEC,therehasbeenaswitchfromusingcensus-tract geographicdesignationsandpopulationandhousingdatafromthe2000decennialcensus tousingacombinationof datafromthe2010decennialcensusandthe2006–10ACS.This switchmakesitchallengingtostudytrendsinlendingacrossgeographiesfrom2011to2012 becauseof sharpchangesinthenumberof tractsclassifiedinagivencategory.For example,thenumberof censustractsinthelow-incomecategoryincreased40percent, whiletheshareof censustractsinwhichminoritiesmakeuplessthan10percentof the totalpopulationdecreasedabout10percentagepoints(datanotshownintables).41 Analternativewaytomeasurethechangesinlendingacrosscensus-tractcategories between2011and2012istousethesubsetof censustractsthathadfewornochangesin 38 Unlikethethresholdrulesusedtoreporthigher-pricedloans,thethresholdrulestoidentifyHOEPAloansdid notchange. 39 HOEPAdoesnotapplytohome-purchaseloans. 40 Previousarticleshavereviewedchangesinlendinginearlieryears.See,forexample,Averyandothers,“The MortgageMarketin2011,”innote10. 41 TheshareoftheU.S.populationincensustractswhoseresidentsarepredominantlynon-Hispanicwhite droppedfromnearly33percentin2000toabout23percentin2010.

MortgageMarketConditionsandBorrowerOutcomes 25 theirphysicalboundariesforthe2000and2010decennialcensuses(thesetractsarereferred tointhisarticleasstable-boundarytracts).Wecategorizedthesetractsaccordingtotheir incomeandminoritystatusasusedinthe2012HMDAdataandthencalculatedchangesin lendingthatwerefreeof reclassificationeffectsforthesetracts.42 Changes in Lending across Populations, 2011 to 2012 Asnoted,home-purchaselendingincreasedabout13percentfrom2011to2012.Virtually allpopulationsegmentsexperiencedgains,althoughtheincreaseinactivitywaslargerfor someborrowergroupsthanforothers (table12Table12pt2.HomeLendingToDifferentPopul-34BB8FC2,firstmemoitem).43 Acrossracialorethnicgroups,thelargestincreaseinhome-purchaseloanactivitywas experiencedbyAsiansandnon-Hispanicwhites;thenumberof home-purchaseloans extendedtoborrowersineachof thesegroupsincreasedabout15percent,whilelendingto blacksandHispanicwhitesincreasedatarateof lessthanhalf thisvalue.Lendingtoall borrowerincomegroupsalsoincreased,withthelargestgainsexperiencedbymiddleorhigh-incomehouseholds. Ignoringthereclassificationeffectdiscussedearlier,weobservethatthechangeinhome-purchaselendingbycensus-tractcategorybetween2011and2012wasgreatestinlow-income censustracts(62percent)andtractswithahighshareof minoritiesinthepopulation(67percentintractswithaminorityshareof 50to79percent)(asshownintable12,firstmemo item).However,focusingonthestable-boundarytractsandusingaconstantcategorization, wefindthathome-purchaselendinggrowthwasactuallyweakestinthelow-incomecategory andinneighborhoodswithahighminorityshare(table12,secondmemoitem). Borrowersof allracialandethnicgroupsandborrowersinallincomesegmentsexperienced significantgainsinrefinanceandhome-improvementloanactivity.Similarly,focusingon ouradjustedmeasureof change,sizableincreasesinsuchlendingwereexperiencedacross nearlyallneighborhoodtypes(asshownintable12,secondmemoitem). Use of Loan Types across Populations Populationsdifferconsiderablyintheiruseof differenttypesof loanproducts.Mostnotably,black,Hispanicwhite,andlower-incomeborrowers,andthoseresidinginareaswith largersharesof minoritypopulations,usenonconventionalloanstopurchasehomestoa greaterextentthanothergroups.Greaterrelianceonnonconventionalloansmayreflectthe relativelylowdown-paymentrequirementsof theFHAandVAlendingprograms,which servetheneedsof borrowerswhohavefewassetstomeetdown-paymentandclosing-cost requirements.44Thepatternsof productincidencecouldalsoreflectthebehaviorof lenders tosomeextent;forexample,concernshavebeenraisedaboutthepossibilitythatlenders steerborrowersincertainneighborhoodstowardgovernment-backedloans.TheHMDA dataindicatethatallgroupsreliedabitlessonnonconventionalloanstopurchasehomesin 2012thanin2011. 42 Stable-boundarytractsaccountforover70percentofallcensustractsinthe2010census,roughlytwo-thirdsof theU.S.populationresidesinthesecensustracts,andtheyincludeabouttwo-thirdsofthe2012home-purchase lending.Nonetheless,stable-boundarytractsmaynotbefullyrepresentativeofallcensustracts—inparticular, theymaybemorereflectiveofslow-growingareas—sosomecautionshouldbeusedindrawingconclusions basedonlendingoutcomesinthissubsetofcensustracts. 43 Changesinlendingtodifferentgroupsovertheperiod2006–10werepresentedinapreviousarticle.SeeAvery andothers,“TheMortgageMarketin2010,”innote16. 44 FindingsoftheFederalReserveBoard’sSurveyofConsumerFinancesfor2010indicatethatliquidassetlevels andfinancialwealthholdingsforminoritiesandlower-incomegroupsaresubstantiallysmallerthantheyarefor non-Hispanicwhitesorhigher-incomepopulations.SeeBoardofGovernorsoftheFederalReserveSystem, “2010SurveyofConsumerFinances,”webpage,www.federalreserve.gov/econresdata/scf/scf_2010.htm.

26 FederalReserveBulletin|November2013 Table12.Homelendingtodifferentpopulations,bycharacteristicofborrowerandofcensustractand bytypeandpurposeofloan,2011–12 Percentexceptasnoted Memo: 2011 2012 Percentage Memo: changein Characteristic Percentage number ofborrower changein ofloansin andof number censustract Co ti n o v n e a n l - conv N e o n n ti - onal1 Total N o M f u e l m o m a b n o e : s r Co ti n o v n e a n l - conv N e o n n ti - onal1 Total N o M f u e l m o m a b n o e : s r 2 o 0 f 1 lo 1 a – n 1 s 2 , un c t c r e h a n a c s n t u s g s , ed 2011–12 A.Homepurchase Borrower Raceotherthanwhiteonly2 AmericanIndianorAlaska Native 36.5 63.5 100 9,435 40.4 59.6 100 10,252 8.7 18.7 Asian 74.3 25.7 100 104,626 78.1 21.9 100 120,681 15.3 16.6 BlackorAfricanAmerican 21.6 78.4 100 113,591 24.6 75.4 100 119,533 5.2 7.5 NativeHawaiianorother PacificIslander 35.1 64.9 100 6,661 39.6 60.4 100 6,811 2.3 5.1 White,byethnicity2 Hispanicwhite 29.2 70.8 100 195,778 33.0 67.0 100 209,749 7.1 11.8 Non-Hispanicwhite 53.3 46.7 100 1,417,339 58.2 41.8 100 1,629,611 15.0 21.9 Incomeratio(percentofareamedian)3 Low 39.9 60.1 100 254,828 44.6 55.4 100 277,827 9.0 12.7 Moderate 37.3 62.7 100 495,859 41.9 58.1 100 548,761 10.7 17.0 Middle 43.9 56.1 100 519,898 49.1 50.9 100 585,729 12.7 19.3 High 65.9 34.1 100 790,223 70.5 29.5 100 919,671 16.4 22.7 Censustractofproperty Racialorethniccomposition(minoritiesasapercentofpopulation) Lessthan10 56.4 43.6 100 767,580 61.5 38.5 100 558,225 -27.3 27.5 10–49 48.8 51.2 100 1,025,746 57.1 42.9 100 1,360,083 32.6 20.0 50–79 41.0 59.0 100 169,409 44.4 55.6 100 282,659 66.9 9.2 80–100 33.7 66.3 100 98,073 34.3 65.7 100 131,021 33.6 -.4 Incomeratio(percentofareamedian)4 Low 45.0 55.0 100 21,128 46.0 54.0 100 34,311 62.4 5.8 Moderate 39.8 60.2 100 206,299 43.2 56.8 100 266,401 29.1 11.0 Middle 44.3 55.7 100 1,029,115 48.9 51.1 100 1,027,212 -.2 20.8 High 60.7 39.3 100 791,254 65.3 34.7 100 989,973 25.1 21.1 B.Refinance Borrower Raceotherthanwhiteonly2 AmericanIndianorAlaska Native 77.6 22.4 100 10,991 75.3 24.7 100 16,785 52.7 63.2 Asian 95.8 4.3 100 204,917 94.1 5.9 100 323,859 58.0 57.9 BlackorAfricanAmerican 62.5 37.6 100 119,267 61.6 38.4 100 197,357 65.5 65.1 NativeHawaiianorother PacificIslander 77.3 22.8 100 8,595 73.2 26.8 100 14,496 68.7 69.2 White,byethnicity2 Hispanicwhite 79.0 21.0 100 176,431 75.3 24.7 100 307,846 74.5 74.9 Non-Hispanicwhite 87.7 12.3 100 2,826,443 85.8 14.2 100 4,282,330 51.5 58.4 Incomeratio(percentofareamedian)3 Low 62.4 37.6 100 648,323 42.0 58.0 100 978,675 51.0 54.7 Moderate 87.9 12.1 100 529,877 90.4 9.6 100 829,141 56.5 62.9 Middle 89.1 10.9 100 821,444 91.0 9.0 100 1,289,873 57.0 63.4 High 93.7 6.3 100 1,840,400 94.4 5.6 100 2,803,098 52.3 57.7 Note:First-lienmortgagesforowner-occupiedone-tofour-familyhomes. 1 Seetable4,note1. 2 Categoriesforraceandethnicityreflecttherevisedstandardsestablishedin1997bytheOfficeofManagementandBudget.Applicantsare placedunderonlyonecategoryforraceandethnicity,generallyaccordingtotheraceandethnicityofthepersonlistedfirstonthe application.However,underrace,theapplicationisdesignatedasjointifoneapplicantreportedthesingledesignationofwhiteandtheother reportedoneormoreminorityraces.Iftheapplicationisnotjointbutmorethanoneraceisreported,thefollowingdesignationsaremade:If atleasttwominorityracesarereported,theapplicationisdesignatedastwoormoreminorityraces;ifthefirstpersonlistedonan applicationreportstworaces,andoneiswhite,theapplicationiscategorizedundertheminorityrace.Forloanswithtwoormoreapplicants, lenderscoveredundertheHomeMortgageDisclosureActreportdataononlytwo.

MortgageMarketConditionsandBorrowerOutcomes 27 Table12.Homelendingtodifferentpopulations,bycharacteristicofborrowerandofcensustractand bytypeandpurposeofloan,2011–12—continued Percentexceptasnoted Memo: 2011 2012 Percentage Memo: changein Characteristic Percentage number ofborrower changein ofloansin andof number censustract Co ti n o v n e a n l - conv N e o n n ti - onal1 Total N o M f u e l m o m a b n o e : s r Co ti n o v n e a n l - conv N e o n n ti - onal1 Total N o M f u e l m o m a b n o e : s r 2 o 0 f 1 lo 1 a – n 1 s 2 , un c t c r e h a n a c s n t u s g s , ed 2011–12 Censustractofproperty Racialorethniccomposition(minoritiesasapercentofpopulation) Lessthan10 88.6 11.4 100 1,662,511 88.1 11.9 100 1,564,181 -5.9 57.2 10–49 85.9 14.1 100 1,825,725 84.4 15.6 100 3,435,574 88.2 58.1 50–79 83.5 16.5 100 241,937 79.2 20.8 100 637,931 163.7 67.5 80–100 77.4 22.6 100 109,871 76.0 24.0 100 263,101 139.5 71.4 Incomeratio(percentofareamedian)4 Low 79.9 20.1 100 20,390 77.8 22.2 100 59,703 192.8 66.6 Moderate 80.3 19.7 100 264,107 78.0 22.0 100 538,499 103.9 69.0 Middle 83.8 16.2 100 1,779,036 81.6 18.4 100 2,484,346 39.6 63.7 High 90.7 9.3 100 1,753,976 88.3 11.7 100 2,793,475 59.3 53.0 C.Homeimprovement5 Borrower Raceotherthanwhiteonly2 AmericanIndianorAlaska Native 96.7 3.3 100 1,787 97.2 2.8 100 2,114 18.3 36.3 Asian 97.4 2.6 100 5,857 98.1 1.9 100 7,411 26.5 26.5 BlackorAfricanAmerican 93.0 7.0 100 17,964 94.2 5.8 100 20,225 12.6 17.0 NativeHawaiianorother PacificIslander 95.9 4.1 100 752 96.1 3.9 100 1,077 43.2 43.6 White,byethnicity2 Hispanicwhite 95.8 4.2 100 20,733 96.0 4.0 100 21,478 3.6 13.8 Non-Hispanicwhite 96.6 3.4 100 227,534 96.5 3.5 100 262,461 15.4 26.8 Incomeratio(percentofareamedian)3 Low 93.0 7.0 100 45,672 95.4 4.6 100 49,414 8.2 15.9 Moderate 95.1 4.9 100 61,778 96.5 3.5 100 68,330 10.6 20.7 Middle 95.2 4.8 100 75,804 96.2 3.8 100 85,884 13.3 23.9 High 96.4 3.6 100 124,873 96.9 3.1 100 144,828 16.0 27.5 Censustractofproperty Racialorethniccomposition(minoritiesasapercentofpopulation) Lessthan10 96.2 3.8 100 154,798 97.2 2.8 100 133,312 -13.9 33.2 10–49 94.8 5.2 100 116,021 96.0 4.0 100 163,078 40.6 22.9 50–79 92.8 7.2 100 17,742 95.4 4.6 100 28,077 58.3 26.1 80–100 93.4 6.6 100 19,566 95.6 4.4 100 23,989 22.6 31.2 Incomeratio(percentofareamedian)4 Low 87.5 12.5 100 3,393 94.9 5.1 100 6,281 85.1 27.2 Moderate 94.3 5.7 100 35,492 96.0 4.0 100 45,966 29.5 27.9 Middle 95.7 4.3 100 170,938 96.2 3.8 100 176,138 3.0 30.0 High 96.2 3.8 100 91,865 96.8 3.2 100 115,147 25.3 23.5 3 Borrowerincomeisthetotalincomereliedonbythelenderintheloanunderwriting.Incomeisexpressedrelativetothemedianfamily incomeofthemetropolitanstatisticalarea(MSA)orstatewidenon-MSAinwhichthepropertybeingpurchasedislocated.“Low”islessthan 50percentofthemedian;“moderate”is50percentto79percent(inthisarticle,“lowerincome”encompassesthelowandmoderate categories);“middle”is80percentto119percent;and“high”is120percentormore. 4 TheincomecategoryofacensustractisthemedianfamilyincomeofthetractrelativetothatoftheMSAorstatewidenon-MSAinwhich thetractislocatedasderivedfromthe2000census.“Low”islessthan50percentofthemedian;“moderate”is50percentto79percent; “middle”is80percentto119percent;and“high”is120percentormore. 5 Consistsoffirst-andjunior-lienloansandloanswithoutalien.

28 FederalReserveBulletin|November2013 Differences in Lending Outcomes by Race, Ethnicity, and Sex of the Borrower OnereasontheCongressamendedHMDAin1989wastoenhanceitsvalueforfairlending enforcementbyaddingtotheitemsreportedthedispositionof applicationsforloansand therace,ethnicity,andsexof applicants.AsimilarmotivationunderlaytheFederal Reserve’sdecisiontoaddpricingdataforhigher-pricedloansin2004,althoughsuchdata serveotherpurposes,includingtohelpidentifylendersactiveinthehigher-costorhigherrisksegmentsof themortgagemarketandprovideinformationonthevolumeandlocationsof borrowersreceivinghigher-pricedloans. Overtheyears,analysesof HMDAdatahaveconsistentlyfoundsubstantialdifferencesin theincidenceof higher-pricedlendingandinapplicationdenialratesacrossracialandethniclines,differencesthatcannotbefullyexplainedbyfactorsincludedintheHMDA data.45AnalysesalsohavefoundthatdifferencesacrossgroupsinmeanAPRspreadspaid bythosewithhigher-pricedloansweregenerallysmall.46Hereweexaminethe2012 HMDAdatatodeterminetheextenttowhichthesedifferencespersist. Theanalysisherepresentsaggregatedlendingoutcomesacrossallreportinginstitutions. Patternsforanygivenfinancialinstitutionmaydifferfromthoseshown,and,foranygiven financialinstitution,relationshipsmayvarybyloanproduct,geographicmarket,andloan purpose.Further,althoughtheHMDAdataincludesomedetailedinformationabouteach mortgagetransaction,manykeyfactorsthatareconsideredbylendersincreditunderwritingandpricingarenotincluded.Accordingly,itisnotpossibletodeterminefromHMDA dataalonewhetherracialandethnicpricingdisparitiesreflectillegaldiscrimination. Comparisonsof outcomes(forbothloanpricinganddenialrates)areshownforeach racial,ethnic,orgendergroup.Theanalysisheredistinguishesamongthreeloanpurposes (homepurchase,refinance,andhomeimprovement)andbetweentwobroadtypesof lending(conventionalandnonconventional),reflectingthedifferentunderwritingstandards andfeesassociatedwiththesetwobroadloanproductcategories. Incidence of Higher-Priced Lending by Race, Ethnicity, and Sex Overall,thereportedincidenceof higher-pricedlendingwasabout50basispointslowerin 2012thanin2011(datafor2011notshownintables).Pricingrelationshipsacrosspopulationgroupsobservedinthe2012HMDAdataareverysimilartothosefoundinthe2011 data.The2012HMDAdataindicatethatblackandHispanic-whiteborrowersaremore likely,andAsianborrowerslesslikely,toobtainconventionalloanswithpricesabovethe HMDAprice-reportingthresholdsthanarenon-Hispanicwhiteborrowers.Theserelationshipsholdbothforhome-purchaseandrefinancelendingandfornonconventionalloans (tables13.Aand13.B).Forexample,forconventionalhome-purchaselendingin2012,the incidenceof higher-pricedlendingwas6.7percentforblackborrowers,7.4percentforHispanicwhiteborrowers,and1.3percentforAsians,comparedwith3.2percentfornon-Hispanicwhiteborrowers.Withregardtothegenderof applicants,wefindrelativelysmalldif- 45 SeeAvery,Brevoort,andCanner,“The2006HMDAData”;Avery,Brevoort,andCanner,“Higher-Priced HomeLendingandthe2005HMDAData”;andAvery,Canner,andCook,“NewInformationReportedunder HMDA”;allthreereferencesareinnote35. 46 See,forexample,AndrewHaughwout,ChristopherMayer,andJosephTracy(2009),“SubprimeMortgage Pricing:TheImpactofRace,Ethnicity,andGenderontheCostofBorrowing,”FederalReserveBankofNew YorkStaffReports368(NewYork:FederalReserveBankofNewYork,April),www.newyorkfed.org/research /staff_reports/sr368.pdf;andMarshaJ.Courchane(2007),“ThePricingofHomeMortgageLoanstoMinority Borrowers:HowMuchoftheAPRDifferentialCanWeExplain?”JournalofRealEstateResearch,vol.29(4), pp.399–439.

MortgageMarketConditionsandBorrowerOutcomes 29 Table13.Incidenceofhigher-pricedlending,meanandmedianaverageprimeofferratespreads forloans,anddenialrates,bytypeandpurposeofapplicationandbyrace,ethnicity,and sexofapplicant,2012 A.Conventionalloanapplication Incidenceofhigher-priced APORspread(percentagepoints) Denialrate(percent) lending(percent) Race,ethnicity,andsex 2011 2012 2011 2012 2011 2012 Mean Median Mean Median Homepurchase Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative 8.06 8.04 2.95 2.51 2.94 2.59 26.0 25.5 Asian 1.32 1.27 2.41 2.11 2.37 2.18 15.3 14.5 BlackorAfricanAmerican 7.92 6.70 2.49 1.96 2.70 2.10 33.0 32.0 NativeHawaiianorotherPacific Islander 2.83 1.74 2.25 1.86 2.59 2.08 21.6 20.4 Twoormoreminorityraces 2.28 2.01 2.68 2.33 2.27 1.85 25.6 27.9 Joint 2.98 2.27 2.50 2.14 2.56 2.13 13.1 11.9 Missing 1.69 1.28 2.30 1.89 2.19 1.85 20.1 18.0 White,byethnicity1 Hispanicwhite 9.23 7.39 2.52 2.19 2.75 2.51 21.9 20.5 Non-Hispanicwhite 3.91 3.17 2.49 2.15 2.54 2.17 12.4 11.6 Sex Onemale 4.11 3.37 2.50 2.14 2.59 2.20 17.0 15.8 Onefemale 3.78 2.98 2.42 2.01 2.48 2.11 16.7 15.4 Twomales 7.20 5.87 2.56 2.37 2.55 2.29 18.7 17.2 Twofemales 4.98 3.82 2.52 2.13 2.62 2.22 18.5 16.2 Refinance Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative 3.21 2.56 2.79 2.18 2.73 2.16 36.2 32.7 Asian .31 .28 2.43 1.97 1.99 1.71 19.3 17.1 BlackorAfricanAmerican 4.25 2.86 2.99 2.08 2.62 1.98 40.5 34.7 NativeHawaiianorotherPacific Islander 1.18 .90 2.42 1.99 2.32 1.82 31.9 29.2 Twoormoreminorityraces .85 1.03 1.98 1.79 2.15 1.68 33.0 30.4 Joint 1.04 .81 2.53 2.03 2.39 1.90 18.7 16.2 Missing .75 .74 2.53 1.84 2.06 1.74 29.3 25.5 White,byethnicity1 Hispanicwhite 2.74 1.87 2.73 2.11 2.51 2.00 30.1 26.1 Non-Hispanicwhite 1.65 1.22 2.54 2.07 2.42 2.00 20.0 17.4 Sex Onemale 1.83 1.39 2.59 2.06 2.40 1.94 26.7 23.0 Onefemale 2.05 1.49 2.67 2.04 2.44 1.96 25.8 22.6 Twomales 2.04 1.40 2.55 2.15 2.49 2.02 24.5 21.7 Twofemales 2.14 1.27 2.70 2.05 2.72 1.98 24.0 20.0 Note:First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans.Business-relatedloansare thoseforwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantorco-applicantare“notapplicable.”Fordefinitionof higher-pricedlending,seetextandtable9,note3.Loanstakenoutjointlybyamaleandfemalearenotshownherebecausetheywouldnotbe directlycomparablewithloanstakenoutbyoneborrowerorbytwoborrowersofthesamesex.Fordefinitionofaverageprimeofferrate (APOR)spread,seetable11,note4. 1 Seetable12,note2.

30 FederalReserveBulletin|November2013 Table13.Incidenceofhigher-pricedlending,meanandmedianaverageprimeofferratespreads forloans,anddenialrates,bytypeandpurposeofapplicationandbyrace,ethnicity,and sexofapplicant,2012 B.Nonconventionalloanapplication Incidenceofhigher-priced APORspread(percentagepoints) Denialrate(percent) lending(percent) Race,ethnicity,andsex 2011 2012 2011 2012 2011 2012 Mean Median Mean Median Homepurchase Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative 2.78 2.35 1.78 1.65 1.84 1.68 17.6 18.4 Asian 2.08 1.87 2.10 1.74 1.87 1.72 18.9 20.2 BlackorAfricanAmerican 4.16 4.86 1.94 1.74 1.86 1.73 23.3 23.9 NativeHawaiianorotherPacific Islander 2.67 2.66 1.97 1.83 1.95 1.80 17.6 18.4 Twoormoreminorityraces .88 1.15 2.07 1.69 1.74 1.71 21.0 24.5 Joint 1.76 1.59 1.96 1.76 1.97 1.73 13.2 15.1 Missing 2.89 2.82 2.21 1.74 1.89 1.72 21.8 22.1 White,byethnicity1 Hispanicwhite 4.52 4.41 1.88 1.74 1.87 1.71 18.9 18.7 Non-Hispanicwhite 2.35 2.53 1.96 1.77 1.95 1.73 13.2 13.6 Sex Onemale 2.91 3.09 1.93 1.73 1.90 1.72 16.6 17.1 Onefemale 3.88 4.20 1.99 1.75 1.89 1.73 16.9 17.0 Twomales 2.95 2.90 1.90 1.76 1.81 1.71 20.4 20.1 Twofemales 3.25 3.33 1.85 1.71 1.81 1.70 19.5 18.0 Refinance Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative 5.01 2.86 2.49 2.51 2.99 3.22 35.4 27.7 Asian 3.98 1.71 2.35 2.28 2.93 3.04 32.5 22.2 BlackorAfricanAmerican 10.74 5.48 2.63 2.57 3.16 3.31 38.8 29.4 NativeHawaiianorotherPacific Islander 3.45 2.59 2.44 2.34 2.97 3.09 30.3 24.6 Twoormoreminorityraces 4.53 2.56 2.25 2.06 3.39 3.37 39.6 30.6 Joint 2.76 1.41 2.37 2.19 2.96 2.60 24.7 18.1 Missing 2.31 .92 3.33 1.97 2.37 1.93 42.6 29.6 White,byethnicity1 Hispanicwhite 6.90 3.08 2.49 2.35 2.64 2.70 30.4 22.3 Non-Hispanicwhite 5.93 2.92 2.44 2.28 2.98 3.17 28.7 19.6 Sex Onemale 4.72 2.36 2.60 2.29 2.92 3.09 33.6 23.8 Onefemale 12.04 6.00 2.63 2.46 3.12 3.25 36.1 25.5 Twomales 2.78 1.54 2.17 2.04 2.61 2.70 30.9 22.0 Twofemales 4.59 2.20 2.30 2.24 2.71 2.90 33.3 21.7 Note:Seenotestotable13.A.

MortgageMarketConditionsandBorrowerOutcomes 31 ferencesintheincidenceof higher-pricedlendingbetweensingleapplicantsof different genders. Rate Spreads by Race, Ethnicity, and Sex The2012dataindicatethat,amongborrowerswithhigher-pricedloans,thegrossAPOR spreadsaresimilaracrossgroups.Thisresultholdsforbothconventional(table13.A)and nonconventionallending(table13.B).Forexample,forconventionalhome-purchaseloans forowner-occupiedproperties,thegrossmeanAPORspreadwas2.70percentagepoints forblackborrowersand2.75percentagepointsforHispanicwhiteborrowers,whileitwas 2.54percentagepointsfornon-Hispanicwhiteborrowersand2.37percentagepointsfor Asianborrowers.GrossdifferencesacrossgroupsinAPORspreadsforrefinancingswere aboutthesameasforhome-purchaselending.Withregardtothegenderof applicants,the 2012datarevealonlysmalldifferencesinthegrossAPRspreadsbetweensingleapplicants of differentgenders. Denial Rates by Race, Ethnicity, and Sex HMDAdatainpreviousyearshaveconsistentlyshownthatdenialratesvaryacrossapplicantsgroupedbyraceorethnicity.Thiscontinuestobethecasein2012.Asinpastyears, blacksandHispanicwhiteshadnotablyhighergrossdenialratesin2012thannon-Hispanicwhites,whilethedifferencesbetweenAsiansandnon-Hispanicwhitesgenerallywere fairlysmallbycomparison(asshownintables13.Aand13.B).Forexample,thedenial ratesforconventionalhome-purchaseloanswere32percentforblacks,20.5percentfor Hispanicwhites,14.5percentforAsians,and11.6percentfornon-Hispanicwhites.Eachof theserateswerelittlechangedfrom2011.Thepatternwasaboutthesamefornonconventionalhome-purchaselending,althoughthegapingrossdenialratesbetweenblacksorHispanicwhitesandnon-Hispanicwhiteswasnotablysmallerthanforconventionalhomepurchaseloans. Some Limitations of the Data in Assessing Fair Lending Compliance Previousresearchandexperiencegainedinthefairlendingenforcementprocessshowthat unexplaineddifferencesintheincidenceof higher-pricedlendingandindenialratesamong racialorethnicgroupsstem,atleastinpart,fromcredit-relatedfactorsnotavailableinthe HMDAdata,suchascredithistory(includingcreditscores),loan-to-valueratios,anddifferencesinloancharacteristics.Differentialcostsof loanoriginationandthecompetitive environmentalsomaybearonthedifferencesinpricing,asmaydifferencesacrosspopulationsincredit-shoppingactivities. Despitetheselimitations,theHMDAdataplayanimportantroleinfairlendingenforcement.Thedataareregularlyusedbybankexaminerstofacilitatethefairlendingexaminationandenforcementprocesses.Whenexaminersforthefederalbankingagenciesevaluate aninstitution’sfairlendingrisk,theyanalyzeHMDApricedataandloanapplication outcomesinconjunctionwithotherinformationandriskfactorsthatcanbedrawndirectly fromloanfilesorelectronicrecordsmaintainedbylenders,asdirectedbytheInteragency FairLendingExaminationProcedures.47Theavailabilityof broaderinformationallowsthe examinerstodrawfirmconclusionsaboutinstitutioncompliancewiththefairlendinglaws. ItisimportanttokeepinmindthattheHMDAdata,ascurrentlyconstituted,canbeused onlytodetectdifferencesinpricingacrossgroupsforloanswithAPRsabovethereporting 47 TheInteragencyFairLendingExaminationProceduresareavailableatwww.ffiec.gov/PDF/fairlend.pdf.

32 FederalReserveBulletin|November2013 threshold;pricingdifferencesmayexistamongloansbelowthethreshold.Thisgapinthe loanpricinginformationwillbeaddressedwhentheCFPBimplementstheexpandeddata reportingrequirementssetforthintheDodd-FrankWallStreetReformandConsumer ProtectionActof 2010(Dodd-FrankAct),includingtheprovisionrequiringthereporting of ratespreadinformationforallloans. Analysis of Matched HMDA and Credit Bureau Data Inthissection,wepresenttheresultsfromananalysisusinganenhancedHMDAdataset inwhichfirst-lien,owner-occupanthome-purchaseandrefinancemortgagesreportedin theHMDAdatahavebeenmatchedtoborrowers’consumercreditrecordinformation.48 Thematcheddatasetprovidesanopportunitytoexploremanyaspectsof homelending thattheHMDAdataalonecannotaddress.Chief amongthesearethecreditcircumstances (forexample,creditscores,nonmortgagedebts,andmonthlypaymentsonloans)of mortgageborrowerspriortoandatthetimeof loanoriginationandtheirsubsequentpayment performanceontheirmortgagesandotherloans. NeithertheHMDAdatanorthecreditrecorddataincludepersonalidentifyinginformation,butborrowersinthetwodatasetscanbematchedbasedonthemortgageloaninformationcommontobothdatasets(detailsof thematchingprocessareprovidedinappendixB,“MatchingHMDARecordswithCreditBureauRecords”).Forthisarticle,we presentresultsfromthematched2006and2010HMDAloanrecords;theprocessof matchingdataforadditionalyearsisongoing.The2006matcheddatareflectlendingactivityattheheightof themostrecenthousingboom,whilethe2010datareflectthefarmore subduedmarketconditionsthatwerestilllargelypresentin2012.Theadvantageof studyingthe2010dataisthatweareabletotrackpaymentperformanceoverthesubsequent 24months. ThecreditrecordsavailableformatchingcomefromtheFederalReserveBankof New YorkConsumerCreditPanel/Equifax(CCP)data.49TheCCPisa5percent,nationally representativesampleof allindividualswithacreditrecordandavalidSocialSecurity number.Furthermore,theCCPdataareaquarterlypanel,trackingthesameindividuals overtime.50 Becausethecreditrecorddataarea5percentsampleof thefullpopulation,onlyasmall fractionof HMDAloanrecordswillberepresentedintheCCP.Thatsaid,becausethe HMDAdataconsistof severalmillionloanrecords,theresultingmatcheddatasetisstill quitelarge.ForreasonsdiscussedinappendixB,weattemptedtomatchonlythosemortgagesforowner-occupiedpropertiesinMSAs.Of suchloans,wematchedabout300,000in eachyear,whichisabout4percentof alleligibleHMDAloansandimpliesamatchrateof about60percent(seeappendixBfordetailsof thecalculation). 48 Forfurtherinformationaboutcreditrecords,seeRobertB.Avery,PaulS.Calem,GlennB.Canner,and RaphaelW.Bostic(2003),“AnOverviewofConsumerDataandCreditReporting,”FederalReserveBulletin, vol.89(February),pp.47–73,www.federalreserve.gov/pubs/bulletin/2003/0203lead.pdf. 49 Forfurtherdetails,seeDonghoonLeeandWilbertvanderKlaauw(2010)“AnIntroductiontotheFRBNY ConsumerCreditPanel,”FederalReserveBankofNewYorkStaffReports479(NewYork:FederalReserve BankofNewYork,November),www.newyorkfed.org/research/staff_reports/sr479.html. 50 Thesamplingapproachisdesignedtogeneratethesameentryandexitbehaviorasispresentinthepopulation, withyoungindividualsandimmigrantsenteringthesampleanddeceasedindividualsandemigrantsleavingthe sampleeachquarteratthesamerateasintheU.S.population,suchthateachquarterlysnapshotcontinuesto benationallyrepresentative.

MortgageMarketConditionsandBorrowerOutcomes 33 Althoughthe60percentimpliedmatchrateiswellbelow100percent,acomparisonof the characteristicsof thematchedloanswiththecharacteristicsof thefullHMDAdataindicatesthatthematchedloansprovideagoodrepresentationof allHMDArecordstargeted formatching(tableB.1,inappendixB). Credit Characteristics and Performance by Borrower, Lender, and Loan Type TheHMDAdataprovideuniqueinformationontherace,ethnicity,andincomeof mortgageborrowers;thetypeof lenderandloanpurchaser;andloanpricing.Matchingto thecreditrecorddataaddsinformationonthecreditprofilesof borrowers.Inaddition, becauseof thepanelnatureof theCCP,weareabletotrackloansovertimetomeasure performance.Wereportstatisticsderivedfromthecreditrecordsbyvariousborrower, lender,andloanattributesidentifiedfromtheHMDAdataforthe2006and2010setsof matchedhome-purchaseandrefinanceloans(tables14and15).BecausetheCCPsamples individualsratherthanmortgages,weweightedthedataaccordinglytoaccountforthefact thatjointmortgages(mortgagesthathavemorethanoneborrower)haveroughlytwicethe likelihoodof beingsampledintheCCP. Credit Scores Creditscoresareasummarymetricof therelativecreditriskposedbycurrentandprospectiveborrowers.Genericcreditscores(sometimesreferredtoasbureauorcredithistory scores)arederivedusingcreditrecordstopredictthelikelihoodof defaultbasedonindividuals’pastexperiences.Notably,creditscoresrank-orderindividualsbythecreditrisk theyposewithinagiveneconomicenvironment;theydonotimplyanyparticularfuture probabilityof default.51 Thecreditscorestatisticsshownintables14and15aremeasuredattheendof thequarter priortomortgageorigination.52Creditscoresfromthisdatewereselectedtobetteralign withtheinformationaloanunderwritermayhavebeenconsideringwhenevaluatingthe homeloanapplication.Overall,thedatashowthatcreditscoresdiffersignificantlyacross variouscategoriesof borrowersandloans,andthattheaveragecreditscoresof borrowers in2010weresignificantlyhigherthanin2006. Thefirstfiverowsof tables14.Aand14.Bshowthatin2006,Asianborrowershadthe highestaveragescores,whileblackmortgageborrowershadthelowestscores.Among home-purchaseloans,Asianborrowershadanaveragescoreof 723,comparedwith640for blackborrowers,andover40percentof blackborrowershadascorebelow620—ascore thresholdoftenassociatedwithsubprimelending—whilejust7percentof Asianborrowers fellbelowthatlevel.53Creditscoresalsovariedbytheincomeandneighborhoodcharacter- 51 Foradiscussionofthereasonsthatcreditscoresdonotpredictthefuturedefaultrateforanyparticularscore, seeBoardofGovernorsoftheFederalReserveSystem(2007),ReporttotheCongressonCreditScoringandIts EffectsontheAvailabilityandAffordabilityofCredit(Washington:BoardofGovernors,August), www.federalreserve.gov/boarddocs/rptcongress/creditscore/default.htm. 52 ThecreditscoreincludedintheCCPisgeneratedfromtheEquifaxRiskScore3.0model.TheEquifaxRisk Score3.0isacreditscoreproducedfromageneral-purposeriskmodelthatpredictsthelikelihoodanindividual willbecome90daysormoredelinquentonanyaccountwithin24monthsafterthescoreiscalculated.The EquifaxRiskScore3.0rangesfrom280to850,withahigherscorecorrespondingtolowerrelativerisk(for moreinformation,seewww.equifax.com).Althoughthelendermayhaveusedadifferentscoretounderwrite theloan,itislikelythatthescoresusedherearehighlycorrelatedwiththescoresusedinunderwriting. 53 Onedrawbackofourmatcheddatasetisthatweobservethecreditrecordinformationandcreditscorefor onlyoneofthetwoborrowersinajointmortgage.Underwritersmayselectthelowerofthetwocreditscores forthetwoapplicants,whereaswematchonlyonerandomlyselectedapplicant.Thus,forjointmortgages,the creditscoresweobservemayoverstatethecreditscoreusedinunderwritingtotheextentthatjointapplicants

34 FederalReserveBulletin|November2013 Table14.Creditcircumstancesofmortgageborrowers,bypurposeofloanandbydemographic,lender, andloancharacteristics,2006 A.Homepurchase Percentexceptasnoted Creditcircumstances1 Consumerdebt Creditscore (dollars) Back-endPTI Performance Characteristicandstatus First-time Loan ofdelinquent mortgage Share Share home- perfor- borrowerson N Mean less Mean Median Median greater buyer mance nonmortgage (points) than than debt 620 43percent Borrower Minoritystatus2 Asian 723 7 16,057 6,263 33 23 51 5.8 53 5,692 BlackorAfricanAmerican 640 43 18,862 11,155 37 33 58 23.3 58 9,678 Hispanicwhite 673 23 16,841 8,850 37 30 51 21.4 54 11,927 Non-Hispanicwhite 712 13 20,442 12,256 33 25 40 6.7 57 89,673 Allothers3 701 18 19,946 11,620 34 26 42 11.0 56 14,534 Incomeratio(percentofareamedian)4 LMI 677 26 12,343 6,539 39 39 62 12.3 55 30,845 Middle 692 20 17,638 12,088 35 26 49 10.2 58 34,663 High 722 10 25,485 15,538 30 17 28 8.3 56 61,705 Censustractofproperty Racialorethniccomposition(minoritiesasapercentofpopulation) Lessthan10 713 14 20,267 12,399 33 24 36 6.9 57 45,842 10–80 703 16 20,204 11,724 34 27 43 9.5 57 79,844 Morethan80 659 32 15,383 7,193 36 28 61 23.0 54 5,814 Incomeratio(percentofareamedian)5 LMI 670 27 15,698 8,449 35 28 60 16.9 53 17,849 Middle 694 19 18,907 11,661 35 27 47 10.8 57 63,485 High 724 10 22,427 12,806 32 24 31 6.1 59 50,125 CRAassessmentarea6 Outsideofassessmentarea 700 17 20,202 12,073 34 26 43 10.9 55 46,702 LMIborrowerorcensustract 675 26 13,747 7,628 38 35 60 15.0 52 13,987 Withinassessmentarea 718 11 19,459 10,279 33 24 42 5.0 55 41,717 LMIborrowerorcensustract 696 17 13,966 6,656 38 34 59 7.2 54 13,178 Note:First-lienmortgagesforowner-occupiedone-tofour-familyhomesinmetropolitanstatisticalareas. 1 CreditscoreistheEquifaxRiskScore3.0inthequarterbeforeorigination;consumerdebtistheborrower’snonmortgagedebtbefore origination;back-endpayment-to-income(PTI)ratioiscalculatedusingnonmortgagepaymentspriortooriginationplusmortgagepayments afterorigination;first-timeborrowersarethosewithnorecordofeverhavingamortgage;andloanperformancemeasureistheshareof borrowerswhoweremorethan60dayspastdueontheirmortgagesoveratwo-yearperiodsinceorigination. 2 Borrowersareplacedunderonlyonecategoryaccordingtotheraceandethnicityofthepersonlistedfirstontheapplication. 3 AllothersconsistofAmericanIndianorAlaskaNative,NativeHawaiianorotherPacificIslander,andapplicantsforwhomraceorethnicity wasnotreported. 4 Seetable12,note3. 5 Seetable12,note4. 6 Includesonlyloansoriginatedbydepositoryinstitutionsandtheirsubsidiariesoraffiliates. isticsof borrowers.ScorestendedtobeloweramongLMIborrowers(thosewithincomes of lessthan80percentof areamedianfamilyincome)andthoselivinginormovinginto LMIneighborhoods(censustractswithmedianfamilyincomelessthan80percentof area medianfamilyincome)orpredominantlyminorityneighborhoods. havesignificantlydifferentcreditscores.Moreover,totheextentthatjointstatusiscorrelatedwithotherborrowerandloancharacteristics,thedifferencesshownintables14and15maybeexacerbated.Forexample, in2006,27percentofblackhome-purchaseborrowershadaco-applicant,comparedwithnearly48percentfor non-Hispanicwhites.Thatsaid,anexaminationofindividuallyheldmortgagesindicatesverysimilarscoredifferencesacrossracegroups,suggestingthattheresultslikelywouldbequitesimilarevenifweobservedboth borrowersonjointmortgages.

MortgageMarketConditionsandBorrowerOutcomes 35 Table14.Creditcircumstancesofmortgageborrowers,bypurposeofloanandbydemographic,lender, andloancharacteristics,2006—continued A.Homepurchase—continued Percentexceptasnoted Creditcircumstances1 Consumerdebt Creditscore (dollars) Back-endPTI Performance Characteristicandstatus First-time Loan ofdelinquent mortgage Share Share home- perfor- borrowerson N Mean less Mean Median Median greater buyer mance nonmortgage (points) than than debt 620 43percent Typeoflender Depository 713 12 20,162 11,103 33 25 41 6.7 55 56,522 Subsidiaryoraffiliateofdepository 700 17 19,338 11,399 34 26 45 10.6 55 31,897 Creditunion 728 7 18,621 11,642 33 25 41 2.1 54 3,100 Independentmortgagecompany 685 24 19,486 12,126 35 28 45 14.6 58 39,985 Typeofloan Conventional 707 15 19,771 11,281 34 26 41 9.9 56 117,707 Higherpriced 624 50 18,681 11,190 36 30 56 31.0 58 21,355 Nothigherpriced 727 6 20,047 11,305 33 25 37 4.5 53 96,352 FHA 643 37 17,526 11,741 36 26 67 13.5 57 9,248 VA,RHS,orFSA 678 23 22,644 17,691 37 32 57 6.7 62 4,549 Typeofpurchasinginstitution Notsold 708 15 20,637 10,942 33 25 42 8.6 57 24,900 FannieMaeorFreddieMac 725 7 18,550 10,676 33 25 37 4.1 55 36,598 GinnieMaeorFarmerMac 656 32 20,097 14,661 36 29 62 9.8 59 4,519 Privatesecuritization 661 34 20,230 11,026 35 26 48 24.4 54 5,983 Bankoraffiliate 707 14 20,501 12,006 34 26 43 9.0 53 22,316 Lifeinsurancecompanyor mortgagebank 682 25 19,151 11,840 34 26 45 15.0 57 13,092 Other 684 23 19,875 12,200 35 27 48 14.6 58 24,096 All 701 17 19,714 11,504 34 26 43 10.0 56 131,504 LMI:Lowandmoderateincome;FHA:FederalHousingAdministration;VA:DepartmentofVeteransAffairs;RHS:RuralHousingService;FSA: FarmServiceAgency. Source:FFIECHMDAdatamatchedtoFRBNYConsumerCreditPanel/Equifax. Creditscoresdifferedbytypeof lender,typeof loan,andsecondary-marketpurchaserin 2006.Thedifferencesincreditscoresalongthesedimensionsreflectawiderangeof factors, includingdifferencesinthepopulationsserved,productofferings,andunderwritingstandards.Amonglenders,creditunionborrowershadthehighestaveragescores.Borrowers whoobtainedloansfromindependentmortgagecompanieshadthelowestscores,especiallyrefinanceborrowers,forwhomtheaveragescorewasunder660.Theelevatedincidenceof borrowerswithlowercreditscoresfromindependentmortgagecompaniesinthe 2006matcheddataisconsistentwithotherresearchindicatingthatsuchlenderstendedto originatelargersharesof subprimeandhigher-pricedcreditthanotherinstitutionsduring thisperiod.54 Acrossloantypes,scoreswerelowestforborrowerswhoobtainedconventionalhigherpricedloans,withaveragescoresof just624and610forhome-purchaseandrefinance loans,respectively.Finally,loansheldinportfolioandloanssoldtoFannieMaeandFreddieMachadthehighestscores.Incontrast,thosesoldintoprivatesecuritization(frequentlysubprimeloans)andtoGinnieMae—predominantlyFHAandVAloans—and FarmerMachadthelowestscores. 54 SeeAvery,Brevoort,andCanner,“The2007HMDAData,”innote35.

36 FederalReserveBulletin|November2013 Table14.Creditcircumstancesofmortgageborrowers,bypurposeofloanandbydemographic,lender, andloancharacteristics,2006 B.Refinance Percentexceptasnoted Creditcircumstances1 Consumerdebt Creditscore (dollars) Back-endPTI Performance Characteristicandstatus Loan ofdelinquent mortgage Share Share perfor- borrowerson N Mean less Mean Median Median greater mance nonmortgage (points) than than debt 620 43percent Borrower Minoritystatus2 Asian 714 11 24,584 13,134 34 29 9.7 49 4,897 BlackorAfricanAmerican 635 44 24,911 15,792 39 40 16.6 56 15,524 Hispanicwhite 667 27 20,683 12,342 37 35 17.2 55 16,526 Non-Hispanicwhite 695 19 26,769 17,040 35 31 9.2 55 102,078 Allothers3 671 29 24,972 15,884 36 35 13.9 55 27,123 Incomeratio(percentofareamedian)4 LMI 663 32 15,883 9,907 43 50 11.9 52 38,845 Middle 674 27 22,419 15,918 37 34 11.7 55 45,447 High 699 18 34,074 22,550 31 21 11.5 57 74,229 Censustractofproperty Racialorethniccomposition(minoritiesasapercentofpopulation) Lessthan10 693 20 27,048 17,271 35 31 9.1 53 51,225 10–80 683 24 25,686 16,272 36 33 12.0 56 99,491 Morethan80 648 37 20,748 11,978 37 37 16.0 55 15,424 Incomeratio(percentofareamedian)5 LMI 654 34 20,561 12,752 37 36 15.6 54 28,940 Middle 678 25 24,796 16,177 36 34 11.9 55 83,776 High 707 16 29,880 18,390 34 30 8.7 56 53,417 CRAassessmentarea6 Outsideofassessmentarea 678 25 26,391 17,219 37 35 11.8 54 58,553 LMIborrowerorcensustract 659 32 19,163 12,477 42 47 13.0 52 19,959 Withinassessmentarea 712 12 25,307 15,164 33 29 5.3 54 48,376 LMIborrowerorcensustract 698 16 17,732 10,469 38 39 5.9 53 15,018 Typeoflender Depository 705 14 25,538 15,475 33 29 7.3 54 65,646 Subsidiaryoraffiliateofdepository 674 26 26,493 17,609 38 38 11.5 55 41,283 Creditunion 725 8 25,131 16,527 34 31 1.8 56 5,111 Independentmortgagecompany 658 34 24,986 15,716 37 35 17.4 56 54,108 Typeofloan Conventional 684 23 25,628 16,050 36 33 11.5 55 161,497 Higherpriced 610 56 25,413 16,001 39 40 26.3 56 45,709 Nothigherpriced 715 9 25,719 16,080 34 30 5.3 53 115,788 FHA 630 44 23,440 17,884 39 39 13.7 56 4,077 VA,RHS,orFSA 651 36 25,682 21,916 39 37 10.1 63 574 Typeofpurchasinginstitution Notsold 690 21 26,362 16,525 34 30 9.5 55 45,086 FannieMaeorFreddieMac 717 9 23,583 15,309 35 31 3.9 52 35,460 GinnieMaeorFarmerMac 638 41 23,533 17,805 38 38 11.4 58 1,575 Privatesecuritization 638 44 25,977 15,636 39 39 21.4 55 12,476 Bankoraffiliate 687 21 26,280 16,749 36 34 10.8 54 26,384 Lifeinsurancecompanyor mortgagebank 657 35 25,395 16,062 36 34 16.8 56 21,187 Other 664 32 26,272 16,072 37 35 17.0 55 23,980 All 682 24 25,576 16,114 36 33 11.6 55 166,148 Note:Seenotestotable14.A.

MortgageMarketConditionsandBorrowerOutcomes 37 Table15.Creditcircumstancesofmortgageborrowers,bypurposeofloanandbydemographic,lender, andloancharacteristics,2010 A.Homepurchase Percentexceptasnoted Creditcircumstances1 Consumerdebt Creditscore (dollars) Back-endPTI Performance Characteristicandstatus First-time Loan ofdelinquent mortgage Share Share home- perfor- borrowerson N Mean less Mean Median Median greater buyer mance nonmortgage (points) than than debt 620 43percent Borrower Minoritystatus2 Asian 745 2.6 11,564 2,430 31 20 63 1.3 45 4,903 BlackorAfricanAmerican 677 21.3 19,233 11,219 38 34 69 9.6 54 4,706 Hispanicwhite 701 11.2 13,804 6,861 37 32 68 4.4 54 6,816 Non-Hispanicwhite 734 5.4 18,415 9,751 31 21 48 2.4 52 59,764 Allothers3 732 6.3 18,064 8,878 32 21 51 2.7 48 9,180 Incomeratio(percentofareamedian)4 LMI 707 10.7 11,661 5,817 38 34 70 4.7 55 26,954 Middle 726 6.8 17,437 10,689 32 20 54 2.8 50 22,226 High 752 2.8 24,098 12,407 26 12 32 1.2 45 35,422 Censustractofproperty Racialorethniccomposition(minoritiesasapercentofpopulation) Lessthan10 736 5.4 18,690 9,916 31 20 43 2.4 53 29,660 10–80 726 7.2 17,318 8,680 33 23 55 3.1 52 52,036 Morethan80 701 11.8 14,606 5,910 37 31 77 5.6 48 3,661 Incomeratio(percentofareamedian)5 LMI 707 10.4 14,890 6,956 34 25 71 4.1 54 9,915 Middle 720 8.1 16,924 9,361 33 24 57 3.5 51 40,667 High 745 4.1 19,456 9,256 31 20 40 1.9 52 34,754 CRAassessmentarea6 Outsideofassessmentarea 726 7.3 18,525 9,992 32 22 50 3.1 53 17,092 LMIborrowerorcensustract 705 11.6 13,350 7,087 37 33 69 5.0 54 6,043 Withinassessmentarea 734 5.7 17,603 7,884 31 20 51 2.3 52 36,522 LMIborrowerorcensustract 715 8.7 12,486 5,393 36 28 69 3.5 56 12,995 Typeoflender Depository 732 6.1 17,892 8,425 31 20 51 2.4 52 43,977 Subsidiaryoraffiliateofdepository 728 6.6 17,919 9,033 32 23 52 2.9 52 9,637 Creditunion 754 2.5 16,167 7,939 27 14 43 .5 28 2,788 Independentmortgagecompany 720 8.3 17,362 9,886 35 26 55 3.9 52 28,967 Typeofloan Conventional 764 1.2 15,673 4,734 27 13 37 .5 49 39,373 Higherpriced 699 15.8 23,365 10,242 30 24 45 3.3 70 600 Nothigherpriced 765 1.0 15,557 4,685 27 13 37 .5 46 38,773 FHA 699 11.2 18,653 11,701 37 30 65 5.0 52 36,569 VA,RHS,orFSA 703 11.4 21,559 15,062 35 25 57 4.6 52 9,427 Typeofpurchasinginstitution Notsold 738 5.8 19,938 7,652 30 19 46 2.0 52 11,771 FannieMaeorFreddieMac 766 .6 13,931 4,355 27 13 38 .4 38 16,816 GinnieMaeorFarmerMac 701 11.6 19,391 12,397 36 27 63 4.3 56 14,452 Privatesecuritization 729 7.5 17,534 8,918 31 20 54 3.9 41 411 Bankoraffiliate 721 7.7 18,027 9,924 34 25 55 3.7 52 21,162 Lifeinsurancecompanyor mortgagebank 723 7.3 18,127 10,035 34 25 52 3.3 45 7,421 Other 719 8.3 17,426 10,148 34 25 56 3.9 53 13,336 All 728 6.8 17,654 9,023 32 22 52 3.0 52 85,369 Note:Seenotestotable14.A.

38 FederalReserveBulletin|November2013 Table15.Creditcircumstancesofmortgageborrowers,bypurposeofloanandbydemographic,lender, andloancharacteristics,2010 B.Refinance Percentexceptasnoted Creditcircumstances1 Consumerdebt Creditscore (dollars) Back-endPTI Performanceof Characteristicandstatus Loan delinquent mortgage Share Share perfor- borrowerson N Mean less Mean Median Median greater mance nonmortgage (points) than than debt 620 43percent Borrower Minoritystatus2 Asian 784 1 12,369 3,089 26 15 .8 26 11,978 BlackorAfricanAmerican 728 7 24,621 17,072 33 28 3.3 39 5,794 Hispanicwhite 754 3 18,432 10,667 32 26 2.3 33 7,477 Non-Hispanicwhite 773 1 19,315 9,993 26 15 1.2 35 164,346 Allothers3 772 2 19,472 9,368 27 17 1.6 35 27,502 Incomeratio(percentofareamedian)4 LMI 760 3 12,329 5,866 36 34 2.0 38 36,240 Middle 769 2 16,457 9,367 29 16 1.3 34 48,140 High 783 1 22,479 11,000 22 8 .6 30 115,078 Censustractofproperty Racialorethniccomposition(minoritiesasapercentofpopulation) Lessthan10 772 1 19,827 10,644 26 14 1.2 37 93,427 10–80 772 2 18,583 8,842 27 17 1.4 34 118,479 Morethan80 752 4 17,387 8,801 33 28 2.2 32 5,174 Incomeratio(percentofareamedian)5 LMI 753 4 18,341 9,671 30 21 2.5 37 14,894 Middle 765 2 19,103 10,627 28 17 1.6 34 95,198 High 781 1 19,159 8,637 25 14 .9 36 106,956 CRAassessmentarea6 Outsideofassessmentarea 769 2 19,865 10,629 27 15 1.4 37 43,472 LMIborrowerorcensustract 757 3 14,686 7,604 35 30 2.3 39 8,610 Withinassessmentarea 775 1 18,739 8,875 26 16 1.2 33 112,477 LMIborrowerorcensustract 764 2 13,559 5,845 34 30 1.7 36 24,239 Typeoflender Depository 774 2 19,076 9,341 26 16 1.3 34 136,092 Subsidiaryoraffiliateofdepository 774 1 18,903 9,438 27 15 .9 36 19,857 Creditunion 779 2 17,568 9,183 24 11 .5 31 14,283 Independentmortgagecompany 763 2 19,554 10,670 29 18 1.9 37 46,865 Typeofloan Conventional 780 1 17,738 8,096 26 14 .7 31 188,085 Higherpriced 698 19 27,295 16,639 32 28 3.7 47 1,055 Nothigherpriced 781 1 17,681 8,049 26 14 .7 31 187,030 FHA 717 6 26,494 19,270 36 31 5.3 37 22,764 VA,RHS,orFSA 725 7 29,493 22,711 33 24 4.1 45 6,248 Typeofpurchasinginstitution Notsold 776 2 19,555 9,031 25 13 .9 33 37,997 FannieMaeorFreddieMac 780 1 17,394 8,028 26 14 .8 32 92,510 GinnieMaeorFarmerMac 713 9 27,262 20,369 34 27 5.3 39 10,793 Privatesecuritization 782 1 16,690 6,105 26 14 .4 33 1,153 Bankoraffiliate 771 1 19,235 9,980 28 18 1.5 35 42,636 Lifeinsurancecompanyor mortgagebank 761 2 20,771 11,929 29 19 1.9 37 13,930 Other 767 2 19,814 10,506 28 17 1.6 35 18,078 All 772 2 19,071 9,629 27 16 1.3 35 217,097 Note:Seenotestotable14.A.

MortgageMarketConditionsandBorrowerOutcomes 39 From2006to2010,averagecreditscoresrosesignificantlyacrossallcategoriesof borrowers,loans,andlenders.Overall,theaveragescorerosefrom701to728forhome-purchase loansandfrom682to772forrefinanceloans.Theincreaseinborrowercreditscoresmay reflectnotonlytighteningincreditstandardssince2006,butalsochangesinthedemand formortgagecredit.Forexample,demandamongborrowerswithlowerscoresmayhave weakenedmorethanthatof borrowerswithhigherscoresif lower-scoreborrowerswere moreadverselyaffectedbytherecession.Therelativelylargeincreaseinthescoresof refinanceborrowersbetween2006and2010likelyreflects,inpart,achangeinthecomposition of borrowersseekingtorefinance.Specifically,in2006,whentheinterestrateenvironment wasrelativelyunfavorable,evidencesuggeststhatthoseelectingtorefinanceweredoingso primarilytoextractequity,andthematcheddataindicatethatsuchborrowershadrelativelylowscores.Incontrast,in2010,thelow-interest-rateenvironmentappearsto haveattractedamuchlargershareof themostcreditworthyborrowerslookingtorefinance simplytoreducetheirmonthlypayments.55 Other Debts and Payment Obligations Themergeddatasetallowedustomeasureotherdebtsowed,inadditiontothemortgage matchedintheenhanceddatabase.Thesecondandthirdcolumnsintables14and15show meanandmedianconsumerdebtbalancesreportedintheCCPinthequarterpriorto originationof themortgage.Consumerdebtconsistsof allreportedbalancesowedother thanthoseassociatedwithmortgagedebt,suchasbankcreditcardandretailcardbalances,vehicleloans,studentloans,andconsumerinstallmentloans.Thenexttwocolumns provideinformationonback-endPTIratios,combiningpaymentsdataonalltypesof debt fromtheCCPandborrowerincomedatafromtheHMDAinformation.Thepayments dataarebasedonwhatlendersandservicersreporttoEquifax,whichtypicallyreflectsthe payment-dueamountonmonthlyaccountstatements.Formortgages,thisamountmay includepaymentsforpropertytaxesandinsurance,if collectedbytheservicer.Wereport medianPTIratiosaswellastheshareof borrowerswithaPTIratioexceeding43percent. UndertheDodd-FrankActasimplementedbytheCFPB,loanswithaPTIratioexceeding 43percentcouldfalloutsidethedefinitionof aqualifiedmortgage,andlendersmaking suchloanscouldfaceheightenedlegalriskintheeventof borrowerdefault.56 ItisimportanttonotethatthePTIratioswecalculatedarelikelytounderstatethePTI ratiosusedinunderwritingfortwomainreasons.First,forjointmortgages,becausewe matchedthecreditrecordinformationof onlyone(randomlyselected)borrower,theconsumerdebtsandpaymentswecalculatedexcludeindividuallyhelddebtsof other, unmatchedco-borrowers.Second,nondebtobligations,suchaschild-supportoralimony payments,maybeincludedbyunderwritersinPTIcalculations,butsuchobligationsare notavailableincreditrecorddataandthuscouldnotbeincludedinourcalculations. AlthoughtheestimatedPTIratiounderstatestruePTIratios,overone-fourthof homepurchaseborrowersin2006exceededthe43percentthreshold,asdidaboutone-thirdof refinanceborrowers.57In2010,thesenumberswerelower,especiallyforrefinanceborrow- 55 AccordingtoFreddieMac,nearly90percentofthe2006refinanceloansinitsportfoliowereestimatedto involvetakingcashout,comparedwithlessthan30percentin2010.SeeFreddieMac,Cash-outRefinance Report(McLean,Va.:FreddieMac),www.freddiemac.com/news/finance/refi_archives.htm. 56 Someloans,suchasthoseeligibleforFHAinsurance,VAguarantees,orpurchasebyFannieMaeorFreddie Mac,wouldbeexemptfromthe43percentPTIrule.SeethefinalruleoftheConsumerFinancialProtection Bureauonability-to-repaystandardsundertheTruthinLendingAct(RegulationZ),whichisavailableat www.federalregister.gov/articles/2013/06/12/2013-13173/ability-to-repay-and-qualified-mortgagestandards-under-the-truth-in-lending-act-regulation-z. 57 ThePTIstatisticsintables14and15reflectnonmortgagepaymentsjustbeforemortgageoriginationplus mortgagepaymentsjustafterorigination,butwealsoexaminedtotalpaymentsafteroriginationtoassess

40 FederalReserveBulletin|November2013 ers,forwhomtheproportionwasonlyabout16percent.Forhome-purchaseloansin2010, 22percenthadPTIratiosabove43percent,butabout70percentof theseloansweregovernmentbacked(dataderivedfromtable15.A),andsuchloanscouldstillbequalified mortgagesdespiteexceedingthethresholdunderthecurrentregulations.Withinagiven yearandloanpurpose,blackandHispanic-whiteborrowers,LMIborrowers,andthose usingFHAorVAloanstendtohavethehighestlikelihoodsof havingPTIratiosinexcess of 43percent. First-Time Homebuyers UsingtheCCPdata,wecanestimatethefractionof home-purchaseloanstofirst-time homebuyersastheshareof home-purchaseborrowerswhohavenorecordinthecredit bureaudataof everhavingamortgage.58Inboth2006and2010,theincidenceof first-time homebuyingwashigheramongminorityandLMIgroups,groupsthattendtohavelower creditscoresandhigherPTIratios.FHAandVAloansaremorelikelytobeusedbyfirsttimehomebuyersthanareconventionalloans,althoughin2006conventionalhigher-priced loanshadahigher-than-averageincidenceof first-timehomebuyers.Perhapssurprisingly, thefractionof home-purchaseloanstofirst-timehomebuyersincreasedmarkedlyfrom 2006to2010.Therelativestrengthof first-timehomebuying(home-purchaselendingoverallwasveryweakin2010)mayreflectseveralfactors,includingtemporaryfederaltax incentivesforsuchactivityavailablein2010andthepossibilitythatmanypotentialrepeat buyersweresaddledwithunderwaterpropertieshinderingtheirmobility.59 Loan Performance Creditrecorddataallowuserstoconstructanarrayof performancemeasuresrangingfrom paymentsmadeasscheduledorminordelinquencies(suchaspayments30daysinarrears) tometricsof more-seriouspaymentproblems(suchaspayments120ormoredayspastdue oranaccountincollectionsorforeclosure).Herewefocusononewidelyusedmetricof performance—theshareof mortgageborrowerswhosepaymentsfellbehind60daysor moreatanypointwithintwoyearsof takingouttheirloan.Incombinationwiththe HMDAdata,differencesinpaymentexperiencescanbeexploredacrosspopulationand neighborhoodgroups,typesof loans,andtypesof lenders. Varyingpaymentperformanceacrosspopulationscanreflectarangeof factors,including differencesinemploymentcircumstancesafterloanclosing(forexample,areductionin hoursandearnings),changesinfamilycircumstances(suchasdivorceorillness),anddifferencesinwealththatmaybedrawnontomakepaymentswhenunforeseeneventsarise. Homepricechangesmayalsoaffectpaymentperformance,asdeclinesinhomevaluesmay alterborrowerincentivestocontinuemakingscheduledpayments,limitrefinanceopportunitiesthatmayallowsomeborrowerstolowertheirmonthlypayments,orhindertheability tosellone’shomeintheeventof financialdistress.Inaddition,paymentperformancemay dependonthefeaturesandpricingof thehomeloanitself.Forexample,loansof similar amountstosimilarborrowersthatcarryhigherinterestratesimposeahighermonthlypaymentburdenandmayplacetheborroweratgreaterriskof default. whetherrefinanceloanswereusedtoconsolidatedebtsandreducethetotalpaymentburden.Onaverage,no sucheffectwasfound. 58 Totheextentthathome-purchaseborrowershaveownedahomeinthepastthatwasnotfinancedbyareportablemortgage,ourmeasurewilloverstatethetrueshareoffirst-timehomebuyers. 59 HomepurchasesthroughApril30,2010,thatwereclosedbeforeSeptember30,2010,mayhavebeeneligiblefor thefirst-timehomebuyertaxcredit.SeeInternalRevenueService,“First-TimeHomebuyerCredit,”webpage, www.irs.gov/uac/First-Time-Homebuyer-Credit-1.

MortgageMarketConditionsandBorrowerOutcomes 41 Thematcheddatarevealsignificantdifferencesinthepaymentperformanceof different populationsgroupedbyraceorethnicity,income,andneighborhooddemographiccharacteristics(seethe“Loanperformance”columnsof tables14and15).Thedataindicatethat blackandHispanic-whiteborrowersaremorelikelytofallbehindontheirpaymentsthan otherracialorethnicgroups.Inaddition,delinquencytendstobenegativelycorrelated withborrowerandneighborhoodincome,althoughin2006,therelationshipwithborrower incomewaslesspronounced.Forexample,in2006,thedifferenceindelinquencyrates betweenLMI-andhigh-incomehome-purchaseborrowerswasabout4percentagepoints, whilethedifferenceindelinquencyratesbetweenthoseinLMI-andhigh-incomecensus tractswas11percentagepoints.Onefactorthatmaybepushingupthedefaultrateof high-incomeborrowersismisreportingof incomeonloanapplications(byborrowersor loanofficers)attheheightof thehousingboom,asindicatedinpreviousresearch.60In otherwords,manyborrowersclassifiedashighincomein2006mayactuallyhavehadlower incomesthanstatedonapplications,andtheseborrowersmayhavehadarelativelyhigh likelihoodof default. Conventionalhigher-pricedloanspostedtheworstperformanceof anycategorylistedin table14,atoverthreetimestheoveralldelinquencyrateforhome-purchaseloans(31percentcomparedwith10percent)andmorethandoubletherateforrefinanceloans(26percentcomparedwith12percent).Thisoutcomemaynotbesurprisinggiventhecreditscores of borrowersinthiscategory;50percentof home-purchaseborrowersusinghigher-priced loanshadascorebelow620.Thatsaid,welatershowthatthepoorperformanceof higherpricedloanscannotbeexplainedentirelybycreditscores.Inotherwords,thefactthata loanishigherpricedmayconveyadditionalinformationaboutriskthatisnotcapturedby scoresalone. Theperformanceof loansoriginatedin2010improveddramaticallycomparedwiththose originatedin2006.Thetwo-yeardelinquencyrateforhome-purchaseandrefinanceloans originatedin2010wasjust3percentand1percent,respectively.FHAandVAloanshad thehighestdelinquencyratesacrossloanproducts;conventionalloans(alltypescombined) experienceddelinquencieswellbelow1percent,implyingalmostnorisk-takinginthenongovernment-backedmortgagemarketintheaftermathof thefinancialcrisis. Performance of Delinquent Mortgagors on Other Debt Obligations Asnoted,thematcheddataprovideanopportunitytoreviewtheperformanceof mortgage borrowersontheirothercreditobligations.Forthisarticle,wefocusontheshareof individualswhoweredelinquentontheirmortgageatanypointduringthetwo-yearperiod fromoriginationandwhowerealsolateontheirpaymentstoatleastoneotherdebtobligationasof thetwo-yearanniversaryof takingouttheirhomeloan.Evidenceof delinquencyonmultipleaccountsspeakstotheseverityof financialdistressthatmayhaveledto mortgagedelinquency.Forthe2006cohortof delinquentmortgageborrowers,overhalf of themwerealsodelinquentonatleastonenonmortgagedebtobligationatthetwo-year markafteropeningtheirmortgage(however,someborrowershavenootheraccountson whichtobedelinquent;excludingsuchborrowers,thefractionof delinquentmortgagors withanonmortgagedelinquencyrisestonearlytwo-thirds).Thereisremarkablylittle variationinperformanceacrossborrower,neighborhood,loan,orlendertype.Forthe2010 cohort,abouthalf of thehome-purchaseborrowersweredelinquentonatleastoneof their otherdebtobligations,while,amongthoseobtainingarefinanceloan,thesharewasnotablylowerat35percent.Theshareof 2010delinquentmortgageborrowerswhowerein arrearsonothercreditobligationsvariestosomeextentacrossgroups.Inparticular, 60 SeeAveryandothers,“TheMortgageMarketin2011,”innote10.

42 FederalReserveBulletin|November2013 Asians,higher-incomeborrowers,andborrowerswhoobtainedtheirhomeloanfroma creditunionorwhoseloanwaspurchasedbyFannieMaeorFreddieMacperformedbetterontheirotherdebtobligationsthanothergroups. Borrower Characteristics, Loan Performance, and the Community Reinvestment Act TheCongressenactedtheCRAtoencouragefederallyinsuredbankinginstitutionstohelp meetthecreditneedsof theirlocalcommunitiesinamannerconsistentwithsafeand soundlendingpractices.TheCRA-relatedlendingactivitiesof bankinginstitutionshave beencloselyscrutinizedbyregulators,researchers,andthegeneralpublic,especially recentlyasquestionshavebeenraisedaboutthelinkbetweentheCRAandthefinancial crisis.Inpreviousresearch,usingHMDAdataalone,wehaveshownthatintherun-upto theGreatRecession,theshareof allhigher-pricedloansoriginatedbybankinginstitutions intheirassessmentareas—thegeographicareasof focusinCRAenforcementexams—was small.61ThematchedHMDA–CCPdataprovideunique,complementaryinformationon thefinancialcharacteristicsof borrowersandtheperformanceof loansextendedbybankinginstitutionsinsidetheirassessmentareas. Inboth2006and2010,averagecreditscoresweresomewhathigherforloansoriginatedby bankinginstitutions(andtheirnondepositorysubsidiaries)forpropertiesinsidetheir assessmentareascomparedwithoutside,andPTIratiosalsotendedtobelowerforloans onpropertiesinsidesuchareasthanforthoseonpropertiesoutsidethem.Of course,the CRAemphasizeslendingtoLMIpopulationswithinassessmentareas,andsimilarpatterns holdforsuchloans.Forexample,in2006,theaveragecreditscoreforhome-purchaseloans toLMIborrowersorneighborhoodsinsideCRAassessmentareaswas21pointshigher thanforloanstoLMIborrowersoutsidesuchareas(696versus675).Further,thedataalso indicatethatthedelinquencyrateof loansextendedtoLMIborrowersoriginatedin2006 bybankinginstitutionsforpropertiesoutsidetheirassessmentareaswasmorethantwice therateof loansoriginatedforhomesinsidetheirassessmentareas.Forexample,outsideassessment-areahome-purchaseloanshadadelinquencyrateof 15percent,comparedwith just7percentforinside-assessment-arealoans. Furtheranalysis(notshown)suggeststhatthedifferenceinperformanceof loansinside andoutsideof assessmentareasseemstolargelyreflectthelikelihoodthatthebanking organizationsthattendedtomakeloansoutsideof theirassessmentareasin2006also tendedtomakeriskierloansingeneral.Inotherwords,theperformanceof inside-andoutside-assessment-arealoanswithinagivenbanktendstobequitesimilar. Finally,thedelinquencyratesfor2006home-purchaseandrefinanceloansthattheCRA promotes—thoseextendedtoLMIborrowersinsidebanks’assessmentareas—weresignificantlylowerthanthe10percentand12percentrates,respectively,forallhome-purchase andrefinanceloansoriginatedin2006.Moreover,CRA-targetedloansperformedmore thanfourtimesbetterthanhigher-pricedloansoriginatedin2006.Therelativelylowdelinquencyrateof loansencouragedbytheCRAisinconsistentwiththenotionthattheCRA wasaprincipaldriverof themortgageandfinancialcrisis. 61 SeeNeilBhuttaandGlennB.Canner(2009),“DidtheCRACausetheMortgageMarketMeltdown?”Federal ReserveBankofMinneapolis,CommunityDividend(March),www.minneapolisfed.org/publications_papers /pub_display.cfm?id=4136.

MortgageMarketConditionsandBorrowerOutcomes 43 Explaining Differences in Loan Performance across Groups Asdiscussedintheprevioussection,thematcheddatarevealsubstantialdifferencesinloan performance(delinquencyrates)acrossborrowersgroupedbytheirraceandethnicity.For example,thedelinquencyrateforAsianhomebuyersin2006waslessthan6percent, comparedwithover23percentforblackhomebuyers(asshownintable14.A).Thissection explorestheextenttowhichtheracialandethnicdifferencesinperformancecanbe explainedbyfactorssuchascreditscores,housepricedeclines,andmortgagepricing (undertheassumptionthatpricereflectsrisk).62Wecompareperformanceacrosspopulationgroupswithin12relativelynarrowcategoriesdefinedbyhigher-pricedloanstatus, creditscorerangeatorigination(under620,620–719,and720orover),andgeography (whetherornotpropertieswerelocatedin“housingbust”counties,wherehouse pricesdeclinedmostsharply).63Theanalysisalsodistinguishesbetweenhome-purchase andrefinanceloans. Focusingfirstonhome-purchaseloansinfigure2.A,wefindthatthethreevariablesused todefinethe12categoriesappeartobehighlycorrelatedwithloanperformance.Ineach panel,performanceimprovesdramaticallyascreditscoresrise,conditionalonraceandethnicity.Inaddition,performanceinhousing-bustcountiesconsistentlylagsthatinother counties,conditionalonscore,price,andraceorethnicity.Finally,foranygivenscore,geographic,andracialorethnicgroup,theperformanceof borrowerswithnon-higher-priced loansexceedsthatof borrowerswithhigher-pricedloans.Thisfindingsuggeststhatprice helpscaptureinformationaboutrisknotobservedinthematcheddata,suchasdown-paymentsizeoranindicationof whetherincomeandassetswerefullydocumentedduringthe applicationprocess.Ithasalsobeenhypothesizedthatsomelendersextendedloanswith higherpricesthatwerenotjustifiedonthebasisof risk,andthatthehigherpaymentburdeneventuallyledtodefault. Acrossracialandethnicgroups,notabledifferencesinperformancewerefoundevenwithin eachnarrowcategory.Forexample,Hispanicwhiteborrowerstendedtoposthigherdelinquencyratesthanothergroupswithineachscore-by-pricecategoryinthehousing-bust counties.Inaddition,blackborrowerswithcreditscoresbelow620innon-housing-bust countiesexperiencedhigherdelinquencyratesthanborrowersinotherracialandethnic groups.Furtherresearchisneededtobetterunderstandwhydifferencesinloanpayment performancepersistafteraccountingforscore,location,andhigher-pricedstatusof the loan.Thesedifferencesmaybedueinparttominoritiesbeingtreateddifferentlyinthe marketplace,whichhasbeenraisedbymanyasaseriousconcern,andseverallegalactions haveallegeddiscriminatorybehavioronthepartof lendersduringtheboom.Atthesame time,itisimportanttokeepinmindthatthematcheddatausedhereexcludesomekey variablesthatmightbecorrelatedwithbothloanperformanceandminoritystatus,suchas availablefinancialresourcesandpost-originationemploymentexperiences.64 62 Foranin-depthanalysis,usingsimilardata,offactorsaffectingmortgagedefaultacrossracialandethnic groups,seePatrickBayer,FernandoFerreira,andStephenL.Ross(2013),“TheVulnerabilityofMinority HomeownersintheHousingBoomandBust,”NBERWorkingPaperSeries19020(Cambridge,Mass.: NationalBureauofEconomicResearch,May). 63 Housing-bustcountiesaredefinedasthe25percentofcountieswiththesteepesthousepricedeclinesfrom December2006toDecember2008accordingtodatafromCoreLogic.TheCoreLogicdatacoverthevast majorityofMSAcounties.ThoseloansforpropertiesinareasnotcoveredbyCoreLogic(under3percentof loans)wereincludedinthesetof“othercounties.”Housing-bustcountiesconsistlargelyofcountiesinArizona,California,Florida,andNevada,aswellasanumberofcountiesinMaryland,Michigan,andMinnesota.SeeappendixfigureC.1foramapofhousing-bustcounties. 64 Whenweaccountmorepreciselyforlocation,loanpricing,andcreditscoreinamultivariateregression,wefind sizableandstatisticallysignificantdifferencesinloanperformanceforblacksandHispanicwhitesrelativeto non-Hispanicwhites.Infuturework,wewillexploretheeffectofotherfactorsthatmaybearonloanperformance.

44 FederalReserveBulletin|November2013 Figure2.A.Delinquencyrateson2006home-purchaseloans,byminoritystatus, higher-pricedloanstatus,location,andcreditscore Higher-priced loans in housing-bust counties Non-higher-priced loans in housing-bust counties Percent Percent 50 50 40 40 30 30 20 20 10 10 0 0 Below 620 620-719 720 and above Below 620 620-719 720 and above Higher-priced loans in other counties Non-higher-priced loans in other counties Percent Percent 50 50 40 40 30 30 20 20 10 10 0 0 Below 620 620-719 720 and above Below 620 620-719 720 and above Asian Black or African American Hispanic white Non-Hispanic white Note:Loansarefirst-lienmortgagesforowner-occupiedone-tofour-familyhomesinmetropolitanstatisticalareas.Fordefinitionofminority status,seetable14.A,note2.Housing-bustcountiesaredefinedasthe25percentofcountieswiththesteepesthousepricedeclinesfrom December2006toDecember2008.CreditscoreistheEquifaxRiskScore3.0,measuredinthequarterpriortoorigination.Delinquencyis definedasbecoming60daysormorepastdueatanytimewithintwoyearsoforigination. Source:FFIECHMDAdatamatchedtoFRBNYConsumerCreditPanel/Equifax. Withrespecttorefinanceloans,thepatternswithinandacrosspanelsonceagainindicate thatthethreevariablesusedtodefinethe12categoriesarehighlycorrelatedwithperformance(figure2.B).Interestingly,unliketheoutcomesforhome-purchaseloans,differences inperformanceacrossracialandethnicgroupswithincategoriesaremoremuted. Long-Term Outcomes for 2006 Home-Purchase Borrowers Thepanelstructureof theCCPprovidesanopportunitytostudythelong-termoutcomes of thosewhopurchasedtheirhomesattheheightof thehousingboom.Manyof these borrowersexperiencedsharpdeclinesinthevalueof theirhomes,aswellasemploymentrelatedeffectsof thesevererecession,soonaftertheyboughttheirhomes.Earliersections documentedsignificantdifferencesinperformanceonmortgagesinthefirsttwoyearsafter originationacrossdifferentpopulations.Herewelookatvariationintheprobabilityof havingamortgagesixormoreyearsafteroriginationof a2006home-purchaseloan(asof theendof 2012).Borrowerswhobecamedelinquentmayhavebeenabletorecoverfrom thedelinquency(bycuringtheirdelinquencyormodifyingtheirmortgage)andstayintheir home,whileothersmayhavelostorsoldthehometheyboughtin2006buthavebeenable Onecaveattokeepinmindwhenlookingatfigures2.Aand2.Bisthatincuttingthedatainto12categories, somecellshaverelativelyfewobservations,whichmaycontributetothevariabilityobserved.Inparticular,the relativelysmallnumberofAsianborrowersinsomecellscanleadtofairlyimpreciseestimatesoftheirdelinquencyrates(seeappendixtablesC.1.AandC.1.Bforobservationcountsineachcell).

MortgageMarketConditionsandBorrowerOutcomes 45 Figure2.B.Delinquencyrateson2006refinanceloans,byminoritystatus, higher-pricedloanstatus,location,andcreditscore Higher-priced loans in housing-bust counties Non-higher-priced loans in housing-bust counties Percent Percent 50 50 40 40 30 30 20 20 10 10 0 0 Below 620 620-719 720 and above Below 620 620-719 720 and above Higher-priced loans in other counties Non-higher-priced loans in other counties Percent Percent 50 50 40 40 30 30 20 20 10 10 0 0 Below 620 620-719 720 and above Below 620 620-719 720 and above Asian Black or African American Hispanic white Non-Hispanic white Note:Seenotestofigure2.A. togetanothermortgagetobuyanewhomemorerecently.65Wealsoexaminewhetherthe creditscoredynamics—scoredeclinesandscorerecovery—of thosewhomissedpayments ontheirmortgagesdifferbyborrowerraceandethnicity.66 Mortgage Status in 2012 for 2006 Homebuyers Thematcheddataindicatethatmanyof the2006borrowersappeartonolongerhavea mortgage,andthedatafurtherindicatethatblackandHispanic-whiteborrowerswhopurchasedtheirhomesin2006arefarlesslikelythanAsiansandnon-Hispanicwhitestohave mortgages(withallmortgagedebtingoodstanding)asof theendof 2012(figure3).67 Wellover60percentof Asianandnon-Hispanic-whiteborrowersstillhaveamortgage, comparedwithabout50percentof blackandHispanic-whiteborrowers(figure3,panel A).Thisdifferencelikelyreflectsthehigherdelinquencyrateof blacksandHispanicwhites ontheir2006mortgagesanddifficultiesdelinquentborrowersmayhavefacedingetting anothermortgagesubsequently.Thisdifficultycouldstemnotonlyfromthetightened 65 Theterm“curing”referstosituationsinwhichborrowerswhoaredelinquentontheirhomeloanstakestepsto coverthepaymentsinarrears. 66 Previousresearchhasexaminedscoredynamicsbeforeandafterforeclosure.SeeKennethP.Brevoortand CherylR.Cooper(2010),“Foreclosure’sWake:TheCreditExperiencesofIndividualsFollowingForeclosure,” FinanceandEconomicsDiscussionSeries2010-59(Washington:BoardofGovernorsoftheFederalReserve System,November),www.federalreserve.gov/pubs/feds/2010/index.html.Theresultshereprovidenewinformationonscoredynamicsbyraceandethnicity. 67 Onedata-relatedfactorthatmightbebiasingdownwardthefractionofborrowerswhoappeartostillhavea mortgageisthepotentiallaginreportingnewloanstothecreditbureaus.Manyborrowersrefinancedin2012, especiallytowardtheendoftheyear.Borrowerswhorefinancedattheendoftheyearmayappeartohaveno mortgagebecausethenewloanhasnotyetbeenreportedtoEquifax,whilethepreviousloanmayhavebeen reportedasclosed.

46 FederalReserveBulletin|November2013 creditstandardsprevailingsince Figure3.Fractionof2006home-purchaseborrowerswith therecession,butalsofromfinanamortgageattheendof2012,byminoritystatusand creditscore cialdifficultiesthatonce-delinquentborrowersmaycontinueto A. Fraction with at least one mortgage account at the end of 2012 face(forexample,longunemploy- (all mortgage accounts in good standing) mentspells).Alternatively,those Percent 80 whowentthroughdefaultmayalso nowprefertorentratherthanown. 60 Figure3alsoindicatesthat 40 accountingforcreditscoreatthe 20 timeof originationof the2006 0 loanhelpsexplainsome,butnot All Below 620 620-719 720 and above all,of thesedifferences. Credit score at origination in 2006 Thematcheddataalsoindicate B. Fraction whose 2006 mortgage is still open at the end of 20121 that,amongthosewhostillhavea Percent 80 mortgageasof theendof 2012, blackandHispanic-whiteborrow- 60 ersaremuchmorelikelytohave 40 thesameloantheyopenedin2006, evenconditionaloncreditscoreat 20 origination(figure3,panelB). 0 Moreover,thesedifferencespersist All Below 620 620-719 720 and above afteralsoaccountingforcurrent Credit score at origination in 2006 creditscoreaswellasgeographic Non-Hispanic white Asian Black or African American Hispanic white location.Thisfindingmight suggestthatsomeminoritygroups Note:Loansarefirst-lienmortgagesforowner-occupiedone-tofour-family homesinmetropolitanstatisticalareas.Fordefinitionofminoritystatus,see havebeenlesslikelytorefinance table14.A,note2.CreditscoreistheEquifaxRiskScore3.0,measuredinthe theirloansandbenefitfromthe quarterpriortooriginationin2006. 1.Onlyamongthosewhohaveatleastonemortgagebytheendof2012,with relativelylowinterestratesinrecent allmortgageaccountsingoodstanding. years.However,onepossiblemiti- Source:FFIECHMDAdatamatchedtoFRBNYConsumerCreditPanel/Equifax. gatingfactorcouldbethatblack andHispanic-whiteborrowers mightbemorelikelytohaveanadjustable-ratemortgagewhosepaymentshaveadjusted downwardsince2006.Amorepreciseunderstandingof thereasonsforthisdifference acrossgroupsrequiresadditionaldataandfurtherinvestigation. Credit Score Dynamics of Delinquent Mortgage Borrowers Finally,weexplorecreditscoredynamicsleadinguptoandafterloanoriginationin2006 forborrowerswhofellbehindby60daysormoreontheirmortgageswithintwoyearsof origination.Thetop-leftpanelinfigure4showsthetimepathof averagecreditscoresfor delinquentmortgagorsbythefourmainracialorethnicgroups,withtheverticallineindicatingthetimeof origination.Creditscorespeakedjustpriortoloanoriginationandthen droppedsharplysoonafterthatasborrowersbecamedelinquent.Scoresthenbeganto recoverbut,onaverage,werestillslightlylower24quarters(6years)afteroriginationthan theywereinthequarterjustbeforeorigination.Theslowrecoveryof scoresmayreflectthe severityandongoingfinancialstressthatdelinquentmortgageborrowersfaced. Thetop-rightpanelindexesscoresto100inthequarterpriortooriginationtomoreeasily comparescoredropsandrecoveriesacrossgroups.ThispanelshowsthatAsianandHispanic-whiteborrowershadasomewhatlargerdropintheircreditscores,onaverage, andscorerecoverywasquitesimilarforallgroups,withscoresat90percentto95percent of theirpeakvaluesixyearsafterorigination.Infigure5,welimitthesampletothosewho

MortgageMarketConditionsandBorrowerOutcomes 47 Figure4.Dynamicsofcreditscoresanddebtfordelinquent2006home-purchaseborrowers, byminoritystatus Average Equifax Risk Score Average Equifax Risk Score, indexed 750 105 700 100 650 95 600 90 550 85 500 80 450 75 -10-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 -10-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 Quarters since origination Quarters since origination Average mortgage balance Average nonmortgage debt balance (thousands of dollars) (thousands of dollars) 600 45 450 35 300 25 150 15 0 5 -10-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 -10-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 Quarters since origination Quarters since origination Share of mortgage debt 60 or more days late Share of nonmortgage debt 60 or more days late 1 1 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0 0 -10-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 -10-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 Quarters since origination Quarters since origination Asian Hispanic white Black or African American Non-Hispanic white Note:Loansarefirst-lienmortgagesforowner-occupiedone-tofour-familyhomesinmetropolitanstatisticalareas.Sampleconsistsof2006 home-purchaseborrowerswhobecame60ormoredayspastduewithintwoyearsoforigination;thetop-rightpanelisindexedto100atone quarterpriortoorigination;thebottomtwopanelsprovidethedollar-weightedaverageshareofbalancesthatare60ormoredayspastdueina givenquarterforthosewhohavepositivebalances.Fordefinitionofminoritystatus,seetable14.A,note2.Inallpanels,theverticalline extendingfrom0onthex-axisindicatesthetimeoforigination. Source:FFIECHMDAdatamatchedtoFRBNYConsumerCreditPanel/Equifax. purchasedpropertiesinCaliforniainordertohelpequalizethehousingandeconomicenvironment,andwefindherethatscorepatternsafteroriginationwerenearlyidenticalacross groups. Themiddletwopanelsof figures4and5showtheevolutionof reportedaveragemortgage andnonmortgagebalances.68Averagemortgagebalancesrosesharplyjustafterorigination and,aftersixyears,droppedbacktothelowlevelspriortooriginationforallgroups.69 68 Mortgagebalancespeakthreequartersafterorigination,inpartbecausenewloansoftenarereportedtothe credit-reportingagencieswithalag.AsdiscussedinappendixB,wematchonlyborrowersintheCCPwhose mortgagewasreportedwithintwoquartersoforigination.Borrowersmayalsotakeoutjuniorliensordrawon linesofcreditsoonafterorigination,pushingoverallmortgagebalanceshigher. 69 Averagesshowninfigures4,5,and6areforaconstantsampleofindividualswhotookaloanin2006,and

48 FederalReserveBulletin|November2013 Figure5.Dynamicsofcreditscoresanddebtfordelinquent2006home-purchaseborrowers inCalifornia,byminoritystatus Average Equifax Risk Score Average Equifax Risk Score, indexed 750 105 700 100 650 95 600 90 550 85 500 80 450 75 -10-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 Quarters since origination Quarters since origination Average mortgage balance Average nonmortgage debt balance (thousands of dollars) (thousands of dollars) 600 45 450 35 300 25 150 15 0 5 -10-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 -10-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 Quarters since origination Quarters since origination Share of mortgage debt 60 or more days late Share of nonmortgage debt 60 or more days late 1 1 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0 0 -10-8 -6 -4 -2 0 2 4 6 8 1012 14 16 18 20 22 24 -10-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 2224 Quarters since origination Quarters since origination Asian Hispanic white Black or African American Non-Hispanic white Note:Loansarefirst-lienmortgagesforowner-occupiedone-tofour-familyhomesinmetropolitanstatisticalareasinCalifornia.Sampleconsistsof2006home-purchaseborrowerswhoboughtpropertiesinCaliforniaandwhobecame60ormoredayspastduewithintwoyearsof origination;thetop-rightpanelisindexedto100atonequarterpriortoorigination;thebottomtwopanelsprovidethedollar-weightedaverage shareofbalancesthatare60ormoredayspastdueinagivenquarterforthosewhohavepositivebalances.Fordefinitionofminoritystatus, seetable14.A,note2.Inallpanels,theverticallineextendingfrom0onthex-axisindicatesthetimeoforigination. Source:FFIECHMDAdatamatchedtoFRBNYConsumerCreditPanel/Equifax. Nonmortgagebalancesalsopeakedjustafteroriginationandthenfellsignificantly.Infigure5,wherewelimitthesampletoCaliforniaborrowers,thereislessdispersioninpeak mortgageandnonmortgagedebtacrossdemographicgroups,withoneexception:Peak nonmortgagedebtof Hispanicwhiteswasabouthalf thatof othergroups.Moreover,the patternof nonmortgagedebtaccumulationbyHispanicwhiteswhobecamedelinquenton theirmortgageswassimilartoaverageaccumulationbyallHispanicwhiteborrowersin California,irrespectiveof delinquencystatus(figure6).Incontrast,nonmortgagedebt accumulationfordelinquentborrowersof otherracialandethnicgroupswasfarmorepronouncedwhencomparedwiththeaveragesof thegroupsatlarge.Thisfindingsuggests thustheyincludezerobalancesatpointsintimewhentheseindividualsdonothaveanymortgages outstanding.

MortgageMarketConditionsandBorrowerOutcomes 49 Figure6.Dynamicsofcreditscoresanddebtforall2006home-purchaseborrowersinCalifornia, byminoritystatus Average Equifax Risk Score Average Equifax Risk Score, indexed 750 105 700 100 650 95 600 90 550 85 500 80 450 75 -10-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 Quarters since origination Quarters since origination Average mortgage balance Average nonmortgage debt balance (thousands of dollars) (thousands of dollars) 600 45 500 35 400 300 25 200 15 100 0 5 -10-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 -10-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 202224 Quarters since origination Quarters since origination Share of mortgage debt 60 or more days late Share of nonmortgage debt 60 or more days late 1 1 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0 0 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 1820 2224 Quarters since origination Quarters since origination Asian Hispanic white Black or African American Non-Hispanic white Note:Loansarefirst-lienmortgagesforowner-occupiedone-tofour-familyhomesinmetropolitanstatisticalareasinCalifornia.Sampleconsistsof2006home-purchaseborrowerswhoboughtpropertiesinCalifornia;thetop-rightpanelisindexedto100atonequarterpriortoorigination;thebottomtwopanelsprovidethedollar-weightedaverageshareofbalancesthatare60ormoredayspastdueinagivenquarterfor thosewhohavepositivebalances.Fordefinitionofminoritystatus,seetable14.A,note2.Inallpanels,theverticallineextendingfrom0onthe x-axisindicatesthetimeoforigination. Source:FFIECHMDAdatamatchedtoFRBNYConsumerCreditPanel/Equifax. thatthefactorsdrivingmortgagedefaultsamongHispanicwhiteborrowersmayhavedifferedfromothergroupsandmayberelatedtotheunexplaineddifferenceinperformance byHispanicwhiteborrowersdocumentedinfigure2.A. Subsequentfallinglevelsof debtandagingof delinquencieslikelyarefactorscontributing toscorerecoveryovertime.Thebottomtwopanelsof figures4and5showthatdelinquencyremainselevatedthroughtheendof theobservationperiod,butthesedelinquencies reflectthepaymentstatusonlyof thosewhocontinuetocarrysubstantialdebt.70 70 Althoughthesampleinfigures4and5consistsonlyofthoseborrowerswhobecamedelinquentontheirmortgagesthatwelinkedtotheHMDAdata,thedelinquencyrateonmortgagedebtinthebottom-leftpaneldoes notreach100percentfortworeasons.First,someborrowersmaybecomedelinquentearlyonwithinthefirst twoyearsandthencure.Second,someborrowerscouldhaveothermortgagesonwhichtheyremaincurrent.

50 FederalReserveBulletin|November2013 Future Analysis Asourinitialanalysisof thematchedHMDA–CCPdataindicate,thesedataofferan opportunitytoinvestigateawiderangeof issuesrelatedtohomelending.Althoughthe matcheddatadonotincludeallfactorsthatresearchersseekwheninvestigatingconsumers’ borrowingexperiences,mergingthecreditrecordswiththeHMDAdataprovidesasignificantstepforwardinthisregardandwillserveasthebasisforfutureresearch.

MortgageMarketConditionsandBorrowerOutcomes 51 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

52 FederalReserveBulletin|November2013 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

MortgageMarketConditionsandBorrowerOutcomes 53 Appendix B: Matching HMDA Records with Credit Bureau Records Forthisarticle,wecreatedanewdatasetthatconnectsborrowersincludedintheHMDA loanrecords—thatis,thosereportedundertheHomeMortgageDisclosureActof 1975—totheircreditbureauinformationfromEquifax,oneof thethreemajorconsumer credit-reportingagenciesintheUnitedStates.Specifically,thecreditrecordsavailabletous formatchingcomefromtheFederalReserveBankof NewYorkConsumerCreditPanel/ Equifax(CCP)data.71TheCCPisa5percent,nationallyrepresentativesampleof allindividualswithacreditrecordandavalidSocialSecuritynumber.Furthermore,theCCPdata areaquarterlypanel,trackingthesameindividualsovertime.Thesamplingapproachis designedtogeneratethesameentryandexitbehaviorasispresentinthepopulation,with youngindividualsandimmigrantsenteringthesampleanddeceasedindividualsandemigrantsleavingthesampleeachquarteratthesamerateasintheU.S.population,suchthat eachquarterlysnapshotisnationallyrepresentative. NeithertheHMDAdatanorthecreditrecorddataincludepersonalidentifyinginformation,butborrowersinthetwodatasetscanbematchedbasedonthemortgageloaninformationcommontobothdatasets—specifically,loanamount,monthof loanorigination, andcensus-tractlocation.Becausewehaveaccesstotheconfidentialversionof theHMDA data,weobserveoriginationdates,whiletheCCPcontainsdetailedtrade-lineinformation oneachopenmortgageaccountaconsumerhasinanygivenquarter,includingtheloan amountandmonthopened.72TheCCPalsoprovidesthecensus-tractlocationsof consumers’reportedmailingaddresseseachquarter.Incontrast,theHMDArecordsprovide thecensus-tractlocationof thepropertysecuringthemortgage.Forthisreason,we attemptedtomatchonlyborrowersintheHMDArecordswhoobtainedloansforowneroccupiedproperties—wheremailingandpropertylocationsarelikelytocoincide. Inordertomatchagivenyearof HMDArecordstothecreditrecords,westartedwithall first-lienHMDAhome-purchaseandrefinanceoriginationsthatwereforone-tofour-familyowner-occupiedpropertiesinmetropolitanstatisticalareas(MSAs).Welimitedthedata toMSAsbecausetheHMDAdataaremorefullyrepresentativeof lendinginsuchareas.73 WealsoexcludedfromtheHMDAdata,priortomatching,theroughly15percentof loans thatarenotuniqueintermsof location,originationmonth,andloanamount.IntheCCP data,weidentifiedallindividualswhosemostrecentclosed-endmortgageloanwasopened twoquartersago,asnewloanstendtobereportedtocreditbureauswithalag.Thus,consumersintheCCPwhohavearecord,asof thethirdquarterof 2006,of openingamortgageinthefirstquarterof 2006wouldbeeligibletobematchedtotheHMDArecords fromthefirstquarterof 2006;thosewhohavearecord,asof thefourthquarterof 2006,of openingamortgageinthesecondquarterof 2006wouldbeeligibletobematchedtothe HMDArecordsfromthesecondquarterof 2006;andsoon.OnceweconnectedaHMDA recordtoanindividualintheCCP,wecouldtrackthatindividualintheCCPovertime. Becausethecreditrecorddataareonlya5percentsampleof thefullpopulation,onlya fractionof HMDAloanrecordswillberepresentedintheCCP.Of theHMDAloanseligibletobematchedin2006and2010,4.4percentwerematched,implyingamatchrateof about60percent.Toseethisresult,firstnotethatabout13.7millionHMDArecordswere eligibleformatchinginthetwoyears(includingtheroughly15percentof non-unique records).Of theserecords,48percenthadco-borrowers,andsuchloanshavetwicethe probability(ormore,if therearemorethantwoborrowers)of showingupintheCCPas 71 Forfurtherdetails,seenote49ofthemaintext. 72 Theterm“tradelines”referstotherecordsofcreditaccountsthatarereflectedincreditrecordfiles. 73 SeeRobertB.Avery,KennethP.Brevoort,andGlennB.Canner(2007),“OpportunitiesandIssuesinUsing HMDAData,”JournalofRealEstateResearch,vol.29(October–December),pp.351–79.

54 FederalReserveBulletin|November2013 individualmortgages,sincesamplingfortheCCPisdoneattheindividuallevel.Thus,the maximumnumberof matcheswecouldexpect(assumingthatalllendersreportmortgages toEquifax)isabout1million(13.7millionx0.05x1.48).Weactuallyobtained 600,118matches,orabout60percentof themaximumpossible. Severalfactorscontributedtotheimpliedmatchratebeingbelow100percent.First,as noted,about15percentof HMDArecordswerenotuniqueandthuscouldnotbe matched.Second,weusedonlythosemortgagesintheCCPthatwerereportedattwo quartersafterorigination;somemortgagesmayhavebeenreportedafterthreequartersor more,andthesemortgageswerenotmatched.And,third,althoughweusedonlyloans relatedtoowner-occupiedproperties,propertylocation(fromtheHMDAdata)andmailinglocation(fromtheCCP)donotalwayscoincide.Forexample,somehomebuyersusea postofficeboxthatislocatedinadifferentcensustractthantheirhome. Ourmainconcernwiththematchedsampleiswhetheritaccuratelyrepresentsthepoolof mortgageoriginations.Solongasnonmatchesoccurmostlyforrandomreasons,the 60percentmatchrateshouldnotposeaproblem.TableB.1comparessummarystatistics fromthefull2006and2010HMDAdatawiththematchedsamples.Ingeneral,thestatisticslineupquiteclosely,somewhatmoresoin2010thanin2006.Overall,thematcheddata arelikelytoprovideagoodrepresentationof first-lien,owner-occupant,one-tofour-familyhome-purchaseandrefinancelendinginU.S.metropolitanareasduring2006and2010.

MortgageMarketConditionsandBorrowerOutcomes 55 TableB.1.Comparisonoffull2006and2010HMDAdatasetswithmatchedsamples Percentexceptasnoted 2006 2010 Characteristicandstatus Full Matched Full Matched Amountofloan(thousandsofdollars)1 Mean 240 226 225 221 Median 190 180 185 184 Borrower Income(thousandsofdollars)2 Mean 97 89 109 105 Median 74 70 83 83 LMIshare 24 27 25 25 Minoritystatus3 Asian 4.3 3.6 6.2 5.7 BlackorAfricanAmerican 10.0 9.5 4.3 4.1 Hispanicwhite 12.4 10.3 5.6 5.0 Non-Hispanicwhite 59.2 62.6 72.1 73.1 Allothers4 14.1 14.0 11.8 12.1 Locationofborrowers Shareinlower-incomeneighborhood 18.1 17.1 9.2 9.1 ShareinCRAassessmentarea5 44.1 45.3 69.5 71.0 ShareofborrowersinArizona,California,Florida,orNevada 29.7 27.3 20.9 20.4 Typeoflender Depository 38.2 40.1 56.7 58.4 Nonbanksubsidiaryoraffiliateofadepository 23.2 24.7 9.8 9.9 Creditunion 2.7 2.5 6.0 5.4 Independentmortgagecompany 35.9 32.7 27.4 26.3 Loancharacteristic Nonconventional6 5.5 6.0 27.1 27.0 Higherpriced 26.5 24.3 1.6 .8 Homepurchase 49.6 44.4 32.7 30.7 Memo: Numberofloans 7,748,853 297,652 5,926,374 302,466 Note:“Full”columnsshowstatisticsfromHMDAdataforfirst-lienhome-purchaseandrefinanceoriginationsforone-tofour-family owner-occupiedpropertiesinmetropolitanstatisticalareas.“Matched”columnsshowstatisticsfromHMDAdatamatchedtotheFRBNY ConsumerCreditPanel/Equifaxdata. 1 LoanamountsarereportedunderHMDAtothenearest$1,000. 2 IncomeamountsarereportedunderHMDAtothenearest$1,000. 3 Borrowersareplacedunderonlyonecategoryaccordingtotheraceandethnicityofthepersonlistedfirstontheapplication. 4 AllothersconsistofAmericanIndianorAlaskaNative,NativeHawaiianorotherPacificIslander,andapplicantsforwhomraceorethnicity wasnotreported. 5 Includesonlyloansoriginatedbydepositoryinstitutionsandtheirsubsidiariesoraffiliates. 6 LoansinsuredbytheFederalHousingAdministrationorbackedbyguaranteesfromtheU.S.DepartmentofVeteransAffairs,theFarmService Agency,ortheRuralHousingService. LMI:Lowandmoderateincome;CRA:CommunityReinvestmentAct. Source:FFIECHMDAdatamatchedtoFRBNYConsumerCreditPanel/Equifax.

56 FederalReserveBulletin|November2013 FigureC.1.Housing-bustcounties Note:Goldareasidentifyhousing-bustcounties,whicharedefinedasthe25percentofcountieswiththesteepesthousepricedeclinesfrom December2006toDecember2008;lightgreenareasidentifynon-housing-bustcounties;andwhiteareasindicatethatdataarenotavailable. Source:HousepriceindexdatafromCoreLogic.

MortgageMarketConditionsandBorrowerOutcomes 57 TableC.1.Delinquencyratesfor2006borrowers,bypurposeofloanandbyminoritystatus, higher-pricedloanstatus,location,andcreditscore A.Homepurchase Percentexceptasnoted Creditscore Minoritystatus1 Below620 620–719 720andabove N Share Delinq.rate N Share Delinq.rate N Share Delinq.rate Higher-pricedloansinhousing-bustcounties2 Asian 99 1.7 40.8 144 2.5 33.9 43 .8 13.7 BlackorAfricanAmerican 837 8.6 51.3 369 3.8 34.2 89 .9 13.0 Hispanicwhite 1,043 8.7 52.0 1,152 9.7 42.8 319 2.7 25.0 Non-Hispanicwhite 1,633 1.8 43.1 1,317 1.5 22.4 454 .5 6.6 Allothers3 525 3.6 50.4 495 3.4 36.4 151 1.0 16.9 Higher-pricedloansinothercounties Asian 83 1.5 26.3 113 2.0 22.1 44 .8 5.6 BlackorAfricanAmerican 1,709 17.7 44.4 572 5.9 19.8 121 1.3 3.4 Hispanicwhite 847 7.1 31.8 626 5.2 17.0 145 1.2 4.9 Non-Hispanicwhite 3,724 4.2 32.6 2,481 2.8 14.5 758 .8 3.5 Allothers3 980 6.7 35.2 542 3.7 17.7 132 .9 5.4 Non-higher-pricedloansinhousing-bustcounties2 Asian 117 2.1 12.6 627 11.0 7.4 1,336 23.5 3.5 BlackorAfricanAmerican 496 5.1 32.5 825 8.5 11.7 559 5.8 3.0 Hispanicwhite 586 4.9 33.1 1,734 14.5 20.6 1,590 13.3 9.6 Non-Hispanicwhite 1,881 2.1 21.0 7,257 8.1 8.7 14,218 15.9 1.8 Allothers3 373 2.6 25.0 1,452 10.0 10.7 2,593 17.8 2.6 Non-higher-pricedloansinothercounties Asian 213 3.7 11.1 947 16.6 2.9 1,926 33.8 .4 BlackorAfricanAmerican 1,310 13.5 25.2 1,647 17.0 8.5 1,144 11.8 2.3 Hispanicwhite 893 7.5 16.0 1,621 13.6 6.0 1,371 11.5 1.4 Non-Hispanicwhite 5,271 5.9 15.7 17,574 19.6 4.3 33,105 36.9 .5 Allothers3 760 5.2 16.2 2,263 15.6 4.2 4,268 29.4 .6 Note:First-lienmortgagesforowner-occupiedone-tofour-familyhomesinmetropolitanstatisticalareas.Delinquencyratereferstothefraction ofborrowerswhobecame60ormoredayspastduewithintwoyearsoforigination;sharesinthetablerefertothepercentageofagivenracial orethnicgroupwithintheprice-location-scorecell. Thenumberofborrowers,byminoritystatus,isasfollows:Asian,5,692;blackorAfricanAmerican,9,678;Hispanicwhite,11,927; non-Hispanicwhite,89,673;andallothers(seenote3),14,534. 1 Borrowersareplacedunderonlyonecategoryaccordingtotheraceandethnicityofthepersonlistedfirstontheapplication. 2 Fordefinitionofhousing-bustcounties,seenotetofigureC.1. 3 AllothersconsistofAmericanIndianorAlaskaNative,NativeHawaiianorotherPacificIslander,andapplicantsforwhomraceorethnicity wasnotreported. Source:FFIECHMDAdatamatchedtoFRBNYConsumerCreditPanel/Equifax.

58 FederalReserveBulletin|November2013 TableC.1.Delinquencyratesfor2006borrowers,bypurposeofloanandbyminoritystatus, higher-pricedloanstatus,location,andcreditscore B.Refinance Percentexceptasnoted Creditscore Minoritystatus1 Below620 620–719 720andabove N Share Delinq.rate N Share Delinq.rate N Share Delinq.rate Higher-pricedloansinhousing-bustcounties2 Asian 191 3.9 46.0 200 4.1 33.0 103 2.1 16.6 BlackorAfricanAmerican 2,006 12.9 37.8 956 6.2 21.4 147 .9 10.6 Hispanicwhite 2,148 13.0 39.8 1,494 9.0 31.3 410 2.5 19.2 Non-Hispanicwhite 5,073 5.0 36.1 3,386 3.3 25.8 963 .9 9.7 Allothers3 2,728 10.1 39.6 1,532 5.6 26.5 371 1.4 10.1 Higher-pricedloansinothercounties Asian 128 2.6 22.7 142 2.9 22.2 39 .8 9.8 BlackorAfricanAmerican 2,978 19.2 25.6 1,267 8.2 13.9 194 1.2 2.8 Hispanicwhite 866 5.2 26.3 582 3.5 21.5 127 .8 13.7 Non-Hispanicwhite 7,251 7.1 27.2 4,842 4.7 14.1 1,292 1.3 3.6 Allothers3 2,677 9.9 28.8 1,418 5.2 16.6 315 1.2 4.7 Non-higher-pricedloansinhousing-bustcounties2 Asian 140 2.9 16.4 834 17.0 11.2 1,737 35.5 3.6 BlackorAfricanAmerican 832 5.4 19.5 1,794 11.6 7.5 1,202 7.7 2.7 Hispanicwhite 1,135 6.9 19.5 3,941 23.8 11.4 3,469 21.0 4.9 Non-Hispanicwhite 3,068 3.0 18.9 13,115 12.8 8.3 20,606 20.2 2.0 Allothers3 1,276 4.7 18.7 4,249 15.7 9.3 5,195 19.2 2.1 Non-higher-pricedloansinothercounties Asian 92 1.9 8.6 502 10.3 4.6 789 16.1 .9 BlackorAfricanAmerican 954 6.1 16.4 2,013 13.0 5.7 1,181 7.6 1.4 Hispanicwhite 355 2.1 13.4 1,135 6.9 6.6 864 5.2 3.0 Non-Hispanicwhite 3,668 3.6 14.1 15,244 14.9 4.6 23,570 23.1 .9 Allothers3 938 3.5 15.9 2,839 10.5 5.7 3,585 13.2 1.3 Note:SeenotestotableC.1.A.

59 Federal Reserve BULLETIN December 2013 Vol. 99, No. 5 Consumer Experiences with Credit Cards GlennB.CannerandGregoryElliehausen,oftheDivisionofResearchandStatistics,prepared thisarticle.ShiraE.StolarskyandMaduraWatanagaseprovidedresearchassistance. Byofferingconsumersbothameanstopayforgoodsandservicesandasourceof creditto financesuchpurchases,creditcardshavebecomethemostwidelyusedcreditinstrumentin theUnitedStates.Asapaymentdevice,creditcardsareareadysubstituteforchecks,cash, anddebitcardsformosttypesof purchases.Creditcardsfacilitatetransactionsthatwould otherwisebedifficultorcostly,suchaspurchasesovertheInternet,bytelephone,oroutsidethecountry.Asasourceof unsecuredcredit,creditcardsprovideconsumersthe optiontofinanceattheirdiscretionthepurchaseof anitemovertimewithouthavingto providethecreditorsomeformof collateralsuchasrealestateoravehicle.Moreover,the smallrequiredminimumpaymentsoncreditcardbalancesallowconsumerstodetermine themselveshowquicklytheywanttorepaytheborrowedfunds.Creditcardshaveother benefitsaswell,suchassecurityprotectionsoncardtransactionsandrewardsforuse.All of thesefeatureshavebeenvaluabletoconsumersandhavehelpedpromotethewidespread holdinganduseof creditcards. Recentfluctuationsineconomicactivityandchangesintheregulationof creditcardshave greatlyaffectedthecreditcardmarket.Asaconsequenceof theGreatRecessionandthe sloweconomicrecoverythathasensued,manyconsumershaveexperienceddifficultfinancialcircumstances.1Duringmuchof thisperiodlargenumbersof consumersfellbehindon theircreditcardpayments,causingdelinquencyandcharge-off ratestorisesharply.Asa furthersignof weaknessinthemarket,outstandingbalancesonrevolvingcredit,nearlyall of whichiscreditcarddebt,fellforthelongestconsecutivenumberof monthssince nationalstatisticshavebeenkeptandhaveonlyrecentlybeguntoreboundslowly.Thesituationhasimprovedmarkedlysincetheendof therecession,particularlyregardingthe incidenceof delinquencyanddefault,butsomeof theeffectsof thedownturnstilllinger, suchasreducedlevelsof borrowingandmore-restrictiveunderwriting. Thecreditcardmarkethasbeenfurtherbuffetedbynewconsumerprotectionregulations, mostnotablytheCreditCardAccountabilityResponsibilityandDisclosureActof 2009 (theCreditCardAct).2TheCreditCardActsoughttoimprovedisclosureof account termsandconditionstoconsumers.Theactalsorestrictsanumberof cardissuerpractices thattheCongressdeemedtobeunfair,deceptive,ornotsufficientlytransparent.Theprovisionsof theCreditCardActwereimplementedinphases,butallarenowineffect.Among theprovisionsof theactarelimitson“penalty”feesformakinglatepaymentsorexceeding creditlimits;rulesthatspecifyhowcreditorsmustallocateconsumerpaymentstooutstandingbalances;andrestrictionsoncertainrisk-managementpracticesbycardissuers,particularlylimitingtheirabilitytoraisetheinterestrateonanoutstandingbalanceunlessthe accountpaymentsaresignificantlyinarrearsortheinterestrateontheaccountisvariable (tiedtoanindex).Eachof theseprovisionsaffectstherevenuesandcostsof cardissuers. (Forfurtherdetailsabouttheprovisionsof theCreditCardAct,seethebox“TheCredit CardAccountabilityResponsibilityandDisclosureAct.”) 1 TheGreatRecessiondatesfromDecember2007throughJune2009. 2 TheCreditCardAct(Pub.L.No.111-24,123Stat.1734(2009))wassignedintolawonMay22,2009.

60 FederalReserveBulletin|December2013 TheCreditCardAccountabilityResponsibilityandDisclosureAct TheCreditCardAccountabilityResponsibilityandDisclosureActof2009(theCreditCard Act)isafederalstatuteintendedtoestablishfairandtransparentpracticesfortheextensionofcreditunderopen-endcreditplans,includingcreditcardaccounts.TheCreditCard ActamendedtheTruthinLendingActof1968(TILA)andwasimplementedunderthe FederalReserveBoard’sRegulationZinthreephases,withimplementationdatesof August20,2009;February22,2010;andAugust22,2010,forthevariousprovisions.1 ResponsibilityforTILAtransferredfromtheFederalReserveBoardtotheConsumerFinancialProtectionBureauonJuly21,2011. Historically,TILAreliedprimarilyonmandatorydisseminationofstandardizedinformation toprotectconsumers,basedonthepremisethatifcreditorsprovideclear,complete,and conspicuousdisclosureofaccounttermsandconditions,consumerscanmakeinformed choicesabouttheiruseofcredit,andthatsuchinformeduseencouragesconsumershoppingandpromotescompetition.Theactandsubsequentamendmentscontainedafew substantiverestrictions,butbyandlargetheregulationcreateddisclosurerequirements. Overtime,however,advocatesforsubstantiveregulationbecameinfluential.Theseadvocatesarguedthatcertaincommonunderwriting,pricing,andrisk-managementpracticesin theindustrywerenottransparentandwerefundamentallyunfairtocardholders.They arguedfurtherthatsuchpracticesmayhavecontributedtoconsumers’becomingexcessivelyindebtedandincurringsubstantialandunnecessaryexpenses.Asthesepractices werewidespreadanddifficultforconsumerstounderstand,advocatesforsubstantive regulationarguedthatdisclosureswouldbeineffectivetoaddressthem.Manyprovisions oftheCreditCardActaremotivatedbysucharguments. TheCreditCardActiscomprehensiveinitsreach,touchingonnearlyallaspectsofcard issuers’interactionswithprospectiveandcurrentcardholders.Theactmodifiesthedisclosuresthatconsumersreceivebothbeforeanaccountisestablishedandoncetheaccount hasbeenopened.Amongthechangesistheintroductionofdisclosuresrelatedtominimumpayments,includingadisclosureofhowlongitwouldtaketopayoffabalanceifthe cardholdermadeonlytherequiredminimummonthlypayments.Theactcontainsmany substantiverequirementsaddressingpracticesthattheCongressdeemedtobeunfairor deceptive,includingso-calleduniversaldefault.2Throughsomeofitskeyprovisions, theact ‰ requirescardissuerstoprovideaccountholdersareasonableperiodoftimetopaytheir bills ‰ establishesahierarchyfortheallocationofpaymentsreceivedinexcessoftherequired minimumpayment,requiringthatbalancesincurringthehighestrateofinterestbepaid offfirst ‰ requirescardholderstogivepermissiontocardissuerstoallowtransactionsthatwould causethecardholderstoexceedtheircreditlimit ‰ bansincreasesininterestratesonbalancesincurredinthefirstyearafteranaccountis openedandrestrictsincreasesofinterestratesonexistingbalancesincurredinsubsequentyears;inparticular,issuersmaynotincreaseinterestratesonexistingbalances unlesstheaccountfallssignificantlyinarrears ‰ limitstheamountoffeeschargedformakinglatepaymentsorforexceedingcreditlimits ‰ limitsfeesoncardswithlowcreditlimits ‰ restrictsmarketingandunderwritingpracticesregardingcardsissuedtoconsumers under21yearsofage ‰ requiresissuerstoconsideraconsumer’sabilitytopaybeforeanyaccountisestablishedoracreditlimitisincreased ‰ enhancesdisclosuresandrestrictsinactivityfeesforgiftcardsandotherstored-value cards 1 RegulationZ—TruthinLending,12C.F.R.pt.226(1981). 2 Universaldefaultistheformerpracticewherebyanissuerwouldraisetheinterestrateonacustomer’screditcard account,includingbalancescurrentlyowed,basedonfactorsnotdirectlyrelatedtothecardholder’saccountwith thatissuer.Forexample,anissuermightraisetheinterestrateonacardholder’saccountifheorshefellbehindon paymentsonotherdebts,includingthosewithothercreditors.

ConsumerExperienceswithCreditCards 61 Cardissuershaverespondedtothechangingeconomicconditionsandregulatoryenvironmentbyalteringthepricesandtermsofferedoncreditcards,thesizeof creditlinesmade availabletocardholders,andthemarketingof andaccesstotheirproducts.Someof these adjustmentsarelikelytocontinuetoplayoutovertimeascardissuersevaluatetheeffects of theirresponsesandconsumers’reactionstothesechanges. Thisarticleexaminesconsumers’behavior,experiences,andattitudeswithregardtocredit cardsintheaftermathof theseeconomicandregulatorychanges.Muchof thedataforthis articlearefromaFederalReserve–sponsorednationwideconsumersurveyconductedin February2012bytheThomsonReuters/Universityof MichiganSurveysof Consumers (Surveysof Consumers).Manyof thequestionsposedinthesurveywereidenticalorsimilartothoseaskedonearliersurveysalsosponsoredbytheFederalReserve,makingitpossibletotrackchangesovertimeinconsumerknowledge,behavior,andattitudesabout creditcardsandtogainamorecompleteunderstandingof consumerexperienceswiththis importantfinancialproduct.3Becauseconsumerattitudesandexperienceswithcreditcards asreflectedinresponsestoconsumersurveysmaybeaffectedbyconditionsinthebroader economy,wefirstpresentinformationfromvarioussourcesaboutconditionsinthecredit cardmarketpriortotheconsumersurveythatwasconductedinFebruary2012.Among thesourcesarecreditrecorddataandcreditscoresderivedfromthesedata,whichshed lightonrecentchangesinthecreditcardmarket,particularlyasthesechangesrelateto paymentperformanceandaccesstocredit.4Wethenexamineresponsestotheconsumer survey,takingintoaccountsomeof theimportantdifferencesfoundinhowconsumersuse theircreditcardsandintheirfinancialandothercircumstances. Themajorityof creditcardsaregeneral-purposecardsorso-calledbankcardsissuedunder theVisa,MasterCard,Discover,orAmericanExpressbrand.Therestof thecreditcard marketconsistslargelyof cardsissuedbystoresandbygascompanies.Unlessotherwise noted,mostof theanalysisthatfollowsfocusesonbankcards,astheirgeneral-purpose capabilitydistinguishesthemfromthevariousothertypesof creditcardsandfromcharge cards.5 Thefollowinglisthighlightsseveralprominentfindingsfromouranalysis: 1. Creditcardsareanimportantmethodof paymentandasignificantsourceof consumercredit.IntheUnitedStatesin2011,bankcardswereusedfornearly22billion transactionsvaluedatanestimated$2.1trillion.Revolvingcreditoutstandingwas 3 ForareviewoffindingsfromearlierFederalReserve–sponsoredsurveysfocusedonconsumeruseofcredit cards,seeThomasA.Durkin(2000),“CreditCards:UseandConsumerAttitudes,1970–2000,”FederalReserve Bulletin,vol.86(September),pp.623–34,www.federalreserve.gov/pubs/bulletin/2000/00index.htm;ThomasA. Durkin(2002),“ConsumersandCreditDisclosures:CreditCardsandCreditInsurance,”FederalReserveBulletin,vol.88(April),pp.201–13,www.federalreserve.gov/pubs/bulletin/2002/02index.htm;andThomasA.Durkin(2006),“CreditCardDisclosures,Solicitations,andPrivacyNotices:SurveyResultsofConsumerKnowledgeandBehavior,”FederalReserveBulletin,vol.92(August),pp.A109–A121,www.federalreserve.gov/pubs /bulletin/2006/06index.htm.AlsoseeBoardofGovernorsoftheFederalReserveSystem(2006),Reporttothe CongressonPracticesoftheConsumerCreditIndustryinSolicitingandExtendingCreditandTheirEffectson ConsumerDebtandInsolvency(Washington:BoardofGovernors,June),www.federalreserve.gov/publications /other-reports/default.htm. 4 Thecreditscoresusedhereindicatethelikelihoodofseriousdelinquency,bankruptcy,oranotherderogatory eventoverthenexttwoyearsbasedontheinformationinanindividual’screditreport.Inmostcreditscoringsystemsandforthescoresusedhere,lowerscoresrepresentagreaterriskofdefaultthanhigherscores. Foracomprehensivediscussionofcreditscores,seeBoardofGovernorsoftheFederalReserveSystem(2007), ReporttotheCongressonCreditScoringandItsEffectsontheAvailabilityandAffordabilityofCredit(Washington:BoardofGovernors,August),www.federalreserve.gov/publications/other-reports/default.htm. 5 Chargecards,whichareprimarilyameansofpayment,havebeenavailablesincethebeginningofthe20thcentury.Chargecardsprovidetemporarycreditforuptoamonthbutdonothavetherevolvingfeaturethatdistinguishescreditcards.SeeLewisMandell(1972),CreditCardUseintheUnitedStates(AnnArbor:Institute forSocialResearch,UniversityofMichigan).

62 FederalReserveBulletin|December2013 $847billionandconstituted32percentof allconsumercreditoutstandingattheendof 2011. 2. TheGreatRecessiontriggeredasignificantupswingindelinquenciesandcharge-offs oncreditcards,althoughcardholderpaymentperformancehasimprovedmarkedly sincethen.Thedelinquencyrateforbankcardsreached5percentof thenumberof outstandingaccountsinJune2009,thenrecededtoabout3percentbytheendof 2011. 3. Creditcardissuershaverespondedtotherecenteconomicdifficultiesinseveralways. Oneresponsehasbeentoreducepotentiallossesbyreducingthesizeof creditlines madeavailabletocardholdersandbyclosingaccounts.Anotherresponsehasbeento curtailpromotionalactivities,particularlymailsolicitations,andtoreorientsuch activitiestoindividualswhoposelesscreditrisk. 4. Theshareof individualswithcreditrecordsholdingatleastonebankcardwasfor manyyearsquitestable,atabout80percent,untiltheonsetof theGreatRecession. Sincethentheincidenceof cardholdinghasfallentoabout72percent.Thereduction intheincidenceof cardholdingappearstohavecomefromindividualsinallcredit scoregroups,althoughthelargestpercentagedeclineswereamongthosewithscores thatareassociatedwithelevateddefaultrates.BoththeGreatRecessionandregulatory restrictionsonrisk-managementpracticeslikelycontributed. 5. Overall,aboutone-fourthof cardholderssurveyedin2012reportedhavinganadverse experiencerelatedtocreditcardsinthepreviousyear,suchashavinganapplicationfor acreditcardturneddown,receivingalowercreditlimitthanrequested,orexperiencinganincreaseininterestratesorfees.Formanyof thesecardholders,theseevents appeartohavebeenassociatedwithlatepaymentsorinactiveaccounts. 6. Cardholderswhohadadverseexperiencesweremorelikelytohaveanegativeopinion of bankcardsthancardholderswhodidnothaveadverseexperiences.Evenso,most cardholderswhohadadverseexperiencesweresatisfiedwiththeirownaccountsand believedthattheircreditcardcompaniestreatedthemfairly. 7. Consumersurveysrevealatrendsince2000towardgreateruseof bankcardsasapaymentmediumratherthanasasourceof credit.In2000,50percentof bankcardholderssaidthattheyalmostalwayspaidthebalancetheyowedinfull;in2012,theproportionroseto62percent.Muchof theincreaseintheshareof cardholderswhoreported thattheytypicallypaidinfullhasoccurredsincetherecentrecessionandtheimplementationof thenewcreditcardregulations.Theproliferationof rewardscardslikely contributedtotheincreaseinthetransactionsuseof creditcards. 8. Opinionsaboutcreditcardusehavepolarizedsincethe1970s,withlargersharesof cardholdersexpressingunqualifiedviewsthatcarduseiseithera“goodthing”ora “badthing.”Theshareof cardholderswhoviewedcarduseasabadthingrosesubstantiallybetween2000and2012,whiletheshareof cardholdersviewingcarduseasa goodthingwaslittlechanged.Manyof thenegativeviewsappeartostemfromrespondents’beliefsthatcreditcardscauseproblemsforotherindividuals,notforthemselves. 9. Despitetheincreaseinnegativeviews,nearlyallcardholderscontinuedtobelievethat creditcardcompaniesprovideausefulservicetoconsumers.Similarly,almostallcardholdersbelievedthattheirowncreditcardcompaniestreatedthemfairly,andalmost allweresatisfiedintheirdealingswiththecompanies,althoughonlyabouthalf of the respondentsheldthesebeliefsstrongly.Mostcardholdersbelievedthattheycouldeasilygetabankcardfromanothercompanyif theywerenottreatedwell.Thesebeliefs werealsostrongamongcardholderswhohadexperiencedadverseactionsinthepreviousyear,asmentionedearlier. 10. Theshareof consumerswhobelievethatTruthinLendingstatementsarecomplicated hastrendedupwardovertheyears.Thischangingviewseemsconsistentwithdevelopmentsinthecreditcardmarketthathaveledtomore-complexproductofferingsand feeandinterestratestructuresand,asaconsequence,tolongerandmore-detailed disclosures.

ConsumerExperienceswithCreditCards 63 11. In2012,mostof thenewcardholderssurveyedsaidthattheyreadaccountdisclosure informationandfileditawayforpossiblefutureuse.Thosecardholderswhoweremost likelytorevolvebalancesfrequentlyweremorelikelythanotherstofinddisclosure informationuseful,becausemuchof itinvolvescreditcostsandtermsthatrelateto howtheyusetheircards. 12. Cardholderawarenessof annualpercentagerates(APRs)washighgenerally,butitwas highestamongthoseindividualswhousedtheircardsasasourceof credit.Thesefindings,whichechothoseof pastconsumersurveys,makesense,asthesearethecardholderswhoincurinterestpayments. 13. Mostcardholderswhohardlyeverpaidtheirmonthlybalanceinfullorwhomadeonly therequiredminimumpaymentsbelievedthatcreditcardsmademanagingtheir financeslessdifficultandweresatisfiedwiththeiraccounts.Thisbelief doesnotseem tosupportthehypothesisthatconsumersoverestimatetheirabilitytorepaytheircredit carddebt. 14. Newdisclosuresappeartohavehadlittleeffectontheshareof cardholderswhomake onlytherequiredminimumpayments. Disclosures and Consumer Protection Protectingconsumersintheirfinancialtransactionshasbeenalong-standinggoalof governmentpolicy.Atthefederallevel,theTruthinLendingActof 1968(TILA)wasthefirst inaseriesof statutesseekingtoprotectconsumersintheiruseof credit.6Historically, TILA’sfocushasbeenonrequiringclearandconsistentdisclosureof keytermsof credit arrangementsandassociatedcreditcosts.Inthisregard,TILAprescribesuniformmethods forcomputingthecostof creditacrossdifferentloanproducts,disclosingcreditterms,and resolvingerrorssuchasthoserelatedtobillingandpayments.TILAhasbeenamended overtheyears,mostrecentlybytheCreditCardActwithregardtoitsprovisionsoncredit cards. Aprimarygoalof TILAistopromotetheinformeduseof creditbyconsumers.Wellinformedconsumersarelesslikelytooverextendthemselvesintheiruseof creditandare morelikelytoshopamongcreditors,helpingtoensurethattheydonotpayexcessivelyhigh pricesorreceiveunfavorablecreditterms.TILAalsoprohibitsorlimitscertainpractices deemedtobeunfairordeceptive.Forexample,inthecreditcardarena,issuersfacelimits ontheimpositionof penaltyfeesandover-the-limitchargesandmaynotrepriceoutstandingbalancesexceptinlimitedcircumstances,suchaswhentheinterestrateontheaccount isvariableorwhenthecardholderissignificantlyinarrearsonhisorherpayments. Historically,creditcardlendinghasbeenprofitableandissuershavecompetedintenselyto acquirenewcustomers,retainexistingcardholders,andencouragemore-intensiveuseof theirproduct.7Competitionhastakenmanyformsasissuershavetargetedspecificpopulationstoencourageuseof cardsasasourceof credit(forexample,byraisingcreditlimits andbyofferingattractiveinterestratesonbalancetransfers)andasapaymentdevice(for example,byofferingavarietyof rewardstiedtocarduseandgenerallyforgoingannual fees).Issuershavealsobeenaggressiveintheuseof informationtobettermanagethecredit risksassociatedwithcreditcardlendingandtopricetheirproducts.Forexample,issuers 6 TruthinLendingAct,tit.I,Pub.L.No.90-321,82Stat.146(1968).ForacomprehensivereviewofTILA,see ThomasA.DurkinandGregoryElliehausen(2011),TruthinLending:Theory,History,andaWayForward (NewYork:OxfordUniversityPress). 7 SeeBoardofGovernorsoftheFederalReserveSystem(2013),ReporttotheCongressontheProfitabilityof CreditCardOperationsofDepositoryInstitutions(Washington:BoardofGovernors,June), www.federalreserve.gov/publications/other-reports/credit-card-profitability-2013.htm.

64 FederalReserveBulletin|December2013 routinelyreviewcustomers’creditrecordsandotherinformationtodecidewhetherto modifythesizeof creditlinesmadeavailabletothecustomers.Issuersalsoconsideravarietyof informationwhendeterminingwhichindividualsshouldreceivesolicitationsfor credit.Overall,creditcardpricingandproductfeatureshavebecomemorecomplexover time;whileofferingnewopportunitiestoconsumers,thegreatercomplexityhasalsopresentedchallengestoconsumersinselectingandusingcards. Notonlyhascomplexitymadeitmoredifficultforconsumerstocompletelyunderstand creditcardtermsandfeatures,butalsothewaythatissuershaveusedinformationhas,in somecases,beencontroversialandmayhaveaffectedconsumers’attitudesaboutcredit cardissuersandtheirproducts.Forexample,theuseof widelydiverseinformationabouta cardholder’sfinancialsituationtorepriceoutstandingbalances,asopposedtotheuseof suchinformationjusttopricenewborrowing,becameacontroversialpracticeandwasgenerallyprohibitedbytheCreditCardAct.Inaddition,thelargevolumeof creditcardmail solicitationsandotherhighlyvisiblemarketingprogramsmayhavefueledaperceptionthat issuers’lendingpracticesweretoolenientandencouragedexcessiveborrowing. Economic Conditions and Credit Cards Consumerexperiencesandattitudestowardcreditcards,asreflectedinconsumersurveys, maybeinfluencedbygeneraleconomicconditions;consumers’ownfinancialcircumstances;theexperiencesof friends,familymembers,andacquaintances;andgeneralknowledgeconveyedbymediareportsaboutthecreditcardmarket.Consumerswithsteady employmentandrisingincomes,forexample,mayhavedifferentexperienceswithandperceptionsof creditcardcompaniesandtheirproductsthanconsumerswithstagnant incomesoruncertainemploymentcircumstances,especiallyif economichardshipresultsin difficultiesinmanagingdebtsandmakingtimelypayments.Theformerlikelyreceiveregularsolicitationsfromcreditcardissuersofferingfavorableterms,largercreditlinesand rewards,orotherbenefits;thelattermayfacelimitedaccesstocredit,elevatedprices,and reductionsinthecreditlinesmadeavailableontheirexistingaccounts. Thefollowingsectionsdescribechangesincreditcardholdinganduseovertimeandissuer responsestotherecentdevelopmentsinthecreditcardmarketandthebroadereconomy. Thisreviewprovidesbackgroundinformationforouranalysisof responsestotheFebruary2012surveyregardingconsumers’recentexperienceswithandattitudestowardcredit cards. Credit Card Holding and Use Althoughcreditcardholdingincreasedrapidlyaftertheintroductionof creditcardsinthe 1950s,creditcard–relatedborrowingaccountedforaverysmallshareof consumercredit formanyyears.Asof 1970justoverhalf of U.S.householdshadoneormorecreditcards.8 Atthattime,revolvingcredittotaledonly$5.1billion($29.4billioninconstant2012dollars)andaccountedforjust3.8percentof totalconsumercreditoutstanding(figure1).9 8 Authors’calculationsfromthe1970SurveyofConsumerFinances,conductedbytheSurveyResearchCenter attheUniversityofMichigan.Formoreinformationaboutthesurvey,seeUniversityofMichigan,“Aboutthe Survey,”http://press.sca.isr.umich.edu/press/about_survey(accessedOctober28,2013).TheSurveyofConsumerFinancesfirstincludedquestionsoncreditcardsin1970. 9 TheFederalReservepublishesestimatesofconsumercrediteachmonth.SeeBoardofGovernorsoftheFederalReserveSystem,StatisticalReleaseG.19,“ConsumerCredit,”www.federalreserve.gov/releases/g19 /Current/.Revolvingconsumercreditconsistsofbalancesowedoncreditcardsandonunsecuredpersonallines ofcredit;itdoesnotincludehomeequitylinesofcreditormortgagedebt.TheFederalReservefirstenumeratedrevolvingconsumercreditseparatelyin1968.

Creditcardholdingandusegrew Figure1.Outstandingconsumercredit, substantiallyinsubsequent January1970–January2012 years.By1977,nearly63percentof householdshadcreditcards,and revolvingcredithadincreasedto $39.3billion($144.1billioninconstant2012dollars),anearlyfivefoldincreaseinconstantdollars; however,itstillaccountedforonly arelativelysmallshareof consumer credit. Less-restrictiveinterestrateregulationintheearly1980sallowed creditcardissuerstochargeinterestratesthatenabledthemto expandlendingtoconsumerswith highercreditriskandtooffercredit cardsasasubstituteforothertypes of credit,suchassmallpersonalinstallmentloans.10Inaddition,technologicaladvancesin informationprocessinggreatlyenhancedtheabilityof issuerstoevaluatethecreditriskof individualsapplyingforcreditcardsandtomonitorthebehaviorof existingcustomers.11 Issuers’abilitytoquicklyandrelativelyinexpensivelyjudgethecreditriskof prospective borrowersandcurrentcustomersandtomonitorhowcardholdersusetheirproducts allowedthemtocompeteaggressivelyfornewcustomers,providelargercreditlines,and offerproducttermsandfeaturesbettertailoredtotheneedsof consumers.Whiletheinnovationsthatallowedissuerstoexpandavailabilityandprovidedistinctivefeaturesmadethe creditcardamoreusefulandattractiveproduct,theincreasedcomplexitythatensuedalso raisedconcerns,includingwhetherconsumerscouldfullyunderstandthetermsandconditionsof theircardsandwhetherlowminimum-paymentrequirementsencouragedsome carduserstoborrowexcessively.12 Creditcardshavebecomeanimportantmethodof paymentandasignificantsourceof consumercredit.13In2011,bankcardswereusedforover22billiontransactionsinvolving purchasesof goodsandservicesvaluedatanestimated$2.1trillion.14Althoughdown about16percentfromitshistoricalhigh,revolvingcreditoutstandingwas$847.3billion andconstituted32percentof consumercreditoutstandingattheendof 2011(derived fromfigure1).Partof thegrowthinrevolvingcredithascomefromthesubstitutionof creditcarddebtforsometypesof nonrevolvingconsumercredit,especiallyloanspreviouslyusedtofinancepurchasesof relativelylessexpensivehouseholddurables,suchasfur- 10 TheSupremeCourt’sdecisioninMarquetteNationalBankofMinneapolisv.FirstofOmahaServiceCorporation,439U.S.299(1978),allowedbankstochargeout-of-stateborrowerslocalrates.In1980,SouthDakota deregulatedinterestrates,andDelawaredidsoin1981.Manyotherstatesderegulatedinterestratesinthenext year. 11 Foradiscussion,seeBoardofGovernors,ReporttotheCongressonCreditScoring,innote4. 12 See,forexample,GovernmentAccountabilityOffice(2006),CreditCards:IncreasedComplexityinRatesand FeesHeightensNeedforMoreEffectiveDisclosurestoConsumers,reporttotheCongress,GAO-06-929(Washington:GAO,September),www.gao.gov/products/GAO-06-929. 13 Foracomprehensivediscussionoftheroleofcreditcardsasamediumforpayment,seeKevinFoster,Erik Meijer,ScottSchuh,andMichaelA.Zabek(2011),“The2009SurveyofConsumerPaymentChoice,”Public PolicyDiscussionSeries11-1(Boston:FederalReserveBankofBoston,April),www.bos.frb.org/economic /ppdp/2011/ppdp1101.htm. 14 EstimatesarederivedfromtheNilsonReport.SeeHSNConsultantsInc.(2012),NilsonReport,no.988(February),tableentitled“U.S.GeneralPurposeCreditCards,”p.10.Thefiguresexcludechargecards,suchasthe DinersClubcardortheAmericanExpresschargecard(asdistinctfromAmericanExpresscreditcards). srallod fo snoilliB Revolving credit share of total credit 2000 0.4 1500 0.3 1000 0.2 500 0.1 0 0 1970 1976 1982 1988 1994 2000 2006 2012 noisseceR taerG ConsumerExperienceswithCreditCards 65 Nonrevolving credit (left scale) Revolving credit (left scale) Revolving share (right scale) Note:Consumercreditexcludesloanssecuredbyrealestate.Revolvingdebt consistsofbalancesowedoncreditcardsandunsecuredrevolvinglinesof credit.Nonrevolvingdebtconsistsofstudentloans,automobilecredit,andother non-real-estatedebt.TheshadedbarindicatestheperiodoftheGreatRecession asdefinedbytheNationalBureauofEconomicResearch. Source:FederalReserveBoard,StatisticalReleaseG.19,“ConsumerCredit.”

66 FederalReserveBulletin|December2013 niture,homeappliances,andentertainmentdevices.Alsocontributingtothegrowthin revolvingcreditwasanincreaseintheuseof so-calledconveniencecredit—thatis,credit usedfortransactionpurposessuchthatmonthlychargesarepaidinfullattheendof the billingcycle.15 Mostpubliclyavailableinformationaboutcreditcardholdinganduseisaboutindividuals; however,sincemanyfinancingdecisionsaremadeatthefamilylevelandattitudesand perspectivesaboutcreditcardsmaybeformedbasedoncollectiveexperience,itisusefulto considerthecreditcard–relatedactivitiesof families.Asof 2010,68percentof familieshad oneormorecreditcards(table1).16Thatequatedtoabout152millionconsumers(roughly two-thirdsof individualsage18orolder)holdingabout520millioncreditcards.17In2010, about39percentof familieswithcreditcardsdidnotpayoff theirfullstatementbalance eachmonth,butratherpaidaportionsothattheycarriedanoutstandingbalanceforward ontheirnextstatement.18Mostfamiliescarryingcreditcarddebtowedrelativelysmall amounts.Themedianamountowedbyfamiliescarryingdebtontheircreditcardswas about$2,600;theaverageamount,however,wasnotablylarger,at$7,100. Credit Card Behavior and Credit Risk Thefinancialandothercircumstancesof individualsaffectboththeirdemandforcredit cardsandthewillingnessof issuerstoprovidethemwiththisformof paymentdeviceand creditinstrument.Ingeneral,thewillingnessof lenderstosupplyunsecuredcredit—the typeof creditprovidedthroughbankcardborrowing—isinverselyrelatedtothecreditrisk posedbyconsumers.Atveryhighlevelsof creditrisk,issuersmaybeunwillingtoextend anycreditatallorwillseverelyrestrictthesizeof linesmadeavailableandpricesuchcredit accordingly.Consumerswhohavedemonstrateddifficultyhandlingcreditinthepastand Table1.Familyholdingsofdebt,bytypeofdebt,2010SurveyofConsumerFinances Securedby Creditcard3 residentialproperty Item Anydebt Installment Nonmortgage Other2 loans linesofcredit Sharewith Primary Other1 All4 positive residence balance Percentageoffamilies holdingdebt 74.9 47.0 5.4 46.3 2.1 6.4 68.0 39.4 Medianvalueofholdings forfamiliesholdingdebt (thousandsof2010 dollars) 70.3 110.0 97.0 12.7 6.0 4.5 … 2.7 Shareofalldebt 100.0 74.1 9.8 11.2 1.0 1.1 … 2.9 1 Secondorvacationhomesandinvestmentproperties. 2 Consistsprimarilyofsingle-paymentloans. 3 Balancesowedafterlastpayment. 4 Includeshouseholdsthathavecreditcardsbutthatdonothaveanycreditcarddebt.Amonghouseholdswithacreditcard,95.7percent holdabankcard. ...Notapplicable. Source:FederalReserveBoard,SurveyofConsumerFinances. 15 SeeKathleenW.Johnson,“ConvenienceorNecessity?UnderstandingtheRecentRiseinCreditCardDebt,” FinanceandEconomicsDiscussionSeries2004-47(Washington:BoardofGovernorsoftheFederalReserve System,September),www.federalreserve.gov/pubs/feds/2004/200447/200447abs.html. 16 SeeJesseBricker,ArthurB.Kennickell,KevinB.Moore,andJohnSabelhaus(2012),“ChangesinU.S.Family Financesfrom2007to2010:EvidencefromtheSurveyofConsumerFinances,”FederalReserveBulletin, vol.98(June),www.federalreserve.gov/pubs/bulletin/2012/default.htm. 17 TheestimateofthenumberofbankcardsisfromHSNConsultantsInc.,NilsonReport,innote14. 18 SeeBrickerandothers,“ChangesinU.S.FamilyFinancesfrom2007to2010,”innote16.

ConsumerExperienceswithCreditCards 67 thoseusinglargeamountsof creditrelativetotheirincomeandwealtharegenerallyriskier thanconsumerswhohavegoodpaymenthistoriesorusesmalleramountsof credit. Consumerswhoposeanelevatedcreditriskoftenseekcredittosupportgreatercurrent consumptionandsometimesresorttounsecured,high-ratecreditproducts,whichmay includesomebankcards,toaugmenttheirsecuredborrowing.Inseekingtoaugmenttheir borrowing,suchconsumerssignalthattheyposeahigherriskof defaultandoftenfindit difficulttoobtainadditionalcredit.Onesignthataconsumerisseekingadditionalcreditis thepresenceof inquiriesforcreditinhisorhercreditrecorddata.19Forexample,individualswhohaverelativelylowcreditscoreshaveanotablyhigherincidenceof creditinquiriesintheirfilesthanthosewithhighercreditscores,andtheytypicallyhavemoreinquiries indicatingthattheyareactivelysearchingformorecredit.Asof theendof 2011,68percentof individualswithcreditscoresinthelowest20percentof thescoredistributionhad arecordof acreditinquiryintheprevious12monthsintheircredithistoryfiles,and,on average,theseindividualshad3.3inquiries(datanotshownintables).Bycomparison,less than30percentof thosewithcreditscoresinthetop20percentof thescoredistribution hadaninquiryintheprevious12months,and,onaverage,theseindividualshad 1.6inquiries. Theresultof theseopposingsupplyanddemandeffects—thereluctanceof lendersto extendunsecuredcredittoindividualswhoposeahighercreditriskandtheelevated demandforsuchcreditbysuchindividuals—canbeseenbyexaminingdatafromanationallyrepresentativesampleof individualsdrawnfromcreditrecordfiles.20Severalrelationshipsarerevealedbyananalysisof thecreditrecorddata.First,theshareof individuals holdingatleastonebankcardwasformanyyearsquitestable,atabout80percent,untilthe onsetof theGreatRecession;afterward,theincidenceof cardholdingfelltoabout72percentin2010(table2).21(Notethattheunitof observationincreditrecorddataistheindividual,notthehouseholdasinearlieranalyses.)Thereductionintheincidenceof cardholdingappearstohavecomefromindividualsinallcreditscoregroups,althoughthe largestpercentagedeclineswereamongthosewithscoresinthetwolowestcreditscore quartiles(derivedfromdataintable2).Second,theincidenceof cardholdingisnotably smallerinthetwolowestcreditscorequartilesthaninthetwohighest.Attheendof 2011, about53percentof thoseinthelowestscorequartileandabout65percentof thoseinthe second-lowestscorequartileheldabankcard,comparedwithabout80percentof thosein thethirdquartileand90percentof thoseinthehighest.Thelowerincidenceof cardholdingamongthosewithlowerscoresmeansthatmostindividualswithbankcardshave fairlyhighcreditscores:Attheendof 2011,roughly60percentof allbankcardholders hadacreditscorethatplacedtheminthetoptwoquartilesof thescoredistribution. Intheyearsleadinguptoandintotherecession,bankcardholdersacrossthecreditrisk 19 Acreditinquiryariseswhenaconsumerhassoughtcreditfromalenderandthatlenderseeksinformationon theconsumer’scredithistorybycontactingthecredit-reportingcompany.Inquiriesthatarisewhenaconsumer isreviewinghisorherowncreditrecordaretreateddifferentlybythoseassessingthecreditworthinessofthe consumerandarenotusedincalculatingacreditscore. 20 ThecreditrecorddatausedherearefromtheFederalReserveBankofNewYorkConsumerCreditPanel/ Equifax(CCP)data.Foradescriptionofthesedata,seeDonghoonLeeandWilbertvanderKlaauw(2010), “AnIntroductiontotheFRBNYConsumerCreditPanel,”FederalReserveBankofNewYorkStaff Reports479(NewYork:FederalReserveBankofNewYork,November),www.newyorkfed.org/research/staff _reports/sr479.html.ThedataareprovidedeachquarterbyEquifax,Inc.,oneofthethreenationalconsumerreportingagencies,andarederivedfromanationallyrepresentativesampleofthecreditrecordsofindividuals. FortheCCPthesameindividualsaretrackedovertime.Asindividualsdropoutofthesample(forexample, becauseofdeath)theyarereplacedinamannerthatcontinuestoprovideanationallyrepresentativesample. Thedataareanonymous;allpersonallyidentifyinginformation(includingname,SocialSecuritynumber,and residentialaddress)isexcludedfromthedatareceivedbytheFederalReserve. 21 Fortheanalysishere,individualsareconsideredtohavehadabankcardduringagivenyeariftheyhadsuchan accountatanypointduringthatyear.

68 FederalReserveBulletin|December2013 Table2.Shareofindividualsholdingbankcards,bycreditscorequartile,2001–11 Percent Creditscorequartile1 Year Lowest Second Third Highest All 2001 71 79 85 90 81 2002 71 78 84 89 80 2003 69 76 84 90 80 2004 67 76 84 90 79 2005 67 76 84 91 79 2006 65 76 84 91 79 2007 67 76 85 91 80 2008 65 76 86 91 79 2009 57 69 83 89 74 2010 54 65 80 90 72 2011 53 65 81 90 72 1 Creditscorequartilesarebasedonthecreditscoredistributionattheendofthepreviousyear. Source:FRBNYConsumerCreditPanel/Equifax. spectrumincreasedtheirrevolvingdebt.Sincethen,allgroupshavereducedsuchborrowing(figure2).Thisbehavioralpatternreflectsthelong-standingobservationthatconsumersborrowmoreheavilyduringeconomicexpansions,whenprospectsaregood,and paydowndebtsduringrecessions.22Determiningtheextenttowhichchangesinoutstandingdebtoverthecurrentbusinesscyclearedrivenbycreditoractionsorbyconsumer behaviorisdifficult.However,becausethebankcardholderswiththehighestcreditscores aretheleastlikelytofacelender-imposedconstraintsonborrowing,arguablytherelatively smallreductionindebt(about6percentfromitspeakattheendof 2007)bycardholdersin thehighestscorequartileismostlikelydrivenbyconsumerchoice. Payment Performance and the Great Recession Althoughdelinquencyrateson creditcardstendtoberelatively Figure2.Averagetotalbankcardbalanceoutstanding,by higheveningoodeconomictimes, creditscorequartile,2005–11 therecentrecessiontriggeredasignificantupswingindelinquencies Credit score quartile Dollars 12,000 andcharge-offs.Thedelin- Lowest Second quencyrateonbankcardsreached Third Highest 10,000 justover5percentof thenumber 8,000 of outstandingaccountsin 6,000 June2009(theofficialendof the 4,000 GreatRecession),recedingto about3percentbytheendof 2011 2,000 (figure3).23Incontrast,delin- 0 2005:Q4 2006:Q4 2007:Q4 2008:Q4 2009:Q4 2010:Q4 2011:Q4 quencyratesonclosed-endconsumercredit(suchasautomobile Note:Seenotestotable2. 22 SeeGeorgeKatona(1975),PsychologicalEconomics(NewYork:Elsevier),or,morerecently,DeanMaki (2002),“TheGrowthofConsumerCreditandtheHouseholdDebtServiceBurden,”inThomasA.Durkinand MichaelE.Staten,eds.,TheImpactofPublicPolicyonConsumerCredit(Boston:KluwerAcademicPublishers),pp.43–63. 23 Delinquencyratesroseevenmoresharplywhenstatedindollartermsthanwhenmeasuredbythepercentageof accounts.Theelevatedcharge-offsassociatedwiththeGreatRecessionresultedincardissuers’experiencing negativereturnsoncreditcardactivitiesin2009,thefirsttimeissuershadhadnegativereturnssinceatleast

loans)peakedatabout4percent Figure3.Creditcarddelinquencyrate,2000–11 duringtherecessionbeforefalling toabout2to3percentduringthe Percent recovery. 6 5 Althoughadelinquencyrateof 4 5percentof bankcardaccounts mightsuggestthatpaymentprob- 3 lemsariseforonlyarelativelysmall 2 shareof bankcardholders,asnap- 1 shotviewsuchasthisunderstates theextentof paymentproblems 0 2000 2002 2004 2006 2008 2010 2012 thatindividualsexperience.First, themeasureof theshareof bankcardaccountsthatarecurrently delinquenttendstodownplaythe proportionof activeaccountsthat experienceddifficultiesbecauseit includesinthedenominatoraccountsthataredormantorinactivebutstillopenandavailableforuseattheconsumer’sdiscretion.Second,manymoreindividualsexperiencesome paymentproblemoveranintervalof time,suchasayearormore,thanatanysinglepoint intime(forexample,attheendof acalendarquarter).Thedifferencebetweenthetwo measuresreflectsthefactthatmanyindividualswhoexperienceaproblematsomepoint gettheirpaymentsbackontrackandthatlenderscloseandchargeoff anaccountafteran extendedperiodof delinquency. Therefore,togainamorecomprehensiveviewof paymentperformanceduringtheyearsof theGreatRecessionandtheearlyrecovery,wedeterminedthenumberof cardholderswho experiencedsomepaymentproblematanypointduringthatperiod.Fortheanalysis,we trackedasampleof individualswhowereconsistentlyincludedinthecreditrecordfilesfrom theendof 2007throughtheendof 2011(thispopulationisreferredtohereastheconstant panel).Overthisentirefour-yearperiod,about20percentof individualswithabankcardin theconstantpanelfellbehindonpaymentsononeormoresuchcardsby30daysormoreat leastonce(datanotshownintables).Bycomparison,attheendof 2009(onarandomly selectedsingledatewithinthisfour-yearperiod),only10percentof individualswithabankcardintheconstantpanelwereinarrearsby30daysormoreonatleastoneof theircards. Oneunusualaspectof cardholderbehaviorduringtheGreatRecessionwasthatconsumers’hierarchyof debtpaymentsseemedtochange.Inthepast,whenconsumersexperiencedfinancialdistress,theytendedtofallbehindontheircreditcardaccountsbefore otherdebts.DuringtheGreatRecession,manycardholderscontinuedtomaketheircard paymentsasscheduledevenastheyfellbehindontheirmortgages.Inalllikelihood,delinquencyratesoncreditcardswouldhavebeenworsehadcardholdersfollowedtheirhistoricalpaymenthierarchy.24 1986.SeeBoardofGovernorsoftheFederalReserveSystem(2011),ReporttotheCongressontheProfitability ofCreditCardOperationsofDepositoryInstitutions(Washington:BoardofGovernors,June), www.federalreserve.gov/publications/other-reports/credit-card-profitability-2011.htm. 24 EzraD.Becker(2011),“APerspectiveonCreditCardUsageandConsumerPerformance,”paperpresentedat theConsumerFinancialProtectionBureauconferenceontheCreditCardAct,Washington,D.C.,February22,www.consumerfinance.gov/credit-cards/credit-card-act/card-act-conference-key-findings. noisseceR taerG ConsumerExperienceswithCreditCards 69 Note:Loans30daysormorepastdueatcommercialbanks.Theshadedbar indicatestheperiodoftheGreatRecessionasdefinedbytheNationalBureauof EconomicResearch. Source:AmericanBankersAssociation,ConsumerCreditDelinquencyBulletin.

70 FederalReserveBulletin|December2013 Geographic Differences in Bankcard Delinquencies TheFederalReserveBankof NewYorkConsumerCreditPanel/Equifax(CCP)datacan offerfurtherinsightintothepaymentexperiencesof cardholders.AlthoughtheGreat Recessionandtheensuingrecoveryhavebeennationalphenomena,cardholdersindifferentareasof thecountryhaveexperiencedconsiderablydifferenteconomicenvironments, whichmayhaveaffectedtheirwillingnessorabilitytomeettheirdebtobligations,including creditcardpayments.Asnoted,theeconomicenvironmentsdifferentindividualshave encounteredandtheirpersonalexperiencesmayhaveinfluencedtheirresponsestotheFebruary2012consumersurvey. Togaininsightintotheextenttowhichdifferenteconomicenvironmentsmayhaveinfluencedbankcardholderbehavior,weexaminedcardholderpaymentperformanceacross groupsof statescategorizedaccordingtochangesintheirjobmarketconditions.Forthis exercise,wecomparedtheratesof delinquencylasting60daysormoreamongcardholders residinginstatesthatexperiencedparticularlypooremploymentmarketswiththedelinquencyratesof thoseresidinginstatesthathadrelativelybetteroutcomes.Specifically,we comparedthebankcarddelinquencyratesof theresidentsof the10statesthatexperienced thelargestpercentageincreaseintheirunemploymentratefromtheendof 2007totheend of 2010withthedelinquencyratesof theresidentsof the10statesthatexperiencedthe smallestpercentageincreaseoverthisperiod.25Thebankcarddelinquencyrateforthe nationasawholewascalculatedasapointof reference. Theanalysisrevealsvariationinbankcardperformanceacrossthetwogroupsof statesas theGreatRecessiontookholdandduringtheinitialphasesof theensuingrecovery.Asone mightexpect,bankcardholdersinstatesthatexperiencedthelargestpercentageincreasein theirunemploymentratehadworsepaymentperformancethanbankcardholdersinthe statesthatexperiencedthesmallestincreaseinunemployment.Fromtheendof 2007tothe endof 2010,bankcardholdersin the10stateswiththepoorestjob Figure4.Bankcardholders60daysormoredelinquent,by performanceexperiencedabouta statesgroupedbythepercentagechangeintheir 10percentincreaseintherateof unemploymentrate,2007:Q4–2010:Q4 delinquencylasting60daysor more,comparedwitha3percent Percent States, by percentage change in unemployment rate decreaseforbankcardholdersin 18 Largest increase National Smallest increase the10stateswiththestrongestjob 16 markets.Theseoutcomesare 14 derivedfromthedataportrayedin 12 figure4,whichshowawideningof 10 thegapindelinquencyrates 8 betweencardholdersinthestates 6 thatexperiencedpooremployment 2007:Q4 2008:Q1 2008:Q2 2008:Q3 2008:Q4 2009:Q1 2009:Q2 2009:Q3 2009:Q4 2010:Q1 2010:Q2 2010:Q3 2010:Q4 outcomesandthoseinstateswith betteroutcomes. Note:Stateswiththelargestpercentageincreaseinunemploymentconsistof Alabama,Arizona,Colorado,Florida,Idaho,Maryland,Nevada,NewMexico,Utah, andWyoming.Stateswiththesmallestpercentageincreaseinunemployment consistofAlaska,Arkansas,Iowa,Kansas,Maine,Michigan,Minnesota,North Dakota,Ohio,andVermont. Source:FRBNYConsumerCreditPanel/Equifax. 25 Analternativeapproachtodistinguishingstatesthathadparticularlypooremploymentconditionsfromthose withrelativelygoodconditionsistoconsidertheabsoluteincreaseineachstate’sunemploymentrate,as opposedtothepercentageincrease.Analysisusingthisapproachyieldedtimepatternsthatwerequitesimilar, showingthatstatesthathadpoorjobmarketoutcomesaccordingtothismetricalsohadnotablyworse bankcarddelinquencyrateoutcomesthanotherstates(datanotshownintables).

ConsumerExperienceswithCreditCards 71 Issuer Responses Creditcardissuershaverespondedtotherecenteconomicdifficulties,newregulations,and othereventsinavarietyof ways.Oneresponsehasbeentorepricemanyaccounts,most notablybyincreasingtheinterestrateschargedonrevolvingbalancesforsomecardholders. Alsointhepricingrealm,issuershavealteredtheirfeeschedulesforcardholderswhomake latepaymentsorexceedtheircreditlimits.Issuershavealsocurtailedpotentiallossesby reducingthesizeof creditlinesmadeavailabletocardholdersandbyclosingsome accounts.26Anotherresponsehasbeentoreduceorreorientpromotionalactivities,particularlyawayfromthoseconsumersjudgedtoposeelevatedcreditrisk.Eachof these responsesisexploredbelow. Repricing Overthepastfewyearsissuershaverepricedmillionsof bankcardaccounts.Datarepresentingasubsetof thelargestbankcardissuersindicatethatmanyaccountsexperiencedan increaseininterestratesasaconsequenceof eitherlatepaymentsorchangesinterms aroundthetimewhenbankcarddelinquenciesincreasedcoincidentwiththeGreatRecessionandwhentheCreditCardActrulemakingwasinplay.However,theshareof accounts experiencinginterestrateincreasesasapenaltyorbecauseof achangeintermsdropped substantiallyoncetheprovisionsof theCreditCardActtookeffect.Forexample,about 4percentof bankcardaccountsexperiencedanincreaseintheirAPRbecauseof apenalty orchangeintermseachquarterinthefirsthalf of 2008,butthissharedroppedtoabout 1.5percenteachquarterbythesecondhalf of 2010.27Also,theincidenceof latefeesand thetypicalamountof suchfeesfelloncetheprovisionsof theCreditCardActbecame effective.28 Credit Limits Thedatashowthatintheaggregate,creditlimitsoncreditcardsgrewsteadilyintheperiod beforetheGreatRecession,reachingapeakof about$3.7trillioninthethirdquarterof 2008beforefallingtoabout$2.7trillionattheendof 2011(datanotshownintables).29As theeconomyhasrecovered,aggregatecreditlimitshavegrownmodestly,buttheystill remainabout25percentbelowtheirpeakvalue.Consistentwiththelargedropinthe aggregatedollaramountof creditlinesmadeavailable,creditrecorddataalsoindicatethat 26 TheSeniorLoanOfficerOpinionSurveyonBankLendingPractices,sponsoredbytheFederalReserve,indicatesthatmostcreditcardissuerswerereducingcreditlimitsduringtherecession,butsincethattimetheshare curtailinglimitshasfallensharplybacktothelevelsseenduringtheyearsprecedingthefinancialcrisisand recession.SeeBoardofGovernorsoftheFederalReserveSystem(variousdates),“SeniorLoanOfficerOpinionSurveyonBankLendingPractices,”BoardofGovernors,www.federalreserve.gov/boarddocs /SnloanSurvey.Duringtherecessionissuersalsoclosedmanydormantorlittle-usedaccountsaswellas accountsthathadbecomedelinquent.Thismoverepresentedanaggressiveresponsebyissuerstothedifficult economicenvironment;inactiveorlittle-usedaccountsposeconsiderableriskoflosswhileofferinglittlepotentialforprofit,ascardholdersmaydrawonthemasemergencylinesofcreditwhentheyareinfinancialdistress. 27 SeeConsumerFinancialProtectionBureau(2013),CARDActReport:AReviewoftheImpactoftheCARD ActontheConsumerCreditCardMarket(Washington:CFPB,October),www.consumerfinance.gov/reports /card-act-report.ForadditionalresearchintotheeffectsoftheCreditCardAct,seeSumitAgarwal,Souphala Chomsisengphet,NealeMahoney,andJohannesStroebel(2013),“RegulatingConsumerFinancialProducts: EvidencefromCreditCards,”NBERWorkingPaperSeries19484(Cambridge,Mass.:NationalBureauof EconomicResearch,September),www.nber.org/papers/w19484. 28 Seetheslidesregardingchangesinpenaltyfeesandover-the-limitfeesinJenniferFaulkner(2011),“The CARDAct—OneYearLater:ImpactonPricingFees”(Washington:DepartmentoftheTreasury,Officeof theComptrolleroftheCurrency,AdministratorofNationalBanks),http://files.consumerfinance.gov/f/2011 /03/OCC-Presentation.pdf. 29 EstimatesarebasedoncreditrecordsincludedintheCCPdata.SeeFederalReserveBankofNewYork(2012), “DelinquentDebtShrinksWhileRealEstateDebtContinuestoFall,”pressrelease,February27, www.newyorkfed.org/newsevents/news/research/2012/an120227.html.

72 FederalReserveBulletin|December2013 issuershavereducedlimitsonmillionsof creditcardaccounts,particularlyaccountsthat wereinactiveorlittleusedbycardholders.Thesedataindicatethatabout60percentof the individualswhohadatleastonebankcardattheendof 2007experiencedareductioninthe aggregatelimitavailableonallof theirbankcardsbytheendof 2011.Thisestimate includesthoseindividualswhohadatleastonebankcardaccountclosed,which,allelse beingequal,wouldresultinaloweraggregatelimit.30 Creditrecorddataprovidefurtherinsightintochangesinindividuals’aggregatecreditlimitsinrecentyears.Areviewof thesedatafindsthataverageaggregatedollarlimitson bankcardsvarywiththecreditriskposedbythecardholderandrespondtochangingeconomiccircumstances.Individualswithlowercreditscoreshavesubstantiallysmalleraggregatelimitsavailabletothemthandoindividualswithhigherscores.Forexample,attheend of 2011,bankcardholderswithcreditscoresthatplacedtheminthelowestquartileof all peoplewithcreditscoreshadanaverageaggregatecreditlimitacrossallof theirbankcards of about$7,600(figure5).Bycontrast,thosewithscoresthatplacedtheminthehighest quartiletypicallyhadanaggregatecreditlimitof about$33,200.Thispatternholdsacross time;thedatashowthesamebasicrelationshipforeachof theyearsreviewed.Credit recorddataalsoindicatethatbankcardissuerscurtailedlimits(includingbyclosing accounts)astherecessiontookhold,particularlyforthosewithbettercreditscores.The cutinlimitsforthosewithhigherscoresmayhavebeenlargerbecausesuchindividuals tendtousetheircardslessandtohavelargernumbersof cardsthattheyrarelyuse. Creditlimitcurtailmentsdidnotappeartoresultinwidespreadconstraintsoncardholder accesstocredit.Despitethecurtailmentof creditlines,thecreditrecorddataindicatethat attheendof 2011,intheaggregate,individualswereusingonlyaboutone-fourthof the totaldollaramountavailableontheirlinesunderbank-issuedcreditcardplans(datanot shownintables).Of course,suchaggregateestimatesmaskconsiderablevariability;some bankcardholdershaveverylowratesof utilization(calculatedasoutstandingbalanceson allcardsdividedbythesumof the creditlimitsonallcards),while Figure5.Creditlimits,bycreditscorequartileand othersarenearorevenovertheir selectedperiods,2006–11 limitsasreflectedinthecredit recorddata.31Forexample,credit Credit limit (dollars) recorddataindicatethatattheend 40,000 2006:Q4 of 2011roughlyone-fourthof 35,000 2008:Q4 bankcardholdershadbalancesthat 30,000 2011:Q4 25,000 were80percentormoreof their 20,000 availablecreditlimitacrossall 15,000 bankcards.32Attheotherextreme, 10,000 abouthalf of bankcardholders 5,000 wereusinglessthan20percentof 0 theiravailablelimit. Lowest Second Third Highest Credit score quartile Thechangesincreditlimitsexperi- Source:FRBNYConsumerCreditPanel/Equifax. encedbycardholdersoverthepast 30 Theincidenceoflinecurtailmentpresentedhereisbasedonananalysisthattrackedthesameindividualsfrom theendof2007totheendof2011.Someadditionalindividualsmayhaveenteredthecreditrecordfiles betweenthesedatesandalsoexperiencedareductionintheirtotalavailablebankcardlimit.Statisticsare derivedfromtheCCPdata. 31 Utilizationratescalculatedfromcreditrecorddatamayexceed100percentonasingleaccountorintheaggregateacrossallofanindividual’saccounts.Anindividualmaybeallowedtoexceedhisorherlimitbyacard issuer,orthereportedlimitinthecreditrecorddatamaynotaccuratelyreflectthecurrentlimitifithas changedsincethelasttimeitwasreportedtothecreditbureau. 32 StatisticsarederivedfromtheCCPdata.

ConsumerExperienceswithCreditCards 73 fewyearsarelikelytoinfluenceconsumers’attitudesabouttheircardsandtheirissuers.In general,reductionsincreditlimitsarenotlikelytobewellreceivedbysomeconsumers, althoughtheextenttowhichsuchchangesmeaningfullyaffecttheirfinancialcircumstances verymuchdependsontheirparticularsituation.Cardholderswhoexperiencelinereductionsoninactiveorlittle-usedcardsbuthaveotheraccountswithavailablecapacityareless likelytobeupsetthancardholderswhowereusingtheiraccountstothefullestextentpossible.Indeed,restrictionsoninactiveorlittle-usedaccountsmayhardlybenoticed. Solicitations Directmailsolicitationisanimportantchannelforcardissuerstoacquirenewcreditcard accountsandretainexistingaccounts.33Afterreachinganall-timeannualhighof 6.8billionin2005,mailsolicitationsforgeneral-purposecreditcardsfellsharplyastheGreat Recessiontookhold(derivedfromfigure6).34Theeffectsof theweakeconomicenvironment,includingsurgingdelinquenciesandlossesoncreditcardactivities,ledcardissuersto mailonlyabout1.5billionsolicitationsin2009.Industrydataindicatethattheretrenchmentinmailsolicitationsbegantoreverseinthelatterportionof 2009,asprospectsfor economicrecoveryimproved.Mailingvolumescontinuedtorecoverthroughout2010, increasing128percentfromDecember2009toDecember2010(datanotshownintables). Overall,nearly3.0billionmailsolicitationsweresentoutin2010,andanother4.2billionin 2011. Whethermeasuredbefore,during,orafterthemostrecentrecession,thenumberof mail solicitationshasbeenlarge.However,aggregatemail-volumefiguresreflectthereceipt of multipleoffersbythesameindividual,sometimesforthesamecardfromthesamecard issuer.Anotherwaytoportraytheextentof mailsolicitationsandtheirreachintotheoverallpopulationistomeasurethepenetrationrate—thatis,theshareof individualswho receivedatleastonecreditcardmailingduringagivenperiod(forexample,overthecourse of amonthoracalendarquarter).Aportionof themailsolicitationdataavailableforsuch ananalysishasbeenlinkedtothecreditrecordsof theindividualsreceivingthesolicitations,soitispossibletoassessthe changeovertimeinmailingsto Figure6.Numberofgeneral-purposebankcardmail solicitations,2005–11 individualsgroupedintocredit scorequartiles.35Themailsolicita- Volume of mail solicitations (millions) tiondataavailableforthisanalysis 800 thatincludecreditscoresarelim- 700 itedtomailingsreceivedincal- 600 endaryear2007andfromthe 500 middleof 2009onward;ouranaly- 400 sisuseddatathroughtheendof 300 2011.Weconsideredboththeover- 200 allpenetrationrate(beginningin 100 0 2007)andthedistributionof mail- 2005 2006 2007 2008 2009 2010 2011 ingsreceivedbyindividuals groupedintocreditscorequartiles Source:MintelComperemedia. 33 OtherkeychannelsfornewaccountacquisitionincludetheInternetandbranchofficeinteractions. 34 TheFederalReservereceivesdatafromMintelComperemedia(Mintel)onmailingsreceivedbyanationally representativesampleof8,000consumerseachmonth.Mintelaskstheseconsumerstoforwardallincoming mailcontainingcreditsolicitations,suchasoffersofcreditcards,homeequityloans,andsoon.Themailsolicitationsshowninfigure6aremonthly,andtheyincludesolicitationsforgeneral-purposecreditcardsand excludethoseforretailcards. 35 Creditscoresareavailableformostbutnotallindividualswhoparticipatedinthemailsurveyconductedby Mintel.

74 FederalReserveBulletin|December2013 forthemonthsinwhichthedata Figure7.Shareofbankcardmailsolicitations,bycredit areavailable. scorequartile,2007–11 Theshareof individualsreceiving Credit score quartile Percent 100 general-purposecreditcardmail Lowest 90 Second offershasvariedovertime,primar- 80 Third ilyreflectingbroadeconomiccon- 70 Highest 60 ditions.Thepenetrationrate 50 reachedabout63percentof indi- 40 vidualsaroundthemiddleof 2007 30 beforefallingtoalowpointof 20 27percentinAugust2009asissu- 10 0 ersrespondedtoincreasingdelin- 2007 2008 2009 2010 2011 quenciesandlossesinthecredit cardmarket(datanotshownin Note:Creditscoredataareavailableonlyfortheperiodsshown. Source:MintelComperemedia;TransUnionLLC. tables).Themailsolicitationdata alsorevealasharpreductiononce therecessiontookholdinoffersto individualsposingahigherexpectedriskof default(thosewithlowercreditscores).In June2007,about11percentof creditcardsolicitationsweresenttoindividualswithcredit scoresinthelowestquartile(figure7).Mailingstosuchindividualsfellsharplyafterthat, reachingalowpointinJanuary2011,whenonly2percentof mailingsweresenttoindividualswiththelowestscores.Morebroadly,theshareof allmailingssenttoindividuals withcreditscoresinthebottomhalf of thescoredistributionfellfrom43percentin June2007toonly16percentinJanuary2011.Afterthebeginningof 2011,cardissuers’ risktoleranceappearstohaverecoveredsome,astheshareof mailingsreceivedbythosein thebottomhalf of thescoredistributionincreased,reaching23percentinDecember2011. Anotherwaytodemonstratethechangingrisktoleranceof issuersof general-purpose creditcardsistoconsidertheshareof individualsineachcreditscorequartilewhoreceived amailsolicitation.Consistentwiththeoverallvolumeof mailings,allscoregroupsexperiencedafalloff insolicitationsastherecessionemerged,butthoseinthelowerscorebands experiencedamuchsharperdecline.ThedatashowthatinJune2007about59percentof individualswithscoresinthebottomquartilereceivedatleastonemailsolicitation;by January2011thatsharehadfallento19percent(figure8).Bycomparison,inJune2007, about58percentof thosewithscoresinthehighestquartilereceivedasolicitation;inJanuary2011thatfigurewasabout55percent.Mailingstoindividualswithcreditscoresinthe lowesttwoquartilesrecoveredsomeoverthecourseof 2011afterreachingtheirlowpoints. Althoughthevolumeof creditcardmailsolicitationsisquitelarge,onlyaverysmallproportionof suchsolicitationsresult inanapplicationforortheestab- Figure8.Shareofindividualsineachcreditscorequartile lishmentof anewcreditcard receivingbankcardmailsolicitations,2007–11 account.Tolearnmoreaboutthose whoactuallyestablishanewcredit Credit score quartile Percent 80 cardaccount,onemustlookat All 70 databeyondmailingsof solicita- S Lo e w co e n s d t 60 tionsfornewcards.Usingnation- Third 50 Highest 40 allyrepresentativesamplesof the 30 creditrecordsdrawnasof June30, 20 2007,andattheendsof 2008and 10 0 2010,itispossibletoprofilethe 2007 2008 2009 2010 2011 characteristicsof individualsopeningnewbankcardaccountsatdif- Note:Seenotestofigure7.

ConsumerExperienceswithCreditCards 75 ferentpointsinthebusinesscycle.36Thesecreditrecorddatashowthatastheeconomyslid intorecessiontherewasanotabledecreaseintheshareof individualstakingoutnew accountswhohadcreditscoresinthelowestquartile,apatternconsistentwiththechange inmailsolicitations.Forexample,overthesix-monthtimeframeof JulytoDecember2008, 15percentof theindividualsopeningnewbankcardaccountshadscoresthatfellinthe lowestcreditscorequartile,asharedownnotablyfromtheperiodprecedingtherecession: DuringtheJulytoDecember2006period,theshareof individualsopeningnewbankcard accountswithcreditscoresinthelowestquartilewas20percent(table3). Table3.Establishmentofnewbankcardaccounts,bycreditscorequartile,JulythroughDecember, 2006,2008,and2010 Percent Creditscorequartile Accountopeningdate Lowest Second Third Highest Total July–December2006 20.2 33.1 28.1 18.6 100.0 July–December2008 14.5 30.2 32.6 22.7 100.0 July–December2010 12.7 28.1 31.4 27.8 100.0 Source:TransUnionLLC. Findings from Consumer Surveys Takentogether,thedatapresentedearlierrevealwidedifferencesincreditcard–related experiencesandoutcomesforindividualsacrossanumberof dimensions,includingthe economicconditionsof theirstateof residenceandonekeymeasureof thecreditriskthey pose—theircreditscore.ThefollowingsectionshighlightfindingsfromtheFebruary2012 Surveyof Consumers.Thefindingshereindicatethatcreditriskwasanimportantdeterminantof consumers’responsestotherecessionandtheCreditCardAct.Thesurvey responsesidentifyconsumerswhosepaymentpracticesmakethemrisky.Suchpatterns includehardlyeverpayingbalancesinfullandhardlyevermakingmorethanminimum payments,behaviorsthatareassociatedwithincurringrelativelyhighcreditcardbalances andmakinglatepaymentsrelativelyoften.Anexaminationof suchcardholders’awareness of APRs,useof information,anddecisionprocessesprovidesinsightsonquestionssuchas whethertheysystematicallyoverestimatetheirabilitytorepayandwhethertheirdecisions arepurposiveandthoughtful. Trends in Bankcard Holder Behavior, 2000 to 2012 Althoughbankcardholdingdeclinedsomewhatinthewakeof therecentrecessionandthe implementationof theCreditCardAct,themajorityof U.S.householdscontinuetohold bankcards.Amonghouseholdsholdingbankcards,thesharehavingmorethanonesuch card(aboutone-fourth)hasnotchangedmuchinrecentyears(table4).However,theper- 36 ThecreditrecorddatausedfortheanalysisofnewaccountacquisitionarefromTransUnion,oneofthethree nationalconsumercredit-reportingcompanies,andarederivedfromanationallyrepresentativesampleofthe creditrecordsofindividuals.Thedatausedinthisanalysisrelyontheportionofthesampleofcreditrecords thattracksthesameindividualsovertime.Thedataareanonymous;allpersonallyidentifyinginformation (includingname,SocialSecuritynumber,andresidentialaddress)isexcludedfromthedatareceivedbytheFederalReserve.Thedataprovideextensiveinformationoneachcreditaccountinanindividual’screditrecord, includingthedatetheaccountwasopened.Theaccountopeningdateallowstheidentificationofnewlyestablishedaccounts.Creditscoresareavailableonlyasofthetimethesamplesweredrawn,sotheymaydiffer somewhatfromthescoresasofthetimetheaccountswereopened.Someindividualsdropoutofthepaneland arereplacedbyarepresentativedrawfromthosewhonewlyenteredthecreditrecordfilesduringthetimeperiodsbetweenthedatesonwhichthesamplesweredrawn.FordetailsaboutthenatureoftheTransUnioncredit recorddatausedhere,seeBoardofGovernors,ReporttotheCongressonCreditScoring,innote4.

76 FederalReserveBulletin|December2013 Table4.Cardholdinginformationandbehaviororattitudesofholdersofbankcards,selectedyears, 2000–12 Percent Behaviororattitude 2000 2001 2004 2005 2012 Numberofbank-typecards One 40 31 25 27 27 Two 29 28 32 30 31 Three 13 19 21 22 21 Four 9 11 10 8 11 Fiveormore 9 11 12 13 10 Total 100 100 100 100 100 Balanceowedafterlatestpayment (inconstant2012dollars) 0 35 40 45 40 50 1–1,499 32 23 21 20 16 1,500–4,999 15 17 15 16 16 5,000ormore 18 20 20 24 19 Total 100 100 100 100 100 Hascardthatprovidesrewards n.a. n.a. n.a. n.a. 73 Adequacyofavailablecredit Toomuch n.a. n.a. n.a. n.a. 44 Justenough n.a. n.a. n.a. n.a. 52 Toolittle n.a. n.a. n.a. n.a. 3 Donotknow n.a. n.a. n.a. n.a. 1 Total 100 Usualpaymentbehavior Almostalwayspaysinfull 50 n.a. n.a. 54 62 Sometimespaysinfull 19 n.a. n.a. 14 16 Hardlyeverpaysinfull 31 n.a. n.a. 32 22 Total 100 100 100 Paymentsmorethanminimum Almostalways 80 n.a. n.a. n.a. 75 Sometimes 11 n.a. n.a. n.a. 14 Hardlyever 9 n.a. n.a. n.a. 11 Total 100 100 Memo:Continuesusingthecardwhenpaying theminimum 7 n.a. n.a. n.a. 16 MakespaymentsusingtheInternet n.a. n.a. n.a. n.a. 48 Cards’effectonmanagingfinances Makeslessdifficult n.a. 72 n.a. n.a. 82 Nodifferent n.a. 16 n.a. n.a. 8 Makesmoredifficult n.a. 10 n.a. n.a. 8 Donotknow n.a. 3 n.a. n.a. 2 Total 100 100 Paidalatefeeinthepast12months 41 30 n.a. n.a. 27 Satisfactionwithbank-typecards Verysatisfied n.a. 48 n.a. n.a. 47 Somewhatsatisfied n.a. 42 n.a. n.a. 37 Notsatisfiedordissatisfied n.a. 5 n.a. n.a. 7 Somewhatdissatisfied n.a. 5 n.a. n.a. 7 Verydissatisfied n.a. 1 n.a. n.a. 1 Total 100 100 Memo:Hasbank-typecard 72 72 68 73 67 Note:Componentsmaynotsumto100becauseofrounding. n.a.Notavailable. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers.

ConsumerExperienceswithCreditCards 77 centageof householdshavingfiveormorebankcardsappearstohavedecreasedslightly (3percentagepoints)since2005. TheSurveysof Consumersrevealatrendsince2000towardgreateruseof bankcardsasa transactionmediumratherthanasasourceof credit.In2000,only35percentof bankcard holdersreportedthattheypaidtheirlateststatementbalanceinfull;inthe2012surveythis figurewas50percent.Bankcardholders’reportsof theirhabitualorusualbehaviorindicatethesametrend.In2000,50percentof bankcardholderssaidthattheyalmostalways paidthebalancetheyowedinfull;in2012theproportionwas62percent.Partof the increaseintransactionsusehasoccurredsincetherecentrecessionandtheimplementation of thenewcreditcardregulations.Thepercentageof bankcardholderswhopaidtheirlateststatementbalanceinfullincreased10percentagepointsbetween2005and2012.The proliferationof rewardscardslikelycontributedtotheincreaseinthetransactionsuseof creditcards.Wedonothavedataforearlieryears,butnearlythree-fourthsof bankcard holdersreportedthattheyhadoneormorecardswithrewardfeaturesin2012.37 Theincreaseintransactionsusemayalsoincludebroaderadoptionof thispatternof use amongbankcardholderswhopreviouslyowedrelativelysmallamountsof bankcarddebt. In2000,32percentof bankcardholdersowed$1to$4,999(inconstant2012dollars)after theirmostrecentpayment;in2012,thesharehadfallento16percent.Oncerevolvingbalancesarerepaid,cardholdersmaycontinuetousetheirbankcardsforthesakeof convenienceinmakingtransactionsandinordertoreceivecreditsforrewardswhilepaying balancesinfullontheirmonthlystatements. Theshareof bankcardholderswithrelativelylargeamountsof bankcarddebtislittle changedsince2000.Inthatyear,33percentof bankcardholdershad$1,500ormoreof bankcarddebt,and18percenthad$5,000ormore.In2012,35percenthad$1,500ormore of bankcarddebt,and19percenthad$5,000ormore.Useof relativelylargeamountsof debtwasmorecommonshortlybeforetherecentrecessionthanin2000or2012,however. In2005,40percentof bankcardholdershad$1,500ormoreof bankcarddebt,and24percenthad$5,000ormore.38Thatcreditcarddebtwasgreaterbeforetherecessionreflects thelong-standingobservationthatconsumersborrowmoreheavilyduringeconomic expansions,whenprospectsaregood,andpaydowndebtsduringrecessions. Thefeatureof bankcardcreditthatallowscardholderstorepaydebtlargelyattheirown discretionprovidesthemwithconsiderableflexibilityinmanagingtheiraccountsbutis somewhatcontroversial.Criticsof thefeaturecontendthatitleadssomeconsumersto overestimatetheirabilitytorepaytheircreditcarddebt,causingthemtoconsistentlymake 37 Thefactthatsomecardholdersreportthattheyalmostalwayspayinfullbutalsoreportthattheycurrentlyowe bankcarddebtisnotnecessarilyacontradiction.Atanypointintime,acardholderwhonormallypaysthe statementbalanceinfullmayhaveborrowed.Theprearrangedlineofcreditprovidedbyabankcardmaybea convenientandeconomicalsourceofshort-termcredit.SeeDagobertL.BritoandPeterR.Hartley(1995), “ConsumerRationalityandCreditCards,”JournalofPoliticalEconomy,vol.103(April),pp.400–33.Another incentiveforcardholderstocarryabalanceisa0percentpromotionalrate,whichhasbeenacommonincentive usedbyissuerstoacquirenewaccounts.Eventhemoststeadfasttransactionsusermightrationallycarryabalanceforthedurationofazero-interest-rateperiod. 38 Justbeforetherecession,datafromthe2007SurveyofConsumerFinancesindicatedthat41percentofbankcardholdershad$1,500ormoreofbankcarddebt,and26percenthad$5,000ormore.SeeBrianK.Bucks, ArthurB.Kennickell,TraciL.Mach,andKevinB.Moore(2009),“ChangesinU.S.FamilyFinancesfrom 2004to2007:EvidencefromtheSurveyofConsumerFinances,”FederalReserveBulletin,vol.95(February), www.federalreserve.gov/pubs/bulletin/2009/articles/scf/default.htm.

78 FederalReserveBulletin|December2013 onlyminimumpaymentsandincurhighfinancechargesforlongperiodsof time.39The CreditCardActaddressedthisconcernbyrequiringnewdisclosuresonmonthlystatementsintendedtoencouragebankcardholderstomakemorethanminimumpayments.It isnotevidentfromthesurveyresults,however,thatthenewdisclosureruleshavealtered consumerbehavior.In2012,11percentof bankcardholderssaidthattheyhardlyever mademorethanminimumpayments,and14percentsaidthattheysometimesmademore thanminimumpayments.40Thispatternislittledifferentfromtheonerevealedinthe2000 survey,whichfoundthat9percentof bankcardholdershardlyevermademorethanminimumpaymentsand11percentsometimesmademorethanminimumpayments.Thenext subsectiondiscussesingreaterdetailconsumers’useof informationandcreditcardpaymentbehaviorusingdatafromthe2012survey. Consumers’ Decisionmaking and Their Credit Cards Economictheorytypicallyfocusesontheoutcomesof decisionsbutprovideslittleinsight intothedecisionprocessunderlyingthebehaviorof consumers.Tobetterunderstandconsumers’creditusebehavior—inparticular,theextenttowhichtheirbehaviorispurposive andthoughtful—researchershaveturnedtothecognitiveinformationprocessingmodelof thedecisionprocessdevelopedbypsychologists.Psychologistsmodelthedecisionprocess asaseriesof steps,involvingrecognitionof aproblem,evaluationof alternativeswith internalsearch(thatis,retrievalfrommemoryof informationonpastexperiences)and externalsearch,choice,andevaluationof theoutcome.Foranyindividual,thedecision processvariesfromonedecisiontoanother.Anindividualevaluatinganeworunfamiliar productmaygainlittlefrominternalsearchandmovequicklytotheexternalsearchstage. If anindividualhassufficientinformationfrompastexperiencetoevaluatealternatives, externalsearchmaynotoccur.Extendedsearchtendstooccurwhentheproductisrelativelyexpensive,longlived,orinfrequentlypurchasedorhasbothdesirableandundesirable features;theconsumer’sneedfortheproductisnoturgent;orpreviousexperiencewiththe producthasprovenunsatisfactory.41Thissubsectionexaminesaspectsof bankcardholders’decisionprocess,especiallytheiraccesstoanduseof informationaboutsuchcards. Bankcardshavefeaturesthatcanleadtolimitedorextendeddecisionprocessesdepending onhowcardholderschoosetousetheircards.Whentheyusetheircardsprimarilyasaconvenientmeansof payment,thedecisionprocessmaybelimitedorevenhabitual.Useis likelytobefrequent,andthecosttothecardholderisgenerallynegligible.Whentheyuse theircardsasameansof financingpurchasesovertime,thedecisionprocessismorelikely tobeextensiveandtooccuroveranextendedperiod.Bankcardcreditisexpensiverelative tosecuredcredit,andthedebtmaybeoutstandingforseveralmonthsorevenlonger.The abilitytoborrowadditionalamountsandtodecideontherepaymentrateatthecardhold- 39 See,forexample,LawrenceM.Ausubel(1991),“TheFailureofCompetitionintheCreditCardMarket,” AmericanEconomicReview,vol.81(March),pp.50–81;OrenBar-Gill(2004),“SeductionbyPlastic,”NorthwesternUniversityLawReview,vol.98(4),pp.1373–434;andMichaelS.Barr,SendhilMullainathan,and EldarShafir(2012),“BehaviorallyInformedRegulation,”inMichaelS.Barr,ed.,NoSlack:TheFinancialLives ofLow-IncomeAmericans(Washington:BrookingsInstitutionPress),pp.246–78. 40 Durkin(“CreditCardDisclosures,”innote3)arguesthatthedisclosureofthenumberofmonthsitwilltake thecardholdertorepaythebalanceinfullwhenmakingonlyminimumpayments(oneoftheCreditCardAct disclosures)isinformativeonlyifbankcardholdersbothmaketheminimumpaymentsandstopmaking additionalchargesonthebankcard.Examiningactualaccounttransactiondata,hefoundsuchbehavioron onlyaveryfewaccounts.Thus,onemightexpectlittleeffectfromthedisclosure.Empiricalevidencefroma recentexperimentalstudysuggeststhatCreditCardActdisclosuresarenoteffectiveinincreasingcreditcard payments.SeeDanielNavarro-Martinez,LindaCourtSalisbury,KatherineLemon,NeilStuart,WilliamJ. Matthews,andAdamJ.L.Harris(2011),“MinimumRequiredPaymentandSupplementalInformationDisclosureEffectsonConsumerDebtRepaymentDecisions,”in“ConsumerFinancialDecisionMaking,”special issue,JournalofMarketingResearch,vol.48(November),pp.S60–S77. 41 Forfurtherdiscussion,seeRogerD.Blackwell,PaulW.Mineard,andJamesF.Engel(2006),ConsumerBehavior,10thed.(Stamford,Conn.:ThomsonSouth-Western).

ConsumerExperienceswithCreditCards 79 er’sdiscretioncanbeviewedasbothgood(offeringflexibility)andbad(enablingcardholderstoborrowexcessivelyandrepaytooslowly).Theseconsiderationssuggestthatthedecisionprocessof cardholderswhoalmostalwayspayinfullmaydifferfromthatof cardholderswhosometimesorhardlyeverpayinfull. Anindividual’sattitudesaboutalternativesforpurchaseandconsumptionreflecthisorher orientationstowardoragainstthosealternatives.Theseorientationsmayaffectsubsequent informationprocessingandbehavior.The2012surveyaskedrespondentswhetherthey thoughtusingcreditcardswasa“goodthing”ora“badthing.”Theirattitudestoward creditcardsdifferedbytheircreditbehavior.Cardholdersmakinggreateruseof theircredit cardsforborrowingwerelikelytoviewcreditcardsasbad:Considerablymorethanhalf of cardholderswhohardlyeverpaidinfullandof thosewhosometimesorhardlyevermade morethanminimumpaymentssaidthatcreditcardswerebadorbadwithqualifications (table5).Incontrast,cardholderswhosometimesoralmostalwayspaidinfullweremore dividedintheirviews.Alittlemorethanhalf of eachgroupsaidthatcreditcardswere goodorgoodwithqualifications.Nearlyallof therestof thesecardholderssaidthatcredit cardswerebadorbadwithqualifications.Themorecriticalviewof creditcardsamong thosewhohardlyeverpaidinfullandthosewhosometimesorhardlyeverpaidmorethan theminimumsuggeststhattheseheavycreditusersmaybepredisposedtoundertakemore deliberativedecisionprocessesthantransactionsusers,althoughthequalifiedpositive responsesof transactionsusersalsosuggestthatthey,too,maybedeliberative. Presumably,useof informationonaccounttermsispartof cardholders’deliberativeprocess.Becauseawarenessof priceisaprerequisiteforinformeduseof credit,pricedisclosure isakeycomponentof federaldisclosurerulesforconsumercreditandafocalpointfor researchersstudyingtheeffectof awarenessof priceoncreditdecisions.42Sincetheimplementationof TILAin1968,thepriceof credithasbeenmeasuredbytheAPR,and researchershaveusedsurveyreportsof APRstoinvestigateconsumerawarenessof credit costs.BecausetheAPRsreportedbyrespondentsininterviewsurveyscannotbechecked againsttheratestheyactuallypay,researchershavereliedontheconceptof “awareness zones”tomeasureknowledgeof APRs.If arespondentreportsanAPRwithinarange Table5.Attitudestowardcreditcards,bypaymentbehavior,2012 Percentaware Usualpaymentbehavior Paymentsmorethanminimum Attitudetoward Sometimesor creditcards Almostalways Sometimes Hardlyever Almostalways hardlyeverpays paysmorethan paysinfull paysinfull paysinfull morethan minimum minimum1 Goodorgoodwith qualifications 52 54 28 41 34 Bothgoodandbad 3 1 1 1 † Badorbadwith qualifications 45 45 71 58 66 Total 100 100 100 100 100 1 Weightedsamplesizeislessthan50. †Lessthan0.5. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. 42 Thefactthatconsumerscanrecallinformationdoesnotnecessarilymeanthattheyusedtheinformationin makingadecision,andthattheyhaveforgotteninformationdoesnotnecessarilymeanthattheywerenot awareofitatthetimeadecisionwasmade.However,informationthatisusefulismorelikelytoberetainedin memorythaninformationthatisnotuseful.Fordiscussion,seeGeorgeS.Day(1976),“AssessingtheEffectsof InformationDisclosureRequirements,”JournalofMarketing,vol.40(April),pp.42–52.

80 FederalReserveBulletin|December2013 thatisdeemedreasonablebasedonthedistributionof actualmarketrates,therespondent isclassifiedas“aware.”If therespondentreportsaratethatisoutsidetherangeoranswers “donotknow,”therespondentisclassifiedas“unaware.” ThisarticleusesthesameawarenesszonesasthoseusedtoassessresponsestotheJanuary2000Surveyof ConsumersinaFederalReserveBulletinarticlepublishedthesame year.43Inthatarticle,twodefinitionsof awarenesswereconsidered.Thefirstwasanarrow definition,inwhichrespondentsreportinginterestratesgreaterthan7.9percentwereclassifiedasaware,andrespondentsreportingratesof 7.9percentorlowerorsayingthatthey didnotknowtheratewereclassifiedasunaware.Thesecondalternativewasabroaddefinitionrecognizingthatlowteaserrateswerecommoninthemarketplaceatthattime,so reportsof ratesbelow7.9percentmayhavebeenaccurate.Underthebroaddefinition, respondentsreportinganyinterestratewereclassifiedasaware,andrespondentsreporting thattheydidnotknowtheirratewereclassifiedasunaware. Regardlessof thedefinitionconsidered,cardholders’awarenessof APRswasveryhighin the2012survey.Amongcardholderswhosometimespaidinfull,92percentwereaware underthenarrowdefinition,and96percentwereawareunderthebroaddefinition (table6).Eightypercentof cardholderswhohardlyeverpaidinfullwereawareunderthe narrowdefinition.Butif oneallowsforthepossibilitythatthesecardholdersmayhave beenpayinglowteaserrates—thatis,if oneadoptsthebroaddefinition—thenupto 95percentof cardholderswhohardlyeverpaidinfullmayhavebeenaware.Thepaymentbehaviorcohortwiththelowestlevelsof awarenesswasthegroupof cardholderswho almostalwayspaidinfull.Eighty-onepercentof thesecardholderswereawareunderthe narrowdefinition,and88percentwereawareunderthebroaddefinition.Cardholderswho almostalwayspaidinfullwereleastlikelytopayfinancechargesandthereforeleastlikely toneedtoknowtheirAPR.SinceAPRinformationisnotpertinenttotheirbehavior,they maynotretaintheinformationinmemory.Incontrast,nearlyallof thecardholderswho actuallypaidfinancechargeswereawareof theirAPR. Tofurtherexaminetheroleof informationinthedecisionprocess,thesurveyaskedcardholdershowoftentheyreviewedtheAPRinformationintheirmonthlystatements.Cardholders whosometimespaidcardbalancesinfullwerethepaymentbehaviorgroupwhomostfrequentlyreviewedAPRinformation;53percentof theserespondentsreportedreviewingAPR informationeverymonth(table7).Cardholderswhohardlyeverpaidinfullwerelesslikely thancardholderswhosometimespaidinfulltoreviewAPRinformationeverymonth (44percent),butthetwogroupswereaboutequallylikelytoreviewAPRinformationat leastquarterly(77percentand80percent,calculatedasthesumof thefirstthreerowsin Table6.Awarenessofannualpercentagerates,byawarenessdefinitionandpaymentbehavior,2012 Percentaware Usualpaymentbehavior Paymentsmorethanminimum Awareness definition Almostalways Sometimes Hardlyever Almostalways Sometimesorhardly paysmorethan everpaysmorethan paysinfull paysinfull paysinfull minimum minimum1 Narrow 81 92 80 84 90 Broad 88 96 95 95 99 Note:Forexplanationofawarenessdefinition,seetext. 1 Weightedsamplesizeislessthan50. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. 43 SeeDurkin,“CreditCards,”innote3.

ConsumerExperienceswithCreditCards 81 Table7.Frequencywithwhichmonthlystatementinformationonannualpercentagerateisreviewed, bypaymentbehavior,2012 Percent Usualpaymentbehavior Paymentsmorethanminimum Frequencyofreview Almostalways Sometimesorhardlyever Almostalways Sometimes Hardlyever paysmorethan paysmorethan paysinfull paysinfull paysinfull minimum minimum1 Everymonth 34 53 44 49 45 Everyothermonth 5 14 10 11 14 4–5timesayear 10 13 23 19 20 Lessthan4timesayear 51 20 23 22 21 Donotknow † † † † † Total 100 100 100 100 100 Note:Componentsmaynotsumto100becauseofrounding. 1 Weightedsamplesizeislessthan50. †Lessthan0.5. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. columns3and2,respectively).Incontrast,only34percentof cardholderswhoalmost alwayspaidinfullreportedreviewingAPRinformationeverymonth,andjust49percent of themreviewedAPRinformationatleastquarterly.Thesepatternsindicatethatcardholderswhomakedecisionsonwhetherornottoborrowandhowmuchtoborrowarethe onesmostlikelytoreviewpriceinformationfrequently.44Thisfindingisconsistentwiththe hypothesisthatborrowersaremorelikelytobedeliberativethantransactionsusers. CardholderswerethenaskedwhetherthedisclosedAPRorthediscloseddollarfinance chargeontheirmonthlybillingstatementaffectedtheirdecisiontousecreditinanyway. CardholderswhosometimesorhardlyeverpaidbalancesinfullweremorelikelythancardholderswhoalmostalwayspaidinfulltoreportthattheAPRorthefinancecharge affectedtheirdecisions(table8).Again,ascardholderswhoalmostalwayspayinfull hardlyeverincurfinancecharges,itmakessensethatinformationontheAPRandthe financechargewouldnotbeespeciallyrelevantforthem.Forcardholderswhosometimes orhardlyeverpaidinfull,thefinancechargewasmorelikelythantheAPRtoaffecttheir decisions.Abouthalf of cardholderswhosometimesorhardlyeverpaidinfullsaidthat theAPRorthefinancecharge(orboth)affectedtheirdecisions. Table8.Effectofannualpercentagerateandfinancechargeinformationonconsumerdecisions,2012 Percentreportingthatinformationaffectsbehavior Usualpaymentbehavior Paymentsmorethanminimum Item Almostalways Sometimesorhardly Almostalways Sometimes Hardlyever paysmorethan everpaysmorethan paysinfull paysinfull paysinfull minimum minimum1 Annualpercentagerate(APR) 17 30 32 31 32 Financecharge 18 48 40 41 51 APRorfinancecharge 24 52 50 51 51 1 Weightedsamplesizeislessthan50. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. 44 Cardholderswerealsoaskedhowoftentheyrevieweddescriptivematerialintheirmonthlystatements.CardholdersreportedreviewingdescriptivemateriallessfrequentlythanAPRinformation(about1in10reviewed descriptivematerialeachmonth),andthefrequencydistributionsofthethreepayment-behaviorgroupswere similar(datanotshownintables).

82 FederalReserveBulletin|December2013 Table9.Effectofannualpercentagerateandfinancechargeinformationondecisionstousecredit, 2012 Percentofmentions APRinformation Financechargeinformation Effectondecision Almostalways Sometimesorhardly Almostalways Sometimesorhardly paysinfull1 everpaysinfull paysinfull1 everpaysinfull Paidofffaster 33 11 22 19 Limitedcarduse 23 20 17 31 Influenceddecisiononwhethertousecashorcredit 22 28 20 19 Decidedwhichcardtouse 14 12 12 8 Stoppedusingcreditcards 4 14 5 7 Changedspendinghabits † 8 14 9 Other 5 8 10 7 Total 100 100 100 100 1 Weightedsamplesizeislessthan50. †Lessthan0.5. APR Annualpercentagerate. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. Whenaskedinwhatwaytheirdecisiontousecreditwasaffected,mostcardholdersindicatedthattheAPRorfinancechargeinformationinfluencedtheirdecisionsonwhetheror nottousecreditorhowmuchcredittouse(table9).However,onlyarelativelysmallshare of cardholderschangedtheirspendinghabitsorstoppedusingcreditcardsaltogether becauseof thisinformation,andrelativelyfewcardholdersusedtheinformationtochoose whichcardtouse.Althoughthepercentagesvary,theseconclusionsholdforresponses aboutbothAPRandfinancechargeinformationanddonotdiffersubstantivelybycardholders’paymentbehavior. Bankcardholderswhousedcreditcardsforthepurposeof borrowingweresomewhatmore likelythantransactionsuserstobelievethatobtaininginformationoncredittermsiseasy, perhapsbecauseborrowersweremorelikelytousesuchinformation.Half of bankcard holderswhosometimesorhardlyeverpaidinfullreportedthatobtaininginformationon credittermswasatleastsomewhateasy,comparedwith44percentof cardholderswho almostalwayspaidinfull(table10).Whileasignificantminorityof cardholdersfound Table10.Easeofobtainingusefulinformationoncreditcardterms,bypaymentbehavior,2012 Percent Usualpaymentbehavior Paymentsmorethanminimum Easeofobtaining usefulinformation Almostalways Sometimes Hardlyever Almostalways Sometimesorhardly paysmorethan everpaysmorethan paysinfull paysinfull paysinfull minimum minimum1 Veryeasy 8 8 6 9 † Somewhateasy 36 42 44 43 43 Somewhatdifficult 43 43 37 38 44 Verydifficult 13 7 11 10 8 Donotknow 1 † 3 1 5 Total 100 100 100 100 100 Note:Componentsmaynotsumto100becauseofrounding. 1 Weightedsamplesizeislessthan50. †Lessthan0.5. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers.

ConsumerExperienceswithCreditCards 83 obtaininginformationoncredittermssomewhatdifficult,onlyarelativelysmallshareof cardholdersoverallfounditverydifficult. Bankcardholders’responsestoaquestionaskingwhethercreditcardsmakemanaging financeslessdifficultormoredifficultprovideevidenceof cardholders’post-purchase evaluationsof creditcards.Bankcardholdersdidgenerallybelievethatcreditcardsmade managingtheirfinanceslessdifficult,andthisbelief wasmorewidelyheldin2012than earlier(seetable4).Eighty-twopercentof bankcardholdersin2012saidthatbankcards mademanagingfinanceslessdifficult,comparedwith72percentinthe2001survey.Only smallpercentagesof respondentstoboththe2012and2001surveysbelievedthatcredit cardsmademanagingtheirfinancesmoredifficult(8percentand10percent,respectively).45Abelief thatcardsmakemanagingone’sfinanceslessdifficultwouldseeminconsistentwiththeviewthatcardsinduceconsumerstooverestimatetheirabilitytorepay. Hardlyeverpayingbalancesinfull,andsometimesorhardlyevermakingmorethanminimumpayments,isbehaviorthatmightoccurif cardholdersoverestimatetheirabilityto repaycreditcarddebt.If so,andif payinghighfinancechargesoverlongperiodsof time burdensthem,thenthesecardholdersmightbeexpectedtobelievethatcreditcardsmake managingtheirfinancesmoredifficult.Responsestothe2012surveydonotprovidemuch supportforthishypothesis,however(table11).Eighty-sevenpercentof cardholderswho onlysometimespaidinfulland85percentof cardholderswhohardlyeverpaidinfullsaid thatcreditcardsmademanagingtheirfinanceslessdifficult(comparedwith80percentof thosewhoalmostalwayspaidinfull).Amongthecardholderswhosometimesorhardly everpaidmorethantheminimum,90percentbelievedthatcreditcardsmademanagingtheirfinanceslessdifficult.Thepercentageof cardholderswhosaidtheybelievedthat creditcardsmademanagingtheirfinancesmoredifficultincreasesascardholders’tendency topayinfullbecomeslessfrequent,butevenamongcardholderswhohardlyeverpaidin full,onlyarelativelysmallshare(14percent)believedthatcreditcardsmademanaging theirfinancesmoredifficult. Cardholdersreportedahighdegreeof satisfactionwiththeirbankcards.Satisfactionwas greatestforcardholderswhoalmostalwayspaidinfull;amongtheserespondents, Table11.Effectofcreditcardsonmanagingfinances,bypaymentbehavior,2012 Percent Usualpaymentbehavior Paymentsmorethanminimum Cards’effecton managingfinances Almostalways Sometimes Hardlyever Almostalways Sometimesorhardly paysmorethan everpaysmorethan paysinfull paysinfull paysinfull minimum minimum1 Lessdifficult 80 87 85 85 90 Nodifferent 13 † † † † Moredifficult 5 11 14 13 10 Donotknow 2 2 1 2 † Total 100 100 100 100 100 Note:Componentsmaynotsumto100becauseofrounding. 1 Weightedsamplesizeislessthan50. †Lessthan0.5. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. 45 TheabilitytomanagecreditcardaccountsusingtheInternetmaybeonefactorcontributingtotherisein thepercentageofbankcardholderswhobelievedthatbankcardsmademanagingtheirfinanceseasier.In2012, 48percentofbankcardholdersreportedhavingmadeacreditcardpaymentusingtheInternet.FinancialserviceshavebecomemorewidelyavailableontheInternetsince2000.

84 FederalReserveBulletin|December2013 58percentwereverysatisfiedand92percentwereatleastsomewhatsatisfied(table12). Satisfactionwaslowestforcardholderswhohardlyeverpaidinfullormademinimumpayments.Evenso,manymorethanhalf (68percent)of thesecardholderswereatleastsomewhatsatisfied,andonlyasmallsharewereverydissatisfied.Consideringthatbyfarthe majorityof cardholderssaidthatcardsmademanagingtheirfinanceseasier,thesehighlevelsof satisfactionarenotsurprising.Thatthesatisfactionlevelsof moreconstrainedcardholders—thatis,cardholderswhohardlyeverpaidinfullormademinimumpayments— weresomewhatlowerthanthoseof othercardholdersmayreflectthatsomeof these constrainedcardholdersmayhaveexperienceddifficultyinservicingtheirdebts,relatively highinterestcosts,andadverseactionstakenbycreditcardcompanies.46 New Accounts Cardholdersmayhaveusedbankcardsformanyyears,andtheirbehaviormayhave becomehabitual,especiallyif theyusebankcardsasaconvenientmeansof paymentrather thanasasourceof credit.Examiningbehavioronrecentlyopenedaccountsmayprovide insightsonbehaviorbeforeusagepatternshavebecomeestablishedandpossiblyhabitual. Sixteenpercentof cardholdersrespondingtothe2012surveyhadopenedanewbankcard accountintheprevious12months.Reasonsforopeninganewaccountdifferedsignificantlybycardholders’paymentbehavior.Reasonsrelatedtoavailabilityandrateswere reportedmostfrequentlybybankcardholderswhoonlysometimesorhardlyeverpaidin full.Twenty-sixpercentof cardholdersopeninganewaccountwhosometimesorhardly everpaidinfullreportedopeningtheaccounttorebuildorincreasetheiravailablecredit, and19percentopenedtheaccounttoobtainalowerorzerointerestrate(table13).These responsesareconsistentwiththeirpaymentbehavior.Thedesiretoreceiverewardswas mentionedmostfrequentlybycardholderswhoalmostalwayspaidinfull.Beyondtheconvenienceinmakingpayments,transactionsusersmightreasonablybeexpectedtoseek cardswithmoregenerousrewards.Cardholderswhoalmostalwayspaidinfulldidnot mentionopeningnewaccountstorebuildorincreasecreditavailability.Only11percentof Table12.Satisfactionwithcreditcards,bypaymentbehavior,2012 Percent Usualpaymentbehavior Paymentsmorethanminimum Degreeofsatisfaction Almostalways Sometimesorhardly Almostalways Sometimes Hardlyever paysmorethan everpaysmorethan paysinfull paysinfull paysinfull minimum minimum1 Verysatisfied 58 38 27 36 19 Somewhatsatisfied 34 44 41 40 49 Neithersatisfiednordissatisfied 4 8 15 11 16 Somewhatdissatisfied 4 11 13 12 12 Verydissatisfied 1 † 4 1 5 Total 100 100 100 100 100 Note:Componentsmaynotsumto100becauseofrounding. 1 Weightedsamplesizeislessthan50. †Lessthan0.5. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. 46 Cardholderswhohardlyeverpaidinfullwere2.5timesmorelikelytohavepaidalatefeeand2.4timesmore likelytohaveexperiencedanadverseeventinthepast12monthsthancardholderswhoalmostalwayspaidin full(datanotshownintables).Cardholderswhosometimespaidinfullwere1.6timesmorelikelytohavepaid alatefeeand1.4timesmorelikelytohaveexperiencedanadverseeventthancardholderswhoalmostalways paidinfull.Adverseeventsincludecreditlimitreductions,accountclosures,interestrateincreases,anddenials oflimitincreaserequestsornewaccountapplications.

ConsumerExperienceswithCreditCards 85 Table13.Reasonforopeninganewaccountintheprevious12months,bypaymentbehavior,2012 Percent Reason Distribution Cardholderswhosometimesorhardlyeverpayinfull1 Makeaspecificpurchase 35 Rebuildorincreaseavailablecredit 26 Obtainalower/zerointerestrate 19 Receiverewards 8 Receivepurchasediscount 6 Other 6 Total 100 Cardholderswhoalmostalwayspayinfull Receiverewards 33 Makespecificpurchase 14 Receivepurchasediscount 13 Obtainlower/zerointerestrate 11 Bankofferedaccount 10 Life-cycleconsideration(forexample,college,marriage,retirement) 7 Other 11 Total 100 Note:Componentsmaynotsumto100becauseofrounding. 1 Weightedsamplesizeislessthan50. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. thesecardholdersopenedanaccounttoobtainalowerorzerointerestrate,whichtransactionsusersmightrationallydoonoccasion. Bothgroupsreportedopeningnewaccountsforspecificpurchases,andmakingaspecific purchasewasthereasonmostfrequentlyreportedbybankcardholderswhosometimesor hardlyeverpaidinfull(35percent).Bankcardholderswhoalmostalwayspaidinfullmentionedopeninganewaccounttomakeaspecificpurchasefarlessfrequently(14percent). Therelativelyheavyrelianceonnewaccountsbycardholderswhosometimesorhardlyever paidinfullfurthersuggeststheimportanceof creditavailabilityforthisgroup. Thereasonforopeninganewaccountmostfrequentlymentionedbybankcardholders whoalmostalwayspaidinfullwastoreceiverewards(33percent).Cardholderswhosometimesorhardlyeverpaidinfullalsoopenednewaccountstoreceiverewards,butmuchless frequently(8percent).Thirteenpercentof cardholderswhoalmostalwayspaidinfulland 6percentof cardholderswhosometimesorhardlyeverpaidinfullopenednewaccountsto receivepurchasediscounts. Forbothcardholderswhoalmostalwayspaidinfullandcardholderswhosometimesor hardlyeverpaidinfull,thesourceof initialinformationaboutthenewaccountwasmost frequentlyasalespersoninastore—28percentand36percent,respectively(table14).This resultreflectstheprevalenceof accountsopenedtomakespecificpurchasesorobtain purchasediscountsoralso,forthelattergroup,toreceiveloworzerointerestrates.Mail solicitationswereimportantsourcesof informationforcardholderswhosometimesor hardlyeverpaidinfull;33percentof theserespondentsinitiallylearnedaboutanaccount fromamailsolicitation.Thispercentageisthreetimesgreaterthantheshareof cardholderswhoalmostalwayspaidinfullwhoreceivedinitialinformationfrommailsolicitations. Thatthosewhorevolvebalancesaremorelikelythantransactionsuserstorespondtomail solicitationsisconsistentwiththeobservationthatrespondentstomailsolicitationsare riskierthannonrespondents,whichsupportsthehypothesisof adverseselectioninthe

86 FederalReserveBulletin|December2013 Table14.Sourceofinitialinformationaboutnewaccount,bypaymentbehavior,2012 Percent Source Almostalwayspaysinfull Sometimesorhardlyeverpaysinfull Mailsolicitation 11 33 Internet 22 13 Salesmaninstore 28 36 Telephonesolicitation 9 5 Bankemployee 23 14 Other 7 † Total 100 100 Note:Weightedsamplesizeislessthan50.Componentsmaynotsumto100becauseofrounding. †Lessthan0.5. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. creditcardmarket.47Cardholderswhoalmostalwayspaidinfullweremorelikelytoobtain initialinformationfromabankemployeeortheInternet. Cardholderswhohadopenedanewaccountwereaskedaseriesof questionsaboutthe informationtheyreceivedwhentheyopenedtheaccount.Thefirstquestionaskedhow carefullytheyreadtheinformation.Alittlemorethantwo-thirdsof thosewhoalmost alwayspaidinfullandnearlythree-fourthsof thosewhosometimesorhardlyeverpaidin fullreadtheaccountdisclosureinformationatleastsomewhatcarefully(table15).48 Regardlessof paymentbehavior,byfarthemajorityof newcardholdersfiledtheinformationawayforpossiblefutureuse,includingsomecardholderswhodidnotreadtheinfor- Table15.Useofinformationreceivedataccountopening,bypaymentbehavior,2012 Percent Item Almostalwayspaysinfull Sometimesorhardlyeverpaysinfull Howcarefullyaccountinformationwasread Verycarefully 24 28 Somewhatcarefully 44 46 Notverycarefully 18 13 Notcarefullyatall 15 14 Total 100 100 Filedinformationincaseneededlater 79 81 Usefulnessofinformation Veryuseful 18 33 Somewhatuseful 16 52 Notveryuseful 48 15 Notatalluseful 17 † Total 100 100 Note:Weightedsamplesizeislessthan50.Componentsmaynotsumto100becauseofrounding. †Lessthan0.5. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. 47 SeeLawrenceAusubel(1999),“AdverseSelectionintheCreditCardMarket,”workingpaper(CollegePark: UniversityofMaryland,June),www.ausubel.com/creditcard-papers.htm. 48 Thesomewhatlowerlevelsofsatisfactionofcardholderswhosometimesorhardlyeverpaidinfull,discussed intheprevioussubsection,mayhavecontributedtothehigherpercentageofthesecardholderswhocarefully readaccountdisclosureinformation.Asmentioned,researchonconsumerbehaviorindicatesthatdissatisfactiontendstoleadtomore-extendeddecisionprocesses.

ConsumerExperienceswithCreditCards 87 mationverycarefully.Alargershareof cardholderswhosometimesorhardlyeverpaidin fullthanof cardholderswhoalmostalwayspaidinfullfoundtheinformationatleast somewhatuseful(85percentversus34percent). Itisnotsurprisingthatcardholderswhousethecreditfeatureof creditcardsaremore likelythanotherstofindaccountdisclosureinformationuseful,becausemuchof this informationinvolvescreditcostsandtermsandismandatedbyTILA.Cardholderswho alwayspayinfullhavelittleneedforinformationoncreditcostsandterms.Responsestoa follow-upquestionaskingwhatmakestheinformationusefulornotusefulsupportthis view.Aboutone-fourthof cardholderswhosometimesorhardlyeverpaidinfullfoundthe informationaboutinterestratesuseful,andone-thirdreportedthattheinformationhelped themunderstandtheaccountorwasusefulasareference(datanotshownintables).These responseswerefarlessfrequentforcardholderswhoalmostalwayspaidinfull.Aboutonefourthof cardholderswhoalmostalwayspaidinfullsaidthattheinformationwasirrelevantpreciselybecausetheypaidinfull.Also,cardholderswhoalmostalwayspaidinfull frequentlysaidthattheyalreadyknewtheinformationorthattheyneverneededtousethe information.Eventhoughtheseconsumersreportedthattheydidnotfindtheaccount openinginformationuseful,manyreadtheinformationatleastsomewhatcarefully,and mostkepttheinformationforlateruse. Adverse Experiences with Credit Card Companies TheFebruary2012Surveyof Consumersquestionedbankcardholdersaboutadverse experiencesinvolvingtheircreditcardsduringthe12-monthperiodpriortotheinterview. Adverseexperiencesweredefinedtoincludeactionssuchasdenialsorlimitationsof credit andincreasesininterestratesorfees.Someof theseeventsmayhavebeenpromptedbythe highdelinquencyratesandcreditlossesexperiencedbycardissuersduringtherecessionor byregulatorychanges,includingthoserelatedtoallowablerisk-managementpracticesand variousformsof consumerprotection.Thissectioninvestigatestheprevalenceof adverse actionsandexamineshowtheymayhaveaffectedconsumerattitudestowardcredit. Overall,26percentof cardholdersreportedhavinganadverseexperienceinthepastyear (datanotshownintables).PreviousSurveysof Consumersdidnotaskaboutadverseexperiences,soabenchmarkisnotreadilyavailable.Thecreditrecorddatadescribedearlier confirmthatalargeshareof cardholdersexperiencedanadverseeventoverthepastseveral years.Manyof thelimitationsof creditimposedbycardissuerswereinresponsetoconsumer-initiatedrequests.Forexample,17percentof cardholdersappliedforanewbankcardinthepastyear(table16).Of thoseapplying,9percentwereturneddown.Sixpercent of cardholdersrequestedanincreaseinacreditline;of those,36percentreceivedlessthan theamountrequested.However,byfarthemajorityof thecardholderswhoreceivedless creditthanrequestedalsoreportedthattheyhadmadealatepaymentontheaccountin theprevious12months. Somelimitationswereinitiatedbythecreditcardcompaniesinconjunctionwithmanaging theirexistingaccountrelationships.Fivepercentof cardholdersreportedthatacreditcard companyhadreducedthecreditlimitonanexistingaccountinthepast12months.Inpart, creditlimitreductionswerepromptedbyaccountinactivity(accountingfor23percentof the linereductionsreported)orlatepayments(21percent).49Inaddition,5percentof cardholdersreportedthatacreditcardcompanyhadclosedoneof theiraccountsinthepastyear. 49 Analysisofcreditrecorddataindicatesthatofthebankcardholderswhofellbehindontheirpaymentsby 30daysormoreatleastoncefromtheendof2007totheendof2010,overtwo-thirdssubsequentlyexperiencedareductionintheiraggregatecreditlimitacrossalloftheircards.

88 FederalReserveBulletin|December2013 Table16.Adverseexperienceswithcreditcardcompaniesinpast12months,2012 Percentofbankcardholdersunlessotherwisenoted Experience Percent Appliedfornewbankcard 17 Ofthoseapplyingforanewcard Cardholderswhoweredenied 9 Requestedanincreaseincreditlimit 6 Ofthosewhorequestedanincrease Cardholderswhoreceivedlessthanrequested1 36 Ofthosereceivinglessthanrequested Cardholderswhohadalatepaymentontheaccountinthepast12months1 80 Creditcardcompanyreducedcreditlimit 5 Ofthosehavingcreditlimitreduction Cardholderswhodidnotusetheaccountinthepast12months 23 Cardholderswhohadalatepaymentontheaccountinthepast12months 21 Hadaccountthatwasclosedbythecreditcardcompany 5 Ofthosehavingaccountsclosed Cardholderswhodidnotuseclosedaccountinthepast12months1 51 Cardholderswhohadalatepaymentontheclosedaccountinthepast12months1 38 Creditcardcompanyincreasedinterestrate/margin 14 Ofthosehavingarate/marginincrease Cardholderswhodidnotuseaccountinthepast12months 21 Cardholderswhohadalatepaymentontheaccountinthepast12months 34 Creditcardcompanyincreasedoraddedannualfeeforaccount 7 1 Weightedsamplesizeislessthan50. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. Justoverhalf of thesecardholderssaidthattheclosedaccountwasinactiveduringthat period,and38percentsaidthattheyhadmadelatepaymentsontheclosedaccount. Suchturndownsandlimitationsdonotnecessarilyimposeabindingconstraintontheconsumer.Forexample,acardholderwhohasbeenturneddowncanapplyforadifferent creditcardandperhapsreceiveapproval(althoughthetermsmaybelessfavorablethan thoseforthedeniedaccount),oracardholdermaychoosetoborrowagreaterproportion of hisorheravailablecreditline.Closuresandreductionsincreditlimitsaffectinginactive accountsinparticularwouldseemnottobebinding. Somecardholdershadexperiencedincreasesininterestratesorannualfeesintheprevious 12months.Increasesininterestrates(ormargins,forvariable-rateaccounts)werereported by14percentof cardholders.Aconsiderableshareof therateincreasesmaybeattributed tothecreditcardcompanies’reassessmentof thecustomers’risk:Justoverone-thirdof cardholderssaidthattheyhadmadelatepaymentsinthepastyearontheaccounts thatreceivedinterestrateincreases.Changesinannualfeeswerelessfrequentthaninterest rateincreases;7percentof cardholdersreportedanincreasedoradditionalannualfeefora bankcardaccount. Notsurprisingly,adverseexperiencessignificantlyinfluencedcardholders’opinions.Cardholderswhohadadverseexperiencesweremorelikelytohaveanegativeopinionof credit cardsthancardholderswhodidnothaveadverseexperiences:57percentof theformerand 49percentof thelattersaidthatcreditcardswere“bad”or“badwithqualifications” (table17).Cardholderswhohadadverseexperienceswereoverthreeandahalf timesmore

ConsumerExperienceswithCreditCards 89 Table17.Opinionsaboutcreditcardsandcreditcardcompanies,byadverseexperiencesin thepast12months,2012 Percent Opinion Hadanyadverseexperience Didnothaveanadverseexperience Opinionaboutcreditcards Goodorgoodwithqualifications 40 50 Bothgoodandbad 2 2 Badwithqualificationsorbad 57 49 Total 100 100 Cardholders’satisfactionwith ownaccounts Verysatisfied 35 52 Somewhatsatisfied 41 36 Notparticularlysatisfiedordissatisfied 8 7 Somewhatdissatisfied 15 4 Verydissatisfied 3 1 Total 100 100 Cardholders’agreementthattheir owncreditcardcompaniestreat themfairly Stronglyagree 32 51 Agreesomewhat 57 43 Disagreesomewhat 5 5 Stronglydisagree 5 2 Total 100 100 Cardholders’agreementthattheycaneasily getacardfromanothercompanyiftheyare nottreatedwell Stronglyagree 54 57 Agreesomewhat 33 35 Disagreesomewhat 5 6 Stronglydisagree 9 2 Total 100 100 Note:Componentsmaynotsumto100becauseofrounding. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. likelytobesomewhatorverydissatisfiedwiththeirownaccountsthancardholderswho didnothaveadverseexperiences(18percentand5percent,respectively).However,itis notablethatbyfarthemajorityof cardholderswhohadadverseexperiencesweresatisfied withtheirownaccountsandbelievedthattheircreditcardcompaniestreatedthemfairly (althoughtheyheldtheseopinionslessstronglythancardholderswhodidnothaveadverse experiences).Alsonotableisthatcardholderswhohadadverseexperiencesbelievedthat theyhadoptionsavailabletothem:Eighty-sevenpercentof cardholderswhohadadverse experiencesbelievedthattheycouldeasilygetabankcardfromanothercompanyif they werenottreatedwell.Thisshareisonlyslightlysmallerthanthe92percentof cardholders whodidnothaveadverseexperienceswhobelievedthattheycouldeasilygetacardfrom anothercompany. Insum,thesurveyresponsespickuptheincidenceof creditlimitationsandinterestrate increasesthatcreditcardcompaniesimplementedinresponsetochangesinmacroeconomicconditions,cardholderbehavior,andregulatoryinitiatives.Overall,one-fourthof cardholdershadexperiencedadverseeventsoverthepreviousyear.Thelackof abenchmarkprecludesusfromsayingwhetherthisincidenceof adverseeventsdiffersfromthe ratethatobtainedbeforetheGreatRecessionandtheimplementationof theCreditCard Act.Anditisnotnecessarilythecasethateverycardholderwhohadanadverseexperience

90 FederalReserveBulletin|December2013 wasforcedtouselesscreditorpaidhigherinterestorfees,althoughsomeclearlydid.While havingadverseexperienceswasassociatedwithcardholders’feelinglesssatisfactionwith theirownaccountsandhavinglesspositiveopinionsof creditcardsingeneral,mostcardholderswhohadadverseexperiencesweresatisfiedwiththeirownaccounts.Andbyfarthe majorityof cardholderswithadverseexperiences,likeothercardholders,believedthattheir creditcardcompaniestreatedthemfairlyandthattheycouldeasilygetacardfrom anothercompanyif theywerenottreatedwell. Changes in Attitudes in the Aftermath of the Recession and the Credit Card Act Asmentioned,individuals’attitudesreflecttheirorientationstowardoragainstalternatives forpurchaseandconsumption,whichmayaffecttheirbehavior.Changesinattitudesmay thuschangebehavior.ThequestionontheSurveysof Consumersaskingrespondents whetherusingcreditcardsisagoodorabadthinghasbeenaskedseveraltimesoverthe years,beginningwiththe1970survey.Asconsumershavegainedexperiencewithcredit cards,theiropinionsaboutcreditcardusehavepolarized.In1970about65percentof cardholdersand71percentof consumersoverallexpressedanunqualifiedviewthatcard usewaseithera“goodthing”ora“badthing”(table18).In2012morethan95percentof bothcardholdersandconsumersoverallexpressedunqualifiedviewsaboutcreditcards. Notably,theshareof cardholderswhoviewedcarduseasabadthingrosesubstantiallybetween2000and2012,whiletheshareof cardholdersviewingcarduseasagood thingwaslittlechanged. Alsonotableisthatthepercentageof bankcardholderswhosaidthatcreditcardusewas badincreasedamongthosewhohardlyeverpaidinfullandthosewhohardlyeverpaid morethantheminimummonthlypayment.Thesebehaviorscanberelativelyrisky,making theseconsumersvulnerabletofinancialdifficulties.Between2000and2012,thepercentage of cardholderswhohardlyeverpaidbalancesinfullandsaidthatcreditcarduseisbad increased12percentagepoints,from59percentto71percent,andtheshareof cardholders whohardlyeverpaidmorethantheminimumpaymentduerose10percentagepoints,from 63percentto73percent(datanotshownintables).Incontrast,amongcardholderswho almostalwayspaidinfull,thepercentageviewingcreditcarduseasbaddidnotchange materiallybetween2000and2012.Thechangeinattitudesof theformergroupsmay reflecttheirexperienceswithdelinquencies,whichrosedramaticallyintherecentrecession, andmayhaveinhibitedsubsequentgrowthinrevolvingdebt. Table18.Opinionsabouttheuseofcreditcards,1970,1977,2000,and2012 Percent 1970 1977 2000 2012 Opinion Have Have Have Have Allfamilies bank-type Allfamilies bank-type Allfamilies bank-type Allfamilies bank-type cards cards cards cards Good 28 45 39 54 33 42 40 46 Good,withqualifications 13 17 19 20 10 9 2 2 Bothgoodandbad 12 14 11 8 6 5 2 2 Bad,withqualifications 4 4 4 3 1 1 † † Bad 43 20 27 14 51 42 56 51 Total 100 100 100 100 100 100 100 100 Note:Componentsmaynotsumto100becauseofrounding. †Lessthan0.5. Source:For1970and1977,FederalReserveBoard,SurveyofConsumerFinances;for2000and2012,ThomsonReuters/UniversityofMichigan SurveysofConsumers.

ConsumerExperienceswithCreditCards 91 Surveyresponsescanreflectnotonlyanindividual’sownexperiencesbutalsohisorher perceptionsof theexperiencesof otherindividuals.Cardholders’viewsabouttheabilityof otherconsumerstomanagecreditcardswiselymayaccountforsomeof thenegative opinionsof creditcarduse.Theseviewsareinformed,atleastinpart,bymediacoverageof consumercredit,whichtendstobestimulatedbyrecessionsandislargelynegative.50 Over60percentof cardholdersbelievedstronglythatcreditcardcompaniesmadetoo muchcreditavailabletomostpeople,and75percentbelievedstronglythatsolicitations offeringlowratesforashorttimeconfusemanypeople(table19).Thesebeliefswerehelda littlelessstronglyin2012thantheywerein2000:Thepercentagesof cardholdersagreeing Table19.Attitudesofholdersofbank-typecreditcardstowardcreditcardsandcardissuers,2012 Percent Attitude Agreestrongly Agreesomewhat Disagreesomewhat Disagreestrongly Total Specificpracticesofcardissuers Theinterestrateschargedoncreditcardsare reasonable. 6 13 25 55 100 Creditcardbillingstatementsareaccurate. 58 34 6 2 100 Cardissuersandconsumersingeneral Creditcardcompaniesmaketoomuchcredit availabletomostpeople. 61 28 7 3 100 Sendingsolicitationsthatofferlowratesbutfor onlyashorttimeprobablymisleadsalotof people. 75 20 4 2 100 Creditcardcompaniesmakeithardforpeople togetoutofdebt. 61 27 7 5 100 Creditcardcompaniesshouldnotbeallowedto issuecreditcardstocollegestudents. 33 21 31 16 100 Overspendingisthefaultofconsumers,notthe creditcardcompanies. 57 30 9 4 100 Cardissuersandme Iamgenerallysatisfiedinmydealingswithmy creditcardcompanies. 51 44 4 1 100 Mycreditcardcompaniestreatmefairly. 46 47 5 3 100 Itiseasytogetacreditcardfromanother companyifIamnottreatedwell. 56 34 6 4 100 Generalsatisfactionordissatisfaction Creditcardcompaniesprovideausefulservice toconsumers. 47 46 5 2 100 Mostpeoplearesatisfiedintheirdealingswith creditcardcompanies. 9 41 28 21 100 Consumerswouldbebetteroffiftherewereno creditcards. 14 25 35 26 100 Informationavailability Informationonthestatementonhowlongit wouldtaketopayoffthebalanceifImakeonly theminimumpayment[wouldbe/is]usefulto me.1 51 27 10 12 100 Mailingsandotheradsthatofferalowrateat firstfollowedbyahigherrateareconfusing tome. 35 19 17 29 100 Note:Componentsmaynotsumto100becauseofrounding. 1 Thequestionread“wouldbe”in2000and“is”in2012.ThischangereflectsarevisiontoTruthinLendingthatrequiresdisclosureofmonths torepayifonlytheminimumpaymentismade. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. 50 ThomasA.DurkinandZachariahJonasson(2002),“AnEmpiricalEvaluationoftheContentandCycleof FinancialReporting:TheCaseofConsumerCredit,”WorkingPaper64(Washington:CreditResearchCenter, GeorgetownUniversity,April).

92 FederalReserveBulletin|December2013 somewhatwiththesestatementsincreased8percentagepointsand6percentagepoints, respectively,between2000and2012(table20).However,thepercentageof cardholdersstronglybelievingthatcreditcardcompaniesmadegettingoutof debtdifficult increasedabout6percentagepoints,to61percent,overthistimeperiod. Despitetheirpessimisticviewsaboutotherconsumers,cardholderswerefairlyconfidentin theirowndealingswithcreditcardcompanies.Almostallcardholdersbelievedthattheir creditcardcompaniestreatedthemfairlyandweresatisfiedintheirdealingswithcredit cardcompanies,althoughonlyabouthalf of therespondentsheldthesebeliefsstrongly. Thevastmajorityof allcardholdersalsofeltconfidentthattheycouldobtaincreditfrom anothercreditcardcompanyif theybecamedissatisfiedwithanyof theirpresentcardproviders.Thesurveyresponsessuggestthatin2012manycardholderswerealittlelesspositiveintheirattitudestowardcreditcardcompaniesandlessconfidentof theeaseof obtainingacreditcardfromanothercompanythantheyhadbeenin2000.Theseopinions Table20.Changesinattitudesofholdersofbank-typecreditcardstowardcreditcardsandcard issuers,2000–12 Percentagepoints Attitude Agreestrongly Agreesomewhat Disagreesomewhat Disagreestrongly Overall Specificpracticesofcardissuers Theinterestrateschargedoncreditcardsare reasonable. 3 -3 -1 0 -1 Creditcardbillingstatementsareaccurate. 4 -5 1 0 0 Cardissuersandconsumersingeneral Creditcardcompaniesmaketoomuchcredit availabletomostpeople. -6 8 -2 -1 -1 Sendingsolicitationsthatofferlowratesbut onlyforashorttimeprobablymisleadsalotof people. -4 6 0 -1 1 Creditcardcompaniesmakeithardforpeople togetoutofdebt. 6 0 -3 -4 -1 Creditcardcompaniesshouldnotbeallowed toissuecreditcardstocollegestudents. 3 -4 8 -6 1 Overspendingisthefaultofconsumers,not thecreditcardcompanies. -6 2 3 0 -1 Cardissuersandme Iamgenerallysatisfiedinmydealingswithmy creditcardcompanies. 0 4 -2 -3 -1 Mycreditcardcompaniestreatmefairly. -8 11 -1 -1 1 Itiseasytogetacreditcardfromanother companyifIamnottreatedwell. -7 11 -4 0 0 Generalsatisfactionordissatisfaction Creditcardcompaniesprovideausefulservice toconsumers. 3 -2 -1 0 0 Mostpeoplearesatisfiedintheirdealingswith creditcardcompanies. -6 -13 8 10 -1 Consumerswouldbebetteroffiftherewere nocreditcards. -1 -1 5 -3 0 Informationavailability Informationonthestatementonhowlongit wouldtaketopayoffthebalanceifImake onlytheminimumpayment[wouldbe/is] usefultome.1 -14 3 3 8 0 Mailingsandotheradsthatofferalowrateat firstfollowedbyahigherrateareconfusing tome. -1 -6 2 5 0 1 Thequestionread“wouldbe”in2000and“is”in2012.ThischangereflectsarevisiontoTruthinLendingthatrequiresdisclosureofmonths torepayifonlytheminimumpaymentismade. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers.

ConsumerExperienceswithCreditCards 93 seemconsistentwiththetighteningof creditstandardsassociatedwiththerecessionand theCreditCardAct. Cardholdersbelievethatcreditcardsareusefultoconsumersgenerally.In2012,nearlyall cardholdersbelievedthatcreditcardcompaniesprovideausefulservicetoconsumers. Morethan60percentof cardholdersdisagreedwiththestatementthatconsumerswould bebetteroff if therewerenocreditcards,andmostof therestdidnotfeelstronglythat thisstatementwastrue.Thesebeliefswerelittlechangedfrom2000. Cardholdersweredecidedlymorenegativeintheirassessmentsof otherconsumers’satisfactionthanof theirownsatisfactionwiththeircreditcardcompanies:Twenty-eightpercent of cardholdersdisagreedsomewhatand21percentdisagreedstronglywiththestatement thatmostconsumersweresatisfiedintheirdealingswithcreditcardcompanies.These assessmentsstandinstarkcontrasttotheirassessmentsof theirownsatisfactionwiththeir owncreditcardissuers(only4percentdisagreedsomewhatand1percentdisagreed stronglywiththestatementthattheyweresatisfiedintheirdealingswiththeircreditcard companies;table19)andaresignificantlymorenegativethanthosereportedin2000 (increasesof 8percentagepointsforcardholderswhodisagreedsomewhatand10percentagepointsforcardholderswhodisagreedstronglythatmostconsumersaresatisfiedintheir dealingswithcreditcardcompanies;table20). Information and Truth in Lending Onseveraloccasionssince1977,FederalReserve–sponsoredSurveysof Consumershave askedconsumersabouttheirviewsregardingdisclosuresrequiredbyTILA.Oneseriesof questionsaskedconsumersabouttheextenttowhichtheyagreedordisagreedwithseveral statementsaboutthesedisclosures.First,cardholderswereaskedwhethertheyagreedor disagreedwiththestatement,“TruthinLendingstatementsarecomplicated.”Agreement withthisstatementhastrendedupwardovertheyears.In1977,38percentof cardholders agreedstronglywiththisstatement,and73percentagreedstronglyorsomewhat(table21). In2012,thepercentageof consumersagreeingstronglywiththestatementincreasedto 52percent,andthepercentageagreeingstronglyorsomewhatincreasedto86percent. Thesecondstatementonwhichrespondentsgavetheiropinionwas,“Someinformationin TruthinLendingstatementsisnotveryhelpful.”Responsesweresimilartothoseforthe firststatement.Thepercentageof cardholderswhoagreedatleastsomewhatwiththis statementhasalsotrendedupward,from59percentin1977to66percentin2001and, mostrecently,75percentin2012.Theseperceptionsseemconsistentwithdevelopmentsin thecardmarket.Creditcardregulationhastendedtorequiredisclosureof moreinformationasnewcreditcardproductshavebeendevelopedandfeatureshavebeenaddedto existingproducts.Also,somerequireddisclosuresmayconfuseconsumersbecausethedisclosuresrelyonunstatedassumptionsaboutconsumers’futurebehavior.51 Athirdquestionaskedwhethercardholdersagreedordisagreedwiththestatement,“Truth inLendingmakespeoplemoreconfidentwhendealingwithcreditors.”Seventy-threepercentof cardholdersagreedsomewhatorstronglywiththisstatementin1977.Thepercentageagreeingsomewhatorstronglyfellgraduallyoverthenext24yearsto67percentin 2001.Thepercentageagreeingsomewhatorstronglyfell10percentagepointsfurtherinthe 2000sto57percentin2012. 51 Someoftheissuesarewhetherafeatureisacharacteristicofcreditoranancillaryproduct,howtodisclose itemsthatdependonunknownfutureevents,andhowtodisclosethepriceofcreditwhencreditisobtained jointlywiththeproduct.Fordiscussion,seeDurkinandElliehausen,TruthinLending,innote6.

94 FederalReserveBulletin|December2013 Table21.Consumers'agreementwithobservationsaboutTruthinLendingstatements,selectedyears, 1977–2012 Percent Statementandopinion 1977 1981 1994 1997 2001 2012 TruthinLendingstatementsarecomplicated. Agreestrongly 38 31 41 49 45 52 Agreesomewhat 35 37 36 32 30 34 Disagreesomewhat 11 18 13 11 9 10 Disagreestrongly 5 8 5 5 8 3 Donotknow 12 6 5 2 8 1 Total 100 100 100 100 100 100 SomeinformationonTruthinLending statementsisnotveryhelpful. Agreestrongly 20 16 21 23 28 33 Agreesomewhat 39 41 43 42 38 42 Disagreesomewhat 16 23 19 21 18 17 Disagreestrongly 5 6 9 10 7 7 Donotknow 20 14 8 3 9 2 Total 100 100 100 100 100 100 TruthinLendingmakespeoplemore confidentwhendealingwithcreditors. Agreestrongly 31 28 24 26 26 15 Agreesomewhat 42 44 46 43 41 42 Disagreesomewhat 12 14 17 19 15 24 Disagreestrongly 5 6 8 10 11 17 Donotknow 11 8 5 2 7 1 Total 100 100 100 100 100 100 MostpeoplereadtheirTruthinLending statementscarefully. Agreestrongly 8 7 9 7 19 6 Agreesomewhat 19 24 26 22 30 14 Disagreesomewhat 33 38 34 35 22 26 Disagreestrongly 31 26 27 34 24 53 Donotknow 9 5 4 1 5 † Total 100 100 100 100 100 100 Note:Componentsmaynotsumto100becauseofrounding. †Lessthan0.5. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers. Finally,cardholderswereaskedfortheiropiniononthestatement,“Mostpeoplereadtheir TruthinLendingstatementscarefully.”Agreementwiththisstatementtrendedupward from1977to2001butfelldramaticallyfrom49percentin2001to20percentin2012.The changeinthepercentageof cardholderswhodisagreedstronglywiththestatementwas equallydramatic:Itincreasedfrom24percentin2001to53percentin2012.Thedisclosure law’srequirementshavebeenaccretivesinceitsinception.Itappearsthatasperceptionsof TILA’scomplexityanddoubtsabouttheusefulnessof someof thedisclosuresitrequires haveincreased,cardholders’attitudestowardthelawhavebecomelesspositiveoverthe years.52 52 SeeDurkinandElliehausen,TruthinLending,innote6.

95 Federal Reserve BULLETIN February 2013 Vol. 99, No. 1 Legal Developments: Fourth Quarter, 2012 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act Mitsubishi UFJ Financial Group, Inc. Tokyo, Japan The Bank of Tokyo-Mitsubishi UFJ, Ltd. Tokyo, Japan UnionBanCal Corporation San Francisco, California OrderApprovingtheAcquisitionof aBankHoldingCompanyandtheMergerof Bank HoldingCompanies FRBOrderNo.2012–12(November14,2012) MitsubishiUFJFinancialGroup,Inc.(“MUFG”)anditswhollyownedsubsidiaries,The Bankof Tokyo-MitsubishiUFJ,Ltd.(“BTMU”)andUnionBanCalCorporation(“Union- BanCal”and,collectivelywithMUFGandBTMU,“Applicants”),haverequestedthe Board’sapprovalundersection3of theBankHoldingCompanyAct(“BHCAct”)1to acquirePacificCapitalBancorp(“PacificCapital”)andtherebyindirectlyacquireitssubsidiarybank,SantaBarbaraBank&Trust,N.A.(“SBBT”),bothof SantaBarbara, California.Inaddition,UnionBanCalhasrequestedtheBoard’sapprovalundersection3 of theBHCActtomergewithPacificCapital.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(77FederalRegister23249(April18,2012)).Thetimeforfilingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedin lightof thefactorssetforthinsection3of theBHCAct. MUFG,withtotalconsolidatedassetsof approximately$2.8trillion,isthelargestbanking organizationinJapan.3MUFGengagesinbankingactivitiesintheUnitedStatesthrough BTMUandMitsubishiUFJTrustandBankingCorporation(“MUTB”),alsoof Tokyo.4 BTMUcontrolsUnionBanCalandoperatesbranches,anagency,andrepresentativeoffices 1 12U.S.C.§1842. 2 Afterthetransaction,ApplicantsplantomergeSBBTwithandintoUnionBanCal’sonlysubsidiarydepositoryinstitution,UnionBankN.A.(“UnionBank”),SanFrancisco.TheOfficeoftheComptrolleroftheCurrency(“OCC”) hasapprovedtheproposedmergerofSBBTwithandintoUnionBank,pursuanttotheBankMergerActandthe NationalBankAct.12U.S.C.§1828(c)and12U.S.C.§215a. 3 Nationaldeposit,asset,andrankingdataareasofJune30,2012. 4 MUFGalsoownsanoncontrollinginterestinMorganStanley,NewYork,NewYork.

96 FederalReserveBulletin|February2013 inseveralstates.5MUTBoperatesabranchandcontrolsMitsubishiUFJTrust&Banking Corporation(U.S.A.)(“MUTBUSA”),bothof NewYork,NewYork.MUFGcontrols depositsof approximately$63.7billionintheUnitedStates,6whichrepresentlessthan 1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnited States.7MUFGandBTMUarequalifyingforeignbankingorganizationsandonconsummationof theproposalwouldcontinuetomeettherequirementsforaqualifyingforeign bankingorganizationunderRegulationK.8 UnionBanCal,withtotalconsolidatedassetsof approximately$87.9billion,isthe20th largestdepositoryorganizationintheUnitedStates,controllingdepositsof approximately $63.7billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.UnionBankoperatesbranchesinCalifornia, Oregon,Texas,andWashington,andonebranchinIllinoisandinNewYork.UnionBank isthefourthlargestinsureddepositoryorganizationinCalifornia,controllingdepositsof approximately$53.4billion,whichrepresent6.0percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate.9 PacificCapital,withtotalconsolidatedassetsof approximately$5.9billion,controlsSBBT, whichoperatesonlyinCalifornia.SBBTisthe19thlargestinsureddepositoryinstitutionin California,controllingdepositsof $4.7billion,whichrepresentlessthan1percentof the totalamountof depositsof insureddepositoryinstitutionsinthestate. Onconsummationof theproposal,MUFGwouldcontroldepositsof approximately $68.6billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.UnionBankwouldbecomethe17thlargest depositoryorganizationintheUnitedStates,withconsolidateddepositsof approximately $68.6billion.InCalifornia,UnionBankwouldremainthefourthlargestdepository organization,controllingdepositsof approximately$58.1billion,representingapproximately6.6percentof depositsof insureddepositoryinstitutionsinthestate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.10TheBoardhasconsideredthecompetitiveeffectsof theproposalinlightof allthefactsof record.UnionBanCalandPacificCapitalcompetedirectlyin10banking marketsinCalifornia. 5 BTMUoperatesbranchesinCalifornia,Illinois,andNewYork;anagencyinTexas;andrepresentativeoffices inCalifornia,theDistrictofColumbia,Georgia,Kentucky,Minnesota,NewJersey,Texas,andWashington.In California,BTMUhasabranchinLosAngelesandarepresentativeofficeinSanFrancisco. 6 NationaldepositdataincludedepositscontrolledbyMUFG’sdepositoryinstitutionsubsidiariesthatare insuredbytheFederalDepositInsuranceCorporation(“FDIC”).Ifdepositsheldinbranchesthatarenot insuredbytheFDICareincluded,MUFGcontrolsdepositsofapproximately$132billionintheUnitedStates. 7 MUFGalsoengagesinnonbankingactivities,includingsecuritiesunderwritinganddealing,intheUnited Statesthroughvarioussubsidiaries. 8 12CFR211.23(a). 9 Statedeposit,asset,andrankingdataareasofJune30,2011. 10 12U.S.C.§1842(c)(1).

LegalDevelopments:FourthQuarter,2012 97 A.CompetitiveEffectsinBankingMarkets TheBoardhasreviewedthecompetitiveeffectsof theproposalinthosebankingmarkets. Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremainin thebankingmarkets,therelativesharesof totaldepositsinthedepositoryinstitutionsin themarkets(“marketdeposits”)controlledbyUnionBanCalandPacificCapital,11theconcentrationlevelof marketdepositsandtheincreaseinthatlevelasmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeMergerCompetitive ReviewGuidelines(“DOJBankMergerGuidelines”),12andothercharacteristicsof the markets. BankingMarketswithinEstablishedGuidelines.Consummationof theproposalwouldbe consistentwithBoardprecedentandwithintheDOJBankMergerGuidelinesinnineof thetenbankingmarketsinwhichUnionBanCalandPacificCapital’ssubsidiarybanks competedirectly.13Onconsummationof theproposal,twomarketswouldremainhighly concentratedandsevenmarketswouldremainmoderatelyconcentrated,asmeasuredby theHHI.ThechangeinHHIinthetwohighlyconcentratedmarketswouldbesmalland consistentwithBoardprecedentandthethresholdsintheDOJBankMergerGuidelines.Inthesevenmoderatelyconcentratedmarkets,thechangeinHHIalsowouldbeconsistentwithBoardprecedentandthethresholdsintheDOJBankMergerGuidelines.In eachof thesebankingmarkets,numerouscompetitorswouldremain. BankingMarketWarrantingSpecialScrutiny.Thestructuraleffectsof theproposalinthe Lompoc,Californiabankingmarketwarrantadetailedreviewbecausetheconcentration levelonconsummationwouldexceedthethresholdlevelsintheDOJBankMergerGuidelines.14UnionBankisthefifthlargestof eightdepositoryinstitutionsinthemarketand controlsdepositsof $45.4million,representing11.7percentof marketdeposits.SBBTis thelargestdepositoryinstitutioninthemarketandcontrolsdepositsof $111.9million,representing28.9percentof marketdeposits.Onconsummationof theproposal,UnionBank wouldbecomethelargestdepositoryinstitutioninthemarket,withdepositsof $157.3million,representing40.6percentof marketdeposits.TheHHIforthemarketwouldincrease 676pointsto2429. Inevaluatingthecompetitiveeffectsof thisproposalintheLompocbankingmarket,the Boardhasconsideredthepresenceof alargeandactivecreditunionoperatinginthemarket.CoastHillsFederalCreditUnion(“CoastHills”),withmorethan$540millionintotal 11 DepositandmarketsharedataareasofJune30,2011,adjustedtoreflectmergersandacquisitionsthrough April16,2012,andarebasedoncalculationsinwhichthedepositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome, significantcompetitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin 386(1989);NationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhas includedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian, Inc.,77FederalReserveBulletin52(1991). 12 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontalMerger Guidelines,DOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified. PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/10-at- 938.html. 13 Thesebankingmarketsandtheeffectsoftheproposalontheconcentrationofbankingresourcesinthemare describedintheappendix. 14 TheLompocbankingmarketisdefinedastheCityofLompoc,MissionHills,VandenbergAirForceBase,and VandenbergVillage.

98 FederalReserveBulletin|February2013 deposits,offersopenmembershiptoalltheresidentsinthemarket.15Itoperatesthree street-levelbranchesinthemarket,twoof whichareeasilyaccessibletothegeneralpopulation.16CoastHillsoffersafullrangeof retailbankingproductsandoffersawiderangeof businessloanproductsandotherbankingservices.Accordingly,theBoardhasconcluded thatdepositscontrolledbythecreditunionshouldbeincludedinmarketsharecalculations witha50percentweight.Accountingfortheseweighteddeposits,UnionBanCalwould control30.95percentof marketdeposits,andtheHHIwouldincrease393pointsto1977 onconsummationof theproposal. Anumberof circumstancesmitigatethepotentialanticompetitiveeffectsof thetransaction.Themarketwouldremainbalancedandcompetitive,asevidencedbythenumberof competitors,thetypeof competitors,andthemarketstructure.17Afterconsummationof theproposal,sevencompetitors,includingCoastHills,wouldremaininthemarket.InadditiontoUnionBanCal,threecompetitorswouldeachcontrolmorethan10percentof marketdeposits.CoastHillswouldcontrol23.8percentof marketdeposits,andtwoothercompetitorswouldcontrol13.1percentand11.7percentof themarket’sdeposits,respectively. Threeothercompetitorswouldcontrolbetween5percentand10percentof marketdeposits.Inaddition,theLompocbankingmarketisrelativelyattractiveforentry,asevidenced byrecentbankentryandeconomiccharacteristicsof themarket.In2005,acommunity bankenteredLompocfromaneighboringmarket.SinceitsentryintotheLompocbanking market,thecommunitybank’sdepositsinthemarkethaveincreasedfrom$1millionto $29million. Economiccharacteristicsof theLompocbankingmarketalsosuggestthatthemarketis reasonablyattractiveforentry.Severallocaleconomicdevelopmentinitiativeshaverecently beencompleted,areunderway,orareproposed.Forinstance,theLompocValleyMedical Center,a60-bedgeneralacute-carehospitalanda110-bedskillednursingfacility,opened in2010.Inaddition,alocalcommunitycollegeisscheduledtocompletea$38million expansioninLompocin2013thatwillhostthecollege’spolice,fire,emergencymedicalservices,andenvironmentaltechnologyprograms.18Theseinitiativessuggestthatthepotential foremploymentgrowthintheLompocbankingmarketisreasonablystrong. TheBoardconcludesthattheforegoingconsiderations,includingthenumberandsizeof competitorsthatwouldremainintheLompocbankingmarketafterconsummation,the structureof themarket,andthemarket’sattractivenessforentry,mitigatethetransaction’s potentialforanticompetitiveeffects. B.Viewsof OtherAgenciesandConclusiononCompetitiveConsiderations TheDOJalsohasconductedadetailedreviewof thepotentialcompetitiveeffectsof the proposalandhasadvisedtheBoardthatconsummationof theproposalwouldnotlikely haveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.In 15 CoastHillsoffersopenmembershiptoanyonewholives,works,worships,orattendsschoolinSanLuisObispo CountyornorthernSantaBarbaraCounty,whichincludestheLompocbankingmarket. 16 Thethirdstreet-levelbranchisattheVandenbergAirForceBaseandaccessibleonlytoemployeesofthebase. 17 Inaddition,analternativemeasureofmarketconcentrationsuggeststhattheincreaseintheconcentrationof themarketforsmallbusinessloansintheLompocbankingmarketasaresultoftheproposalwouldbesmaller thantheincreaseintheconcentrationinthemarketfordeposits. 18 ThecollegeservesallofnorthernSantaBarbaraCounty,aportionofeasternSanLuisObispoCounty,and partofVenturaCountyandhasapproximately1,300employees.Inaddition,theLompoccitycouncilisnegotiatingtheconstructionofaprivatespacecenteroncity-ownedlandthatcouldcreateapproximately1,700jobs andattractupto500,000visitorsannually.Seesantamariatimes.com/news/local/article_00e58bda-5775-11e0ab45-001cc4c03286.html.

LegalDevelopments:FourthQuarter,2012 99 addition,theappropriatebankingagencieshavebeenaffordedanopportunitytocomment andhavenotobjectedtotheproposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinthe10bankingmarketswhereUnionBanCalandPacificCapitalcompete directlyorinanyotherrelevantbankingmarket.Accordingly,theBoardhasdetermined thatcompetitiveconsiderationsareconsistentwithapproval. OtherSection3(c)Considerations Section3(c)of theBHCActrequirestheBoardtotakeintoconsiderationanumberof otherfactorsinactingonbankacquisitionapplications:financialandmanagerialresources (includingconsiderationof thecompetence,experience,andintegrityof officers,directors, andprincipalshareholders)andfutureprospectsof thecompanyandbanksconcerned; effectivenessof thecompanyincombattingmoneylaundering;theconvenienceandneeds of thecommunitytobeserved;andtheextenttowhichtheproposalwouldresultingreater ormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem. Section3(c)of theBHCActalsorequirestheBoardtodeterminethatanapplicanthas providedadequateassurancesthatitwillmakeavailabletotheBoardsuchinformationon itsoperationsandactivitiesandthoseof itsaffiliatesthattheBoarddeemsappropriateto determineandenforcecompliancewiththeBHCAct.19 TheBoardhasconsideredallthesefactorsand,asdescribedbelow,hasdeterminedthatall considerationsareconsistentwithapprovalof theapplication.Thereviewwasconducted inlightof allthefactsof record,includingsupervisoryandexaminationinformationfrom variousU.S.bankingsupervisorsof theinstitutionsinvolved,publiclyreportedandother financialinformation,informationprovidedbyApplicants,andpubliccommentsreceived ontheproposal.Inaddition,theBoardhasconsultedwiththeJapaneseFinancialServices Agency(“JFSA”),theagencywithprimaryresponsibilityforthesupervisionandregulationof Japanesebankingorganizations. A.Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarybanksandsignificantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.TheBoard evaluatesthefinancialconditionof theproformaorganization,includingitscapitalposition,assetquality,andearningsprospects,andtheimpactof theproposedfundingonthe transaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessing financialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespecially important. TheBoardhasconsideredthefinancialfactorsof theproposal.Thecapitallevelsof MUFGandBTMUexceedtheminimumlevelsthatwouldberequiredundertheBasel CapitalAccordandareconsideredtobeequivalenttothecapitallevelsthatwouldbe requiredof aU.S.bankingorganization.20Inaddition,UnionBanCalandUnionBankare 19 12U.S.C.§1842(c)(3)(A). 20 TheBoardconsideredthetotalandtier1risk-basedcapitalratiosandtheratiooftier1capitaltototalconsolidatedassetsofbothMUFGandBTMU.

100 FederalReserveBulletin|February2013 wellcapitalizedandwouldremainsoonconsummationof theproposedacquisition. MUFG’sreportedasset-qualityindicators,includingnonperformingloansandreservesfor loanlosses,areconsistentwithapprovalof theproposal.MUFG’searningsperformance alsoisconsistentwithapproval. Theproposedtransactionisstructuredasacashpurchaseof sharesforatotalof approximately$1.5billion.UnionBanCalwilluseexistingresourcestofundthepurchaseof shares andhassufficientfinancialresourcestoeffecttheacquisition.Applicantsappeartohave adequateresourcestoabsorbthecostsof theproposalandtheproposedintegrationof the institutions’operations. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolved.The Boardhasreviewedtheexaminationrecordsof Applicants,UnionBank,PacificCapital, andSBBT,includingassessmentsof theirmanagement,risk-managementsystems,and operations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbankingsupervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankinglaw,includinganti-money-launderinglaws.21 ApplicantsandUnionBankareallconsideredtobewellmanaged.22UnionBankhasa demonstratedrecordof successfullyintegratingorganizationsintoitsoperationsandriskmanagementsystemsfollowingacquisitions,includingitsintegrationsof FrontierBank andTamalpaisBankin2010.Applicantsproposetodevotesignificantfinancialandother resourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal. ApplicantswouldimplementUnionBanCal’sandUnionBank’srisk-managementpolicies, procedures,andcontrolsatthecombinedorganization.Applicants’managementhasthe experienceandresourcestoensurethatthecombinedorganizationoperatesinasafeand soundmanner. TheBoardhasreviewedtherestrictionsondisclosureintherelevantjurisdictionsinwhich Applicantsoperate.Inaddition,Applicantshavecommittedthat,totheextentnotprohibitedbyapplicablelaw,theywillmakeavailabletotheBoardsuchinformationontheir operationsandtheoperationsof theiraffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliancewiththeBHCAct,theInternationalBankingAct,andother applicablefederallaws.ApplicantsalsohavecommittedtocooperatewiththeBoardto obtainanywaiversorexemptionsthatmaybenecessarytoenablethemortheiraffiliatesto makesuchinformationavailabletotheBoard.Basedonallfactsof record,theBoardhas concludedthatApplicantshaveprovidedadequateassurancesof accesstoanyappropriate informationtheBoardmayrequest. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedare consistentwithapproval. 21 TheBoardhasconsultedwithrelevantstate,federal,andinternationalagenciesregardingtheassessmentsby thoseagenciesoftheApplicants’programsforcompliancewithanti-money-launderinglawsandwillcontinue tomonitorthoseprogramsandagencyassessments. 22 AcommenterassertedthattheSwissCompetitionCommission(“SCC”)isinvestigatingpossiblemanipulation ofLIBORandotherratesbytradersofvariousbanks,includingBTMU.Applicantsacknowledgedthat BTMUhasreceivedaquestionnairefromtheSCCandiscooperatingwithitsinvestigation.Alongwithother banksontherate-settingpanelsforLIBORandotherinterestrates,MUFGandBTMUaresubjecttoinvestigationsbyvariousregulatorybodiesintheUnitedStatesandabroadthathaveresponsibilityandauthorityfor investigatingallegationsofmarketmanipulationactivities.TheBoardismonitoringthecourseoftheinvestigationsandwillconsider,totheextentoftheBoard’sauthority,thefindingsinthoseinvestigationsasthey develop.

LegalDevelopments:FourthQuarter,2012 101 B.SupervisionorRegulationonaConsolidatedBasis Inevaluatingthisapplicationandasrequiredbysection3of theBHCAct,theBoardconsideredwhetherMUFG,BTMU,andanyotherforeignbankinvolvedintheacquisition aresubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbyappropriateauthoritiesintheirhomecountry.23 TheJFSAisthesupervisorof Japanesebankingorganizations,includingholdingcompaniessuchasMUFG.TheBoardpreviouslyhasdeterminedthatMUFG,BTMU,and MUTBaresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhome countrysupervisor.24MUFG,BTMU,andMUTBcontinuetobesupervisedbytheJFSA onsubstantiallythesametermsandconditions.Basedonthisfindingandallthefactsof record,theBoardhasconcludedthatMUFG,BTMU,andMUTBcontinuetobesubject tocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor. C.ConvenienceandNeedsConsiderations Undersection3,theBoardmustconsidertheeffectsof theproposalontheconvenience andneedsof thecommunitiestobeservedandtakeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).25The CRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepository institutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeirsafeandsoundoperation,26andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.27 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformancerecordsof UnionBankandSBBT,datareportedbyUnionBankand SBBTundertheCRAandtheHomeMortgageDisclosureAct(“HMDA”),28otherinformationprovidedbyApplicants,confidentialsupervisoryinformation,andpubliccommentsreceivedontheproposal.Fifteencommunitygroupssubmittedcommentsinsupport of theproposal.ThosecommentersgenerallycommendedUnionBank’sperformance undertheCRA,particularlyitssupportforcommunitydevelopmentandsmallbusiness programsthroughloans,investments,grants,donatedspace,andcorporatevolunteers. FourcommentersexpressedconcernsaboutUnionBank’smortgage,smallbusiness,and consumerlendingrecords.ThosecommentersgenerallyassertedthatUnionBankhadnot engagedinanadequateamountof homemortgagelendingtoLMIandminority 23 12U.S.C.§1842(c)(3)(B).AsprovidedinRegulationY,theBoarddetermineswhetheraforeignbankissubject toconsolidatedhomecountrysupervisionunderthestandardssetforthinRegulationK.See12CFR 225.13(a)(4).RegulationKprovidesthataforeignbankissubjecttoconsolidatedhomecountrysupervisionif theforeignbankissupervisedorregulatedinsuchamannerthatitshomecountrysupervisorreceivessufficient informationontheworldwideoperationsoftheforeignbank(includingtherelationshipsofthebanktoany affiliate)toassesstheforeignbank’soverallfinancialconditionandcompliancewithlawandregulation. 12CFR211.24(c)(1)(ii). 24 SeeMitsubishiUFJFinancialGroup,Inc.(OrderdatedJune14,2011),97FederalReserveBulletin10(2ndQuar. 2011).SeealsoMitsubishiTokyoFinancialGroup,Inc.,87FederalReserveBulletin349(2001)(orderinvolving predecessorstoMUFG,BTMU,andMUTB). 25 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 26 12U.S.C.§2901(b). 27 12U.S.C.§2903. 28 12U.S.C.§2801etseq.

102 FederalReserveBulletin|February2013 borrowers.Someof thecommentersalsocriticizedUnionBankasfailingtomeettheneeds of smallandminority-ownedbusinesses.29 1.Recordsof PerformanceUndertheCRA AsprovidedintheCRA,theBoardevaluatestherecordof performanceof aninstitution inlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformance recordsof therelevantinstitutions.30TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’s recordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.31Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriate federalsupervisor. CRAPerformanceof UnionBank.32UnionBankwasassignedan“outstanding”ratingat itsmostrecentCRAperformanceevaluationbytheOCC,asof June1,2009(“UBEvaluation”).33Thebankreceiveda“highsatisfactory”ratingonthelendingtestand“outstanding”ratingsonboththeinvestmentandservicetests.34Asdescribedindetailbelow,Union Bankhasrespondedtothecreditneedsof theentirecommunitiesthatthebankserves, suchasaffordablehousingforLMIgeographiesandborrowers,throughextensivetransactionsassociatedwithcommunitydevelopmentloans,investments,andservices,inaddition toitsdirectlending.Asnotedabove,anumberof commenters,includingcommunity groupsandadvocates,highlightedprogramsandeffortsof UnionBankthatsupportedthe CRAratingsof UnionBank. IntheUBEvaluation,examinersnotedthatUnionBank’slendingundertheCRAfocused onsmallbusinesslendingandthatthebankofferedvariousspecialloanprogramsdesigned toaccommodatesmallbusinessneedsandtofostertheirdevelopment.Theseprograms includetheBusinessDiversityLendingprogram,whichprovideseasieraccesstocreditfor women-owned,minority-owned,anddisabled-veteran-ownedsmallbusinesses,programs relatedtotheSmallBusinessAdministration(“SBA”),andprogramsrelatedtostate initiatives. UnionBankalsoengagesinresidentialmortgagelending.UnionBank’sprimaryresidentialmortgagelendingproductisajumbo,interest-onlymortgageloanwithalowloanto-value(“LTV”)ratio.Inaddition,UnionBankoffersnon-jumbo,adjustableratemortgagesandanon-jumbo,fixed-rateproductforLMIborrowersunderitsEconomic 29 OnecommenteralsoquestionedUnionBank’seffortsinawardingcontractstominority-ownedbusinesses. AlthoughtheBoardfullysupportsprogramsdesignedtopromoteequalopportunityincontracting,thecommentaboutcontractingpracticesisbeyondthefactorstheBoardisauthorizedtoconsiderundertheBHCAct. See,e.g.,BankofAmericaCorporation,94FederalReserveBulletinC81(2008). 30 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at 11665(2010). 31 12U.S.C.§2906. 32 Asnotedabove,MUFGindirectlycontrolsMUTBUSA,whichisalimited-purposebankforpurposesofthe CRA.MUTBUSAreceiveda“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbythe FDIC,asofDecember18,2006. 33 TheperiodfortheUBEvaluationwasJanuary1,2005,throughDecember31,2008. 34 UnionBank’sperformanceinCaliforniawasgivenconsiderablymoreweightthanitsperformanceinother statesthatarepartofUnionBank’sassessmentareatoreflectthefactthat99percentofthebank’sdeposits werebookedinbranchesinCalifornia.InreachingtheirconclusionsonUnionBank’sCRAperformance, examinerstookintoaccountsignificanthousingaffordabilitybarriersthatexistinCaliforniathathaveaneffect onalender’sabilitytooriginatehomemortgageloanstoLMIborrowers.OtherstatesincludedintheevaluationwereOregonandWashington.

LegalDevelopments:FourthQuarter,2012 103 OpportunityMortgage(“EOM”)program,35whichpermitshigherLTVratios,higher debt-to-incomeratios,andlendingtoborrowerswithlimitedcredithistories.UnionBank’s emphasisonresidentialmortgagelendinghasincreasedsincetheUBEvaluation.Currently,morethanhalf of UnionBank’scombinedcommercial,mortgage,andconsumer lendingportfolioiscomprisedof residentialmortgageloans.36 UnionBankreceiveda“highsatisfactory”onthelendingtestintheUBEvaluation.Examinersstatedthatthelendingtestratingswereinfluencedmostbythebank’ssmallbusiness lendingand,toalesserextent,itshomemortgagepurchaselending.37Examinersnoted thatUnionBankhadgoodlendingactivityandcharacterizeditsdistributionof loans amonggeographiesof differentincomelevelsasgood.Examinersreportedthatthebank’s distributionof smallbusinessloansamongbusinessesof differentrevenuesizesandgeographieswasgood.38 InevaluatingUnionBank’sHMDA-reportablemortgagelendingandreachingconclusions regardingthebank’srecordof meetingthecreditneedsof itsentirecommunity,examiners tookintoaccountthehighhousingcostsinCaliforniaandnotedthatthosecostspresent severechallengesforafinancialinstitutiontolendtoLMIborrowers.Examinersfound thatthebank’soveralldistributionforHMDA-reportablemortgageloanstoborrowersof variousincomelevelswaspoor.However,examinersalsonotedthatUnionBankhad developedtheEOMprogramtohelpaddressaffordablehousingandtheneedsof LMI borrowersandthatduringtheevaluationperiod,thebankoriginated1,613loanstotaling morethan$263millionthroughtheEOMprogram.ExaminersalsostatedthatUnion Bankexhibitedanadequategeographicdistributionof HMDA-reportablemortgageloans. Inaddition,examinersgavesignificantweighttoUnionBank’scommunitydevelopment lendingactivitiesthatprovidedandsupportedaffordablehousingtoLMIgeographiesand borrowers.ExaminerscommendedUnionBank’s$1.8billionof communitydevelopment lendingandnotedthatUnionBankemphasizedaffordablehousingloans,whichtheexaminersidentifiedasmeetinganimportantcommunityneed.ExaminersnotedthatUnion Bankprovidedfinancingfor9,030unitsof affordablehousinginitsfull-scopeassessment areasduringtheevaluationperiodthatbenefittedLMIgeographiesorborrowers. SincetheUBEvaluation,thebankhasmaintainedasubstantialamountof community developmentandsmallbusinesslending.UnionBankrepresentedthatitoriginated approximately$1.1billionincommunitydevelopmentloansin2011inCalifornia,Oregon, andWashington.Inaddition,UnionBankrepresentedthatitincreaseditssmallbusiness lendingthroughvariousSBAprogramsinitsassessmentareasfrom$32.5millionin 2009to$93.1millionin2011.39 35 UnionBank’sEOMproductisintendedtocompetewithloansinsuredbytheFederalHousingAdministration. 36 Asaportfoliolender,UnionBank’sgeneralpracticeistoretainloansinitsportfoliountilmaturity. 37 Examinersnotedthat,consistentwithUnionBank’sfocusonsmallbusinesslendingduringtheevaluation period,thebankhadalowvolumeofHMDA-reportablehomelendingactivityinitsassessmentareas. 38 Inthiscontext,“smallbusinessloans”areloanswithoriginalamountsof$1millionorlessthateitherare securedbynonfarm,nonresidentialpropertiesorareclassifiedascommercialandindustrialloans.AcommenterassertedthatUnionBankhasnotprovidedsufficientlendingtoAfrican-American-ownedsmallbusinesses.TheBoardrevieweddataonUnionBank’sCRA-reportablesmallbusinesslendingin2008,2009,2010, and2011.ThedatagenerallysupportthefindingsofexaminersregardingUnionBank’ssmallbusinesslending andindicatethatthepercentageofthebank’sCRAreportablesmallbusinessloansthatweremadeinminority censustractsgenerallyapproximatedorexceededthatoflendersintheaggregate. 39 OnecommenterassertedthatUnionBank’sSBAlendingdoesnotbenefitverysmallbusinessesthatneed small-tomid-sizeloans.ThecommenterassertedthattheaveragesizeofUnionBank’sSBA7(a)and504programloansismorethan$1millionandthatUnionBankhasstoppedofferingSBAExpressloans.TheBoard revieweddataprovidedbyApplicantsonUnionBank’sSBAlending.Thedataindicatethattheaveragesizeof

104 FederalReserveBulletin|February2013 In2011,UnionBankimplementedarevisedlendingstrategyintendedtoincreaselending tominorities,inminorityresidentialareas,andinLMIcommunities.UnionBankrepresentedthatithasdevelopedrelationshipswithminorityrealtortradeorganizationsand advertisesitsproductsinmulticulturalmediaacrossradio,mainstreamnewspapers,targetedethnicnewspapers,andEnglishandSpanishwebsites.40Thebankalsohascreated thenewpositionof Headof Multicultural&CRABusinessDevelopment,addedmulticultural-andCRA-focusedloanofficersandsalesteams,andincreasedto85thenumberof brokersapprovedtooriginateEOMloans,9of whomprimarilyserveLMIandminority markets. Inaddition,UnionBankmadeseveralchangestotheEOMproductin2011tomakethe productmoreattractivetoLMIborrowers.Amongotherchanges,thebankincreasedthe maximumLTVratioincertaincounties,loweredtheminimumdownpaymentneededwithoutprivatemortgageinsurance,andraisedthemaximumborrowerincomethresholdfor theEOMprogram.Asdiscussedbelow,thisrevisedlendingstrategyresultedinanincrease inUnionBank’slendingtominorities,inminorityresidentialareas,andinLMI communities. ExaminersassignedUnionBankan“outstanding”ratingundertheinvestmenttestinthe UBEvaluation.Duringtheevaluationperiod,UnionBankmademorethan2,800investments,includinggrantsandcontributions,totalingmorethan$379million.Examiners notedthatmuchof UnionBank’sinvestments,grants,andcontributionswerefocusedon affordablehousingforLMIhouseholds,andthevastmajorityof theinvestmentswerein tax-creditequityfundsthatfinancedprojectsformorethan1,000affordablehousingunits. ExaminerscommendedUnionBankforitsinnovativeprogramof packagingitsinvestmentsinLow-Income-HousingTaxCredits(“LIHTC”)intoUnionBankGuaranteedTax CreditFundsandthensellingparticipationsinthefundstootherfinancialinstitutions. Examinersnotedthatthisprogramenablessmallerfinancialinstitutionstoparticipatein LIHTCinvestmentsandreducesUnionBank’soverallinvestmentbalances,therebyallowingthebanktoexplorenewinvestmentopportunities. UnionBankhasmaintainedasubstantiallevelof communitydevelopmentinvestmentsin itsassessmentareassincetheUBEvaluation.UnionBankrepresentedthatithascommittedapproximately$370millioninCRA-qualifiedinvestmentsto41projectssinceJanuary2010.Inaddition,UnionBankrepresentedthatithasapprovedfundingfortwonew investmentsinsmallbusinessinvestmentcompaniesandthelaunchof anewprogram tosupportcommunitydevelopmentfinancialinstitutions. Examinersalsoassignedan“outstanding”ratingundertheservicetestintheUBEvaluation.ExaminersfoundthatUnionBank’soverallbranchdistributionwasexcellentandthat UnionBank’sproductsandserviceswerereadilyaccessibletogeographiesandindividuals UnionBank’sSBA7(a)and504loanswasapproximately$427,000in2011,andtheaveragesizeofallUnion Bank’sSBAprogramloanswasapproximately$308,000.Further,althoughUnionBankhasreducedthenumberofSBAExpressloansitoriginatedfrom348in2009to90in2011,UnionBankhasincreasedthenumber ofSBA7(a)and504loansfrom29in2009to212in2011.UnionBankrepresentedthatthereductioninthe originationofSBAExpressloans,whichcarryonlya50percentguaranteefromtheSBA,wastheresultofthe bankadjustingitscreditpolicystandardsinlightofthedeterioratingperformanceofitsportfolioduringthe economicdownturn.Inaddition,dataonUnionBank’sCRA-reportablesmallbusinesslendingin2011indicatethatUnionBankoriginatedorpurchased6,699loanstobusinessesinCaliforniawithgrossrevenuesof $1millionorlessandthattheseloansaveragedapproximately$44,000each. 40 AcommenterassertedthatUnionBankspentlessmoneyadvertisinginAfricanAmericanmediaoutletscomparedwithothertypesofmedia.TheBoardreviewedUnionBank’sadvertisingpracticesandexamination recordsandconsultedwiththeOCCandConsumerFinancialProtectionBureau(“CFPB”),whichhave responsibilityforenforcingthebank’scompliancewithfairlendinglaws.Therecorddoesnotsuggestthat UnionBank’sadvertisingpracticesarediscriminatory.

LegalDevelopments:FourthQuarter,2012 105 of differentincomelevels.ExaminerscommendedUnionBank’sCash&Saveprogram, whichcombinestraditionalbankingproductsandserviceswithcheckcashingservicesto serveLMIindividualswhodonottypicallyusetraditionalbankingservices.41Examiners alsoreportedthatUnionBankprovidedahighlevelof communitydevelopmentservices thathadanoverallpositiveimpactinallthebank’sfull-scopeassessmentareas.Inaddition,examinerspraisedUnionBank’sleadershipeffortsinitsinvolvementwiththeBank onCaliforniaprogram,whichhelpsLMIindividualsopenbankaccounts,andtheCommunityBasedFinancingprogram,whichassistsdevelopingsmallbusinessesingainingaccess tobankingservicesandcapital. SincetheUBEvaluation,UnionBankhasmaintainedasubstantiallevelof community developmentservicesinitsassessmentareas.In2011,UnionBankexpandedthenumberof branchesthatofferCash&Saveservicesfrom16to29.Inaddition,thedistributionof UnionBank’sbranchescontinuestoapproximatetheoverallpopulationdistribution withinitsassessmentareas.42Further,UnionBankrepresentedthatitsemployeesdonated morethan53,000hoursof volunteerservicein2011,anincreaseof morethan175percent overthebank’stotalin2010. TheOCCisconductinganewCRAperformanceevaluationof UnionBankasof June4, 2012.TheBoardhasconsultedwiththeOCCregardingtheongoingevaluation. CRAPerformanceof SBBT.SBBTreceivedanoverall“outstanding”ratingatitsmost recentCRAperformanceevaluationbytheOCC,asof September11,2007(“SBBTEvaluation”).43IntheSBBTEvaluation,thebankreceived“outstanding”ratingsonthelending andinvestmenttestsanda“highsatisfactory”ratingontheservicetest.Examiners reportedthatSBBT’soveralllendingactivitywasexcellentandreflectedgoodresponsivenessinrelationtothecreditneedsof thebank’sassessmentareas.44Examinersalsonoted thatSBBT’slevelof communitydevelopmentloanswasexcellent.Further,examiners reportedthatSBBT’sdistributionof branchesprovidedanexcellentresponsetotheneeds of LMIgeographiesandindividuals.Examinersalsonotedthatthebankprovidedasatisfactorylevelof retailservicesthroughoutitsassessmentareas.Inaddition,examiners reportedthatSBBTprovidedasatisfactorylevelof communitydevelopmentservicesthat areresponsivetocommunityneedsthroughoutitsassessmentareas.UnionBankexpectsto 41 AcommenterassertedthatthedatacitedintheUBEvaluationrelatingtothepercentageofCash&Savecustomerswhosuccessfullytransitiontotraditionalbankproductswereincorrect.Applicantsrepresentedthatthe datacitedintheevaluationreferredtothepercentageofonebranch’sCash&Savecustomers,ratherthanthe overallpercentageofthebank’sCash&Savecustomers.ExaminersfromtheOCCconfirmedthatthematerial factorinUnionBank’s“outstanding”ratingundertheservicetestwasthatthebankprovidesalternativebankingservicesthroughitsCash&SaveprogramandthattheconversionofaparticularpercentageofCash& Savecustomerstotraditionalcheckingaccountserviceswasnotacriticalevaluativefactorundertheservice test. 42 Acommenterexpressedgeneralconcernthattheproposedacquisitionwouldleadtobranchclosings.Applicantshavestatedthattheyhavenotmadeanydecisionsregardingpotentialbranchclosuresorconsolidations. TheBoardhasconsideredthatfederalbankinglawprovidesaspecificmechanismforaddressingbranchclosings.Federallawrequiresaninsureddepositoryinstitutiontoprovidenoticetothepublicandtotheappropriatefederalsupervisoryagencybeforeclosingabranchandtoadoptapolicyregardingbranchclosures.See 12U.S.C.§1831r-1;JointPolicyStatementRegardingBranchClosings(64FederalRegister34844(1999)).The BoardhasreviewedApplicants’branchclosingpolicyinconnectionwiththisapplicationandnotesthatthe OCCwillcontinuetoreviewthebranchclosingrecordofUnionBankinthecourseofconductingCRAperformanceevaluations. 43 BeforeMay26,2011,SBBTwasnamedPacificCapitalBank,N.A.TheperiodfortheSBBTEvaluationwas January1,2003,throughDecember31,2006. 44 AcommenterallegedthatSBBThasalonghistoryofissuinghigh-costtaxrefundanticipationloans (“RALs”).SBBThasnotoriginatedRALssince2009,andSBBTsoldthebusinesslineresponsibleforissuing RALsin2010.ApplicantsrepresentedthatUnionBankhasnoplanstoofferRALsafterconsummationofthe proposal.

106 FederalReserveBulletin|February2013 implementitsCRApoliciesandproceduresatthecombinedorganizationafterthemerger of SBBTintoUnionBank. 2.HMDAAnalysisandFairLendingRecord TheBoardhasconsideredtherecordsof UnionBankandSBBTincomplyingwithfair lendingandotherconsumerprotectionlaws.SeveralcommenterscitedHMDAdataand allegedthatUnionBankdisproportionatelyexcludedordeniedminorityandLMIapplicantsforhomemortgageloans.Aspartof itsconsiderationof UnionBank’scompliance withfairlendingandotherconsumerprotectionlaws,theBoardhasreviewedHMDAdata from2009,2010,and2011reportedbyUnionBank. TheHMDAdatafor2009,2010,and2011indicatethatthepercentagesof UnionBank’s totalHMDA-reportableapplicationsfromandloanstoAfricanAmerican,Hispanic,and AsianindividualswerebelowthepercentagesforlendersintheaggregateinUnionBank’s combinedassessmentareas.Forinstance,theHMDAdatashowthatinitscombined assessmentareasin2010,UnionBankoriginated0.9percent,3.6percent,and5.2percent of itstotalHMDA-reportablemortgageloanstoAfricanAmericans,Hispanics,and Asians,respectively,whilelendersintheaggregateoriginated2percent,9.6percent,and 14.5percentof theirtotalHMDA-reportablemortgageloanstoAfricanAmericans,Hispanics,andAsians,respectively.UnionBankalsogenerallylaggedlendersintheaggregate inthepercentagesof applicationsfromandloanstoLMIindividualsandborrowersinpredominantlyLMIareasinitscombinedassessmentareas. Inaddition,theHMDAdatafor2009,2010,and2011indicatethatanabove-averageproportionof UnionBank’shomemortgageapplicationslackinformationregardingthe applicant’srace.Forinstance,in2011,28.5percentof UnionBank’shomemortgageapplicationsinitscombinedCRAassessmentareaslackedinformationregardingtheapplicant’s racecomparedwith16.2percentforlendersintheaggregate.45UnionBankisundertaking effortstoreinforcethetrainingitprovidestoprocessors,loanofficers,andbrokersinorder toreinforcetherequirementtocollectinformationfromloanapplicantsregardingtheir race. Asignificantportionof UnionBank’sHMDA-reportablemortgageloanoriginationsare jumbo,interest-onlyloanswithlowLTVratios.46Incontrasttoapparentweaknessesin lendingevidentfromtheaggregateHMDAdata,thesedataalsodemonstratethatthepercentageof UnionBank’sjumboloanoriginationstoAfricanAmericanandHispanicborrowerssignificantlyexceededthepercentagesforlendersintheaggregateinUnionBank’s combinedassessmentareasinCalifornia.Forinstance,in2011,approximately1.6percent and9.8percentof UnionBank’sjumboloanoriginationsweretoAfricanAmericanand Hispanicborrowers,respectively,comparedwith0.6percentand2.7percentforlendersin theaggregate. 45 In2010,UnionBankdidnotobtainraciallyidentifyinginformationfrom27.4percentofitsloanoriginations comparedwith16.5percentoflendersintheaggregate.Forloansabove$900,000,whichapproximatesthe averageamountofaUnionBankjumboloan,UnionBankdidnotobtaininformationregardingraceon 29percentoforiginationsin2010,whilelendersintheaggregatedidnotobtainsuchinformationon25percent.UnionBankrepresentedthatjumboloanapplicationslackinformationregardingracemoreoftenthan conventionalloanapplicationsbecauseahigherproportionofjumboloanapplicationsarereceivedbyphone ormail,andtheonlymethodofobtainingtheinformationregardingraceisifthecustomerelectstosubmitit. UnionBankcontendsthatitsgreateroveralldisparitycomparedwithlendersintheaggregateisduetothefact thatthemajorityofUnionBank’sloanapplicationsareforjumboloans. 46 Forinstance,almost80percentofUnionBank’slendingintheLosAngelesandSanFranciscomarketsin2010 consistedofjumboloans.

LegalDevelopments:FourthQuarter,2012 107 TheHMDAdataalsoreflectoverallimprovementsinthenumberof mortgageloansthe bankoriginatedduring2011toAfricanAmericans,Hispanics,Asians,andindividuals residinginpredominantlyminorityandLMIcensustracts.Inaddition,inconnectionwith therevisedlendingstrategyadoptedbyUnionBankdiscussedabove,thebank’sloanoriginationstominorityandLMIborrowersandcommunitiesincreasedfromthefirstquarter of 2011tothefirstquarterof 2012.Dataprovidedbythebankindicatethat,withinthis timeframe,itsloanstoAfricanAmerican,Hispanic,andAsianborrowersincreasedby 36percent,61percent,and43,respectively.LoanstoAfricanAmerican,Hispanic,and AsianborrowerswhoareLMIindividualsincreasedby100percent,45percent,and 218percent,respectively.LoanstoAfricanAmerican,Hispanic,andAsianborrowersin LMIcensustractsincreasedby200percent,86percent,and118percent,respectively. TheBoardisconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlending andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatensurenotonlysafeandsoundlendingbutalsoequalaccessto creditbycreditworthyapplicantsregardlessof theirraceorethnicity.AlthoughtheHMDA datamightreflectcertaindisparitiesintheratesof loanapplications,originations,and denialsamongmembersof differentracialorethnicgroupsincertainlocalareas,HMDA dataalonedonotprovideasufficientbasisonwhichtoconcludewhetherUnionBankhas excludedorimposedhighercostsonanygrouponaprohibitedbasis. Becauseof thelimitationsof HMDAdata,theBoardhasconsidered,alongwiththese data,otherinformation,includingexaminationreportsthatprovideon-siteevaluationsof compliancewithfairlendingandotherconsumerprotectionlawsandregulationsbyUnion Bank.TheBoardalsohasconsultedwiththeOCCandCFPBaboutthisproposalandthe recordof UnionBankwithfairlendingandotherconsumerprotectionlawsandregulationssincetheUBEvaluation. ExaminersnotedintheUBEvaluationthattheyfoundnoevidenceof prohibiteddiscriminatoryorotherillegalcreditpracticesorof substantiveviolationsof fairlendinglaws. UnionBankissubjecttocontinuoussupervisionbyitssupervisoryagencies,andithas undergoneanumberof reviewsforcompliancewithconsumerprotectionandfairlending laws,regulations,andstatutessincetheUBEvaluation.SuchreviewsincorporateadditionaldatabeyondtheHMDAdatareportedannuallyandincludereviewsof loanfiles,the statedpoliciesandproceduresof theinstitution,andassessmentsof thebank’sactualpractices.47Thefairlendingreviewsincludeassessmentsof UnionBank’sunderwriting,pricing,andadvertisingandmarketingprograms,andexaminershavefoundnoevidenceof discouragementordiscriminationonanyprohibitedbasis. TheBoardhasreviewedUnionBank’scomplianceprogramsandconferredwiththeOCC andCFPBregardingUnionBank’sprograms.UnionBankhastakenstepstoensurecompliancewithfairlendinglaws,includinginstitutingpoliciesandprocedurestohelpensure compliancewithallfairlendingandotherconsumerprotectionlawsandregulations.48 UnionBank’scomplianceprogramsincludeasecond-reviewprocess,regularinternal 47 HMDAdataarealsotakenintoaccountintheassessmentofarelevantdepositoryinstitution’srecordofcompliancewiththeCRAbyitsprimaryfederalsupervisor.Accordingly,theOCCconsideredHMDAdatafor UnionBankintheUBEvaluation.Asnotedabove,UnionBankreceivedan“outstanding”CRAratingatits mostrecentCRAperformanceevaluation,andexaminersfoundthatUnionBankmetitsCRAobligations throughitsdirectlendingefforts,aswellasthroughextensivetransactionsassociatedwithcommunitydevelopmentloans,investments,andservices. 48 AcommenterassertedthatUnionBank’scheckingaccountoverdraftpracticesareunfair.InNovember2011, UnionBankagreedtosettleaclassactionlawsuitthatallegedthatitunfairlysequencedtheorderinwhichit posteddebitcardtransactionsandATMwithdrawalstocustomercheckingaccounts.Pursuanttothesettlement,UnionBankagreedtopay$35milliontocheckingaccountholderswhowerechargedoverdraftand otherfeesasaresultofthesequencingpolicies.InAugust2010,UnionBankchangeditssequencingpolicyso

108 FederalReserveBulletin|February2013 examinations,andcomplianceself-assessments.Thebankalsoprovidesfairlendingtrainingtoallnewlyhiredsalesandoperationalstaff andconductsannualfairlendingtraining forallemployees.UnionBankreviewsandmanagesallcomplaintswithrespecttofair lendingandunfair,deceptive,orabusiveactsandpractices. Foritsmortgagelendingbusiness,UnionBankreliesonawholesalechannelof approved mortgagebrokersinadditiontoitsin-houseretailchannel.49UnionBankcontrolsfair lendingrisksinitswholesalechannelthroughabrokerapprovalprocesswherebythebank reviewsfairlendinglawsuits,judgments,orsettlementsagainstthebrokerandrequires annualbrokercertificationof compliancewithallapplicablelawsandregulations.The bankalsousescontractualprovisionsunderwhichapprovedbrokersreceiveastraightpercentageof theloanamountregardlessof aborrower’srace,age,orgender,withthe exceptionthatinasmallpercentageof loans,thebrokermaychoosetoreceiveborrowerpaidcompensation.Tomonitorpricingandensurenondiscriminatorypricinginthewholesalechannel,UnionBankperformsstandardpricinganalysis. In2011,UnionBankhiredanewchief complianceofficerandcentralizeditscompliance functionbycombiningitsbusinessunitcompliancegroupswithitscorporatecompliancegroup.Thenew,centralizedcompliancefunctioncoordinatescomplianceactivities acrossbusinesslinesandhasestablishedenterprise-widecompliancestandards.Asnoted above,theseenhancementsalreadyhaveresultedinimprovementstocompliancewithfair lendingrequirements.Applicantshaverepresentedthat,onconsummationof theproposal, SBBT’scompliancefunctionwillbeintegratedintoUnionBank’scentralizedcompliance managementsystem. 3.ConvenienceandNeedsof theCommunitiesServedbySBBT Applicantsrepresentthattheproposalwillbenefittheconvenienceandneedsof thecommunitiescurrentlyservedbySBBTinseveralways.UnionBankintendstoofferitstreasury management,capitalmarkets,andotherservicestoSBBT’scorporateclients.Further, UnionBankexpectstoenhanceSBBT’ssmallbusinessproductswithlonger-termreal estatefinancingandaccesstoSBAproducts,whichcurrentlyarenotofferedbySBBT.In addition,duetoincreasedautomation,UnionBankexpectstoprocesssmallbusinessloan applicationsinapproximatelyhalf thetimethatSBBTtooktoprocesssuchapplications. UnionBankalsointendstoextendtoSBBT’sclientbaseitsBusinessDiversityLending Program,which,asnotedabove,provideseasieraccesstocreditforwomen-owned,minority-owned,anddisabled-veteran-ownedsmallbusinesses.Inaddition,consummationof the proposalwouldprovidecustomersof UnionBankandSBBTwithaccesstoalargerATM network. 4.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyApplicants,andconfidentialsupervisoryinformation.BasedontheBoard’sanalysisof theHMDAdata,evaluationof UnionBank’smortgagelendingoperationsandcomplianceprograms,reviewof thatdebitcardtransactionsandATMwithdrawalsarepostedfromlowtohighdollaramounts.Inaddition, UnionBankprovidesconsumerfinancialeducationaboutavoidingoverdraftstoitscustomerswithrepeat overdrafts. 49 In2010,UnionBankreceived59.2percentofitstotalhomemortgageapplicationsthroughitswholesalechannel.UnionBank’srelianceonthewholesalechannelwasmoderatelylowerin2011,with50.4percentofits applicationsoccurringthroughthatchannel.Loanoriginationscloselycorrespondedtotheproportionof applicationsreceivedbychannel,with59.8percentand52.7percentoforiginationsin2010and2011,respectively,occurringthroughthebank’swholesalechannel.

LegalDevelopments:FourthQuarter,2012 109 examinationreports,andconsultationswiththeOCCandCFPB,theBoardbelievesthat, onbalance,theconvenienceandneedsfactor,includingtheCRArecordof theinsured depositoryinstitutionsinvolvedinthistransaction,isconsistentwithapprovalof theapplication.TheBoardalsobelievesthatthereareopportunitiesforUnionBanktocontinueto improveitsoutreachandmortgagelendingtominorityandLMIindividualsandtoborrowersinLMIcommunities,andtheBoardwillcontinuetomonitorthatperformance, alongwiththeOCC. D.FinancialStability TheDodd-FrankActamendedsection3of theBHCActtorequiretheBoardtoconsider “theextenttowhichaproposedacquisition,merger,orconsolidationwouldresultin greaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancial system.”50 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm;availabilityof substituteprovidersforanycriticalproductsandservicesofferedbythe resultingfirm;interconnectednessof theresultingfirmwiththebankingorfinancial system;extenttowhichtheresultingfirmcontributestothecomplexityof thefinancial system;andextentof thecross-borderactivitiesof theresultingfirm.51Thesecategories arenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inaddition tothesequantitativemeasures,theBoardconsidersqualitativefactors,suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitutionthatcanbe resolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothebroader economy.52 Analysisof theFinancialStabilityImpactof thisProposal Inthiscase,theBoardhasevaluatedtheproposal,includingconsideringthemetricsnoted above,todeterminewhethertheproposalpresentsasignificantrisktothestabilityof the U.S.bankingorfinancialsystem.TheBoardreviewedpubliclyavailabledata,datacompiledthroughthesupervisoryprocess,anddataobtainedthroughinformationrequeststo theinstitutionsinvolvedintheproposal,aswellasqualitativeinformation. TheBoardhasconsideredtheeffectof theproposedacquisitiononMUFG’ssystemic footprint.PacificCapitalcontrolsapproximately0.05percentof thetotaldepositsinthe UnitedStatesandranksbetween156thand200thamongU.S.financialinstitutionsin deposits,assets,liabilities,andleverageexposures.PacificCapitalisengagedintraditional commercialbankingactivitiesandisnotmeaningfullyinterconnectedwiththerestof the USFS,nordoesitengageinanycross-borderactivitiesorserveasasignificantproviderof anycriticalproductsorservices.Asaresultof theacquisition,MUFGwouldremainthe 17thlargestfinancialinstitutionintheUnitedStatesbydepositsize,controllinglessthan 50 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 51 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system(“USFS”). 52 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

110 FederalReserveBulletin|February2013 1percentof FDIC-insureddepositsintheUnitedStates.53MUFGwouldcontinuetorank asaboutthe20thlargestfinancialinstitutionintheUnitedStatesbasedonitsshareof U.S. assets,liabilities,andleverageexposures.MUFG’sshareof theothermetricsrelativetothe USFSiseithercommensuratewithorfarlowerthanitsshareof thesize-basedmetricsand wouldnotmateriallychangeasaresultof theacquisition.Theacquisitionof PacificCapitalwouldnotintroduceadditionaldifficultiesinaresolutionof MUFG’sU.S.orglobal operations.54 Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.Basedontheseandalltheotherfactsof record,theBoardhas determinedthatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasapprovedtheproposed transaction.55Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordin lightof thefactorsthatitisrequiredtoconsiderundertheBHCActandotherapplicable statutes.TheBoard’sapprovalisspecificallyconditionedoncompliancebyApplicantswith allthecommitmentsmadetoandreliedonbytheBoardinconnectionwiththeapplication andonreceiptof allotherregulatoryapprovals.Forpurposesof thisaction,theconditions andcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedings underapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unless suchperiodisextendedforgoodcausebytheBoardortheFederalReserveBankof San Francisco,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveNovember14,2012. 53 TakingintoaccountuninsureddepositscontrolledbyMUFG’sU.S.branches,MUFGwouldremaintheninth largestU.S.financialinstitutionintheUnitedStatesafterconsummation. 54 MUFGhas$2.57trillioninglobalassets,anditsglobaloperationsareconcentratedoutsidetheUnitedStates andonprovidingJapanesecorporateclientsandothermultinational,nonfinancialfirmswithloansandother commercialbankingservicesinthecountriesinwhichthoseentitiesoperate.InevaluatingMUFG’sU.S.and globaloperations,theBoardconsideredMUFG’ssignificantbutnoncontrollinginvestmentsinU.S.entities suchasMorganStanley,NewYork,NewYork.SeeMitsubishiUFJFinancialGroup,Inc.(OrderdatedJune14, 2011),97FederalReserveBulletin10(2ndQuar.2011). 55 SeveralcommentersrequestedthattheBoardholdapublicmeetingorhearingontheproposal.Section3(b)of theBHCActdoesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriate supervisoryauthorityforthebanktobeacquiredmakesatimelywrittenrecommendationofdenialofthe application.12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromthoseauthorities. Underitsrules,theBoardalsomay,initsdiscretion,holdapublicmeetingorhearingonanapplicationto acquireabankifnecessaryorappropriatetoclarifymaterialfactualissuesrelatedtotheapplicationandto provideanopportunityfortestimony.12CFR225.16(e),262.25(d).TheBoardhasconsideredthecommenters’ requestsinlightofallthefactsofrecord.IntheBoard’sview,thecommentershavehadampleopportunityto submittheirviewsand,infact,submittedwrittencommentsthattheBoardhasconsideredinactingontheproposal.Thecommenters’requestsfailtodemonstratewhywrittencommentsdonotpresenttheirviews adequatelyorwhyameetingorhearingotherwisewouldbenecessaryorappropriate.Forthesereasons,and basedonallthefactsofrecord,theBoardhasdeterminedthatapublicmeetingorhearingisnotrequiredor warrantedinthiscase.Accordingly,therequestsforapublicmeetingorhearingontheproposalaredenied.

LegalDevelopments:FourthQuarter,2012 111 Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,Raskin,Stein,andPowell. RobertdeV.Frierson Secretaryof theBoard Appendix UnionBanCal/PacificCapitalBankingMarketsinCaliforniaConsistentwithBoardPrecedentandDOJ BankMergerGuidelines Amountof MarketDeposit Change RemainingNumberof Bank Rank ResultingHHI deposits Shares(%) inHHI Competitors LosAngeles–includestheLosAngelesRanallyMetropolitanArea(“RMA”),Acton,andRosamond. UnionBanCalPre-Consummation 3 $32.6B 10.1 1003 1 145 PacificCapital 84 $172M 0.1 UnionBanCalPost-Consummation 3 $32.7B 10.1 Monterey-Seaside-Marina–includestheMonterey-Seaside-MarinaRMA. UnionBanCalPre-Consummation 8 $114M 2.9 2071 60 11 PacificCapital 4 $403M 10.3 UnionBanCalPost-Consummation 4 $517M 13.2 Oxnard-ThousandOaks-Ventura–includestheOxnard-ThousandOaks-VenturaRMA,Fillmore,andPiru. UnionBanCalPre-Consummation 18 $111M 0.8 1465 11 26 PacificCapital 5 $842M 6.3 UnionBanCalPost-Consummation 4 $953M 7.1 Salinas–includestheSalinasRMA,Gonzales,andSoledad. UnionBanCalPre-Consummation 6 $115M 3.8 1718 68 10 PacificCapital 5 $276M 9 UnionBanCalPost-Consummation 4 $391M 12.8 SanFrancisco-Oakland-SanJose–includestheSanFrancisco-Oakland-SanJoseRMA,Byron,Hollister,SanJuanBautista,Pescadero,and PointReyesStation. UnionBanCalPre-Consummation 8 $7.7B 2.4 2137 1 88 PacificCapital 26 $507M 0.2 UnionBanCalPost-Consummation 8 $8.2B 2.6 SanLuisObispo–includestheSanLuisObispoRMA,ArroyoGrande,Atascadero,Cambria,Cayucos,GroverBeach,GroverCity,LosOsos,Morro Bay,PasoRobles,PismoBeach,andTempleton. UnionBanCalPre-Consummation 14 $87M 1.8 1273 10 13 PacificCapital 8 $140M 2.9 UnionBanCalPost-Consummation 7 $227M 4.6 SantaBarbara–includestheSantaBarbaraRMA,Buellton,LosOlivos,SantaYnez,andSolvang. UnionBanCalPre-Consummation 17 $49M 0.6 1416 32 16 PacificCapital 1 $2.0B 25.9 UnionBanCalPost-Consummation 1 $2.1B 26.5 SantaMaria–includestheSantaMariaRMAandGuadalupe. UnionBanCalPre-Consummation 11 $30M 1.7 1595 14 12 PacificCapital 7 $71M 4 UnionBanCalPost-Consummation 7 $100M 5.7 Watsonville–includestheWatsonvilleRMA. UnionBanCalPre-Consummation 5 $84M 10.2 1692 290 8 PacificCapital 3 $117M 14.2 UnionBanCalPost-Consummation 1 $201M 24.4 DataareasofJune30,2011.Allamountsofdepositsareunweighted.Allrankings,marketdepositshares,andHHIsarebasedonthrift depositsweightedat50percent.DatadonotincludeBTMU’sbranchintheLosAngelesbankingmarket.ThisbranchisnotinsuredbytheFDIC andgenerallycannotacceptretaildeposits.Moreover,thebranchdoesnotcontrolasignificantshareoftheLosAngelesbankingmarket.

112 FederalReserveBulletin|February2013 River Valley Bancorp Madison, Indiana OrderApprovingtheFormationof aBankHoldingCompany FRBOrderNo.2012–10(October17,2012) RiverValleyBancorp(“RVB”),Madison,hasrequestedtheBoard’sapprovalundersection3of theBankHoldingCompanyAct(“BHCAct”)1toacquireDupontStateBank (“Dupont”),Dupont,bothof Indiana,andtobecomeabankholdingcompany. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(77FederalRegister3774(2012)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheapplicationandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. RVB,withtotalconsolidatedassetsof approximately$408million,2iscurrentlyasavings andloanholdingcompanythatownsallof RiverValleyFinancialBank(“RiverValley”), Madison,Indiana,afederalsavingsassociation.RiverValleyisthe53rdlargestinsured depositoryinstitutioninIndiana,controllingapproximately$293millionindeposits.3As partof thisproposal,RiverValleywouldbemergedintoDupont,theresultingbankwould berenamedRiverValleyFinancialBank,andRVBwouldbecomeabankholding company. Dupontisthe127thlargestinsureddepositoryinstitutioninIndiana,controllingdeposits of approximately$72.9million.Dupontcontrols$82.6millionof totalassets.Dupontis currentlywhollyownedbyCitizensUnionBancorpof Shelbyville,Inc.(“CitizensUnion”), Shelbyville,Kentucky. Undertheproposedtransaction,RVBwouldpurchaseDupontfromCitizensUnionand mergeRiverValleyintoDupont,withtheresultinginstitutionrenamedRiverValleyFinancialBank.Onconsummationof thisproposal,theresultingbankwouldbecomethe41st largestinsureddepositoryorganizationinIndiana,controllingdepositsof approximately $365.9million,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitstheBoardfrom approvingaproposedbankacquisitionthatwouldsubstantiallylessencompetitioninany relevantbankingmarketunlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.4 1 12U.S.C.§1842. 2 AssetdataareasofJune30,2012. 3 State-andmarket-leveldepositandrankingdataareasofJune30,2011,updatedtoreflectmergers,acquisitions,andbranchtransactionsthroughMay2,2012.Inthiscontext,insureddepositoryinstitutionsinclude commercialbanks,savingsassociations,andsavingsbanks. 4 12U.S.C.§1842(c)(1).

LegalDevelopments:FourthQuarter,2012 113 RiverValleyandDupontcompetedirectlyintheMadison,Indiana,bankingmarket (“Madisonbankingmarket”).5RiverValleyoperatesfourbranchesinthemarket:threein oraroundthetownof Madisoninthesouthernpartof themarketandoneinthetownof Hanover,Indiana,whichissouthwestof Madison.DuponthasoneofficeinDupontinthe northernpartof themarket.TheBoardhasreviewedthecompetitiveeffectsof theproposalinthisbankingmarketinlightof allthefactsof record.Inparticular,theBoardhas consideredthenumberof competitorsthatwouldremaininthebankingmarket,therelativesharesof totaldepositsininsureddepositoryinstitutionsinthemarket(“market deposits”)controlledbyRiverValleyandDupont,6theconcentrationlevelsof market depositsandtheincreaseinthoselevels,asmeasuredbytheHerfindahl-HirschmanIndex (“HHI”)undertheDepartmentof JusticeMergerCompetitiveReviewGuidelines(“DOJ BankMergerGuidelines”),7andothercharacteristicsof themarket. RiverValleyisthelargestinsureddepositoryinstitutionintheMadisonbankingmarket, controllingdepositsof approximately$235.2million,whichrepresentapproximately 43.6percentof marketdeposits.Dupontisthefifthlargestinsureddepositoryinstitutionin themarket,controllingdepositsof approximately$14.5million,whichrepresentapproximately2.7percentof marketdeposits.Asthesedataindicate,theacquisitionrepresentsa relativelysmall,incrementalchangeinRiverValley’sshareof marketdeposits.Onconsummationof theproposedmerger,theresultinginstitutionwouldremainthelargestinsured depositoryinstitutioninthemarket,controllingdepositsof approximately$249.7million, whichwouldrepresentapproximately46.3percentof themarketdeposits.TheHHIwould increaseby234pointsto3284. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldhaveasignificantlyadverseeffectoncompetitionintheMadisonbankingmarket.8Anumberof factorsindicatethattheincreasein concentrationinthisbankingmarket,asmeasuredbytheHHIandthemarketshareof the combinedorganization,overstatesthepotentialcompetitiveeffectsof theproposalinthe market.ThreecommunitycreditunionsexertacompetitiveinfluenceintheMadisonbank- 5 ThebankingmarketisdefinedasJeffersonCounty,Indiana,andtheMiltoncensuscountydivisioninTrimble County,Kentucky. 6 DepositandmarketsharedataarebasedoncalculationsinwhichthedepositsofRiverValley,theonlythrift institutioninthemarket,areincludedat100percent.TheBoardpreviouslyhasindicatedthatthriftinstitutions havebecome,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,Midwest FinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991).However,where,as here,thefactsandcircumstancesofabankingmarketindicatethataparticularthriftservesasasignificantsourceofcommercialloansandprovidesabroadrangeofconsumer,mortgage,andotherbankingproducts,theBoardhasconcludedthatcompetitionfromsuchathriftcloselyapproximatescompetitionfroma commercialbankandthatdepositscontrolledbytheinstitutionshouldbeweightedat100percentinmarketsharecalculations.See,e.g.,RegionsFinancialCorporation,93FederalReserveBulletinC16(2007);Banknorth Group,Inc.,75FederalReserveBulletin703(1989).Inthiscase,RiverValley’scommercialandindustrialand agriculturalloanportfoliosaresimilartothoseofothercommercialbanksinthemarket,asmeasuredinterms oftheratiosofthosetypesofloanstototalloansandassets.Moreover,RiverValleyproposestomergeintoa bankatconsummationofthisproposal.Thus,afullweightingmoreaccuratelyreflectsthecompetitiveenvironmentinthiscase. 7 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelines,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified. PressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10-at-938.html. 8 Thenumberandstrengthofthefactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependon thesizeoftheincreaseandresultinglevelofconcentrationinabankingmarket.SeeNationsBankCorp.,84 FederalReserveBulletin129(1998).

114 FederalReserveBulletin|February2013 ingmarket.9Eachinstitutionoffersawiderangeof consumerproducts,operatesstreetlevelbranches,andhasmembershipsopentoalmostalltheresidentsinthemarket.Their operationsinthisbankingmarketmitigate,inpart,thepotentialcompetitiveeffectsof the proposal.Thethreecommunitycreditunionscontrolapproximately$30.1millionindepositsinthemarketona50percentweightedbasis,whichrepresentsapproximately5percent of marketdeposits.Accountingfortherevisedweightingsof thesedeposits,RiverValley wouldcontrolapproximately43.8percentof marketdepositsonconsummationof theproposal,andtheHHIwouldincreaseby210pointsto2959. Threeotherinsuredcommercialbankcompetitorsandatotalof sixotherinsureddepositoryinstitutions(includingthecreditunions)wouldremaininthisruralmarket.Someof theothercompetitorshaveasignificantpresenceinthemarket.Thesecondlargestcompetitorafterconsummationwouldbealargeregionalbankthatwouldcontrolapproximately25.5percentof marketdeposits,if credituniondepositsareweightedat50percent. Thethirdlargestcompetitorwouldcontrolapproximately18percentof marketdeposits. Thefourthlargestcompetitorisintheprocessof beingacquiredbyalargeregionalcommercialbank. Inaddition,therecordindicatesthattheMadisonbankingmarketmaybeattractivefor entryandexpansionbybankcompetitors.In2005,thelargeregionalinstitutionthatiscurrentlythesecondlargestbankcompetitorenteredthemarketthroughacquisitionof a smallerdepositoryinstitutionthatoperatedonlyinthismarket.Thethirdlargestbank competitorinthemarkethasbegunconstructionof anewbranchinthismarket,indicating itsintentiontoexpand.Finally,asnoted,thesmallestremainingbankcompetitorisbeing acquiredbyalargeregionalbank. Thefeaturesof theMadisonbankingmarketandthelocationof theapplicantandtarget inthemarketalsosuggestthatHHIcalculationsarelikelytooverstatethecompetitive effectsof themerger.Allthebankingactivityinthemarket,exceptforDupont’sactivities, iscenteredaroundthetownof Madisonandthepopuloussouthernportionof themarket. Incontrast,Dupontonlyoperatesin,andistheonlydepositoryinstitutionthatoperates in,therural,sparselypopulated,northernmostpartof themarket.AlthoughtheBoardhas concludedthatthenorthernandsouthernpartsof thisareashouldbeincludedinthesame bankingmarketduetoeconomictiesbetweenthem,thosetiesaremostlyoneway.For example,ahighpercentage,butverysmallnumber,of individualsresidinginthenorthern partof themarketcommutetoMadisoninthesouth.Neitherahighpercentagenora largenumberof individualsmakethereversetrip.Thischaracteristicof themarketsuggeststhattheeliminationof Dupontasacompetitorinthenorthernpartof themarketis unlikelytohavesubstantialeffectsoncompetition.Totheextentthatthecombinationof RiverValleyandDuponthasaneffectoncompetitioninthenorthernportionof themarket,thateffectshouldbelessenedbytheothermitigatingfactorsnotedabove. TheBoardhasreviewedcarefullyallthefactsof recordandhasconsideredthosefactsin lightof Boardprecedent.TheproformamarketshareintheMadisonbankingmarketis relativelyhighinthiscase.Thechangeinconcentrationinthemarket,however,onlymarginallyexceedstheDOJBankMergerGuidelines,andotherfactorsinthismarketsuggest thatthisproposalisnotlikelytohaveasignificantlyadverseeffectoncompetitioninthe Madisonbankingmarket. 9 TheBoardpreviouslyhasconsideredthecompetitivenessofcertainactivecreditunionsasamitigatingfactor. See,e.g.,ThePNCFinancialServicesGroup,Inc.,93FederalReserveBulletinC65(2007);AlliedIrishBanks, p.l.c.andM&TBankCorporation,93FederalReserveBulletinC11(2007);RegionsFinancialCorporation,93 FederalReserveBulletinC16(2007);WachoviaCorporation,92FederalReserveBulletinC183(2006).

LegalDevelopments:FourthQuarter,2012 115 TheDOJhasreviewedthepotentialcompetitiveeffectsof theproposalandhasadvisedthe Boardthatconsummationof theproposalwouldnotlikelyhaveasignificantlyadverse effectoncompetitioninanyrelevantbankingmarket.Theappropriatefederalbankingagencyhasbeenaffordedanopportunitytocommentandhasnotobjectedtothe proposal. Forthereasonsdiscussedinthisorderandbasedonallthefactsof record,theBoardhas determinedthatcompetitivefactorsareconsistentwithapprovalof theproposal. OtherSection3(c)Considerations Section3(c)of theBHCActrequirestheBoardtotakeintoconsiderationanumberof otherfactorsinactingonbankacquisitionapplications.Thosefactorsinclude:thefinancialandmanagerialresources(includingconsiderationof thecompetence,experience,and integrityof theofficers,directors,andprincipalshareholders)andfutureprospectsof the companyandbanksconcerned;effectivenessof thecompanyincombattingmoneylaundering;theconvenienceandneedsof thecommunitytobeserved;andtheextenttowhich theproposalwouldresultingreaterormoreconcentratedriskstothestabilityof the UnitedStatesbankingorfinancialsystem.TheBoardhasconsideredallthesefactorsand, asdescribedbelow,hasdeterminedthatallconsiderationsareconsistentwithapprovalof theapplication.Thereviewwasconductedinlightof allthefactsof record,including supervisoryandexaminationinformationfromvariousU.S.bankingsupervisorsof the institutionsinvolved,publiclyreportedandotherfinancialinformation,andinformation providedbyRVB. A.Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Aspartof thisreview, theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardassessesthefinancialconditionof theproformaorganization,includingitscapitalposition,assetquality,andearningsprospects,andtheimpact of theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof the organizationtoabsorbthecostsof theproposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant. RVBandRiverValleyarewellcapitalizedandwillremainsoonconsummationof theproposedacquisition.RVBisashellholdingcompany,withRiverValleyaccountingforalmost allof RVB’sconsolidatedassets.Theproposedtransactionisabankmergerstructuredas acashpurchaseof shares.RVBwillfundthepurchasefromcashonhand.RVBisinstable financialcondition,andtheassetqualityandearningsof RiverValleyareconsistentwith approval.Onaproformabasis,theacquisitionof Dupontwouldnotadverselyimpact RVB’soperations.Basedonitsreviewof therecord,theBoardfindsthattheorganization hassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of RVB,RiverValley,andDupont,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisory experiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations andtheorganizations’recordsof compliancewithapplicablebankingandanti-money-

116 FederalReserveBulletin|February2013 launderinglaws.TheBoardalsohasconsideredRVB’splansforimplementingthe proposal. RVBandRiverValleyareconsideredtobewellmanaged.Theboardsof directorsand seniormanagementof RVBandRiverValleyareconsideredexperiencedandcapable. RVB’sexistingrisk-managementprogramanditsdirectorateandseniormanagementare consideredtobesatisfactory.Thedirectorsandseniormanagementof RVBandRiverValley,andtherisk-managementprogramof RVB,wouldnotchangeasaresultof the proposal. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalareconsistentwithapproval,asaretheothersupervisoryfactors. B.ConvenienceandNeedsConsiderations Undersection3,theBoardmustconsidertheeffectsof theproposalontheconvenience andneedsof thecommunitiestobeservedandtakeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).10The CRArequiresfederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,11andrequirestheappropriatefederalfinancial supervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-incomeneighborhoods,inevaluatingbankexpansionaryproposals.12 TheBoardhasconsideredallthefactsof record,includingevaluationsof theCRAperformanceof RiverValleyandDupont,otherinformationprovidedbyRVB,andconfidential supervisoryinformation. AsprovidedintheCRA,theBoardhasconsideredtheconvenienceandneedsfactorin lightof examinationsbytheappropriatefederalsupervisorsof theCRAperformance recordsof therelevantinstitutions.13Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceunder theCRAbyitsappropriatefederalsupervisor.RiverValleyreceiveda“satisfactory”rating atitsmostrecentCRAperformanceevaluationbytheOfficeof ThriftSupervision,asof February2,2010,andDupontreceiveda“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFederalDepositInsuranceCorporation,asof February16, 2011.Examinersfoundnoevidenceof illegalcreditdiscriminationduringtheseevaluations. RiverValleyandDuponthaveestablishedrecordsof assistinginmeetingthecreditneeds of theircommunities.AtRiverValley’s2010CRAevaluation,examinersdeterminedthat thebank’sloan-to-depositratiowasverygoodandthatitslendinglevelswereconsistently aboveaverage.Dupont’s2011CRAperformanceevaluationnotedthatthebank’slevelof lending,asreflectedbyitsloan-to-depositratio,wasexcellentanddemonstratedthatthe bankwasusingthedepositsobtainedfromitsassessmentareatofundloans. 10 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 11 12U.S.C.§2901(b). 12 12U.S.C.§2903. 13 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at 11665(2010).

LegalDevelopments:FourthQuarter,2012 117 RVBhasrepresentedthatitwillcontinuetomeetthecreditneedsof itscommunitiesinthe samemannerasithasinthepast.RVBalsohasrepresentedthatthemergedentitywould provideconvenientandaccessibleservicetotheretailmarketthroughextendedbanking hours,aswellasaccesstoitsATMsanddrive-thrufacilities. TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof RiverValleyandDupont,informationprovidedbyRVB,andconfidential supervisoryinformation,includingcurrentrecordsof compliancewithconsumerlawsand regulations. Basedonareviewof theentirerecord,andforthereasonsdiscussedabove,theBoardhas concludedthatconsiderationsrelatingtotheconvenienceandneedsfactorandtheCRA performancerecordsof therelevantinsureddepositoryinstitutionsareconsistentwith approval. C.FinancialStability TheBoardhasalsoconsideredinformationrelevanttoriskstothestabilityof theUnited Statesbankingorfinancialsystem.Theproposedinvestmentrepresentsademinimistransactionforfinancialstabilitypurposes,andtheproposedtransactionwouldnotmaterially increasetheinterconnectednessorcomplexityof RVB.TheBoard,therefore,concludes thatfinancialstabilityconsiderationsinthisproposalareconsistentwithapproval. D.ConclusiononSection3(c)Factors Basedonallthefactsof record,includingthosedescribedabove,theBoardhasdetermined thatallof thefactorsitmustconsiderundersection3(c)of theBHCActareconsistent withapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyRVBwithalltheconditionsimposedinthisorderandthecommitments madetotheBoardinconnectionwiththeapplication,includingreceiptof allrequired regulatoryapprovals.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof St.Louis,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveOctober17,2012. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,Raskin,Stein,andPowell. RobertdeV.Frierson Secretaryof theBoard

118 FederalReserveBulletin|February2013 Sumitomo Mitsui Financial Group, Inc. Tokyo, Japan Sumitomo Mitsui Banking Corporation Tokyo, Japan OrderApprovingAcquisitionof Sharesof aBankHoldingCompany FRBOrderNo.2012–11(October31,2012) SumitomoMitsuiFinancialGroup,Inc.(“SMFG”)andSumitomoMitsuiBankingCorporation(“SMBC”),bothof Tokyo,Japan(collectively,“Applicants”),foreignbanking organizationsthatarebankholdingcompaniesundertheBankHoldingCompanyActof 1956,asamended(“BHCAct”),1haverequestedtheBoard’sapprovalundersection3(a)of theBHCActtoacquireupto9.9percentof thevotingsharesof TheBankof EastAsia, Limited(“BEA”),HongKongSAR,People’sRepublicof China,aforeignbankingorganizationthatisabankholdingcompanyundertheBHCActbyvirtueof itsownershipof TheBankof EastAsia(U.S.A.)NationalAssociation(“BEAUSA”),NewYork,New York.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(76FederalRegister70722(November15,2011)).Thetimeforfiling commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. SMFG,withtotalassetsof approximately$1.7trillion,isthethirdlargestbankingorganizationinJapan.3SMFG,throughitssubsidiaries,includingSMBC,engagesinabroad rangeof bankingandfinancialservicesthroughoutJapan,Asia,theUnitedKingdom,and NorthandSouthAmerica.OutsideJapan,SMFGownssubsidiarybanksintheUnited Kingdom,Brazil,Canada,People’sRepublicof China,Indonesia,Russia,andMalaysia, andSMBCoperatesbranchesinmorethanadozenadditionalcountries.IntheUnited States,ApplicantsownManufacturersBank,LosAngeles,California,withconsolidated assetsof $2.1billionanddepositsof approximately$1.6billion.ManufacturersBank engagesinretailandcommercialbankingintheUnitedStatesthrough10branchesinCalifornia.SMBCoperatesuninsuredstatebranchesinNewYorkCity,LosAngeles,andSan FranciscoandrepresentativeofficesinHoustonandJerseyCity.Applicantsalsomaintain nonbankingsubsidiariesintheUnitedStates.4SMFGandSMBCareeachaqualifyingforeignbankingorganizationand,uponconsummationof theproposal,wouldcontinueto 1 12U.S.C.§1842. 2 12CFR225.11(c)(1).BEAanditssubsidiary,EastAsiaHoldingCompany,Inc.,NewYork,NewYork,are bankholdingcompaniesbyvirtueoftheirownershipof20percentofthevotingsharesofBEA-USA.With theBoard’spriorapproval,theIndustrialandCommercialBankofChinaLimited(“ICBC”),Beijing,People’s RepublicofChina,recentlyacquired80percentofthevotingsharesofBEA-USAfromBEA.SeeIndustrial andCommercialBankofChinaLimited,FRBOrderNo.2012-4(May9,2012).BEAhasanoptiontosellthe remainingsharesofBEA-USAtoICBCbeginning18monthsafterthistransaction.IfBEAexercisesits option,BEAwouldcontinuetobetreatedasabankholdingcompanysubjecttotheBHCActbecauseitoperatesbranchesintheUnitedStates.12U.S.C.§3106(a). 3 Unlessotherwiseprovided,assetandrankingdataareasofJune30,2012,andarebasedontheexchangerate asofthatdate,asappropriate.JapanTrusteeServicesBank,Ltd.(“JTSB”)andTheMasterTrustBankof Japan,Ltd.(“MTBJ”)ownapproximately6.4percentand5.2percentofthesharesofSMFG,respectively,as ofMarch31,2012.BothJTSBandMTBJholdthesesharesasregisterednomineeaccountsforvariousbeneficialshareholders,noneofwhichowns5percentormoreofthesharesofSMFG.Noothershareholderowns 5percentormoreoftheoutstandingsharesofSMFG. 4 ThesenonbankingsubsidiariesincludeSMBCCapitalMarkets,Inc.;SMBCLeasingandFinance,Inc.;SMBC NikkoSecuritiesAmerica,Inc.;andJRIAmerica,Inc.,allofNewYork,NewYork.

LegalDevelopments:FourthQuarter,2012 119 meettherequirementsforaqualifyingforeignbankingorganizationunderRegulationK.5 BEA,withtotalconsolidatedassetsof approximately$82.6billion,isthethirdlargestbank inHongKong.BEAengagesprimarilyinretailandcommercialbanking,wealthmanagement,andinsuranceservicesinPeople’sRepublicof China,NorthAmerica,theUnited Kingdom,andSoutheastAsia.IntheUnitedStates,BEAcontrolsBEA-USAandoperates aninsuredfederalbranchinNewYorkCityanduninsuredfederalbranchesinNewYork CityandLosAngeles.BEA-USA,withconsolidatedassetsof approximately$720.6million anddepositsof approximately$561.1million,engagesinretailandcommercialbankingin theUnitedStates.BEAUSAoperates13branchesinNewYorkandCalifornia. NoncontrollingInvestment Applicantsownapproximately4.7percentof thevotingsharesof BEA.Applicantshave statedthattheydonotproposetocontrolorexerciseacontrollinginfluenceoverBEAasa resultof theproposal.6 Applicantshaveagreedtoabidebycertaincommitmentssubstantiallysimilartothoseon whichtheBoardhaspreviouslyreliedindeterminingthataninvestingcompanywouldnot beabletoexerciseacontrollinginfluenceoveranotherbankholdingcompanyorbankfor purposesof theBHCAct(“PassivityCommitments”).Forexample,Applicantshavecommittednottoexerciseorattempttoexerciseacontrollinginfluenceoverthemanagement orpoliciesof BEA;nottoseekoracceptmorethanonerepresentativeontheboardof directorsof BEA;andnottohaveanyotherdirector,officer,employee,oragentinterlocks withBEAoritssubsidiaries.ThePassivityCommitmentsalsoincludecertainrestrictions onthebusinessrelationshipsbetweenApplicantsandBEA. Basedontheseconsiderationsandallthefactsof record,theBoardhasconcludedthat Applicantswouldnot,asaresultof thestructureof theproposedtransaction,controlor exerciseacontrollinginfluenceoverBEAoranyof itssubsidiariesthroughtheacquisition of upto9.9percentof thevotingcommonstockof BEA.TheBoardnotesthattheBHC ActrequiresApplicantstoreceivetheBoard’sapprovalbeforetheydirectlyorindirectly acquireadditionalsharesof BEAorattempttoexerciseacontrollinginfluenceoverBEA oranyof itssubsidiaries.7 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitstheBoardfrom approvingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbanking market,unlesstheanticompetitiveeffectsof theproposalclearlyareoutweighedinthe publicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneeds of thecommunitytobeserved.8 5 12CFR211.23(a). 6 TheBoardpreviouslyhasapprovedtheacquisitionbyabankholdingcompanyoflessthanacontrollinginterestinabankorbankholdingcompany.See,e.g.,MitsubishiUFGFinancialGroup,Inc.,95FederalReserve BulletinB34(2009)(acquisitionofupto24.9percentofthevotingsharesofabankholdingcompany); BrooklineBancorp,MHC,86FederalReserveBulletin52(2000)(acquisitionofupto9.9percentofthevoting sharesofabankholdingcompany);MansuraBancshares,Inc.,79FederalReserveBulletin37(1993)(acquisitionof9.7percentofthevotingsharesofabankholdingcompany). 7 12U.S.C..§1842.See,e.g.,EmigrantBancorp,Inc.,82FederalReserveBulletin555(1996)(“EmigrantBancorp Order”). 8 12U.S.C.§1842(c)(1).See,e.g.,EmigrantBancorpOrder.

120 FederalReserveBulletin|February2013 TheBoardpreviouslyhasstatedthatonecompanyneednotacquirecontrolof another companytolessencompetitionbetweenthemsubstantially.9TheBoardhasfoundthat noncontrollinginterestsindirectlycompetingdepositoryinstitutionsmayraisecompetitive issuesundertheBHCActandhasstatedthatthespecificfactsof eachcasewilldetermine whethertheminorityinvestmentinacompanywouldbeanticompetitive.10 Becausethesubsidiarybanksof ApplicantsandBEAcompetedirectlyinCaliforniainthe LosAngelesandSanFrancisco-Oakland-SanJosebankingmarkets,11theBoardhas reviewedthecompetitiveeffectsof theproposalinthesemarketsinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwould remaininthebankingmarkets,therelativesharesof totaldepositsininsureddepository institutionsinthemarkets(“marketdeposits”)controlledbyrelevantinstitutions,12andthe concentrationlevelof marketdepositsandtheincreaseinthelevelasmeasuredbythe Herfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeMergerGuidelines (“DOJGuidelines”).13 Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJGuidelinesintheLosAngelesandSanFranciscobankingmarkets. ThetransactionwouldnotchangetheHHIintheLosAngelesbankingmarketsandon consummation,themarketwouldremainmoderatelyconcentrated,asmeasuredbythe HHI.14TheHHIintheSanFranciscobankingmarketwouldalsoremainunchanged.15In eachbankingmarket,numerouscompetitorswouldremaininthemarket. TheDOJalsohasreviewedthematterandhasadvisedtheBoardthatitdoesnotbelieve thattheownershipinterestof ApplicantsinBEAislikelytohaveasignificantlyadverse effectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebanking 9 Seee.g.,SunTrustBanks,Inc.,76FederalReserveBulletin542(1990). 10 Seee.g.,BOKFinancialCorp.,81FederalReserveBulletin1052,1053-54(1995). 11 TheLosAngelesbankingmarketisdefinedastheLosAngelesRanallyMetropolitanArea(“RMA”)andthe citiesofActoninLosAngelesCountyandRosamondinKernCounty.TheSanFranciscobankingmarket isdefinedastheSanFrancisco-Oakland-SanJoseRMAandthecitiesofByroninContraCostaCounty,HollisterandSanJuanBautistainSanBonitoCounty,PescaderoinSanMateoCounty,andPointReyesStation inMarshCounty.ApplicantsdonotcurrentlycompetewithBEAinanyotherrelevantbankingmarket.BEA operatesaninsuredbranchinNewYork,andBEA-USAoperatesinNewYork,SMBC’sNewYorkbranchis notinsuredbytheFederalDepositInsuranceCorporationandgenerallycannotacceptretaildeposits.Moreover,neitherbankingorganizationcontrolsasignificantshareoftheNewYorkbankingmarket. 12 Callreport,deposit,andmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsinthe summaryofdepositsdata,asofJune30,2011.Thedataarealsobasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,Midwest FinancialGroup,Inc.,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 13 UndertheDOJGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIisunder1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepostmergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthatabankmergeror acquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects) unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan200points. AlthoughtheDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontalMergerGuidelines, theDOJhasconfirmedthatitsguidelinesforbankmergersoracquisitions,whichwereissuedin1995,werenot changed.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/10-at-938.html. 14 TheHHIwouldremainunchangedat1018intheLosAngelesbankingmarket,whichhas145insureddepositoryinstitutioncompetitors.Thecombineddepositsoftheinstitutionsinvolvedintheproposalinthebanking marketrepresentlessthan1percentofmarketdeposits. 15 TheHHIwouldremainunchangedat2048intheSanFranciscobankingmarket,whichhas92insureddepositoryinstitutioncompetitors.Thecombineddepositsoftheinstitutionsinvolvedintheproposalinthebanking marketrepresentlessthan1percentofmarketdeposits.

LegalDevelopments:FourthQuarter,2012 121 agencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtothe application. Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of bankingresourcesinanyrelevantbankingmarketandthatcompetitivefactorsareconsistentwithapprovalof theproposal. Financial,Managerial,andOtherSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resources(includingconsiderationof thecompetence,experience,andintegrityof officers, directors,andprincipalshareholders)andfutureprospectsof thecompaniesanddepositoryinstitutionsinvolvedintheproposal,aswellastheeffectivenessof thesecompaniesin combattingmoneylaunderingactivities.16Section3of theBHCActalsorequiresthe Boardtodeterminethatanapplicanthasprovidedadequateassurancesthatitwillmake availabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseof its affiliatesthattheBoarddeemsappropriatetodetermineandenforcecompliancewiththe BHCAct.17 Thereviewwasconductedinlightof allthefactsof record,includingconfidentialsupervisoryandexaminationinformationfromthevariousU.S.bankingsupervisorsof theinstitutionsinvolved,publiclyreportedandotherfinancialinformation,andinformationprovidedbyApplicantsandbypubliccommenters.TheBoardalsohasconsultedwiththe JapaneseFinancialServicesAgency(“JFSA”),theagencywithprimaryresponsibilityfor thesupervisionandregulationof Japanesebankingorganizations,includingApplicants. Inevaluatingfinancialfactors,theBoardreviewsthefinancialconditionof theapplicants andthetargetdepositoryinstitutions.Inthisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.The Boardalsoevaluatestheeffectof thetransactiononthefinancialconditionof theapplicants,includingtheircapitalposition,assetquality,andearningsprospects,andtheimpact of theproposedfundingof thetransaction.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant. Thecapitallevelsof Applicantsexceedtheminimumlevelsthatwouldberequiredunder theBaselCapitalAccordandareconsideredtobeequivalenttothecapitallevelsthat wouldberequiredof aU.S.bankingorganizationseekingtoacquireupto9.9percentof BEA.18Applicants’reportedearningsperformanceandassetqualityindicators,including nonperformingloansandreservesforloanlosses,areconsistentwithapprovalof the proposal.Applicants’U.S.banksubsidiary,ManufacturersBank,andBEA-USAareeach wellcapitalizedandwouldremainsoonconsummation. Theproposedtransactionisstructuredasacashpurchaseof shares,andApplicantswill useexistingresourcestofundtheproposedpurchaseof shares.Inlightof therelativesize of Applicantstothesizeof theinvestmentinBEA,thetransactionwouldhaveaminimal 16 TheBoardhasanalyzedtheeffectivenessofApplicants’anti-money-launderingeffortsinconnectionwiththe Board’sassessmentofwhetherApplicantsaresubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbyappropriateauthoritiesintheirhomecountry. 17 12U.S.C.§1842(c)(3)(A). 18 TheBoardhasconsideredthetotal,andthetier1risk-based,capitalratiosandtheratiosoftier1capitalto totalconsolidatedassetsofSMFGandSMBC.

122 FederalReserveBulletin|February2013 impactonthefinancialconditionof Applicants.Basedonitsreviewof therecord,the BoardfindsthatApplicantshavesufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolved.The Boardhasreviewedtheexaminationrecordsof Applicants’andBEA’sU.S.operations, includingassessmentsof theirmanagement,risk-managementsystems,andoperations.TheBoardalsohasconsidereditssupervisoryexperiencesandthoseof theotherrelevantbanksupervisoryagencieswiththeorganizations,includingconsultationsinconnectionwiththisproposal,andtheorganizations’recordsof compliancewithapplicable bankingandanti-money-launderinglaws.Asnoted,theBoardhasalsoconsultedwiththe JFSA.Inaddition,theBoardhasconsideredthefutureprospectsof Applicants,BEA, ManufacturersBank,andBEA-USAinlightof thefinancialandmanagerialresourcesof theorganizations. TheBoardhasreviewedtherestrictionsondisclosureintherelevantjurisdictionsinwhich Applicantsoperateandhascommunicatedwithrelevantgovernmentauthoritiesconcerningaccesstoinformation.Inaddition,Applicantshavecommittedthat,totheextentnot prohibitedbyapplicablelaw,theywillmakeavailabletotheBoardsuchinformationon theiroperationsandtheoperationsof theiraffiliatesthattheBoarddeemsnecessaryto determineandenforcecompliancewiththeBHCAct,theInternationalBankingAct,and otherapplicablefederallaws.ApplicantsalsohavecommittedtocooperatewiththeBoard toobtainanywaiversorexemptionsthatmaybenecessarytoenablethemortheiraffiliates tomakesuchinformationavailabletotheBoard. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellasaccesstoinformationbytheBoard,areconsistentwithapproval. SupervisionorRegulationonaConsolidatedBasis Inevaluatingthisapplicationandasrequiredbysection3of theBHCAct,theBoardhas consideredwhetherApplicantsaresubjecttocomprehensivesupervisionorregulationona consolidatedbasisbyappropriateauthoritiesintheirhomecountry.19 TheBoardpreviouslyhasdeterminedthatSMBCissubjecttocomprehensivesupervision onaconsolidatedbasisbyitshomecountrysupervisor.20SMBCcontinuestobesupervisedbytheJFSAonsubstantiallythesametermsandconditions.Basedonthisfinding 19 12U.S.C.§1842(c)(3)(B).AsprovidedinRegulationY,theBoarddetermineswhetheraforeignbankissubject toconsolidatedhomecountrysupervisionunderthestandardssetforthinRegulationK.See12CFR 225.13(a)(4).RegulationKprovidesthataforeignbankissubjecttoconsolidatedhomecountrysupervisionif theforeignbankissupervisedorregulatedinsuchamannerthatitshomecountrysupervisorreceivessufficient informationontheworldwideoperationsoftheforeignbank(includingtherelationshipsofthebanktoany affiliate)toassesstheforeignbank’soverallfinancialconditionandcompliancewithlawandregulation. 12CFR211.24(c)(1)(ii).Inassessingthisstandardundersection211.24ofRegulationK,theBoardconsiders, amongotherindiciaofcomprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors:(i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide; (ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetween thebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedonaworldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;(v)evaluateprudentialstandards,suchascapitaladequacyandrisk assetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’s determination. 20 TheWakashioBank,Limited,89FederalReserveBulletin217(2003).SMBCmergedwithandintoThe WakashioBank,Limited,whichwassubsequentlyrenamedSumitomoMitsuiBankingCorporation.

LegalDevelopments:FourthQuarter,2012 123 andallthefactsof record,theBoardhasconcludedthatSMBCcontinuestobesubjectto comprehensivesupervisiononaconsolidatedbasisbyitshomecountrysupervisor. Inevaluatingthisproposal,theBoardalsohasconsideredwhetherSMFGissubjectto comprehensivesupervisionorregulationonaconsolidatedbasisbyappropriateauthorities initshomecountry.Asnoted,theJFSAisthesupervisorof Japanesebankingorganizations,includingholdingcompaniessuchasSMFG.Assuch,theJFSAconductsinspectionsof SMFGanditssubsidiariesandrequiresSMFGtosubmitreportsaboutitsoperationsonaconsolidatedbasis.TheJFSAalsoreviewstransactionsbetweenSMFGandits subsidiariesandhasauthoritytorequireSMFGtotakemeasuresnecessarytoensurethe safetyandsoundnessof theSMFGorganization.TheBoardhaspreviouslydetermined thatotherJapaneseholdingcompaniesof Japanesebanksweresubjecttocomprehensive, consolidatedsupervisionbytheJFSA.21SMFGhasrepresented,andtheJFSAhasconfirmed,thatSMFGissubjecttothesamesupervisoryregimeasthoseotherJapaneseholdingcompanies.Basedonallthefactsof record,theBoardhasdeterminedthatSMFGis subjecttocomprehensivesupervisiononaconsolidatedbasisbyitsappropriatehome countryauthoritiesforpurposesof thisapplication. Inevaluatingtheeffectivenessof Applicants’policiesandprocedurestocombatmoneylaunderingactivitiesinconnectionwiththesedeterminations,theBoardconsideredApplicants’anti-money-launderingpoliciesandproceduresaswellastheBoard’ssupervisory experiencesandthoseof otherrelevantbankingsupervisoryorganizationswithApplicants’ compliancerecord.Onthebasisof allfactsof record,theBoardhasdeterminedthat Applicants’anti-money-launderingmeasuresareconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardalsomustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantinsureddepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).22TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccount arelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbank expansionaryproposals.23 TheBoardhasconsideredallthefactsof record,includingevaluationsof theCRAperformancerecordsof ManufacturersBank,BEA-USA,andBEA’sinsuredNewYorkCity branch;datareportedbyBEA-USAundertheHomeMortgageDisclosureAct (“HMDA”);24otherinformationprovidedbyApplicants;confidentialsupervisoryinformation;andpubliccommentsreceivedontheproposal.Acommenteralleged,basedon2009 HMDAdata,thatBEA-USAhadexcludedAfricanAmericansandHispanicsinitsconventionalhomepurchaseandrefinancelending(“one-to-fourfamilylending”)andAsian Americanswithincomebelow100percentof themedianincomeof themetropolitanstatisticalareainitsrefinancelending. 21 See,e.g.,MitsubishiUFJFinancialGroup,Inc.(OrderdatedJune14,2011),97FederalReserveBulletin10(2nd Quar.2011);ChuoMitsuiTrustHoldings,Inc.(OrderdatedMarch15,2011),97FederalReserveBulletin30(1st Quar.2011). 22 12U.S.C.§2901etseq.;12U.S.C.§1842(c)(2). 23 12U.S.C.§2903. 24 12U.S.C.§§2801-2810.

124 FederalReserveBulletin|February2013 A.CRAPerformanceEvaluations AsprovidedintheCRA,theBoardhasconsideredtheconvenienceandneedsfactorin lightof theevaluationsbytheappropriatefederalsupervisorsof theCRAperformance recordsof therelevantinsureddepositoryinstitutions,includingBEA-USA.Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsideration intheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.25 ManufacturersBankreceiveda“satisfactory”ratingatitsmostrecentCRAperformance evaluationbytheFederalDepositInsuranceCorporation(“FDIC”),asof November29, 2010.26BEA’sinsuredfederalbranchinNewYorkCityreceivedan“outstanding”ratingat itsmostrecentCRAperformanceevaluationbytheFDIC,asof January4,2010.27BEA- USAreceivedan“outstanding”ratingatitsmostrecentCRAperformanceevaluationby theOfficeof theComptrollerof theCurrency(“OCC”),asof January4,2010.28Thebank receivedan“outstanding”ratingundereachof thelendingandcommunitydevelopment tests.29 BEA-USAhasapproximately$561.1millionintotaldepositsand$720.6millionintotal assets.Thebankisprimarilyacommerciallenderandengagesinlimitedresidentiallending.30Examinersnotedthatasubstantialmajorityof BEA-USA’sloanswereoriginatedin itsassessmentareas,thatthedistributionof itsloansreflectsexcellentpenetrationamong businessesof differentsizesintheassessmentareas,andthatthegeographicdistributionof loansreflectsexcellentdispersionthroughouttheassessmentareas.Examinersalso reportedthatBEA-USA’scommunitydevelopmentperformancedemonstratesexcellent responsivenesstotheneedsof theassessmentareasthroughloans,investments,and services.31Asindicatedabove,ApplicantswouldnotcontrolBEAorBEA-USAasaresult of theproposaland,accordingly,theproposalshouldnotaffectBEA-USA’sCRAprogram orperformance. B.HMDAandCompliancewithFairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtheHMDAdatafor2009,2010,and2011reportedbyBEA- USAinitscombinedassessmentareas,aswellasthefairlendingrecordof BEA-USAin lightof publiccommentsreceivedontheproposal.32Acommenteralleged,basedon HMDAdatareportedin2009,thatBEA-USAhadengagedindisparatetreatmentof minorityindividualsinitsone-to-fourfamilyhomemortgagelending.Specifically,thecom- 25 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at 11665(2010). 26 ManufacturersBankreceivedahighsatisfactoryineachofthelending,investment,andservicetests.The evaluationperiodwasOctober25,2007,toNovember29,2010. 27 TheevaluationperiodwasJanuary1,2007,toSeptember30,2009.SMBC’sandBEA’suninsuredbranchesare notsubjecttotheCRA. 28 TheevaluationperiodwasJanuary1,2006,toJanuary4,2010. 29 BEA-USAwasevaluatedundertheintermediatesmallbankperformancecriteria,whichonlyincludealending testandacommunitydevelopmenttest. 30 HMDA-reportableloanswerenotpartofBEA-USA’sCRAperformanceevaluationbecauseexaminersdid notconsiderthebank’svolumeofthosetypesofloanstobesufficientenoughtoreview. 31 BEA-USAcontrols$261millionindepositsintheNewYorkbankingmarket,whichapproximatesitsCRA assessmentareainNewYork.Inthatassessmentarea,BEA-USAmade15communitydevelopmentloans totaling$18.6million,including5loansforaffordablehousing,and22qualifiedinvestmentstotalingapproximately$2.6million,whichconsistedof$2.5millioninFannieMaeinvestmentsand$100,000incharitable donations.BEA-USA’sstaffalsoprovidedcommunitydevelopmentservicesduringthereviewperiod,includingfinancialliteracyandhomeownershipseminars. 32 BEA-USA’scombinedCRAassessmentareasconsistofKings,Manhattan,andQueensCountiesintheNew York-NewJersey-LongIsland,NY-NJ-PAMetropolitanStatisticalArea;theSanFrancisco-SanMateo-Red-

LegalDevelopments:FourthQuarter,2012 125 menterhasassertedthatBEA-USAexcludesAfricanAmericansandHispanicsinhome purchaseandrefinancelendinganddiscriminatesagainstAsianAmericanswithincome below100percentof themedianincomeof themetropolitanstatisticalareainitsrefinance lending. AlthoughtheHMDAdataprovideaninsufficientbasisbythemselvesonwhichtoconcludewhetherornotBEA-USAisexcludingorimposinghighercostsonanyracialorethnicgrouponaprohibitedbasis,theBoardisneverthelessconcernedwhenHMDAdatafor aninstitutionindicatedisparitiesinlending.33TheBoardbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpracticesarebasedoncriteriathatensure notonlysafeandsoundlendingbutalsoequalaccesstocreditbycreditworthyapplicants regardlessof theirraceorethnicity.Moreover,theBoardbelievesthatallbankholding companiesandtheiraffiliatesshouldconductmortgagelendingoperationsthatarefreeof abusivelendingpracticesandincompliancewithallconsumerprotectionlaws. Becauseof thelimitationsof HMDAdata,theBoardhasconsideredthesedataandtaken intoaccountotherinformation,includingexaminationreportsthatprovideevaluationsof compliancebyBEA-USAwithconsumerprotectionlaws.TheBoardalsohasconsulted withtheOCC,BEA-USA’sprimaryfederalsupervisor. Asnotedabove,BEA-USAispredominantlyacommerciallenderandmakesalimited numberof one-to-fourfamilymortgageloans.BEA-USA’sone-to-fourfamilymortgage lendinglargelyresultsfromwalk-intrafficatBEA-USA’sbranches,mostof whicharein AsianAmericanneighborhoods.Throughoutitscombinedassessmentareas,BEA-USA madeatotalof 32one-to-fourfamilymortgageloansin2009,26in2010,and20in2011. Duringthatsametimeperiod,BEA-USAreceivedonlyoneapplicationforaone-to-four familymortgageloanfromanAfricanAmericanandfourapplicationsfromHispanics. TheHMDAdataalsoindicatethatthebankmadeamaterialpercentageof itsone-to-four familymortgageloanstoLMIborrowers(thosewithincomesof lessthan80percentof the areamedianincome)inBEA-USA’sassessmentareas.Between2009and2011,21percent of BEA-USA’smortgagerefinanceloans,and35percentof BEA-USA’sconventional homepurchaseloans,weremadetoLMIborrowers.34 Therecordof thisapplication,includingconfidentialsupervisoryinformation,alsoindicatesthatBEA-USAhastakenstepstoensurecompliancewithfairlendingandotherconsumerprotectionlawsandregulations.InBEA-USA’smostrecentCRAperformance evaluation,examinersnotednoevidenceof discriminatoryorotherillegalcreditpractices.35Inaddition,BEA-USA’sloanpoliciesincludeinformationonprohibiteddiscriminatorylendingpracticesanditsadvertisingandmarketingpolicycontainsspecificguidanceonpracticesemployeesshouldavoidthatwouldtendtodiscourageloanapplicantson aprohibitedbasis.Additionally,thebank’semployeeswhoareinvolvedinlendingare woodCity,CaliforniaMetropolitanDivisionandtheAlamedaCountyportionoftheOakland-Fremont-Hayward,CAMetropolitanDivision,whicharepartofthegreaterSanFrancisco-Oakland-Fremont,California MetropolitanStatisticalArea;andtheLosAngeles-LongBeach-GlendaleMetropolitanDivision. 33 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicationsthanotherinstitutionsattractanddonotprovideforan independentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.Inaddition, credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueof therealestatecollateral(reasonsmostfrequentlycitedforacreditdenialorhighercostcredit)arenotavailable fromHMDAdata. 34 MorethanhalfofBEA-USA’sbranchesarelocatedinlow-to-moderateincomecommunities. 35 TheBankofEastAsia,USA,NationalAssociationCommunityReinvestmentActPerformanceEvaluation, January4,2010,at5.Moreover,theCRAperformanceevaluationnotedthatBEA-USA’sassessmentareasdo notarbitrarilyexcludeLMIareas.Id.at4.

126 FederalReserveBulletin|February2013 requiredtoparticipateinannualtrainingthatincludescompliancewithfairlendinglaws andotherapplicablelawsandregulations. C.ConclusiononConvenienceandNeedsandCRAPerformance TheBoardhasconsideredallthefactsof record,includingevaluationsof theCRAperformancerecordof ManufacturersBank(thebankcontrolledbyApplicants),BEA-USA,and otherrelevantinsureddepositoryinstitutions,informationprovidedbyApplicants,commentsreceivedontheproposal,andconfidentialsupervisoryinformation.Basedona reviewof theentirerecord,theBoardconcludesthatconsiderationsrelatingtotheconvenienceandneedsfactorandtheCRAperformancerecordsof therelevantinsureddepositoryinstitutionsareconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardalsotoconsider“theextentto whichaproposedacquisition,merger,orconsolidationwouldresultingreaterormore concentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.”36 Inthiscase,theproposedacquisitionof anoncontrollinginterestinBEAisnotasignificantexpansionbySMFGandwouldhaveademinimisimpactonSMFG’ssystemicfootprint.Thevalueof theadditionalsharesthatApplicantsproposetopurchaseisapproximately$415million.37Inaddition,thereisnoevidenceof anysignificantincreasein interconnectedness,complexity,cross-borderactivities,orotherriskfactor,astheproposal merelyincreasestheownershipbyApplicantsfromapproximately4.7percentto9.9percentof thevotingsharesof BEA.ApplicantswouldneitherconsiderBEAasubsidiarynor consolidateitsfinancialperformanceontheirbalancesheets. Basedontheseandalltheotherfactsof record,theBoardhasdeterminedthattheproposalwouldnotmateriallyincreaserisktothestabilityof theU.S.financialorbanking system. Conclusion Basedontheforegoingandallthefactsof record,theBoardapprovestheproposalby Applicantstoacquireupto9.9percentof thevotingsharesof BEA.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitis requiredtoconsiderundertheBHCActandotherapplicablestatutes.TheBoardconditionsitsdecisiononApplicantsprovidingtotheBoardadequateinformationontheir operationsandactivitiesaswellasthoseof theiraffiliatestodetermineandenforcecompliancebyApplicantsortheiraffiliateswithapplicablefederalstatutes.Shouldanyrestrictionsonaccesstoinformationontheoperationsoractivitiesof Applicantsoranyof their affiliatessubsequentlyinterferewiththeBoard'sabilitytoobtaininformationtodetermine andenforcecompliancebyApplicantsortheiraffiliateswithapplicablefederalstatutes,the Boardmayrequireterminationordivestitureof anyof Applicants’ortheiraffiliates'direct orindirectactivitiesintheUnitedStates. TheBoard’sapprovalisspecificallyconditionedoncompliancebyApplicantswiththeconditionsimposedinthisorderandthecommitmentsmadetotheBoardinconnectionwith 36 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 37 ThisvalueisbasedonBEA’slistedpriceontheHongKongStockExchangeasofOctober17,2012,andthe exchangerateasofthatdate.

LegalDevelopments:FourthQuarter,2012 127 theproposal.38Forpurposesof thisaction,theconditionsandcommitmentsaredeemedto beconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecision hereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unless suchperiodisextendedforgoodcausebytheBoardortheFederalReserveBankof New York,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveOctober31,2012. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,Raskin,Stein,andPowell. RobertdeV.Frierson Secretaryof theBoard 38 ThecommenterrequestedthattheBoardholdapublichearingontheproposal.Section3(b)oftheBHCAct doesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisory authoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsregulations,theBoardalsomay,initsdiscretion,holdapublichearingonanapplication toacquiresharesofabankifnecessaryorappropriatetoclarifyfactualissuesrelatedtotheapplicationandto provideanopportunityfortestimony.12CFR262.3(e)and262.25(d).TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.IntheBoard’sview,thecommenterhadampleopportunityto submitviewsand,infact,submittedwrittencommentsthattheBoardhasconsideredinactingontheproposal. TherequestfailstoidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionthatwouldbeclarifiedbyapublichearing.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthat apublichearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.ThecommenterraisedadditionalconcernsthataddressmattersbeyondthestatutoryfactorstheBoardisauthorizedtoconsider.SeeWesternBancshares,Inc.v.BoardofGovernors,480F.2d 749(10thCir.1973).

129 Federal Reserve BULLETIN May 2013 Vol. 99, No. 2 Legal Developments: First Quarter, 2013 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act FirstMerit Corporation Akron, Ohio OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2013-3(March22,2013) FirstMeritCorporation(“FirstMerit”),Akron,Ohio,hasrequestedtheBoard’sapproval undersection3of theBankHoldingCompanyAct(“BHCAct”)1toacquireCitizens RepublicBancorp,Inc.(“Citizens”)andtherebyindirectlyacquireitssubsidiarybank, CitizensBank(“CitizensBank”),bothof Flint,Michigan.Immediatelyfollowingtheproposedacquisition,CitizensBankwouldbemergedintoFirstMerit’ssubsidiarybank,First- MeritBank,N.A.(“FirstMeritBank”),Akron.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(77FederalRegister64338(2012)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheapplicationandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. FirstMerit,withconsolidatedassetsof approximately$14.9billion,isthe76thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$11.8billioninconsolidateddeposits.FirstMeritBankoperatesinOhio,Illinois,andPennsylvania. FirstMeritBankistheseventhlargestdepositoryinstitutioninOhio,controllingdeposits of approximately$8.7billion,whichrepresent3.6percentof thetotaldepositsof insured depositoryinstitutionsinthestate.3FirstMeritBankisthe19thlargestinsureddepository institutioninIllinois,controllingdepositsof approximately$2.7billion,andthe128thlargestinsureddepositoryinstitutioninPennsylvania,controllingdepositsof approximately $200million,whichrepresentlessthan1percentof thetotaldepositsof insureddepository institutionsinthosestates,respectively. Citizens,withtotalconsolidatedassetsof $9.6billion,controlsCitizensBank,whichcontrolsapproximately$7.2billionindeposits.CitizensBankoperatesinMichigan,Wisconsin,andOhio.CitizensBankisthe62ndlargestinsureddepositoryinstitutioninOhio,con- 1 12U.S.C.§1842. 2 ThemergerofCitizensBankintoFirstMeritBankissubjecttotheapprovaloftheOfficeoftheComptrollerofthe Currency(“OCC”)undertheBankMergerAct. 3 StatedepositandassetdataareasofJune30,2012.AllotherassetdataareasofDecember31,2012,unlessotherwise noted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavings banks.

130 FederalReserveBulletin|May2013 trollingdepositsof approximately$306.5million,whichrepresentlessthan1percentof the totaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,FirstMeritwouldbecomethe55thlargestdepository organizationintheUnitedStates,controllingconsolidateddepositsof approximately $19.0billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.FirstMeritBankwouldremaintheseventh largestinsureddepositoryinstitutioninOhio,controllingdepositsof approximately $9.0billion,whichwouldrepresent3.7percentof thetotaldepositsof insureddepository institutionsinthestate. InterstateandDepositCapAnalysis Section3(d)of theBHCActimposescertainrequirementsoninterstatetransactions.Section3(d)generallyprovidesthattheBoardmayapproveanapplicationbyabankholding companythatiswellcapitalizedandwellmanagedtoacquirecontrolof abankinastate otherthanthehomestateof thebankholdingcompanywithoutregardtowhetherthe transactionisprohibitedunderstatelaw.4However,thissectionfurtherprovidesthatthe Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststatethathasnotbeeninexistenceforthelesserof thestatestatutoryminimumperiodof timeorfiveyears.5Inaddition,theBoardmaynot approveanapplicationbyabankholdingcompanytoacquireaninsureddepositoryinstitutionif thehomestateof suchinsureddepositoryinstitutionisastateotherthanthe homestateof thebankholdingcompanyandtheapplicantcontrolsorwouldcontrolmore than10percentof thetotaldepositsof insureddepositoryinstitutionsintheUnited States.6 Forpurposesof theBHCAct,thehomestateof FirstMeritisOhio,7andCitizensis locatedinMichigan,Ohio,andWisconsin.8FirstMeritiswellcapitalizedandwellmanaged underapplicablelaw.MichiganandWisconsinhavenominimumrequirementsforperiod of operation,9andCitizensBankhasbeeninexistenceformorethanfiveyears. Basedonthelatestavailabledatareportedbyallinsureddepositoryinstitutions,thetotal amountof consolidateddepositsof insureddepositoryinstitutionsintheUnitedStatesis $9.9trillion.Onconsummationof theproposedtransaction,FirstMeritwouldcontrolless than1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnitedStates.Accordingly,inlightof allthefactsof record,theBoardisnot requiredtodenytheproposalundersection3(d)of theBHCAct. 4 Thestandardwaschangedfromadequatelycapitalizedandadequatelymanagedtowellcapitalizedandwell managedbysection607(a)oftheDodd-FrankWallStreetReformandConsumerProtectionAct(the“Dodd- FrankAct”),Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(d)(1)(A). 5 12U.S.C.§1842(d)(1)(B). 6 12U.S.C.§1842(d)(2)(A). 7 See12U.S.C.§1842(d).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater. 8 Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersabanktobelocatedinthestatesinwhich thebankischarteredorheadquarteredoroperatesabranch.See12U.S.C.§§1841(o)(4)-(7)and1842(d)(1)(A) and1842(d)(2)(B). 9 SeeMSA§487.13702andWSA§221.0901(8)(bothpermitinterstateacquisitionsbutdonotimposearequirementforperiodofoperation).

LegalDevelopments:FirstQuarter,2013 131 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.10 FirstMeritandCitizenscompetedirectlyintheAkronandCleveland,Ohio,bankingmarkets.11TheBoardhasconsideredthecompetitiveeffectsof theproposalinthesebanking marketsinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarkets,therelativesharesof total depositsininsureddepositoryinstitutionsinthemarkets(“marketdeposits”)controlledby FirstMeritandCitizens,12theconcentrationlevelsof marketdepositsandtheincreasein thoselevels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeMergerCompetitiveReviewGuidelines(“DOJBankMergerGuidelines”),13andothercharacteristicsof themarkets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesintheAkronandClevelandbankingmarkets.Onconsummationof theproposal,thebankingmarketswouldremainmoderately concentrated,asmeasuredbytheHHI,andnumerouscompetitorswouldremain.14 10 12U.S.C.§1842(c)(1). 11 TheAkronbankingmarketisdefinedasSummitCounty(excludingSagamoreHills,NorthfieldCenter,Twinsburg,RichfieldandBostontownships,thevillagesadjoiningthesetownships,andthecitiesofTwinsburg, Macedonia,andHudson);Franklin,Ravenna,Charlestown,Paris,Brimfield,Rootstown,Edinburg,Palmyra, Suffield,Randolph,Atwater,andDeerfieldtownships,andthecityofKentinPortageCounty;Guilford,Wadsworth,andSharontownships,andthecityofWadsworthinMedinaCounty;LawrenceandLaketownshipsin StarkCounty;andMiltonandChippewatownships,andthevillagesadjoiningthosetownships,inWayne County,allinOhio(the“Akronbankingmarket”).TheCleveland,Ohiobankingmarketisdefinedas Cuyahoga,Lake,Lorain,andGeaugaCounties;SagamoreHills,NorthfieldCenter,Twinsburg,Richfield,and Bostontownships,thevillagessurroundingthosetownships,andthecitiesofMacedonia,Twinsburg,andHudsoninSummitCounty;Homer,Harrisville,Westfield,Spencer,Chatham,Lafayette,Montville,Litchfield, York,Medina,Granger,Liverpool,BrunswickHills,andHinckleytownships,andthecitiesofMedinaand BrunswickinMedinaCounty;Mantua,Hiram,Nelson,Shalersville,Freedom,andWindhamtownships,and thecitiesofAuroraandStreetsboroinPortageCounty;andthecityofVermilion(notthewholetownship)in ErieCounty,allinOhio(the“Clevelandbankingmarket”). 12 DepositandmarketsharedataareasofJune30,2012,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,Midwest FinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 13 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelinesin 2010,seePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10-at- 938.html,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenot modified. 14 FirstMeritBankoperatesthesixthlargestdepositoryinstitutionintheClevelandbankingmarket,controlling depositsofapproximately$3.1billion,whichrepresentapproximately6.7percentofmarketdeposits.Citizens Bankoperatesthe17thlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately $293.4million,whichrepresentlessthan1percentofmarketdeposits.Onconsummation,FirstMeritBank wouldoperatethesixthlargestdepositoryinstitutioninthemarket,controllingweighteddepositsofapproximately$3.4billion,whichrepresentapproximately7.3percentofmarketdeposits.TheHHIwouldincreaseby

132 FederalReserveBulletin|May2013 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthebankingmarketsinwhichFirstMeritBankandCitizensBankcompete directlyorinanyotherrelevantbankingmarket.Accordingly,theBoardhasdetermined thatcompetitiveconsiderationsareconsistentwithapproval. OtherSection3(c)Considerations Section3(c)of theBHCActrequirestheBoardtotakeintoconsiderationanumberof otherfactorsinactingonbankacquisitionapplications.Thesefactorsincludethefinancial andmanagerialresources(includingconsiderationof thecompetence,experience,and integrityof theofficers,directors,andprincipalshareholders)andfutureprospectsof the companyandbanksconcerned;theeffectivenessof thecompanyincombattingmoney laundering;theconvenienceandneedsof thecommunitiestobeserved;andtheextentto whichtheproposalwouldresultingreaterormoreconcentratedriskstothestabilityof the UnitedStatesbankingorfinancialsystem. TheBoardhasconsideredallof thesefactorsand,asdescribedbelow,hasdeterminedthat allconsiderationsareconsistentwithapprovalof theapplication.Thereviewwasconductedinlightof allthefactsof record,includingsupervisoryandexaminationinformationfromvariousU.S.bankingsupervisorsof theinstitutionsinvolved,publicly reportedandotherfinancialinformation,informationprovidedbyFirstMerit,andapublic commentreceivedontheproposal. A.Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,and theimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheability of theorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof the operationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant. TheBoardhasconsideredthefinancialfactorsof theproposal.FirstMeritandFirstMerit Bankarewellcapitalizedandwouldremainsoonconsummationof theproposedacquisition.Theproposedtransactionisabankholdingcompanymerger,structuredasashare exchange.Eachshareof Citizens’commonstockwouldbecancelledandconvertedinto 9pointsto1045.FirstMeritBankoperatesthelargestdepositoryinstitutionintheAkronbankingmarket,controllingdepositsofapproximately$3.0billion,whichrepresentapproximately29.6percentofmarketdeposits. CitizensBankoperatesthe22ndlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately$13.1million,whichrepresentlessthan1percentofmarketdeposits.Onconsummation,FirstMerit Bankwouldcontroldepositsofapproximately$3billion,whichrepresentapproximately29.7percentofmarketdeposits.TheHHIwouldincreaseby8pointsto1497.

LegalDevelopments:FirstQuarter,2013 133 therighttoreceiveFirstMeritcommonstockbasedonanexchangeratio.15FirstMeritisin stablefinancialcondition,andtheassetqualityandearningsof bothFirstMeritBankand CitizensBankareconsistentwithapproval.Onaproformabasis,theacquisitionof CitizensisnotexpectedtohaveanegativeimpactonFirstMerit’soperations.Basedonits reviewof therecord,theBoardfindsthattheorganizationhassufficientfinancialresources toeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of FirstMerit,FirstMeritBank,Citizens,andCitizensBank,includingassessmentsof their management,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencies withtheorganizationsandtheirrecordsof compliancewithapplicablebankingandantimoney-launderinglaws.TheBoardalsohasconsideredFirstMerit’splansforimplementingtheproposal. FirstMerit,FirstMeritBank,Citizens,andCitizensBankareeachconsideredtobewell managed.FirstMerit’sexistingriskmanagementprogramanditsdirectorateandsenior managementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof FirstMerithavesubstantialknowledgeandexperienceinthebankingandfinancialservices sectors.16Boththechairmanandchief executiveofficerof FirstMeritwouldcontinuein theirrolesfollowingconsummationof theproposedtransaction. FirstMeritsuccessfullyintegratedintoitsoperationsthebankingoperationsof three insureddepositoryinstitutionslocatedintheChicago,Illinois,market,includingtheassets anddepositsof twofaileddepositoryinstitutionsin2010.FirstMeritisdevotingsignificant financialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.FirstMeritwouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombinedorganization,andtheyareconsideredacceptablefrom asupervisoryperspective.Inaddition,FirstMerit’smanagementhastheexperienceand resourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner, andFirstMeritisproposingtointegrateCitizensBank’sexistingmanagementandpersonnelinamannerthataugmentsFirstMerit’smanagement.17 FirstMerit’sintegrationrecord,managerialandoperationalresources,andplansforoperatingthecombinedinstitutionsafterconsummationprovideareasonablebasistoconclude thatmanagerialfactorsareconsistentwithapproval.Basedonallthefactsof record,the Boardhasconcludedthatconsiderationsrelatingtothefinancialandmanagerialresources andfutureprospectsof theorganizationsinvolvedintheproposalareconsistentwith approval,asaretheothersupervisoryfactors. 15 Aspartoftheproposedtransaction,FirstMeritwouldpaytheUnitedStatesDepartmentoftheTreasuryin fullforallofCitizens’TroubledAssetReliefProgram(“TARP”)preferredstock,includingaccumulatedbut unpaiddividends. 16 Onconsummation,FirstMerit’sboardofdirectorswouldincludetwoadditionaldirectorsfromCitizens’currentboardofdirectors. 17 ThecommenterreferredtopressreleasesissuedbytworatingagenciesraisingconcernsregardingpossibleintegrationdifficultiesandFirstMerit’sentryintonewmarkets.Thecommenteralsoreferredtooutstandinglitigationassociatedwiththeproposedtransaction.TherecordinthiscasesupportstheconclusionthatFirstMerit hasthenecessarysupportstructures,andhumanandfinancialresources,tointegratetheorganizations’operations.Inaddition,thereferencedlitigationhasbeensettled.

134 FederalReserveBulletin|May2013 B.ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).18TheCRArequiresthefederalfinancialsupervisoryagencies toencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,19and requirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevant depositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.20 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof FirstMeritBankandCitizensBank,datareportedbyFirstMerit BankandCitizensBankundertheHomeMortgageDisclosureAct(“HMDA”),21other informationprovidedbyFirstMerit,confidentialsupervisoryinformation,andthepublic commentreceivedobjectingtotheproposal.Thecommenterobjectedtotheproposalon thebasisof themortgagelendingrecordsof FirstMeritBankandCitizensBankas reflectedinHMDAdata. 1.Recordsof PerformanceUndertheCRA AsprovidedintheCRA,theBoardevaluatestherecordof performanceof aninstitution inlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformance recordsof therelevantinstitutions.22TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’s recordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.23Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriate federalsupervisor. CRAPerformanceof FirstMeritBank.FirstMeritBankwasassignedan“outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheOCC,asof November17,2008 (“FirstMeritEvaluation”).Examinersconcludedthatthedistributionof loansamongborrowersof differentincomelevelswasgoodoverall,includinglendinginLMIareas.24OCC examinersnotedthatFirstMeritBank’scommunitydevelopmentlendingperformance reflectedanexcellentlevelof responsivenesstocommunityneeds.FirstMeritBankreceived 18 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 19 12U.S.C.§2901(b). 20 12U.S.C.§2903. 21 12U.S.C.§2801etseq. 22 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at 11665(2010). 23 12U.S.C.§2906. 24 TheAkron,Canton,andClevelandassessmentareaswereselectedforfull-scopereviewsinOhio.FirstMerit Bank’sOhioratingsarebasedprimarilyonconclusionsreachedforthebank’sperformanceinthesefull-scope assessmentareas.PerformanceintheAkronandClevelandassessmentareasisweighedmoreheavilythanthe Cantonassessmentarea.AlimitedscopereviewwasperformedintheToledoassessmentarea.

LegalDevelopments:FirstQuarter,2013 135 an“outstanding”ratingontheLendingTestand“highsatisfactory”ratingsonboththe InvestmentandServiceTests.25 CRAPerformanceof CitizensBank.CitizensBankwasassigneda“satisfactory”ratingat itsmostrecentCRAperformanceevaluationbytheFederalReserveBankof Chicago,as of November1,2010(“CitizensEvaluation”),26withratingsof “highsatisfactory”forthe LendingTestand“lowsatisfactory”fortheInvestmentandServiceTests.27ExaminersconcludedthatCitizensBankexhibitedexcellentpenetrationamongborrowersof different incomelevelsandbusinessesof differentsizesbasedonthebank’srecordof lendingto smallbusinesses. 2.FairLendingRecord TheBoardhasconsideredtherecordsof FirstMeritBankandCitizensBankincomplying withfairlendingandotherconsumerprotectionlaws.Thisincludesareviewof theirperformanceasdetailedintheFirstMeritandCitizensEvaluationsandanevaluationof First- MeritBank’srecordof performanceinprovidingcommunitydevelopmentlendingandservicessincetheFirstMeritEvaluation.Thisalsoincludesanevaluationof FirstMeritBank’s fairlendingpoliciesandproceduresandconsiderationof otheragencies’viewsonFirst- MeritBank’srecordof performanceunderfairlendinglaws.TheBoardalsohastakeninto accountthecommentontheapplication. TheFirstMeritEvaluation.AsdescribedintheFirstMeritEvaluation,OCCexaminers foundthatFirstMeritBankprovidedsignificantlevelsof communitydevelopmentloans andqualifiedcommunitydevelopmentinvestments.IntheFirstMeritEvaluation,examinersnotedthatdeliverysystemswereaccessibletogeographiesandindividualsof different incomelevels.ExaminersfoundthatFirstMeritBankhadagoodrecordof participatingin communitydevelopmentinitiatives. ExaminersstatedthatFirstMeritBankhadbeenhighlyresponsivetocommunityneeds throughitscommunitydevelopmentlending.Thecommunitydevelopmentloansreflected avarietyof communitydevelopmentpurposesincludingaffordablehousing,fundingfor organizationsprovidingcommunityservicestargetedtoLMIindividualsandfamilies, activitiesthatrevitalizeorstabilizeLMIgeographies,andinitiativesthatprovidefinancing tosmallbusinesses.Withrespecttocommunitydevelopmentservices,FirstMeritBankwas foundtohaveagoodrecordof participatingincommunitydevelopmentinitiatives,especiallyconsideringthelimitedopportunitiesforworkingwithlocalorganizationsthatprovidecommunitydevelopmentservices. TheOCCassignedFirstMeritBankaratingof “outstanding”fortheLendingTest,noting thatthebankhadanexcellentcommunitydevelopmentlendingrecord.Examinersfound thatFirstMeritBank’soverallgeographicdistributionperformanceandborrowerdistributionperformanceweregood.ExaminersnotedthatFirstMeritBank’sexcellentcommunity 25 TheevaluationperiodfortheLendingTestintheFirstMeritEvaluationwasJanuary1,2004,throughDecember31,2007,exceptforcommunitydevelopmentloans,whichhadanevaluationperiodfromMay17,2004, throughNovember17,2008.TheevaluationperiodfortheInvestmentandServiceTestswasfromMay17, 2004,throughNovember17,2008. 26 Theratingwasanimprovementfromthe“needstoimprove”ratingCitizensBankreceivedduringtheprevious CRAreview,in2008.Thereviewperiodforthe2010evaluationofloansreportedundertheHMDAandthe CRAwasJanuary1,2008,toDecember31,2009,andfortheevaluationofcommunitydevelopmentactivities wasJanuary1,2008,throughOctober31,2010.CitizensBank’scurrentCRAevaluationbytheFederal ReserveBankofChicagocommencedinthefourthquarterof2012. 27 Forthe2010evaluation,thereviewperiodfortheevaluationofloansreportedundertheHMDAandtheCRA wasJanuary1,2008,toDecember31,2009,andfortheevaluationofcommunitydevelopmentactivitieswas January1,2008,throughOctober31,2010.

136 FederalReserveBulletin|May2013 developmentlendingrecordhadasignificantpositiveimpactonitsLendingTestperformance.Duringtheevaluationperiod,FirstMeritBankgenerated56communitydevelopmentloanstotaling$43.5millionintheAkronMetropolitanStatisticalArea(“MSA”),and 66communitydevelopmentloanstotaling$38.2millionintheClevelandMSA.Inaddition tothecommunitydevelopmentloans,examinersnotedthatintheClevelandMSA,First- MeritBankoriginated19loanstotaling$4millionforhomemortgageandsmallbusiness purposesthatalsohadcommunitydevelopmentcharacteristics,whichdemonstrateFirst- MeritBank’scommitmenttocommunitydevelopmentlending.Examinersnotedthatin theToledoMSA,thebank’sperformancewasweakerthanthebank’soverallperformance inthestateduetoweakergeographicdistributionrecordsandlowerlevelsof community developmentlending.28 ExaminersassignedFirstMeritBankaratingof “highsatisfactory”fortheInvestment Test.ExaminershighlightedFirstMeritBank’squalifiedinvestmentsintheOhioEquity FundLimitedPartnershipfundsandotherlow-incomehousingtaxcreditfacilities,First- MeritBank’scommunitydevelopmentcorporation(“CDC”),andgrantstolocalorganizationstosupportcommunitydevelopmentinitiativeswithinthebank’sassessmentareas.In particular,FirstMerit’s$7.6millionequityinvestmentintheFirstMeritCDCwasgiven positiveconsiderationbytheexaminers.ProjectsfinancedbytheCDCaretypesthatthe bankcannotnormallyprovidesimilardegreesof supportbecausetheCDCcanuseless stringentfinancingstandards.Mostof theinvestmentsaddressedaffordablehousingand socialserviceneedsof LMIindividuals.ExaminersalsonotedthatFirstMeritBankhad takenleadershiprolesinsomeprojectsandcombinedloanandinvestmentactivitiesto fundinitiatives. TheCitizensEvaluation.Asnotedabove,CitizensBankreceiveda“highsatisfactory”ratingfortheLendingTestintheCitizensEvaluation.FederalReserveexaminersconcluded thatCitizensBankexhibitedexcellentpenetrationamongborrowersof differentincome levelsandbusinessesof differentsizesbasedonthebank’srecordof lendingtosmallbusinesses.ExaminersfoundthatCitizensBankmadearelativelyhighlevelof community developmentloansinthefullreviewassessmentareasinMichiganandOhio.Examiners highlightedCitizensBank’suseof innovativeandflexiblelendingprogramsandpractices tohelpmeetthecreditneedsof LMIindividualsandLMIareas. TheReserveBankassignedCitizensBankaratingof “lowsatisfactory”fortheInvestment Test.ExaminersfoundthatCitizensBankhadanadequatelevelof qualifiedcommunity developmentinvestments.ExaminersnotedthatCitizensBankwasadequatelyresponsive tothecreditandcommunitydevelopmentneedsinitsassessmentareasandoccasionally usedinnovativeorcomplexinvestmentstosupportcommunitydevelopmentinitiatives. TheReserveBankassignedCitizensBankaratingof “lowsatisfactory”fortheService Test.Examinersfoundthatservicedeliverysystemswereaccessibletoallportionsof CitizensBank’sassessmentareas.ExaminersfoundthatCitizensBankprovidedanadequate levelof communitydevelopmentservicesinmostgeographies. FirstMeritBank’seffortssincethe2008CRAEvaluation.AccordingtoFirstMerit,sincethe FirstMeritEvaluation,FirstMeritBankhasinvested$18millioninLowIncomeHousing TaxCreditEquityFundssyndicatedbytheOhioCapitalCorporationforHousing,providingdirectequitytoaffordablehousingprojectsthroughoutOhio.FirstMeritBankhaspro- 28 TheToledoassessmentareawasnotincludedasafull-scopeassessmentareabecauseofFirstMerit’srelatively lowleveloflendingvolumeintheToledoMSA.Forexample,fromJanuary1,2004,toDecember31,2007, FirstMeritreportedonly373totalloansintheToledoMSAascomparedto8,081intheAkronMSA,5,430in theCantonMSA,and11,454intheClevelandMSA.

LegalDevelopments:FirstQuarter,2013 137 videdsmallbusinessloansof almost$665millionintheAkron,Cleveland,andToledo MSAs.29Duringthissametimeperiod,FirstMeritBankhasprovidedcommunitydevelopmentloansof over$126millionintheAkron,Cleveland,andToledoMSAs.30Examplesof communitydevelopmentprojectsinclude$7.1millioninAkrontocreatesinglefamily homesforLMIfamiliesandaffordablehousingforlow-incomeseniors,participationinthe ClevelandHousingNetworktoprovidehousingformorethan2,000familiesinCleveland, and$4.6millioninaseniorhousingdevelopmentinToledo. FirstMerit’sFairLendingProgram.TheBoardalsoconsideredinformationaboutFirst- Merit’scomplianceandriskmanagementsystemsandthestepsithastakentoensurecompliancewithfairlendinglaws.FirstMerithasinstitutedpoliciesandprocedurestohelp ensurecompliancewithallfairlendingandotherconsumerprotectionlawsandregulations.FirstMerit’slegalandcomplianceriskmanagementprogramincludesproceduresto evaluatenewlawsandregulationstodetermineapplicabilitytoFirstMerit’smortgage operations,annualfairlendingriskassessmentstoanalyzepotentialvulnerabilitiesinloan processesandcontrols,fairlendingtrainingforalllending-relatedemployees,specialized trainingforpersonnelwithhigherfairlendingrisk,ongoingstatisticalregressionanalysisof loandata,comparativeloanfilereviews,legalandcompliancereviewsforallfairlending complaints,andasecondreviewcommittee,whichreviewsallhomemortgageloanapplicationsinitiallyrecommendedfordenialorforapprovalbasedonapolicyexception.First- Meritalsohasacorporatefairlendingcommittee,whichischargedwithreviewingfair lendingcomplianceandregulatorychangesandrecommendingpolicyandprocedural changesaimedatensuringcompliancewithfairlendinglawsandregulations.FirstMerit’s risk-managementsystemsandpoliciesandproceduresforassuringcompliancewithfair lendinglawswillbeimplementedatthecombinedorganization. ConsultationwiththeOCCandtheCFPB.TheBoardhasreviewedtheFirstMeritandCitizensEvaluationsandconsultedwiththeOCCandtheConsumerFinancialProtection Bureau(“CFPB”)withrespecttoFirstMeritBank’srecordof fairlendingperformance sincetheFirstMeritEvaluation.TheOCCreported,basedonitsreviewof supervisory information,thatitdidnotfindevidencethatFirstMeritBankengagedindiscriminatory conductduringtheperiodbeforewhichtheCFPBassumedjurisdictionoverfederalconsumerfinanciallaws.31TheOCChasindicatedthatthebank’soperationsandcompliance programarecompliantwithfairlendingandotherconsumerprotectionlaws.Basedonits consultationwiththeCFPB,theBoardissatisfiedwithFirstMerit’sperformance,policies, andproceduresintheareasreviewedbythatagency. TheOCCconductedapre-mergerexaminationof CitizensBankinOctober2012.The OCCidentifiedspecificmeasuresFirstMeritBankmusttaketoenhanceitsfairlending complianceprograminordertoensurecontinuedfairlendingcompliancebythecombined organization.Asaconditionof approval,FirstMeritmustensurethatFirstMeritBankis infullcompliancewiththeOCC’srequirementswithin180daysof thedateof thisorder. 3.HMDAAnalysisandPublicCommentontheApplication ThecommentercitedHMDAdataandallegedthatFirstMeritBankmadefewerconventionalhomepurchaseloanstoAfrican-AmericanandHispanicapplicantsthantowhite applicantsanddisproportionatelydeniedapplicationsbyminorityapplicantsforconven- 29 Thesmallbusinesslendingcomprises$234millionintheAkronMSA,$388millionintheClevelandMSA,and $43millionintheToledoMSA. 30 Thecommunitydevelopmentlendingcomprises$19millionintheAkronMSA,$101millionintheCleveland MSA,and$6millionintheToledoMSA. 31 See12U.S.C.§5481(14).

138 FederalReserveBulletin|May2013 tionalhomepurchaseloansintheAkronandClevelandMSAs.Thecommenterfurther allegedlowlevelsof conventionalhomepurchaselendingbyFirstMeritBanktoAfrican- AmericanapplicantsrelativetothoseforwhiteapplicantsintheToledoMSA.Inaddition, thecommentercitedHMDAdataandallegedthatCitizensBankmadefewerconventional homepurchaseloanstoAfricanAmericansthantowhitesintheAkronandCleveland MSAs. TheBoardhasreviewedHMDAdatafrom2010and2011reportedbyFirstMeritBank, FirstMeritMortgageCorporation(“FirstMeritMortgage”),andCitizensBank,themost recentpubliclyavailabledata.32Inresponsetothecomment,theBoardanalyzeddata relatedtoallHMDA-reportableloanstodevelopaviewof overalllendingpatterns,aswell asthesubsetof thatdatarelatedspecificallytoconventionalhomepurchaseloans,which wasthesubjectof thepubliccommentreceivedontheproposal.Withinthosedatasets,the Boardfocuseditsreviewontheracesandethnicitieshighlightedbythepubliccomment,in thiscase,AfricanAmericansandHispanics.TheBoardconsiderednotonlytheMSAs addressedinthepubliccomment(Akron,Cleveland,andToledo),butalsotheMSAsin whichFirstMeritBankandCitizensBankhavetheirheadquartersandallof thestatesin whichFirstMeritBank,FirstMeritMortgage,andCitizensBankoriginateHMDA-reportableloans. WithrespecttoFirstMeritBankandCitizensBank,theBoardconfirmedthelevelsof conventionalhomepurchaseloansanddenialdisparityratiosassociatedwithconventional homepurchaseloansnotedbythecommenter.Inaddition,theBoard’sanalysisforall HMDA-reportableloansrevealedsmalldifferencesinthepercentagesof loanapplications receivedandloansoriginatedbyFirstMeritBankandFirstMeritMortgageforapplicants residinginmajority-minoritytracts33intheClevelandMSAascomparedtothepercentagesof loanapplicationsreceivedandloansoriginatedbyallHMDAreportersforapplicantsresidinginmajority-minoritytractsintheClevelandMSA.TheBoarddidnotfind anysignificantdisparitieswithrespecttoCitizensBank.TheBoardcommunicateditsfindingswithrespecttoFirstMerittotheOCCandtheCFPB. TheBoardisconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlending andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatensurenotonlysafeandsoundlendingbutalsoequalaccessto creditbycreditworthyapplicantsregardlessof theirraceorethnicity.AlthoughtheHMDA datamightreflectcertaindisparitiesintheratesof loanapplications,originations,and denialsamongmembersof differentracialorethnicgroupsincertainlocalareas,HMDA dataalonedonotprovideasufficientbasisonwhichtoconcludewhetherFirstMeritBank andFirstMeritMortgagehaveexcludedordeniedcredittoanygrouponaprohibited basis.34 Becauseof thelimitationsof HMDAdata,theBoardalsohasconsideredotherinformation,includingexaminationreportsthatprovideon-siteevaluationsof compliancebyFirst- MeritBankandCitizensBankwithfairlendinglawsandregulations.TheBoardalsohas 32 FirstMeritMortgage,awhollyownedmortgagebankingsubsidiaryofFirstMeritBank,servicestheloansit originatesaswellasthoseoriginatedbyFirstMeritBank. 33 Inthiscase,majority-minoritytractsarethosewhereamajorityofthepopulationisAfricanAmericanand/or Hispanic. 34 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(thereasonsmostfrequentlycitedforacreditorhighercreditcost)arenot availablefromHMDAdata.

LegalDevelopments:FirstQuarter,2013 139 consultedwiththeOCCandtheCFPBaboutthisproposal,includingtherecordof First- MeritBankwithfairlendinglawsandregulationssincetheFirstMeritEvaluation. WithrespecttothespecificHMDAdataonconventionalhomemortgagescitedbythe commenter,FirstMeritprovidedinformationonthenondiscriminatoryreasonsforindividuallendingdecisions(i.e.,credithistory,inadequatecollateral,anddebt-to-income ratio).Withrespecttothesmalldifferencesinthepercentagesof loanapplicationsreceived andloansoriginatedbyFirstMeritBankandFirstMeritMortgageidentifiedinthe Board’sanalysisforapplicantsresidinginmajority-minoritytractsintheClevelandMSA ascomparedtotheaggregate,theBoardhasconcludedthatthesedifferencesalonewould notbeenoughtoprecludeapproval.FirstMeritBankbranchesareaccessibletomajority-minorityareasintheClevelandMSA,withfourbranchesinmajority-minoritytracts.35 FirstMeritBankhasnotattemptedtoadjustitsassessmentareatoexcludemajorityminorityareasforCRApurposes,butratherhasincludedtheentireClevelandMSAinto itsassessmentarea.FirstMeritalsohasprovidedtheBoardwithdetailedinformationonits training,marketing,andadvertising,andcentralizedunderwritingprogramsreflectingits commitmenttothepreventionof prescreening,discouragement,orexclusionof credit applicationsonaprohibitedbasis.Basedonitsreviewof informationtodate,theBoard hasnotfoundevidencethatFirstMerithasengagedindiscriminationorotherillegalcredit practices. Basedonthisinformation,aswellastheviewsof theCFPBandtheOCConFirstMerit Bank’srecordof fairlendingperformance,andconsideringthefairlendingpoliciesand proceduresandcompliancerecordof FirstMeritBank,theBoardconcludesthatFirst- MeritBank’sfairlendingrecordisconsistentwithapprovalandthattheHMDAdisparitiescitedbythecommenterandidentifiedbytheBoardarenotabarriertoapproval. 4.ConvenienceandNeedsof CommunitiestobeServedbytheCombinedOrganization TheBoardhasconsideredtheextenttowhichtheproposalwouldbenefitthecustomersof FirstMeritBank,CitizensBank,orboth.Suchbenefitscanincludemerger-relatedcostsavings,improvementsinthequalityof existingproductofferings,andtheavailabilityof productsthatwerenotpreviouslyavailabletocustomersof eitherof theparties. FirstMeritrepresentsthattheproposalwouldresultincostsavingsforthecombinedorganizationbyreducingitsfundingcostsandconsolidatingredundantfunctions,including Citizen’srelianceonthird-partyvendorstosupplyservicestoitscustomers.TheBoardhas consideredthatdecreasedfundingcostscouldresultfromthefactthatFirstMeritwould redeemCitizensBank’sTARPshareswithalternativefunding,allowingittoloweritsdebt service;Citizens’stablebaseof short-termdepositswouldallowFirstMerittoreduceits relianceonmoreexpensivewholesalefundingsources;andthecombinedorganization wouldpaylowerFDICinsuranceassessments. FirstMeritalsohasstatedthatitwouldbeabletouseitsexistinginfrastructuretoperform avarietyof servicesthatCitizenscurrentlycontractswiththirdpartyvendorstoprovide. Inadditiontotheprojectedcostsavings,FirstMeritrepresentsthat,byprovidingcertain servicesin-house,theywouldhavetheabilitytoprovidemorecustomizationthaniscurrentlyofferedbyCitizensBankthroughthirdparties.Forexample,FirstMerithasrepresentedthatitwouldassumeresponsibilitiesfromthird-partiesthatissuecreditcards,provideinternationaltradelettersof credit,andoriginatemortgagesforCitizens’customers onCitizens’behalf. 35 Thisinformationisbasedoncensusdemographicdatafortheyear2012thatwereupdatedinJune2012using 2006-2010ACSandCensus2010SF1-baseddata.

140 FederalReserveBulletin|May2013 ThemergeralsowouldextendthebranchandATMfootprintsof FirstMeritBankand CitizensBanktocoverportionsof fivestates.Theresultingnetworkwouldbecontiguous overabroadergeographicareathaniscurrentlyavailabletocustomersof eitherinstitution. Consumersthatcommutetoworkandbusinesseslocatedacrossmultiplegeographicareas arelikelytobetheprimarybeneficiariesof thelargerbranchnetwork. Finally,FirstMeritrepresentsthat,asaresultof themerger,Citizens’customerswould haveaccesstoavarietyof consumerandbusinessservicesthatarenotcurrentlyofferedby Citizens.Citizens’retailcustomerswouldhaveaccesstoprivatebanking,wealthmanagement,andadditionallendingproducts.Asaresultof themerger,Citizens’smallbusiness customerswouldgainaccesstoavarietyof financialservicessuchasmobilebankingand merchantservices,commercialpurchasingcards,andimport/exportservices.FirstMerit alsorepresentsthatitwouldexpandCitizens’commercialandindustriallendingbusiness andhireadditionalcommerciallendingofficersatCitizensBankbranches,andthat,asa resultof themerger,Citizens’businesscustomerswouldhaveaccesstolargerloans. 5.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyFirstMerit,confidential supervisoryinformation,andthepubliccommentontheproposal.BasedontheBoard’s analysisof theHMDAdata,evaluationof FirstMeritBank’sandCitizensBank’smortgagelendingoperationsandcomplianceprograms,reviewof examinationreports,andconsultationswiththeOCCandtheCFPB,theBoardbelievesthattheconvenienceandneeds factor,includingtheCRArecordof theinsureddepositoryinstitutionsinvolvedinthis transaction,isconsistentwithapprovalof theapplication.TheBoardencouragesFirst- MeritBanktocontinuetoseekopportunitiestoassistinmeetingthecreditneedsof the communitiesitserves. C.FinancialStability TheDodd-FrankActamendedsection3of theBHCActtorequiretheBoardtoconsider “theextenttowhichaproposedacquisition,merger,orconsolidationwouldresultin greaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancial system.”36 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm;theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm;theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem;theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem;andtheextentof thecross-borderactivitiesof theresultingfirm.37These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution 36 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 37 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system.

LegalDevelopments:FirstQuarter,2013 141 thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.38 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theUnitedStates bankingorfinancialsystem.Afterconsummation,FirstMeritwouldhaveapproximately $24billioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firm size,FirstMeritwouldbebetweenthe50thand75thlargestU.S.insureddepositoryorganization.TheBoardgenerallypresumesthatamergerresultinginafirmwithlessthan $25billionintotalconsolidatedassetswillnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors. Suchadditionalriskfactorsarenotpresentinthistransaction.Thecompaniesengageand wouldcontinuetoengageintraditionalcommercialbankingactivities.TheresultingorganizationwouldexperiencesmallincreasesinthemetricsthattheBoardconsidersto measureaninstitution’scomplexityandinterconnectedness,withtheresultingfirmgenerallyrankingoutsideof thetop50U.S.financialinstitutionsintermsof thosemetrics.For example,FirstMerit’sintrafinancialassetsandliabilitieswouldcompriseanegligibleshare of thesystem-widetotal,bothbeforeandafterthetransaction.Theresultingorganization wouldnotengageincomplexactivities,norwoulditprovidecriticalservicesinsuchvolume thatdisruptioninsuchserviceswouldhaveagreatimpactonthemacroeconomicconditionof theUnitedStatesbydisruptingtradeorresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.39Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyFirstMeritwithalltheconditionsimposedinthisorderandthecommitmentsmadetotheBoardinconnectionwiththeapplication,includingreceiptof all requiredregulatoryapprovals.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithits findingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. 38 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012). 39 ThepubliccommenterrequestedthattheBoardholdapublichearingontheproposal.Section3(b)ofthe BHCActdoesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication.12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallow interestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequately presenttheirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.Inthe Board’sview,commentershavehadampleopportunitytosubmitcommentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequest doesnotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedby apublichearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentsdonotpresentthe commenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredor warrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

142 FederalReserveBulletin|May2013 Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof Cleveland,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveMarch22,2013. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,Raskin,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard Trustmark Corporation Jackson, Mississippi OrderApprovingtheAcquisitionof aBankHoldingCompanyandtheMergerof Bank HoldingCompanies FRBOrderNo.2013-1(January24,2013) TrustmarkCorporation(“Trustmark”),Jackson,Mississippi,hasrequestedtheBoard’s approvalundersection3of theBankHoldingCompanyAct(“BHCAct”)1toacquire BancTrustFinancialGroup,Inc.(“BancTrust”),andtherebyindirectlyacquireBancTrust’s subsidiarybank,BankTrust(“BankTrust”),bothof Mobile,Alabama.Inaddition,TrustmarkhasrequestedtheBoard’sapprovalundersection3of theBHCActtomergewith BancTrust.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(77FederalRegister42312(July18,2012)).Thetimeforfilingcommentshasexpired,andtheBoardhasconsideredtheapplicationandallcommentsreceived inlightof thefactorssetforthinsection3of theBHCAct. Trustmark,withtotalconsolidatedassetsof approximately$9.9billion,iscurrentlyabank holdingcompanythatownsallof TrustmarkBankandTheSomervilleBank&Trust Company,Somerville,Tennessee(“SomervilleBank”).Trustmarkisthe102ndlargest depositoryorganizationintheUnitedStates,controllingapproximately$8.0billionin deposits.TrustmarkBankoperatesbranchesinMississippi,Florida,Tennessee,andTexas. InFlorida,TrustmarkBankisthe80thlargestinsureddepositoryinstitution,controlling depositsof approximately$444million,whichrepresentabout0.1percentof thetotal amountof depositsof insureddepositoryinstitutionsinthatstate.3SomervilleBankoperatesonlyinTennessee. BancTrust,withtotalconsolidatedassetsof approximately$2.0billion,isthe358thlargest depositoryorganizationintheUnitedStates,controlling$1.8billionindeposits.BancTrust controlsBankTrust,whichhasoperationsinAlabamaandFlorida.InFlorida,BankTrust isthe154thlargestinsureddepositoryinstitution,controllingabout$178millionindepos- 1 12U.S.C.§1842. 2 Afterthetransaction,ApplicantplanstomergeBankTrustwithandintoTrustmark’ssubsidiarydepository institution,TrustmarkNationalBank(“TrustmarkBank”),Jackson,Mississippi.TheOfficeoftheComptrolleroftheCurrency(“OCC”)hasapprovedtheproposedmergerpursuanttotheBankMergerActandthe NationalBankAct.12U.S.C.§1828(c)and12U.S.C.§215a. 3 DataareasofJune30,2012.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savings associations,andsavingsbanks.

LegalDevelopments:FirstQuarter,2013 143 its,whichrepresentabout0.04percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate. Onconsummationof thisproposal,Trustmarkwouldbecomethe93rdlargestdepository organizationintheUnitedStateswithconsolidatedassetsof approximately$11.9billion, controlling$9.8billionindeposits.TrustmarkBankwouldbecomethe60thlargestinsured depositoryinstitutioninFlorida,controllingapproximately$622millionindeposits,which representapproximately0.14percentof thetotalamountof depositsof insureddepository institutionsinthestate. InterstateandDepositCapAnalysis Section3of theBHCActimposescertainrequirementsoninterstatetransactions.Section3(d)generallyprovidesthattheBoardmayapproveanapplicationbyabankholding company(“BHC”)thatiswellcapitalizedandwellmanaged4toacquireabanklocatedina stateotherthanthehomestateof theBHCwithoutregardtowhetherthetransactionis prohibitedunderstatelaw.However,thissectionfurtherprovidesthattheBoardmaynot approveanapplicationthatwouldpermitanout-of-stateBHCtoacquireabankinahost statethathasnotbeeninexistenceforthelesserof thestatestatutoryminimumperiodof timeorfiveyears.5Inaddition,theBoardmaynotapproveanapplicationbyaBHCto acquireaninsureddepositoryinstitutionif thehomestateof suchinsureddepositoryinstitutionisastateotherthanthehomestateof theBHC,andtheapplicantcontrolsorwould controlmorethan10percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates(“nationwidedepositcap”).6 Forpurposesof theBHCAct,thehomestateof TrustmarkisMississippiandBankTrust’s homestateisAlabama.7Trustmarkiswellcapitalizedandwellmanagedunderapplicable law.Alabamahasafive-yearminimumagerequirement,8andBankTrusthasbeeninexistenceformorethanfiveyears. Basedonthelatestavailabledatareportedbyallinsureddepositoryinstitutions,thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStatesis$9.9trillion. Onconsummationof theproposedtransaction,Trustmarkwouldcontrollessthan1percentof thetotalamountof depositsininsureddepositoryinstitutionsintheUnitedStates. Accordingly,inlightof allthefactsof record,theBoardisnotrequiredtodenytheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof 4 Thestandardwaschangedfromadequatelycapitalizedandadequatelymanagedtowellcapitalizedandwell managedbysection607(a)oftheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd- FrankAct”),Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(d)(1)(A). 5 12U.SC.§1842(d)(1)(B). 6 12U.S.C.§1842(d)(2)(A).Foradetaileddiscussionofthenationwidedepositcap,seeBankofAmerica Corporation/LaSalle,93FederalReserveBulletin,109,109-110(2007);BankofAmericaCorporation/Fleet,90 FederalReserveBulletin217,219-220(2004). 7 Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofallsubsidiarybanksofthe companywerethelargestonJuly1,1966,orthedateonwhichthecompanybecameabankholdingcompany, whicheverislater.12U.S.C.§1841(o)(4)(c).Forpurposesofsection3(d)oftheBHCAct,theBoardconsiders abanktobelocatedinthestatesinwhichthebankischarteredorheadquarteredoroperatesabranch. 12U.S.C.§§1841(o)(4)-(7),1842(d)(1)(A),and1842(d)(2)(B). 8 Ala.Code§15-13B-6(d)(LexisNexis2010).

144 FederalReserveBulletin|May2013 bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.9TheBoardhasconsideredthecompetitiveeffectsof theproposalinlightof allthefactsof record.TrustmarkandBancTrustcompetedirectlyintwobankingmarkets inFlorida:TheFortWaltonandPanamaCitybankingmarkets.10 TheBoardhasreviewedthecompetitiveeffectsof theproposalintheFortWaltonand PanamaCitybankingmarkets.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarkets,therelativesharesof totaldeposits inthedepositoryinstitutionsinthemarkets(“marketdeposits”)controlledbyTrustmark andBancTrust,theconcentrationlevelof marketdepositsandtheincreaseinthatlevelas measuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof Justice MergerCompetitiveReviewGuidelines(“DOJBankMergerGuidelines”),11andother characteristicsof themarkets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe DOJBankMergerGuidelinesinbothbankingmarkets.Onconsummationof theproposal,onemarketwouldremainunconcentratedandtheothermarketwouldremainmoderatelyconcentrated,asmeasuredbytheHHI.ThechangeinHHIinbothmarketswould besmallandconsistentwithBoardprecedentandthethresholdsintheDOJBankMerger Guidelines.Inbothbankingmarkets,numerouscompetitorswouldremain.12 TheDOJalsohasconductedadetailedreviewof thepotentialcompetitiveeffectsof the proposalandhasadvisedtheBoardthatconsummationof theproposalwasnotlikelyto haveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentand havenotobjectedtotheproposal. 9 12U.S.C.§1842(c)(1). 10 TheFortWaltonAreabankingmarketisdefinedas:OkaloosaandWaltonCounties;andthewesternhalfof HolmesCounty,includingthetownofPoncedeLeon,allinFlorida.ThePanamaCityAreabankingmarketis definedas:BayandGulfCounties;andthesouthernhalfofWashingtonCounty,includingthetownsofVernonandWausau,allinFlorida. 11 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelinesin 2010,seePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10-at- 938.html,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenot modified. 12 BasedondataasofJune30,2012,TrustmarkBankisthe14thlargestinsureddepositoryinstitutionintheFort WaltonAreabankingmarket,controllingdepositsof$123million,representingapproximately2.89percentof marketdeposits.BankTrustisthe11thlargestinsureddepositoryinstitution,controllingdepositsof $136million,representing3.20percentofmarketdeposits.Onconsummation,TrustmarkBankwouldbecome the8thlargestinsureddepositoryinstitution,controllingdepositsof$260million,representing6.09percentof marketdeposits.Asaresult,theHHIwouldincreaseby18pointsto812,and22competitorswouldremainin themarket. InthePanamaCityAreamarket,TrustmarkBankisthe2ndlargestinsureddepositoryinstitution,controlling depositsof$320million,representing12.19percentofmarketdeposits.BankTrustisthe12thlargestinsured depositoryinstitution,controllingdepositsof$41million,representing1.58percentofmarketdeposits.Upon consummation,TrustmarkBankwouldremainthe2ndlargestinsureddepositoryinstitution,controlling depositsof$362million,representing13.8percentofmarketdeposits.Asaresult,theHHIwouldincreaseby 39points,to1356,and17competitorswouldremaininthemarket.

LegalDevelopments:FirstQuarter,2013 145 Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinthetwobankingmarketsinwhichTrustmarkandBancTrustcompetedirectly orinanyotherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwithapproval. OtherSection3(c)Considerations Section3(c)of theBHCActrequirestheBoardtotakeintoconsiderationanumberof otherfactorsinactingonbankacquisitionapplications.Thesefactorsinclude:thefinancial andmanagerialresources(includingconsiderationof thecompetence,experience,and integrityof officers,directors,andprincipalshareholders)andfutureprospectsof thecompanyandbanksconcerned;effectivenessof thecompanyincombattingmoneylaundering; theconvenienceandneedsof thecommunitytobeserved;andtheextenttowhichthe proposalwouldresultingreaterormoreconcentratedriskstothestabilityof theUnited Statesbankingorfinancialsystem. TheBoardhasconsideredallthesefactorsand,asdescribedbelow,hasdeterminedthatall considerationsareconsistentwithapprovalof theapplication.Thereviewwasconducted inlightof allthefactsof record,includingsupervisoryandexaminationinformationfrom variousU.S.bankingsupervisorsof theinstitutionsinvolved,publiclyreportedandother financialinformation,informationprovidedbyTrustmark,andpubliccommentsreceived ontheproposal. A.Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,andearningsprospects,andtheimpact of theproposedfundingonthetransaction.TheBoardalsoconsiderstheabilityof the organizationtoabsorbthecostsof theproposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant. TheBoardhasconsideredthefinancialfactorsof theproposal.Trustmark,Trustmark Bank,andSomervilleBankarewellcapitalizedandwouldremainsoonconsummationof theproposedtransaction,whichisabankholdingcompanymerger,structuredasan exchangeof shares.Trustmarkwouldissuenewsharesof commonstocktocompletethe transaction.Trustmarkisinstablefinancialcondition,andtheassetqualityandearnings of bothTrustmarkBankandSomervilleBankareconsistentwithapproval.Onapro formabasis,theacquisitionof BancTrustwouldnotadverselyimpactTrustmark’soperationsfinancially.Basedonitsreviewof therecord,theBoardfindsthattheorganization hassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolved.The Boardhasreviewedtheexaminationrecordsof Trustmark,TrustmarkBank,andSomervilleBank,includingassessmentsof theirmanagement,riskmanagementsystems,and operations.Trustmark,TrustmarkBank,andSomervilleBankareconsideredtobewell managed,andtheirboardsof directorsandseniormanagementareconsideredexperienced andcapable.Followingthemerger,BancTrustandBankTrustwouldbeintegratedinto

146 FederalReserveBulletin|May2013 Trustmark’soperationsandgovernedbyTrustmark’sriskmanagement,corporategovernance,andcompliancepoliciesandprocedures.Trustmark’sexistingrisk-managementprogramanditsdirectorateandseniormanagementareconsideredtobesatisfactory.The directorsandseniormanagementof Trustmark,TrustmarkBank,andSomervilleBank, andtherisk-managementprogramof Trustmark,wouldnotchangeasaresultof theproposal.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthoseof other relevantbankingsupervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankinglaw,includinganti-money-launderinglaws. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedare consistentwithapproval,asaretheothersupervisoryfactors. B.ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).13TheCRArequiresthefederalfinancialsupervisoryagencies toencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,14and requirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevant depositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.15 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof TrustmarkBank,SomervilleBank,andBankTrust,datareportedby TrustmarkBankundertheHomeMortgageDisclosureAct(“HMDA”),16otherinformationprovidedbyTrustmark,confidentialsupervisoryinformation,andonepubliccommentreceivedontheproposal.Thecommenterobjectedtotheproposalonthebasisof TrustmarkBank’smortgagelendingrecord.Thecommenterhighlighteddisparitiesin denialratestoAfricanAmericanandHispanicapplicantsforconventionalhomepurchase orrefinanceloans,relativetothoseforwhiteapplicantsintheJackson,Mississippi,MetropolitanStatisticalArea(“MSA”).Inaddition,thecommenternoteddisparitiesinthelevel of conventionalhomepurchaseloansmadetoAfricanAmericanapplicantsascompared towhiteapplicantsintheGulfport-BiloxiMSA,theMemphisMSA,andtheHoustonMSA. 1.Recordsof PerformanceUndertheCRA AsprovidedintheCRA,theBoardevaluatestherecordof performanceof aninstitution inlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformance recordsof therelevantinstitutions.17TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’s recordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.18Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimpor- 13 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 14 12U.S.C.§201(b). 15 12U.S.C.§2903. 16 12U.S.C.§2801etseq. 17 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at 11665(2010). 18 12U.S.C.§2906.

LegalDevelopments:FirstQuarter,2013 147 tantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriate federalsupervisor. CRAPerformanceof TrustmarkBank.TrustmarkBankwasassignedan“outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheOCC,asof April12,2010 (“TrustmarkEvaluation”).Ingeneral,examinersconcludedthatTrustmarkBankhadan excellentrecordof lendinginsideitsassessmentareasbynumberanddollaramountof loansandthatitscommunitydevelopmentlendingperformancewasexcellent.Inparticular,examinersstatedthatTrustmarkBankusedflexibleandinnovativeloanproducts.The bankreceiveda“highsatisfactory”ratingonthelendingtestand“outstanding”ratingson boththeinvestmentandservicetests.19 CRAPerformanceof SomervilleBank.SomervilleBankwasassigneda“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFederalDepositInsuranceCorporation(“FDIC”),asof August11,2008(“SomervilleEvaluation”).20Ingeneral,examinersconcludedthatSomervilleBankexhibitedareasonablepenetrationof lendingamong individualsof differentincomelevelsandhadanexcellentrecordof smallbusinesslending. CRAPerformanceof BankTrust.BankTrustreceivedanoverall“satisfactory”ratingatits mostrecentCRAperformanceevaluationbytheFDIC,asof April19,2010(“BankTrust Evaluation”).21Thebankreceived“highsatisfactory”ratingsonthelendingandservice testsanda“needstoimprove”ratingontheinvestmenttest.Examinersreportedthat BankTrust’slendingperformancereflectedagoodrecordof servingthecreditneedsof the mosteconomicallydisadvantagedassessmentareas,low-incomeindividuals,andverysmall businessesconsistentwithsafeandsoundbusinesspractices. 2.HMDAAnalysisandFairLendingRecord TheBoardhasconsideredtherecordsof TrustmarkBankincomplyingwithfairlending andotherconsumerprotectionlaws.ThecommentercitedHMDAdataandallegedthat TrustmarkBankdisproportionatelydeniedapplicationsbyminorityapplicantsforconventionalhomepurchaseorrefinanceloansintheJackson,Mississippi,MSA.Inaddition,the commenterallegeddisparitiesinthelevelof conventionalhomepurchaseloansmadeto AfricanAmericanapplicantscomparedtowhiteapplicantsintheGulfport,Memphis,and Houstonmarkets. TheBoardhasreviewedHMDAdatafrom2010and2011reportedbyTrustmarkBank, focusingon2011,themostrecentpubliclyavailabledata.22TheHMDAdataindicatethat theratioof thedenialrateforAfricanAmericanorHispanicapplicantstothedenialrate 19 TheevaluationperiodfortheLendingTestintheTrustmarkEvaluationwasJanuary1,2006,throughDecember31,2009,exceptforcommunitydevelopmentloans,whichhadanevaluationperiodfromJuly12,2006, throughApril12,2010.TheevaluationperiodfortheInvestmentandServiceTestswasfromJuly12,2006, throughApril12,2010. 20 TheperiodforhomemortgagedataevaluationintheSomervilleEvaluationwasJanuary1,2006,through March31,2008andtheperiodofsmallbusinessloanoriginationevaluationwasJuly23,2007throughJuly23, 2008. 21 TheperiodformortgagedataevaluatedintheBankTrustEvaluationwasJanuary1,2008,throughDecember31,2009.TheperiodforsmallbusinessdataevaluatedwasJanuary1,2009,throughDecember31,2009, withasamplingofloansfrom2008.TheperiodofcommunitydevelopmentloansevaluatedwasFebruary22, 2007,throughApril19,2010. 22 TheBoardreviewedHMDAdataforTrustmarkBankinitsassessmentareasonacombinedbasis(“thecombinedassessmentareas”)forbothloandenialdisparitiesandloanpenetrationandseparatelyreviewedportions ofthebank’sassessmentareaslocatedwithinthespecificmetropolitanareascitedbythecommenter:Jackson, Mississippi,Gulfport-Biloxi,Mississippi,Memphis,Tennessee,andHouston,Texas,fortheconcernsraisedby thecommenterrelevanttoaspecificMSA.

148 FederalReserveBulletin|May2013 forwhite,non-Hispanicapplicantswashigherforthebankthanfortheaggregateof all HMDAreportersintheJacksonMSAandinthebank’scombinedassessmentareas.In addition,TrustmarkBank’snumberof originationsfromAfricanAmericanapplicantsas apercentageof itstotalHMDAoriginationsin2011waslowerthantheaggregate’spercentageintheportionof thebank’sassessmentareasintheGulfport-BiloxiMSA,the MemphisMSA,andtheHoustonMSA,althoughthebank’spercentageof originationsto AfricanAmericanapplicantswashigherthantheaggregate’sinthebank’scombined assessmentareasin2011. TheBoardisconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlending andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatensurenotonlysafeandsoundlendingbutalsoequalaccessto creditbycreditworthyapplicantsregardlessof theirraceorethnicity.AlthoughtheHMDA datamayreflectcertaindisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsincertainlocalareas,HMDAdata alonedonotprovideasufficientbasisonwhichtoconcludewhetherTrustmarkBankhas excludedordeniedcredittoanygrouponaprohibitedbasis.23 Becauseof thelimitationsof HMDAdata,theBoardhasconsideredthesedataandtaken intoaccountotherinformation,includingexaminationreportsthatprovideon-siteevaluationsof compliancebyTrustmarkBankwithfairlendinglawsandregulations.TheBoard alsohasconsultedwiththeOCCaboutthisproposal,includingtherecordof Trustmark BankwithfairlendinglawsandregulationssincetheTrustmarkEvaluation. TheTrustmarkEvaluation.AsdescribedintheTrustmarkEvaluation,above,Trustmark Bankprovidessignificantlevelsof communitydevelopmentloansandqualifiedcommunity developmentinvestments.IntheTrustmarkEvaluation,examinersnotedthatservicedeliverysystemswerereadilyaccessibletoallportionsof theassessmentareas,commensurate withthesizeandscopeof theoperationsof thebank.ExaminersfoundthatTrustmark Bankprovidedarelativelyhighlevelof communitydevelopmentservicesthatwereresponsivetoavarietyof communitydevelopmentneeds. Examinersstatedthatthebankhadrespondedtoothercommunitycreditneeds,suchas affordablehousingforLMIgeographiesandborrowers,throughextensivetransactions associatedwithcommunitydevelopmentloans,investments,andservices.24Withrespectto communitydevelopmentservices,TrustmarkBankemploysafull-timeCommunityOutreachCoordinatorwhoisresponsibleforprovidingfinancialeducationclassestoLMIindividuals,workingwiththebank’soriginatorstoincreaselendingtoLMIindividuals,and workingwithhousing-relatedentitiestoeducateconsumersandpromotehomeownership. TheOCCassignedTrustmarkBankaratingof “HighSatisfactory”fortheLendingTest, notingthatthebank’slendingactivitywasexcellent.ExaminersfoundthatTrustmark Bank’sgeographicdistributionof homemortgageandsmallbusinessloanswasadequate andthatthedistributionof homemortgageloansbyincomelevelof theborrowerandthe distributionof loansbysizeof businessweregood.ExaminersdeterminedthatTrustmark 23 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(thereasonsmostfrequentlycitedforacreditdenialorhighercreditcost)are notavailablefromHMDAdata. 24 TrustmarkBank’sperformanceinMississippiwasgivenconsiderablymoreweightthanitsperformancein otherstatesthatarepartofitsassessmentareatoreflectthefactthat82percentofthebank’sdepositswere bookedinbranchesinMississippi.

LegalDevelopments:FirstQuarter,2013 149 Bankhadanexcellentrecordof lendingwithinitsassessmentareasbynumberanddollar amountof loans.ExaminersfoundthatTrustmarkBank’scommunitydevelopmentlendingperformancewasexcellentandhighlightedthebank’soriginationof morethan $97millionof communitydevelopmentloansinMississippi.Examinersalsostatedthat TrustmarkBank’suseof flexibleandinnovativeloanproductshadapositiveimpactonthe bank’sperformanceundertheLendingTest. ExaminersassignedTrustmarkBankaratingof “Outstanding”fortheInvestmentTest andnotedthebank’sexcellentlevelof qualifiedcommunitydevelopmentinvestments.In particular,examinershighlightedqualifiedinvestments,grants,anddonationstotaling $36.3millioninthebank’sfull-scopeassessmentareasinMississippi.Mostof thoseinvestmentsprovidedfor:theconstruction,repair,andexpansionof schoolsservingprimarily LMIstudents;fundinghomeownershipandrentalhousingforLMIhouseholds;anda projecttorevitalizeandstabilizealow-incomearea. TrustmarkBank’seffortssincethe2010CRAEvaluation.TrustmarkstatesthatTrustmark Bankreportedalmost14,000HMDA,smallbusinessandsmallfarmloanstotaling approximately$2billionfor2011.Inaddition,Trustmarkindicatedthatthebankmade50 communitydevelopmentloanstotaling$65millionduring2010and35communitydevelopmentloanstotaling$59millionin2011.TrustmarkalsoreportedthatTrustmarkBank madeapproximately$54millioninqualifiedcommunitydevelopmentinvestmentsfrom July10,2010,throughJulyof 2012,includinginvestmentsinGNMAandFNMAmortgage-backedsecurities,low-income-housingtaxcredits,newmarkettaxcreditprojects,and contributionstononprofitorganizationsservingLMIindividuals. TrustmarkBank’sFairLendingProgram.TheBoardalsoconsideredinformationabout TrustmarkBank’scomplianceandriskmanagementsystemsandthestepsithastakento ensurecompliancewithfairlendinglaws.TrustmarkBankhasinstitutedpoliciesandprocedurestohelpensurecompliancewithallfairlendingandotherconsumerprotectionlaws andregulations.TrustmarkBank’sfairlendingprogramincludesaseparatefairlending departmentledbyafull-timeperson,asecondreviewprocess,variouspoliciesandprocedures,25training,andinternalfairlendingriskassessments.TrustmarkBankalsohasasecondreviewcommittee,whichreviewsallhomemortgageloanapplicationsinitiallyrecommendedfordenialorforapprovalbasedonapolicyexception.Thebankcompletes quarterlyreviewsof compliancewithTrustmarkBank’sfairlendingpolicies.Trustmark’s risk-managementsystemsandpoliciesandproceduresforassuringcompliancewithfair lendinglawswillbeimplementedatthecombinedorganization. ConsultationwiththeOCC.Aspreviouslynoted,theBoardhasreviewedtheTrustmark EvaluationandconsultedwiththeOCCwithrespecttoTrustmark’srecordof fairlending performancesincetheTrustmarkEvaluation.Initsreview,theOCCreliedinlargeparton datagatheredaspartof itssupervisoryprocesstosatisfyitthatTrustmarkdidnotengage indiscriminatoryconduct.TheOCCdidnotfindevidencethatindicatesthepresenceof prohibiteddiscriminationorotherillegalcreditpracticesbyTrustmark.Inaddition,the OCChasindicatedthatthebank’soperationsandcomplianceprogramarecompliantwith fairlendingandotherconsumerprotectionlaws. 25 Toassureunderwritingconsistency,thebank’scentralizedunderwritingcenterconsultsadatabaseofallapplicationsthatweredeclinedorapprovedwithapolicyexceptionbeforepermittinganewapplicationwitha policyexceptiontobedeclinedorapproved.TrustmarkBank’sRetailCreditAdministrationandFairLending DepartmentperformsanongoingFairLendingRiskAssessmentdesignedtoidentifyareasofinherentrisk associatedwithproducts,deliverychannels,anddisparityindeclineratios.Thisassessmentisreviewedand changedasproducts,branches,andunderwritingguidelineschange,andasfairlendingcomplaintsandother pertinentissuesarise.

150 FederalReserveBulletin|May2013 3.ConvenienceandNeedsof CommunitiesServedbyBankTrust Trustmarkrepresentsthattheproposalwouldbenefittheconvenienceandneedsof the communitiescurrentlyservedbyBankTrustinseveralways.Primarily,Trustmarkasserts thattheproposedtransactionwouldstrengthenBankTrustandenableittobea strongerandmoreactiveparticipantinthemarketsitserves.Specifically,Trustmarkindicatedthatthemergedbankwouldhaveexpandedlendingcapacityandahigherlegallendinglimitandthatnobroadormaterialcategoriesof BankTrustproductswouldbeeliminated.Inaddition,consummationof theproposalwouldprovideaccesstoalarger ATMnetworktocurrentcustomersof TrustmarkBankandBankTrustandwouldprovide BankTrustcustomersaccesstoTrustmarkBank’sexpertiseasaSmallBusinessAdministrationPreferredLender. 4.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyTrustmark,andconfidentialsupervisoryinformation.BasedontheBoard’sanalysisof theHMDAdata,evaluationof TrustmarkBank’smortgagelendingoperationsandcomplianceprograms,review of examinationreports,andconsultationswiththeOCC,theBoardbelievesthattheconvenienceandneedsfactor,includingtheCRArecordof theinsureddepositoryinstitutions involvedinthistransaction,isconsistentwithapprovalof theapplication.TheBoard encouragesTrustmarkBanktocontinuetoseekopportunitiestoassistinmeeting thecreditneedsof thecommunitiesitserves. C.FinancialStability TheDodd-FrankActamendedsection3of theBHCActtorequiretheBoardtoconsider “theextenttowhichaproposedacquisition,merger,orconsolidationwouldresultin greaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancial system.”26 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm;theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm;theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem;theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem;andtheextentof thecross-borderactivitiesof theresultingfirm.27These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.28 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking 26 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 27 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 28 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012).

LegalDevelopments:FirstQuarter,2013 151 orfinancialsystem.Afterconsummation,Trustmarkwouldhaveassetswellbelowthe thresholdestablishedbytheBoardfortransactionsthatarepresumedtoraisefinancialstabilityconcernsabsentevidencethatthetransactionwouldresultinasignificantincreasein interconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchother riskfactorsarenotpresentinthistransaction.Thecompaniesengageandwouldcontinue toengageintraditionalcommercialbankingactivities.Theresultingorganizationwould experiencesmallincreasesinthemetricsthattheBoardconsiderstomeasureaninstitution’scomplexityandinterconnectednesswiththeresultingfirmgenerallyrankingoutside, andoftenwelloutside,of thetop100U.S.financialinstitutionsintermsof thosemetrics. Theresultingorganizationwouldnotengageincomplexorinternationalactivities,nor woulditprovidecriticalserviceswhosedisruptionwouldimpactthemacroeconomicconditionof theUnitedStatesbydisruptingtradeorresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. ConclusiononSection3(c)Factors Basedonallthefactsof record,includingthosedescribedabove,theBoardhasdetermined thatallof thefactorsitmustconsiderundersection3(c)of theBHCActareconsistent withapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasapprovedtheproposed transaction.29Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordin lightof thefactorsthatitisrequiredtoconsiderundertheBHCActandotherapplicable statutes.30TheBoard’sapprovalisspecificallyconditionedoncompliancebyTrustmark CorporationwithallthecommitmentsmadetoandreliedonbytheBoardinconnection withtheapplicationandonreceiptof allotherregulatoryapprovals.Forpurposesof this action,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwriting 29 ThecommenterrequestedthattheBoardextendthecommentperiod.TheBoardbelievesthattherecordin thiscasedoesnotwarrantpostponingitsconsiderationoftheproposal.Duringtheapplicationsprocess,the Boardaccumulatedasignificantrecord,includingreportsofexamination,supervisoryinformation,public reportsandinformation,andpubliccomment.TheBoardbelievesthisrecordissufficienttoallowittoassess thefactorsitisrequiredtoconsiderundertheBHCAct.TheBHCActandtheBoard’sprocessingrulesestablishtimeperiodsforconsiderationandactiononacquisitionproposals.Moreover,asdiscussedabove,theCRA requirestheBoardtoconsidertheexistingrecordofperformanceofanorganizationanddoesnotrequirean organizationtoenterintocontractsoragreementswithinterestedpartiestoimplementitsCRAprograms.For thereasonsdiscussedabove,theBoardbelievesthatcommenterhashadampleopportunitytosubmitviews, andinfact,thecommenterhasprovidedsubstantialwrittensubmissionsthattheBoardhasconsideredcarefullyinactingontheproposal.Basedonareviewofallthefactsofrecord,theBoardconcludesthatgranting anextensionofthecommentperiodisnotwarranted. 30 ThecommenterrequestedthattheBoardholdapublicmeetingorhearingontheproposal.Section3(b)ofthe BHCActdoesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsregulations,theBoardalsomay,initsdiscretion,holdapublicmeetingorhearingonan applicationtoacquireabankifameetingorhearingisnecessaryorappropriatetoclarifyfactualissuesrelated totheapplicationandtoprovideanopportunityfortestimony.12CFR262.3(e)and262.25(d).TheBoardhas consideredcarefullythecommenter’srequestinlightofallthefactsofrecord.IntheBoard’sview,thecommenthashadampleopportunitytosubmitviewsand,infact,submittedwrittencommentsthattheBoardhas consideredcarefullyinactingontheproposal.TherequestfailstoidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionthatwouldbeclarifiedbyapublicmeetingorhearing.Forthesereasons,andbased onallthefactsofrecord,theBoardhasdeterminedthatapublicmeetingorhearingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublicmeetingorhearingontheproposalisdenied.

152 FederalReserveBulletin|May2013 bytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybe enforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unless suchperiodisextendedforgoodcausebytheBoardortheFederalReserveBankof Atlanta,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveJanuary24,2013. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,Raskin,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard Order Issued Under International Banking Act NongHyup Bank Seoul, Republic of Korea OrderApprovingEstablishmentof aBranchandaRepresentativeOffice FRBOrderNo.2013-2(January28,2013) NongHyupBank(“NHBank”),Seoul,Republicof Korea,aforeignbankwithinthe meaningof theInternationalBankingAct(“IBA”),hasappliedundersections7(d)and 10(a)of theIBA1toestablishastate-licensedbranchandarepresentativeoffice(“U.S. offices”),bothinNewYork,NewYork.TheForeignBankSupervisionEnhancementAct of 1991,whichamendedtheIBA,providesthataforeignbankmustobtaintheapprovalof theBoardtoestablishabranchorrepresentativeofficeintheUnitedStates. Noticeof theapplications,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinNewYork,NewYork(NewYork Post,April19,andJuly30,2012).Thetimeforfilingcommentshasexpired,andallcommentsreceivedhavebeenconsidered. NHBank,withtotalconsolidatedassetsof approximately$175billion,isanewlychartered bankingentityresultingfromaninternalcorporaterestructuringof NationalAgricultural CooperativeFederation(“NACF”),alsoof Seoul.2NHBankiswhollyownedbyNH FinancialGroupInc.(“NHFG”)which,inturn,iswhollyownedbyNACF.3 NHFGandNHBankwereestablishedasof March2,2012,pursuanttoanamendmentto theKoreanNationalAgriculturalCooperativeFederationAct,whichseparatedNACF’s financialandnonfinancialactivities.Onthatdate,byoperationof Koreanlaw,NACF’s creditandbankingbusinessesweretransferredtoNHBank.NHBankassumedNACF’s bankingbusinessinitsentiretyandsucceededtoallof NACF’srightsandobligations associatedtherewith.Asof year-end2011,NHBankwouldhavebeenthefourthlargest 1 12U.S.C.§§3105(d)and3107(a). 2 AssetdataisasofSeptember30,2012. 3 NACFisaspecial-purposeentitycreatedbytheKoreangovernmentthatactsasanumbrellaorganizationfor Koreanagriculturalcooperatives.NACFisentirelyownedbyitsmemberagriculturalcooperatives.Noshareholder,directlyorindirectly,owns5percentormoreofthevotingsharesofNACF.

LegalDevelopments:FirstQuarter,2013 153 bankinginstitutioninKoreabasedonassetsize.4NHBankengagesincommercialbankingactivitiesthroughitsheadofficeandapproximately1,172branchofficesinKorea, includinggeneralcommercial,agriculturalandcreditcardlending,trustactivities,and deposittaking.IntheUnitedStates,NACFoperatesarepresentativeofficeinNewYork CityandanonbankcompanyinCerritos,California.5Upontheestablishmentof theproposedbranch,NACF,NHFG,andNHBankwouldallbequalifyingforeignbankingorganizationsunderRegulationK.6 Theproposedrepresentativeofficewouldassumethecurrentbusinessof NACF’sexisting representativeoffice.WhenNHBankestablishestheproposedbranch,theproposedrepresentativeofficewouldbeclosed.Theproposedrepresentativeofficewouldactasliaison betweenNHBankanditscustomersintheUnitedStatesandwouldengageinotherrepresentationalactivities,includingsolicitingpurchasersof loansandpartiestocontractwith NHBankfortheservicingof NHBankloans;andconductingresearch.7Theproposed representativeofficewouldalsosolicitloansinprincipalamountsof $250,000ormoreand, inconnectionwiththoseloanproposals,wouldassemblecreditinformation,makeproperty inspectionsandappraisalsof property,securetitleinformation,andprepareloanapplicationsandmakerecommendations.Theproposedbranchwouldprovideremittance/money transmittalservicesforexistingNHBankcustomersinKorea;tradefinanceservices,such aslettersof creditandbankersacceptances,onbehalf of NHBankanditsKorean branchesforKoreancompaniesandU.S.companiesseekingtodobusinesswithKorea; andfinancingforKoreanandothercompanieswithsubsidiariesorbranchesintheUnited States. UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranchorarepresentativeoffice,theBoardmustconsiderwhethertheforeignbank (1)engagesdirectlyinthebusinessof bankingoutsidetheUnitedStates;(2)hasfurnished totheBoardtheinformationitneedstoassesstheapplicationadequately;and(3)issubject tocomprehensivesupervisiononaconsolidatedbasisbyitshomecountrysupervisors.8 TheBoardalsoconsidersadditionalstandardssetforthintheIBAandRegulationK.9 4 ThisrankingisbasedontheassetsizeofNACF’sbankingbusinesspriortotherestructuringandincludes trustaccounts. 5 Seee.g.,NationalAgriculturalCooperativeFederation,96FederalReserveBulletinB27(2010).Througha Koreannonbankingsubsidiary,NACFhasanindirectU.S.subsidiarythatengagesprimarilyinagricultural marketresearch,marketingKoreanagriculturalproducts,andothernonbankingactivities.NACFhassimilar establishmentsinTokyoandBeijing.NACFwouldholditsindirectU.S.subsidiarypursuanttosection2(h)(2)of theBankHoldingCompanyAct.12U.S.C.§1841(h)(2). 6 12CFR211.23(a). 7 Arepresentativeofficemayengageinrepresentationalandadministrativefunctionsinconnectionwiththe bankingactivitiesoftheforeignbank,includingsolicitingnewbusinessfortheforeignbank,conducting research,actingasaliaisonbetweentheforeignbank’sheadofficeandcustomersintheUnitedStates,performingpreliminaryandservicingstepsinconnectionwithlending,andperformingback-officefunctions.A representativeofficemaynotcontractforanydepositordeposit-likeliability,lendmoney,orengageinany otherbankingactivity.12CFR211.24(d)(1). 8 12U.S.C.§§3105(d)(2)and3107(a)(2);12CFR211.24(d)(2).Inassessingthesupervisionstandard,theBoard considers,amongotherindiciaofcomprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors(i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivities worldwide;(ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregular examinationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandtherelationshipbetweenthebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreports thatareconsolidatedonaworldwidebasisorcomparableinformationthatpermitsanalysisofthebank’s financialconditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapital adequacyandriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmay informtheBoard’sdetermination. 9 See12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2).Thesestandardsinclude:whetherthebank’shomecountrysupervisorhasconsentedtotheestablishmentoftheoffice;thefinancialandmanagerialresourcesofthe bank;whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimeinplacein thehomecountrytoaddressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateral

154 FederalReserveBulletin|May2013 TheIBAincludesalimitedexceptiontothegeneralstandardrelatingtocomprehensive, consolidatedsupervision.10Thisexceptionprovidesthat,if theBoardisunabletofindthat aforeignbankseekingtoestablishabranch,agency,orcommerciallendingcompanyis subjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbytheappropriateauthoritiesinitshomecountry,theBoardmayneverthelessapprovetheapplication providedthat:(i)theappropriateauthoritiesinthehomecountryof theforeignbankare activelyworkingtoestablisharrangementsfortheconsolidatedsupervisionof suchbank; and(ii)allotherfactorsareconsistentwithapproval.11Thisisthestandardappliedinthis case.Indecidingwhethertoexerciseitsdiscretiontoapproveanapplicationunderauthorityof thisexception,theBoardmustalsoconsiderwhethertheforeignbankhasadopted andimplementedprocedurestocombatmoneylaundering.12TheBoardalsomaytakeinto accountwhetherthehomecountryof theforeignbankisdevelopingalegalregimeto addressmoneylaunderingorisparticipatinginmultilateraleffortstocombatmoneylaundering.13 Asnotedabove,NHBankengagesdirectlyinthebusinessof bankingoutsidetheUnited States.NHBankhasprovidedtheBoardwiththeinformationnecessarytoassessthe applicationsthroughsubmissionsthataddresstherelevantissues. Withrespecttosupervisionbyhomecountryauthorities,thefollowingfactorshavebeen takenintoconsideration.NHBankissubjecttooversightbyanumberof Koreangovernmentagencies,includingtheFinancialSupervisoryService(“FSS”),inamannerdifferent fromotherKoreancommercialbanks.14AsNHBankisaspecializedbankthatispartof anagriculturalcooperative,severalothergovernmentalagencies,inadditiontotheFSS, participateinthesupervisionof NHBankandintheoversightof itsparentcompanies.TheseincludetheMinistryforFood,Agriculture,Forestry,andFisheries(“Foodand AgricultureMinistry”);theMinistryof StrategyandFinance;andtheBoardof Auditand Inspection.UnderapplicableKoreanlaw,theFinancialServicesCommission,whoseexecutivebodyistheFSS,musttakeintoaccounttheuniqueobjectivesof NHBankandconsult withtheFoodandAgricultureMinistrybeforeimposingsanctionsonorgrantingauthorizationstothebank.NHBank’sdirectparent,NHFG,issupervisedasafinancialholding companybytheFSS,whileNHBank’sultimateparent,NACF,issupervisedbytheFood andAgricultureMinistry,whichinspectseachNACFunitoverthecourseof athree-year schedule.Additionally,NACFissubjecttoperiodicon-siteexaminationof allitsbusinesses bytheKoreanNationalAssembly’sCommitteeof Agriculture,ForestryandOceaninconnectionwithitsoversightof theKoreanagriculturalindustry.NHBankissubjecttolower liquidityrequirementsthancommercialbanksand,inconnectionwithitsformation,was grantedtemporaryauthoritytoextendcredittootherbusinessunitsintheNACFgroup. effortstocombatmoneylaundering;whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthebank’soperationswiththeBoard;whetherthebankanditsU.S.affiliatesareincompliancewith U.S.law;theneedsofthecommunity;andthebank’srecordofoperation.TheBoardmayalso,inthecaseof aforeignbankthatpresentsarisktothestabilityoftheUnitedStates,takeintoaccount,totheextent appropriate,whetherthehomecountryoftheforeignbankhasadopted,orismakingdemonstrableprogress towardadopting,anappropriatesystemoffinancialregulationforthefinancialsystemofsuchhomecountry tomitigatesuchrisk.12U.S.C.§3105(d)(3)(E). 10 12U.S.C.§3105(d)(6). 11 12U.S.C.§3105(d)(6)(A). 12 12U.S.C.§3105(d)(6)(B). 13 Id. 14 TheFSSistheexecutivebodyoftheFinancialServicesCommission(“FSC”),whichisresponsibleforpromulgatingsupervisoryregulations,makingpolicydecisionsaboutsupervision,andimposingsanctionsonKorean financialinstitutions.TheFSSisresponsibleforthesupervisionofKoreanfinancialinstitutions,including overseasoffices,pursuanttoregulationspromulgatedbytheFSC.

LegalDevelopments:FirstQuarter,2013 155 Thestructureof NHBankisnewandwasdesignedtopermitmoreeffectivesupervisionof thebankingoperationsof theNACForganization.Thisrestructuringhascausedarealignmentof theregulatorystructureapplicabletoNHBankaswell.Thisregulatorystructure involvesacombinationof agenciesandabalancingof missionsthatisdifferentthanthe regulatorystructurepreviouslyreviewedbytheBoardforotherKoreanbanks.15TherelevantKoreanauthoritiesareworkingtogethertofullyimplementasupervisoryframework thatwilleffectivelysuperviseNHBankonaworldwideconsolidatedbasis. Koreaisamemberof theFinancialActionTaskForce(“FATF”)andsubscribestoitsrecommendationsregardingmeasurestocombatmoneylaunderingandinternationalterrorism.Inaccordancewiththoserecommendations,Koreahasenactedlawsandcreatedlegislativeandregulatorystandardstodetermoneylaundering,terroristfinancing,andother illicitactivities.MoneylaunderingisacriminaloffenseinKorea,andfinancialservices businessesarerequiredtoestablishinternalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughouttheirworldwideoperations.NH Bankhaspoliciesandprocedurestocomplywiththoselawsandregulations,andthese policiesandproceduresaremonitoredbygovernmentalentitiesresponsibleforanti-money launderingcompliance. Basedonallthefactsof record,ithasbeendeterminedthatNHBank’shomecountry supervisoryauthoritiesareactivelyworkingtoestablisharrangementsfortheconsolidated supervisionof NHBank.ConsiderationsrelatingtothestepstakenbyNHBankandits homejurisdictiontocombatmoneylaunderingareconsistentwithapprovalunderthis standard. Theadditionalstandardssetforthinsection7of theIBAandRegulationKalsohavebeen takenintoaccount.16TheFSShasnoobjectiontotheestablishmentof theproposed branchandrepresentativeoffice. Thefinancialandmanagerialfactorsinthiscasehavebeenconsideredandareconsistent withapprovalof theproposedoffices.Korea’srisk-basedcapitalstandardsareconsistent withthoseestablishedbytheBaselCapitalAccord.NHBank’scapitalisinexcessof the minimumlevelsthatwouldberequiredof aU.S.bankingorganization.Managerialand otherfinancialresourcesof NHBankareconsistentwithapproval,andNHBankappears tohavetheexperienceandcapacitytosupporttheproposedbranch.Inaddition,NHBank hasestablishedcontrolsandproceduresfortheproposedU.S.officestoensurecompliance withU.S.law. WithrespecttoaccesstoinformationaboutNHBank’soperations,therestrictionsondisclosureinrelevantjurisdictionsinwhichNHBankoperateshavebeenreviewedandrelevantgovernmentauthoritieshavebeencommunicatedwithregardingaccesstoinformation.NHBankandNACFhavecommittedtomakeavailabletotheBoardsuch informationontheoperationsof NHBankandanyof itsaffiliatesthattheBoarddeems necessarytodetermineandenforcecompliancewiththeIBA,theBankHoldingCompany Actof 1956,asamended,andotherapplicablefederallaw.17Totheextentthatproviding suchinformationtotheBoardmaybeprohibitedbylaworotherwise,NHBankand NACFhavecommittedtocooperatewiththeBoardtoobtainanynecessaryconsentsor waiversthatmightberequiredfromthirdpartiesforthedisclosureof suchinformation.In 15 SeeShinhanFinancialGroupCo.,Ltd.,90FederalReserveBulletin85(2004);WooriFinanceHoldingsCo.,Ltd., 89FederalReserveBulletin436(2003). 16 See12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2). 17 NACFpreviouslyprovidedthiscommitmenttotheBoardinconnectionwithitsapplicationtoestablisharepresentativeofficein2010.Seesupra,note4.

156 FederalReserveBulletin|May2013 addition,subjecttocertainconditions,theFSCandFSSmayshareinformationonNH Bank’soperationswithothersupervisors,includingtheBoard.Inlightof thesecommitmentsandotherfactsof record,andsubjecttotheconditiondescribedbelow,ithasbeen determinedthatNHBankandNACFhaveprovidedadequateassurancesof accesstoany necessaryinformationthattheBoardmayrequest. Section173of theDodd-FrankActamendedtheIBAtoprovidethattheBoardmayconsider,foraforeignbankthatpresentsarisktothestabilityof theUnitedStatesfinancial system,whetherthehomecountryof theforeignbankhasadopted,orismakingdemonstrableprogresstowardadopting,anappropriatesystemof financialregulationforthe financialsystemof suchhomecountrytomitigatesuchrisk.18Informationrelevanttothe standardregardingrisktothestabilityof theUnitedStatesfinancialsystemhasalsobeen reviewed.Inparticular,considerationhasbeengiventotheabsoluteandrelativesizeof NHBankinitshomecountry,thescopeof NHBank’sactivities,includingthetypeof activitiesitproposestoconductintheUnitedStates,andthepotentialforthoseactivities toincreaseortransmitfinancialinstability,andtheframeworkinplaceforsupervisingNH Bankinitshomecountry.Basedontheseandotherfactors,financialstabilityconsiderationsinthisproposalareconsistentwithapproval. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyNHBank andNACF,NHBank’sapplicationstoestablishtheproposedU.S.officesarehereby approvedbytheDirectorof theDivisionof BankingSupervisionandRegulation,withthe concurrenceof theGeneralCounsel,pursuanttoauthoritydelegatedbytheBoard.19 Shouldanyrestrictionsonaccesstoinformationontheoperationsoractivitiesof NH BankanditsaffiliatessubsequentlyinterferewiththeBoard’sabilitytoobtaininformation todetermineandenforcecompliancebyNHBankoritsaffiliateswithapplicablefederal statutes,theBoardmayrequireterminationof anyof NHBank’sdirectorindirectactivitiesintheUnitedStates.Approvalof theapplicationsalsoisspecificallyconditionedon compliancebyNHBankandNACFwiththeconditionsimposedinthisorderandthe commitmentsmadetotheBoardinconnectionwiththisapplication.20Forpurposesof thisaction,thesecommitmentsandconditionsaredeemedtobeconditionsimposedin writingbytheBoardinconnectionwiththisdecisionand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveJanuary28, 2013. MargaretMcCloskeyShanks DeputySecretaryof theBoard 18 12U.S.C.§3105(d)(3)(E). 19 12CFR265.7(d)(12). 20 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedrepresentativeofficeandbranchparallels thecontinuingauthorityoftheStateofNewYorktolicenseofficesofaforeignbank.TheBoard’sapprovalof thisapplicationdoesnotsupplanttheauthorityoftheStateofNewYorkoritsagent,theNewYorkState DepartmentofFinancialServices,tolicensetheproposedofficesofNHBankinaccordancewithanytermsor conditionsthatitmayimpose.

157 Federal Reserve BULLETIN Legal Developments: Second Quarter, 2013 Noordersordecisionswerereleasedinthesecondquarterof 2013.

159 Federal Reserve BULLETIN November 2013 Vol. 99, No. 3 Legal Developments: Third Quarter, 2013 Orders Issued Under Bank Holding Company Act Order Issued Under Section 3 of the Bank Holding Company Act Hana Financial Group Inc. Seoul, Republic of Korea OrderApprovingAcquisitionof Sharesof aBankHoldingCompany FRBOrderNo.2013-4(August14,2013) HanaFinancialGroupInc.,Seoul,Republicof Korea(“HFG”),aforeignbankingorganizationsubjecttotheprovisionsof theBankHoldingCompanyAct,asamended(“BHC Act”),1hasrequestedtheBoard’sapprovalundersection3of theBHCActtoacquireup to71.4percentof thevotingsharesof BNBFinancialServicesCorporation(“BNB”),New York,NewYork,andindirectlyacquireBNBBank,NationalAssociation,FortLee,New Jersey,pursuanttosection3(a)(1)of theBHCAct.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(77FederalRegister48984,August15,2012).Thetimeforfiling commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. HFG,withtotalassetsof approximately$260.4billion,isthethirdlargestbankingorganizationinKorea.3HFG,throughitssubsidiaries,HanaBankandKoreaExchangeBank (“KEB”),bothof Seoul,engagesinabroadrangeof bankingandfinancialservices throughouttheworld,includingretailandcommercialbanking,corporateandinvestment banking,assetmanagement,insurance-relatedactivities,leasing,foreignexchange,and tradefinance. Internationally,HFGoperatesthroughitsbranchesandsubsidiariesinfivecontinents, includingAsia,Australia,Europe,andNorthandSouthAmerica.IntheUnitedStates, HanaBankoperatesanuninsuredNewYorkstate-licensedagency.HFGalsomaintains nonbankingsubsidiariesintheUnitedStates.4 1 12U.S.C.§1842. 2 12CFR225.11(c)(1). 3 Unlessotherwiseprovided,assetandrankingdataareasofMarch31,2013,andarebasedontheexchangerateasof thatdate,asappropriate. 4 KEBdoesnotengageincommercialbankingactivitiesintheU.S.,butownsseveralU.S.nonbanksubsidiaries.The nonbankingsubsidiariesareKEBNYFinancialCorp.andKEBUSAInternationalCorp.,bothofNewYork,New York;andKEBLAFinancialCorp.,LosAngeles,California.KEBNYandKEBLAprovidelendingandtrade financingservices,whileKEBUSAengagesinactivitieslimitedtoprovidingadministrativeback-officefunctions toKEB.

160 FederalReserveBulletin|November2013 HFGisaqualifyingforeignbankingorganizationand,uponconsummationof theproposal,wouldcontinuetomeettherequirementsforaqualifyingforeignbankingorganizationunderRegulationK.5 BNB,withtotalconsolidatedassetsof $320.1million,ownsBNBBankandanon-bank subsidiary,BNBStatutoryTrustI(“BNBTrust”),alsoof NewYork,NewYork.6BNB Bankprovidesgeneralcommercialbankingservicestoindividualsandsmall-andmediumsizedbusinessesthroughitsthreebranches,twoinNewJerseyandoneinNewYork.The bankalsohastwoloanproductionofficesinNewJersey. FactorsundertheBankHoldingCompanyAct TheBHCActsetsforththefactorsthattheBoardmustconsiderwhenreviewingtheformationof bankholdingcompaniesortheacquisitionof banks.Thesefactorsarethecompetitiveeffectsof theproposalintherelevantgeographicmarkets;theconvenienceand needsof thecommunitiestobeserved,includingtherecordsof performanceof theinsured depositoryinstitutionsinvolvedinthetransactionundertheCommunityReinvestmentAct (“CRA”);7theeffectsof theacquisitiononfinancialstability;thefinancialandmanagerial resourcesandfutureprospectsof thecompaniesandbanksinvolvedintheproposal;the availabilityof informationtodetermineandenforcecompliancewiththeBHCActand otherapplicablefederalbankinglaws;and,inthecaseof applicationsinvolvingaforeign banksuchasHanaBank,whethertheforeignbankissubjecttocomprehensivesupervision andregulationonaconsolidatedbasisbyitshomecountrysupervisor.8 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitstheBoardfrom approvingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbanking market,unlesstheanticompetitiveeffectsof theproposalclearlyareoutweighedinthe publicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneeds of thecommunitytobeserved.9 HFGdoesnotcurrentlycompetewithBNBinanyrelevantbankingornonbankingmarket.10Basedonallthefactsof record,theBoardhasconcludedthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof bankingresourcesinanyrelevantbankingmarketandthatcompetitivefactorsare consistentwithapprovalof theproposal. Financial,Managerial,andOtherSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resources(includingthecompetence,experience,andintegrityof officers,directors,and principalshareholders)andfutureprospectsof thecompaniesanddepositoryinstitutions 5 12CFR211.23(a). 6 BNBTrustwasestablishedin2004toissuetrustpreferredsecuritiesforBNB. 7 12U.S.C.§2901etseq. 8 12U.S.C.§1842(c). 9 12U.S.C.§1842(c)(1).Seee.g.,EmigrantBancorp,Inc.,82FederalReserveBulletin555(1996). 10 HanaBank’sNewYorkagencyisnotinsuredbytheFederalDepositInsuranceCorporationandcannotaccept retaildeposits.BNB’sonlynonbanksubsidiaryisatrustcompanythatprovidesservicessolelytoBNBBank, whileHana’snonbanksubsidiariesengageinlending,tradefinanceandmoneytransmittalservices.

LegalDevelopments:ThirdQuarter,2013 161 involvedintheproposalaswellastheeffectivenessof thesecompaniesincombatting moneylaunderingactivities.11TheBoard’sreviewwasconductedinlightof allthefactsof record,includingconfidentialsupervisoryandexaminationinformationfromthevarious U.S.bankingsupervisorsof theinstitutionsinvolved,publiclyreportedandotherfinancial information,andinformationprovidedbyHFGandbypubliccommenters.TheBoard alsohasconsultedwiththeKoreanFinancialSupervisionService(“FSS”),theagencywith primaryresponsibilityforthesupervisionandregulationof Koreanbankingorganizations, includingHFG. Inevaluatingfinancialfactors,theBoardreviewsthefinancialconditionof theapplicant andthetargetdepositoryinstitution.TheBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.TheBoardalsoevaluatesthe effectof thetransactiononthefinancialconditionof theapplicant,includingitscapital position,assetquality,andearningsprospects,andtheimpactof theproposedfundingof thetransaction. Thecapitallevelsof HFGexceedtheminimumlevelsthatwouldberequiredunderthe BaselCapitalAccordandareconsideredtobeequivalenttothecapitallevelsthatwouldbe requiredof aU.S.bankingorganization.12HFG’sreportedearningsperformanceandasset qualityindicators,includingnonperformingloansandreservesforloanlosses,areconsistentwithapprovalof theproposal.Theproposedtransactionisstructuredasacashpurchaseof shares.HFGwoulduseexistingresourcestofundthepurchaseof theshares. Inlightof thesizeof HFGrelativetothesizeof itsinvestmentinBNB,thetransaction wouldhaveaminimalimpactonthefinancialconditionof HFG.Basedonitsreviewof therecord,theBoardfindsthatHFGhassufficientfinancialresourcestoeffectthe proposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolved.The Boardhasreviewedtheexaminationrecordsof HFG’sU.S.operationsandof BNB, includingassessmentsof theirmanagement,risk-managementsystems,andoperations. TheBoardalsohasconsidereditssupervisoryexperienceandthatof theotherrelevantbanksupervisoryagencieswiththeorganizations,includingconsultationsinconnectionwiththisproposal,andtheorganizations’recordsof compliancewithapplicablebankingandanti-money-launderinglaws.Asnoted,theBoardhasalsoconsultedwiththeFSS. Inaddition,theBoardhasconsideredthefutureprospectsof HFGinlightof thefinancial andmanagerialresourcesof theorganizations. Section3of theBHCActalsorequirestheBoardtodeterminethatanapplicanthasprovidedadequateassurancesthatitwillmakeavailabletotheBoardsuchinformationonits operationsandactivitiesandthoseof itsaffiliatesthattheBoarddeemsappropriateto determineandenforcecompliancewiththeBHCAct.13TheBoardhasreviewedthe restrictionsondisclosureintherelevantjurisdictionsinwhichHFGoperatesandhascommunicatedwithrelevantgovernmentauthoritiesconcerningaccesstoinformation.In addition,HFGhascommittedthat,totheextentnotprohibitedbyapplicablelaw,itwill makeavailabletotheBoardsuchinformationonitsoperationsandtheoperationsof its affiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliancewiththe BHCAct,theInternationalBankingAct,andotherapplicablefederallaws.HFGalsohas 11 12U.S.C.§1842(c)(2),(5),and(6).TheBoardhasanalyzedtheeffectivenessofHFG’santi-money-laundering effortsinconnectionwiththeBoard’sassessmentofwhetherHFGissubjecttocomprehensivesupervisionor regulationonaconsolidatedbasisbyappropriateauthoritiesinitshomecountry. 12 TheBoardconsideredthetotalandtier1risk-basedcapitalratiosandtheratiooftier1capitaltototalconsolidatedassetsofHFG,HanaBank,andKEB. 13 12U.S.C.§1842(c)(3)(A).

162 FederalReserveBulletin|November2013 committedtocooperatewiththeBoardtoobtainanywaiversorexemptionsthatmaybe necessarytoenableitoritsaffiliatestomakesuchinformationavailabletotheBoard. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellasaccesstoinformationbytheBoardareconsistentwithapproval. SupervisionorRegulationonaConsolidatedBasis Inevaluatingthisapplicationandasrequiredbysection3of theBHCAct,theBoardconsideredwhetherHFGissubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbyappropriateauthoritiesinitshomecountry.14 Asnoted,theFSSisthesupervisorof Koreanbankingorganizations,includingholding companiessuchasHFG.TheFSSconductsinspectionsof HFGanditssubsidiariesannuallyoronanasneededbasis,andrequiresHFGtosubmitreportsaboutitsoperationsona consolidatedbasis.TheFSSalsoreviewstransactionsbetweenHFGanditssubsidiaries andhasauthoritytorequireHFGtotakemeasuresnecessarytoensurethesafetyand soundnessof theHFGorganization.TheBoardhaspreviouslydeterminedthattheFSS exercisescomprehensiveconsolidatedsupervisionoverKoreanfinancialholdingcompanies andbanks.15HFGrepresents,onitsownbehalf andwithrespecttoHanaBankandKEB, thattheyaresubjecttothesamesupervisoryregimeasappliestootherKoreanfinancial holdingcompaniesandbanks.TheBoardalsohasconsultedwiththeFSSabouttheir supervisionof HanaBank,KEB,andHFG.Basedonallthefactsof record,theBoardhas concludedthatHFG,HanaBankandKEBaresubjecttocomprehensivesupervisionona consolidatedbasisbytheirappropriatehomecountryauthoritiesforpurposesof this application. Inevaluatingtheeffectivenessof HFGanditssubsidiaries’policiesandprocedurestocombatmoneylaunderingactivitiesinconnectionwiththesedeterminations,theBoardconsideredHFG’sanditssubsidiaries’anti-money-launderingpoliciesandproceduresaswellas theBoard’ssupervisoryexperiencesandthoseof otherrelevantbankingsupervisoryorganizationswithHFG’scompliancerecord.Onthebasisof allfactsof record,theBoardhas determinedthatHFGanditssubsidiaries’anti-money-launderingmeasuresareconsistent withapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardalsomustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand 14 12U.S.C.§1842(c)(3)(B).AsprovidedinRegulationY,theBoarddetermineswhetheraforeignbankissubject tocomprehensivesupervisiononaconsolidatedbasisbytheappropriateauthoritiesinthebank’shomecountryunderthestandardssetforthinRegulationK.See12CFR225.13(a)(4).RegulationKprovidesthataforeignbankissubjecttoconsolidatedhomecountrysupervisioniftheforeignbankissupervisedorregulatedin suchamannerthatitshome-countrysupervisorreceivessufficientinformationontheworldwideoperationsof theforeignbank(includingtherelationshipsofthebanktoanyaffiliate)toassesstheforeignbank’soverall financialconditionandcompliancewithlawandregulation.12CFR211.24(c)(1)(ii).Inassessingthisstandard undersection211.24ofRegulationK,theBoardmustassess,amongotherfactors,theextenttowhichthe homecountrysupervisor:(a)ensuresthatthebankhasadequateproceduresformonitoringandcontrollingits activitiesworldwide;(b)obtainsinformationontheconditionofthebankanditssubsidiariesandofficesoutsidethehomecountrythroughregularreportsofexamination,auditreports,orotherwise;(c)obtainsinformationonthedealingsandrelationshipsbetweenthebankanditsaffiliates,bothforeignanddomestic; (d)receivesfromthebankfinancialreportsthatareconsolidatedonaworldwidebasis,orcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwide,consolidatedbasis;and(e)evaluatesprudentialstandards,suchascapitaladequacyandriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’sdetermination. 15 SeeWooriFinanceHoldingsCo.,Ltd.,89FederalReserveBulletin436(2003).

LegalDevelopments:ThirdQuarter,2013 163 takeintoaccounttherecordsof therelevantinsureddepositoryinstitutionsunderthe CRA.16TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’s recordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-incomeneighborhoods,inevaluatingbankexpansionaryproposals.17 TheBoardhasconsideredtheconvenienceandneedsfactorandtheCRAperformance recordof BNBinlightof allthefactsof record.HFGrepresentedthatitintendstoleverageitsresourcesandbankingexpertisetostrengthenBNBBank,andtoupdateand expandtheproductsandservicesthatBNBBankofferstoitscustomers. Aspartof itsconsiderationof convenienceandneeds,theBoardhasexaminedtheCRA performancerecordof BNBBank.BNBBankreceivedaCRAratingof “satisfactory” fromtheOfficeof theComptrollerof theCurrencyatitsmostrecentCRAperformance evaluationdatedMarch12,2012.HFGdoesnotownanyentitiesthataresubjecttoCRA. Basedonareviewof theentirerecord,theBoardhasconcludedthatconsiderationsrelatingtoconvenienceandneedsconsiderationsandtheCRAperformancerecordsof therelevantinsureddepositoryinstitutionsareconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardalsotoconsider“theextentto whichaproposedacquisition,merger,orconsolidationwouldresultingreaterormore concentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.”18 Inthiscase,theproposedacquisitionof BNBisnotasignificantexpansionbyHFGand wouldhaveademinimisimpactonHFG’ssystemicfootprint.Inaddition,thereisnoevidenceof anysignificantincreaseininterconnectedness,complexity,cross-borderactivities, orotherriskfactors.Basedontheseandalltheotherfactsof record,theBoardhasdeterminedthattheproposalwouldnotmateriallyincreaserisktothestabilityof theU.S.financialorbankingsystem. Conclusion Basedontheforegoingandallthefactsof record,theBoardapprovestheproposalby HFGtoacquireupto71.4percentof thevotingsharesof BNB.Inreachingitsconclusion, theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredto considerundertheBHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedoncompliancebyHFGwithalltherepresentationsandcommitments madeinconnectionwiththeapplications,commitmentsreferredtointhisorder,andthe receiptof allotherregulatoryapprovals.Theserepresentations,commitments,andconditionsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithits findingsanddecisionand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Thetransactionmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffectivedateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder, 16 12U.S.C.§2901etseq.;12U.S.C.§1842(c)(2). 17 12U.S.C.§2903. 18 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7).

164 FederalReserveBulletin|November2013 unlesssuchperiodisextendedforgoodcausebytheBoardortheFederalReserveBankof NewYork,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveAugust14,2013. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,Raskin,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard Order Issued Under Section 4 of the Bank Holding Company Act Live Oak Bancshares, Inc. Wilmington, North Carolina OrderApprovingNoticetoEngageinNonbankingActivities FRBOrderNo.2013-5(August14,2013) LiveOakBancshares,Inc.(“LiveOak”),Wilmington,NorthCarolina,hasrequestedthe Board’sapprovalundersections4(c)(8)and4(j)of theBankHoldingCompanyAct (“BHCAct”)1andsection225.24of theBoard’sRegulationY2toacquireGovernment LoanSolutions,Inc.(“GLS”),Cleveland,Ohio.3GLSprovidessupportservicesinconnectionwiththesettlement,accounting,andsecuritizationprocessesforgovernment-guaranteedloans,includingloansoriginatedundersection7(a)of theSmallBusinessAdministrationAct(“SBA”)andU.S.Departmentof Agriculture(“USDA”)loanprograms. Noticeof theproposal,affordinginterestedpersonsanopportunitytocomment,hasbeen publishedintheFederalRegister(77FederalRegister73467(2012)).Thetimeforfiling commentshasexpired,andtheBoardhasconsideredthenoticeandallcommentsreceived inlightof thefactorssetforthinsection4of theBHCAct. LiveOak,withconsolidatedassetsof approximately$342.9million,controlsdepositsof approximately$288.8million,whichrepresentslessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.4LiveOakcontrolsone insureddepositoryinstitution,LiveOakBankingCompany(“Bank”),Wilmington,that operatesoneofficeinNorthCarolina. Asaresultof theproposedacquisition,LiveOakwouldengageinthefollowingnonbankingactivities: 1. making,acquiring,brokering,orservicingloansorotherextensionsof creditforthe accountof GLSortheaccountof others,inaccordancewith12CFR225.28(b)(1); 2. activitiesusualinconnectionwithmaking,acquiring,brokering,orservicingloansor otherextensionsof credit,asdeterminedbytheBoard,includingperformingapprais- 1 12U.S.C.§§1843(c)(8)and1843(j). 2 12CFR225.24. 3 LiveOakindirectlywouldacquireacontrollinginterestinSBIndexes,LLC(“SBIndexes”)andSecondary MarketAccess,LLC(“SMA”),bothofCleveland,Ohio.GLSowns33percentofSBIndexes.GLSandtwo managementofficialsofGLSownacombinedtotalof51percentofSMA.SBIndexesandSMAarenotcurrentlyconductinganyoperations. 4 AssetandnationwidedepositdataareasofDecember31,2012.

LegalDevelopments:ThirdQuarter,2013 165 alsof realestateandtangibleandintangiblepersonalproperty,includingsecurities,in accordancewith12CFR225.28(b)(2); 3. actingasinvestmentorfinancialadvisortoanyperson,includingfurnishinggeneral economicinformationandadvice,generaleconomicstatisticalforecastingservices,and industrystudies,inaccordancewith12CFR225.28(b)(6); 4. providingmanagementconsultingadviceonanymattertounaffiliateddepository institutions,includingcommercialbanks,inaccordancewith12CFR225.28(b)(9);and 5. providingdataprocessing,datastorageanddatatransmissionservices,facilities,databases,advice,andaccesstosuchservices,facilities,ordatabasesbyanytechnological means,inaccordancewith12CFR225.28(b)(14). TheBoardhasdeterminedbyregulationthattheseproposedactivitiesareactivitiesclosely relatedtobankingforpurposesof section4(c)(8)of theBHCAct.LiveOakhascommittedtoconducttheproposedactivitiesinaccordancewiththelimitationssetforthinRegulationYandtheBoard’sorders. Inreviewingtheproposal,theBoardisrequiredbysection4(j)(2)(A)of theBHCActto determinethattheproposedacquisition“canreasonablybeexpectedtoproducebenefitsto thepublic…thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”5Aspartof itsevaluationof thesefactors,theBoardconsidersthefinancialandmanagerialresources of thecompaniesinvolvedandtheeffectof theproposaloncompetitionintherelevant markets.6 Inassessingthefinancialandmanagerialresourcesof thecompaniesinvolved,theBoard hasconsidered,amongotherthings,informationprovidedbyLiveOak,publiccomments ontheproposal,confidentialreportsof examination,otherconfidentialsupervisoryinformation,andpubliclyreportedfinancialandotherinformation. Inevaluatingthefinancialfactorsof thisproposal,theBoardhasconsideredanumberof factors,includingcapitaladequacyandearningsperformance.LiveOakandBankarewellcapitalizedandwouldremainsoafterconsummationof theproposedtransaction.The transactionwouldbestructuredasashareexchange,withtheoutstandingsharesof GLS’s commonstockbeingexchangedforsharesof LiveOak.Assetqualityandearningsprospectsareconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of LiveOakandBank,includingassessmentsof theirmanagementexpertise,internalcontrols,risk-managementsystems,andoperations.Inaddition,theBoardhasconsideredits supervisoryexperiencesandthoseof otherrelevantfinancialsupervisoryagencieswiththe organizationanditsrecordsof compliancewithapplicablebankinglawsandwithantimoney-launderinglaws. TheBoardalsoconsideredpubliccommentsthatexpressedgeneralconcernaboutLive Oak’scapacitytosupervisetheproposedactivities.LiveOakhasrepresentedtotheBoard 5 12U.S.C.§1843(j)(2)(A). 6 12CFR225.26.

166 FederalReserveBulletin|November2013 thatthenecessarycontrolsandreportingrequirementswouldbeimplementedinorderto manageeffectivelyGLSasanonbanksubsidiaryof LiveOak.Thesecontrolsand reportingrequirementsincludepoliciesandproceduresforthemanagementof financial riskandtreasuryoperations,formaloperatingandstrategicplanningprocesses,andreview byLiveOak’sinternalandexternalauditors,whichreportdirectlytotheauditcommittee of LiveOak’sboardof directors.LiveOakandBankareconsideredtobewellmanaged, andthepoliciesandprocedurestobeimplementedatGLSareconsideredsatisfactory. Basedonallthefactsof record,includingareviewof thecommentsreceived,theBoard hasconcludedthatconsiderationsrelatingtothefinancialandmanagerialresourcesof the organizationsinvolvedintheproposalareconsistentwithapprovalundersection4of the BHCAct. Inaddition,theBoardhasconsideredthecompetitiveeffectsof theproposalinlightof all thefactsof record.LiveOakandGLSdonotprovidethesamenonbankingservicesand, therefore,donotcompeteinthesamemarketforanynonbankingservices.Asaresult,the proposedacquisitionwouldnothaveanyeffectoncompetition.Basedonallthefactsof record,theBoardconcludesthattheproposedacquisitionwouldhavenosignificantly adversecompetitiveeffectsinanyrelevantmarket. Section4(j)(2)(A)of theBHCActalsorequirestheBoardtoconsiderwhethertheproposal islikelytoposeasignificantrisktothestabilityof theUnitedStatesbankingorfinancial system.Giventhesizeof theentitiesinvolvedinthistransaction,thetypesof activitiesproposed,andtheavailabilityof substituteprovidersof theproposedfinancialservices,this transactionwouldnotresultinasignificantincreaseintherisktoorinterconnectednessof thefinancialsystem.Basedontheseandalltheotherfactsof record,theBoardhasdeterminedthatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. TheBoardexpectsthattheproposedacquisitionwouldresultinbenefitstothepublicthat outweighanypossibleadverseeffectsfromthetransaction.GLSprovidesautomationand valuationservicesforfinancialparticipantsinSBAandUSDAloanprograms.Theacquisitionof GLSbyLiveOakwillenhancetheabilityof GLStoprovideitsservicestolenders whomakeSBAandUSDAloans,therebypotentiallyexpandingtheavailabilityof those services.TheBoardconcludesthattheconductof theproposednonbankingactivities withintheframeworkof RegulationYandBoardprecedentisnotlikelytoresultin adverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition, conflictsof interests,unsoundbankingpractices,orasignificantrisktothestabilityof the UnitedStatesbankingorfinancialsystemthatwouldoutweighthepublicbenefitsof the proposaldiscussedabove.7 7 ThreecommentersopposedtheproposalonCommunityReinvestmentAct(“CRA”)(12U.S.C.§2901etseq.) grounds.Adepositoryinstitution’sCRAperformancerecordisnotastatutoryfactorinevaluatinganoticeto acquireanondepositoryinstitutionundersection4oftheBHCAct.Nevertheless,theBoardconsideredthe substanceofthecommentsinevaluatingthebalanceofpublicbenefitslikelytoresultfromthetransaction. TheBoardconsultedwiththeFederalDepositInsuranceCorporation(“FDIC”),Bank’sprimaryfederalregulator,andreviewedBank’smostrecentCRAperformanceevaluation(“2010Evaluation”).TheFDIChas determinedthattheCRAperformanceofBankis“Satisfactory,”“giventhestrongperformanceintheloans andinvestmentsandgrantscriteria.”2010Evaluation,p.2.Moreover,the2010Evaluationdidnotidentifyany violationsofantidiscriminationlawsorregulationsoruncoverevidenceofdiscriminatoryorotherillegalcredit practices.BankhasindicatedithascompliedinallrespectswithitsapprovedCRAStrategicPlansincethe 2010Evaluation.ThecommentersalsoassertedthatBankshouldnothavereceivedcreditunderthelending testforaparticularloaninBank’s2010Evaluation.TheFDICevaluatedtheloananddeterminedthatitmet theCRA-qualifyingcriteriaforcommunitydevelopmentloans.ThecommentersalsoquestionedwhetherLive OakwouldexpanditsCRAcommitments“toserveinitsexpandedmarkets”inviewofthisproposal.Acquisitionbyabankholdingcompanyofanondepositoryinstitutionundersection4oftheBHCActdoesnotresult inanexpansionofaninstitution’sCRAassessmentarea.See12CFR228.41.

LegalDevelopments:ThirdQuarter,2013 167 Accordingly,basedonallthefactsof record,theBoardhasdeterminedthatthebalanceof thepublicbenefitsthatitmustconsiderundersection4(j)(2)of theBHCActisconsistent withapprovalof theproposal. BasedontheforegoingtheBoardhasdeterminedthatthenoticeshouldbe,andherebyis, approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordin lightof thefactorsthatitisrequiredtoconsiderundertheBHCAct.TheBoard’sapproval isspecificallyconditionedoncompliancebyLiveOakwiththeconditionsimposedinthis orderandthecommitmentsmadetotheBoardinconnectionwiththenotice.TheBoard’s approvalalsoissubjecttoalltheconditionssetforthinRegulationY,includingthosein sections225.7and225.25(c),8andtotheBoard’sauthoritytorequiresuchmodificationor terminationof theactivitiesof LiveOakandanyof itssubsidiariesastheBoardfindsnecessarytoensurecompliancewith,ortopreventevasionof,theprovisionsof theBHCAct andtheBoard’sregulationsandordersissuedthereunder.Forpurposesof thisaction, theseconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbythe Boardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedin proceedingsunderapplicablelaw. Thistransactionshallnotbeconsummatedlaterthanthreemonthsaftertheeffectivedate of thisorderunlesssuchperiodisextendedforgoodcausebytheBoardortheFederal ReserveBankof Richmond,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveAugust14,2013. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,Raskin,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard Order Issued Under Sections 3 and 4 of the Bank Holding Company Act One PacificCoast Foundation Oakland, California One PacificCoast Bancorp, Inc. Oakland, California OrderApprovingtheFormationof BankHoldingCompaniesandNoticetoEngagein NonbankingActivities FRBOrderNo.2013-7(September25,2013) OnePacificCoastFoundation(the“Foundation”),asavingsandloanholdingcompany withinthemeaningof theHomeOwners’LoanAct,anditssubsidiary,OnePacificCoast Bancorp,Inc.(“OnePacBancorp”),bothof Oakland,California(collectively,“Applicants”),haverequestedtheBoard’sapprovalundersection3of theBankHoldingCompanyAct(“BHCAct”)1tobecomebankholdingcompaniesbyacquiring90.1percentof 8 12CFR225.7and225.25(c). 1 12U.S.C.§1842.

168 FederalReserveBulletin|November2013 thecommonstock2of AlbinaCommunityBank(“AlbinaBank”),Portland,Oregon.3 ApplicantshavealsorequestedtheBoard’sapprovalundersections4(c)(8)and4(j)of the BHCActandsection225.24of theBoard’sRegulationYtoretaincontrolof OnePacific- CoastBank,FSB(“OnePacificCoastBank”),alsoof Oakland,4afederalsavingsassociationcurrentlycontrolledbyApplicants,andtherebyengageinoperatingasavingsassociationundersection225.28(b)(ii).TheFoundationhasrequestedtheBoard’sapprovalunder sections4(c)(8)and4(j)of theBHCActtoengageincommunitydevelopmentactivities andactivitiesrelatedtoextendingcredit.5 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(78FederalRegister11884,15015,24201(2013)).Thetimeforfiling commentshasexpired,andtheBoardhasconsideredtheapplicationsandallcomments receivedinlightof thefactorssetforthintheBHCAct. TheFoundation,OnePacBancorp,andOnePacificCoastBankwerecreatedandfunded byThomasSteyerandKathrynTaylor.6TheFoundationcommencedoperationsin2007, andinthatsameyear,Mr.SteyerandMs.Taylordonatedallof thenonvotingstockof OnePacBancorptotheFoundation.7Mr.SteyerandMs.Taylorcontrolallof thevoting rightsof OnePacBancorp. TheFoundation,anon-stock,Delawarecorporationandanonprofit,taxexemptcorporationundersection501(c)(3)of theInternalRevenueCode,wasestablishedforthepurpose of combatingeconomicdistressandencouragingcommunitydevelopmentincommunities thatOnePacificCoastBankservesbypromotingfinancialliteracy,affordablehousing,and theprovisionof loansandinvestments,includingconsumerloansandmicroandsmall businessloans.TheFoundationalsosupportseffortstobringdepositoryservicestodisadvantagedcommunities.OnePacificCoastBankisadirectsubsidiaryof OnePacBancorp, whichisashellsavingsandloanholdingcompanysubsidiaryof theFoundation. OnePacBancorphastotalconsolidatedassetsof approximately$290.5millionandcontrolsapproximately$227.5millionindeposits.8OnePacBancorpoperatesinCalifornia, 2 OnePacBancorpwoulddirectlyacquirenewlyissuedsharesofAlbinaBank,representing90.1percentofthe latter’scommonstock.Undertheproposal,AlbinaBank’scurrentparent,AlbinaCommunityBancorp (“AlbinaBancorp”),Portland,wouldretain9.9percentofthecommonstockofAlbinaBank. 3 AlbinaBankhasbeenoperatingunderaconsentorderissuedbytheFederalDepositInsuranceCorporation (“FDIC”)andtheOregonDivisionofFinanceandCorporateSecuritiessinceMarch2,2010.Onconsummation,ApplicantswouldoperateAlbinaBankseparatelyfromOnePacificCoastBank. 4 12U.S.C.§§1843(c)(8)and1843(j);12CFR225.24.TheBoardpreviouslyhasdeterminedbyregulationthat theoperationofasavingsassociationiscloselyrelatedtobankingforthepurposesofsection4(c)(8)ofthe BHCAct.12CFR225.28(b)(4)(ii). 5 12U.S.C.§§1843(c)(8)and1843(j);12CFR225.28(b)(2)and225.28(b)(12).OnePacificCoastBankisdesignatedasaCommunityDevelopmentFinancialInstitution(CDFI).ACDFIisafinancialinstitutionthatprovidescreditandfinancialservicestounderservedmarketsandpopulationsandiscertifiedbytheCommunity DevelopmentFinancialInstitutionsFundattheU.S.DepartmentofTreasury.OnePacificCoastBank’smissionistobringbankingtolow-incomecommunitiesinaneconomicallyandenvironmentallysustainable manner. 6 Mr.SteyerandMs.TaylorfoundedOneCaliforniaBankandOneCaliforniaFoundationinOaklandin2007. OnePacBancorpwasformerlynamedOneCaliforniaBancorp,Inc.OnePacificCoastBank,whichOnePac Bancorpacquiredin2010,wasformedbymergingOneCaliforniaBankandShoreBankPacific,Ilwaco, Washington. 7 Thenonvotingcommonstockcarrieswithitallofthedividendanddistributionrightsandalloftheeconomic interestinBancorp.ProfitsofOnePacificCoastBankcanonlybedistributedtotheFoundation,whichismandatedtoreinvestthoseproceedsintothecommunitiesitservesandintobusinessesandprogramsdesignedto protecttheenvironment. 8 Unlessotherwisenoted,nationaldataondepositsandassetsareasofJune30,2013,whilestatedataareasof June30,2012.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations, andsavingsbanks.

LegalDevelopments:ThirdQuarter,2013 169 Oregon,andWashington.9InOregon,theonlystateof commonoperationwithAlbina Bank,OnePacBancorpisthe54thlargestdepositoryinstitution,controllingdepositsof approximately$23.2million,whichrepresentlessthan1percentof thetotaldeposits of insureddepositoryinstitutionsinthestate.10 AlbinaBancorp,whichoperatessolelyinPortland,hastotalconsolidatedassetsof $123.2millionandisthe36thlargestinsureddepositoryinstitutioninOregon,controlling depositsof approximately$114.1million,whichrepresentlessthan1percentof thetotal depositsof insureddepositoryinstitutionsinthestate. Onconsummationof thisproposal,OnePacBancorpwouldcontroldepositsof approximately$341.6million,whichwouldrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.InOregon,OnePacBancorpwouldbecomethe32ndlargestinsureddepositoryinstitution,controllingdepositsof approximately$147.1million,whichwouldrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsinthestate. Becausethistransactioninvolvesboththeformationof abankholdingcompanythrough theacquisitionbyApplicantsof abankandtheretentionof athriftbythatbankholding company,theBoardhasreviewedthetransactionunderbothsection3andsection4of the BHCAct.Section3governstheformationof abankholdingcompanyandtheacquisition of abank;section4establishesthestandardsgoverningtheacquisitionandretentionof a thrift. InterstateandDepositcapAnalysis Sections3(d)and4(i)(8)of theBHCActimposecertainrequirementsoninterstatetransactions.Section3(d)generallyprovidesthattheBoardmayapproveanapplicationbya bankholdingcompanythatiswellcapitalizedandwellmanagedtoacquirecontrolof a bankinastateotherthanthehomestateof thebankholdingcompanywithoutregardto whetherthetransactionisprohibitedunderstatelaw.11However,thissectionfurtherprovidesthattheBoardmaynotapproveanapplicationthatwouldpermitanout-of-state bankholdingcompanytoacquireabankinahoststatethathasnotbeeninexistencefor thelesserof thestatestatutoryminimumperiodof timeorfiveyears.12Inaddition,sections3(d)and4(i)(8)providethattheBoardmaynotapproveanapplicationbyabank holdingcompanytoacquireaninsureddepositoryinstitutionif thehomestateof suchinsureddepositoryinstitutionisastateotherthanthehomestateof thebankholding companyandtheapplicantcontrolsorwouldcontrolmorethan10percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStates.13 OnePacBancorpwouldbecomeabankholdingcompanyupontheacquisitionof control of AlbinaBank.Forpurposesof theBHCAct,thehomestateof OnePacBancorpwould 9 OnePacificCoastBankoperatesbranchesinOakland;Portland;andSeattleandIlwaco,Washington.One PacificCoastBankalsooperatesaloanproductionofficeinSacramento,California. 10 InCaliforniaandWashington,statesinwhichAlbinaBankdoesnotoperate,OnePacBancorpisalsonot amongthelargest50insureddepositoryinstitutions. 11 Thestandardwaschangedfromadequatelycapitalizedandadequatelymanagedtowellcapitalizedandwell managedbysection607(a)oftheDodd-FrankWallStreetReformandConsumerProtectionAct,Pub.L. No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(d)(1)(A). 12 12U.S.C.§1842(d)(1)(B). 13 12U.S.C.§§1842(d)(2)(A)and1843(i)(8).

170 FederalReserveBulletin|November2013 beOregononconsummationof theproposal,14andOnePacificCoastBankislocatedin California.Onconsummation,OnePacBancorpwouldownoneinsureddepositoryinstitutionineachof OregonandCalifornia.Assumingthiswereaninterstatetransactionfor purposesof theBHCAct,theBoardwouldnotberequiredtodenytheproposalundersection3(d)or4(i)(8)of theBHCAct. OnePacBancorpiswellcapitalizedandwellmanagedunderapplicablelaw.Theminimum agerequirementunderOregonlawisthreeyears,15andAlbinaBankhasbeeninexistence formorethanthreeyears. Basedonthelatestavailabledatareportedbyallinsureddepositoryinstitutions,thetotal amountof consolidateddepositsof insureddepositoryinstitutionsintheUnitedStatesis $9.9trillion.Onconsummationof theproposedtransaction,OnePacBancorpwouldcontrollessthan1percentof thetotalamountof consolidateddepositsininsureddepository institutionsintheUnitedStates.Accordingly,inlightof allthefactsof record,theBoardis notrequiredtodenytheproposalundersections3(d)or4(i)(8)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.16Inaddition,undersection4of theBHCAct,theBoardmustconsiderthe competitiveeffectsof aproposaltoretainasavingsassociationunderthepublicbenefits factorof section4(j)of theBHCAct.17 OnePacBancorpandAlbinaBankcompetedirectlyinthePortlandbankingmarket.18The Boardhasconsideredthecompetitiveeffectsof theproposalinthisbankingmarketinlight of allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket,therelativesharesof totaldepositsin insureddepositoryinstitutionsinthemarket(“marketdeposits”)thatarecontrolledby OnePacBancorpandAlbinaBank,19theconcentrationlevelsof marketdepositsandthe increaseinthoselevels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)under theDepartmentof JusticeMergerCompetitiveReviewGuidelines(“DOJBankMerger 14 Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofallbankingsubsidiariesofsuch companywerethelargestonJuly1,1966,orthedateonwhichthecompanybecameabankholdingcompany, whicheverislater.12U.S.C.§1842(d).Thehomestateofafederalsavingsassociationisthestatewherethe homeofficeislocated.12U.S.C.§1841(o)(4). 15 SeeOregonRevisedStatutes§715.017. 16 12U.S.C.§1842(c)(1). 17 12U.S.C.§1843(j)(2)(A). 18 ThePortland(OR-WA)bankingmarketincludesportionsofClarkCounty,Washington,aswellassixcounties inOregon(Clackamas,Columbia,Marion,Multnomah,Washington,andYamhill). 19 DepositandmarketsharedataareasofJune30,2012,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991).Inthiscase, OnePacBancorp’sdepositsareweightedat50percentpre-mergerand100percentpostmergertoreflectthe resultingownershipbyacommercialbankingorganization.

LegalDevelopments:ThirdQuarter,2013 171 Guidelines”),20andothercharacteristicsof themarkets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesinthePortlandbankingmarket.Theproposalwouldresultinaslightdecreaseinmarketconcentration,asmeasuredbytheHHI, andnumerouscompetitorswouldremain.21 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthebankingmarketinwhichOnePacBancorpandAlbinaBankcompete directlyorinanyotherrelevantbankingmarket.Accordingly,theBoardhasdetermined thatcompetitiveconsiderationsareconsistentwithapproval. OtherSection3(c)Considerations Section3(c)of theBHCActrequirestheBoardtotakeintoconsiderationanumberof otherfactorsinactingonbankacquisitionapplications.Thesefactorsincludethefinancial andmanagerialresources(includingconsiderationof thecompetence,experience,and integrityof theofficers,directors,andprincipalshareholders)andfutureprospectsof the companyandbanksconcerned;theeffectivenessof thecompanyincombattingmoney laundering;theconvenienceandneedsof thecommunitytobeserved;andtheextentto whichtheproposalwouldresultingreaterormoreconcentratedriskstothestabilityof the UnitedStatesbankingorfinancialsystem. TheBoardhasconsideredallof thesefactorsand,asdescribedbelow,hasdeterminedthat allconsiderationsareconsistentwithapprovalof theapplication.Thereviewwasconductedinlightof allthefactsof record,includingsupervisoryandexaminationinformationfromvariousU.S.bankingsupervisorsof theinstitutionsinvolved,publicly reportedandotherfinancialinformation,informationprovidedbyApplicants,andpublic commentsreceivedontheproposal. A.Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only 20 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoard thatabankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelinesin2010(seePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/ 10-at-938.html),theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenot modified. 21 OnePacBancorpoperatesthe34thlargestdepositoryinstitutioninthePortlandbankingmarket,controlling depositsofapproximately$23.2million,whichrepresentlessthan1percentofmarketdeposits.AlbinaBank operatesthe22ndlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately$123.9million,whichrepresentlessthan1percentofmarketdeposits.Onconsummation,OnePacBancorpwouldcontrolweighteddepositsofapproximately$135.5millionandunweighteddepositsofapproximately$147.1million,bothofwhichrepresentlessthan1percentofmarketdeposits.TheHHIof2065woulddecreaseby1 pointto2064.

172 FederalReserveBulletin|November2013 andaconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepository institutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation, theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,and theimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheability of theorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof the operationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant.Thistransactionwouldbestructured asasharepurchasebyOnePacBancorpof newlyissuedsharesof AlbinaBank,representing90.1percentof thecommonsharesof AlbinaBank.Asnotedpreviously,underthe proposal,AlbinaBank’scurrentparent,AlbinaBancorp,wouldretaincommonsharesof AlbinaBankthatwouldrepresent9.9percentof AlbinaBank’scommonstock.22 TheBoardhasconsideredthefinancialfactorsof theproposal,includingpubliccomments receivedontheproposal.ThecommentersexpressedconcernthatOnePacBancorpdoes notpossessthefinancialormanagerialresourcesnecessarytorestoreAlbinaBankto soundconditioninlightof thefactthatOnePacBancorp(i)doesnotappeartohaveaplan torestoreAlbinaBanktoprofitabilityand(ii)hasnotgeneratedaprofitsinceacquiring ShoreBankPacificinlate2010.ThecommentersarguethatMr.SteyerandMs.Taylor, ratherthantheFoundationandOnePacBancorp,appeartobethesourceof strengthfor OnePacificCoastBankandwouldbethesourceof strengthforAlbinaBank.Inaddition, thecommentersquestionedtheabilityof ApplicantstoeffectivelyoverseeandmanageOne PacificCoastBankandAlbinaBankastwoseparatebanksandassertedthatthetwoinstitutionscouldbeoperatedatlowercostif combined. OnePacBancorpandOnePacificCoastBankarewellcapitalizedandwouldremainsoon consummationof theproposedacquisition.TheFoundation,whichcontrolsmostof the totalequityof OnePacBancorp,wouldprovidethecapitalnecessarytocompletetheproposedtransactionthroughacashgrantmadetoitbyMr.SteyerandMs.Taylor.The Foundationiscontrolledbyaboardof eightdirectors,whichincludesMr.SteyerandMs. Taylor.Theboardof directorshasdeterminedtofocustheFoundation’ssupporton OnePacBancorpandthebank(s)thatitowns,andsubstantiallyallof theFoundation’s activitiesandexpendituresareindirectsupportof OnePacificCoastBank.23 Asanonstockcorporation,Foundationcannotdirectlyraisefundsthroughstockissuance. However,OnePacBancorp,anintermediatestockholdingcompany,wouldbethedirect ownerof AlbinaBankandOnePacificCoastBankandwouldhavetheabilitytoaccess fundingmarkets,includingbyissuingnewsharesof commonstockforthepurposeof 22 Thecommenters,twoofwhichareindirectinvestorsinthetrustpreferredsecurities(“TruPS”)issuedbyaffiliatesofAlbinaBancorp,andoneofwhichprovidedcreditprotectiontoindirectholdersoftheTruPS,objected tothestructureoftheproposalforseveralreasons,includingthat(i)thestructureofthetransactionviolates AlbinaBancorp’slegalobligationstoitscreditorspursuanttoindenturesunderwhichtheTruPSwereissued, exposingAlbinaBancorp,itsmanagement,AlbinaBank,andpossiblyOnePacBancorp,tolitigation;and (ii)theproposedtransactionmayraiseotherlegalbasesofliability,includingdeepeninginsolvencyandbreach offiduciarydutybydirectorsofAlbinaBancorpandAlbinaBankandtortiousinterferencewithcontractual relationsbyOnePacBancorp,furtherexposingOnePacBancorp,AlbinaBank,andpotentiallyAlbinaBancorp,tolitigation.Thecommentersalsospeculatedthatapprovaloftheproposedtransactioncouldimpairthe abilityofbankholdingcompaniestoraisecapitalinthefuture.Applicantsdisagreewiththeconclusionpresentedbythecommenters.CourtshaveconcludedthattheBoard’slimitedjurisdictiontoreviewapplications undertheBHCActdoesnotauthorizeittoconsidermattersunrelatedtospecificstatutoryfactors,andinparticular,mattersrelatedtominorityshareholdervaluations.SeeWesternBancshares,Inc.v.BoardofGovernors, 480F.2d749(10thCir.1973).Thesemattersaregovernedbystatecorporateandcontractlawandmaybeadjudicatedbyacourtwithjurisdictiontoprovidethecommenterswithrelief,ifappropriate.Id.at753. 23 ApplicantshaverepresentedthattheFoundationcancontributecapitaldirectlytoAlbinaBank,orindirectly throughOnePacBancorp,consistentwithitsstatusasanIRStax-exemptentity.

LegalDevelopments:ThirdQuarter,2013 173 fundingthecapitalneedsof AlbinaBankandOnePacificCoastBank.Furthermore, ApplicantshaverepresentedthatwhenevercapitalhasbeenneededtosupportOnePacific- CoastBank,theFoundationhasbeenabletoraisecapitalthroughdonationsmadedirectly byMr.SteyerandMs.TaylororindirectlythroughorganizationsfundedbyMr.Steyerand Ms.Taylor.Forexample,Mr.SteyerandMs.Taylorhavecontributedapproximately $50milliontotheFoundation,$46millionof whichhasbeeninjectedintoOnePacific- CoastBank.Inaddition,theFoundationhasunencumberedcashonhandthatisavailable tosupportthecapitalneedsof thebank.Inlightof OnePacBancorp’sabilitytoraisecapitalandtherecordof thefinancialsupportprovidedbyMr.SteyerandMs.TaylortoApplicantsandOnePacificCoastBank,Applicantsappeartohaveadequateresourcestoabsorb thecostsof theproposalandtomanagetheoperationsof bothOnePacificCoastBank andAlbinaBank.Inaddition,assetqualityandearningsprospectsareconsistentwith approval.Onaproformabasis,theacquisitionof AlbinaBankisnotexpectedtohavea negativeimpactonOnePacBancorp’soperations.Basedonitsreviewof therecord,the Boardfindsthattheorganizationhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproformaorganization.TheBoardhasreviewedtheexaminationrecordsof OnePac Bancorp,OnePacificCoastBank,andAlbinaBank,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidered itssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththe organizationsandtheseorganizations’recordsof compliancewithapplicablebankingand anti-money-launderinglaws.TheBoardalsohasconsideredOnePacific’splansforimplementingtheproposal,aswellasthepubliccommentreceivedontheproposal.Thecommentersexpressedconcernregardingtheabilityof Applicants’managementteamto restoreAlbinaBanktoprofitability.24 OnePacBancorpandOnePacificCoastBankareeachconsideredtobewellmanaged,and theirseniormanagementwouldcontinueintheirrolesfollowingconsummationof theproposedtransaction.Thedirectorsandseniorexecutiveofficersof OnePacBancorphave substantialknowledgeandexperienceinthebankingandfinancialservicessectors. Asnoted,AlbinaBankhasbeenoperatingunderaConsentOrdersinceMarch2,2010, thatrequiresAlbinaBank,amongotherthings,toincreaseitsTier1capitalbysuch amounttoensurethatitsleverageratioequalsorexceeds10percent;maintainitstotalriskbasedcapitalratioat12percentorabove;retainqualifiedmanagement;reduceclassified assetsandCREconcentrations;maintainafullyfundedallowanceforloanandleaselosses (“ALLL”)andupdateitsALLLpolicyconsistentwiththeInteragencyPolicyStatementon AllowanceforLoanandLeaseLossesMethodologiesandDocumentationforBanksand SavingsInstitutionsfromJuly2,2001;improveitslendingandcreditadministration policies;andadoptathree-yearstrategicplan. OnePacBancorpwilldevotesignificantfinancialandotherresourcestoaddressallaspects of theConsentOrderonconsummation.OnePacBancorp’sinvestmentinAlbinaBank wouldbringAlbinaBankintocompliancewiththecapitalrequirementssetforthinthe ConsentOrder,andtherecapitalizationwouldenableAlbinaBanktocontinuewiththe measuresunderwaytoimproveassetquality,asrequiredbytheConsentOrder.OnePac BancorpisproposingtoappointtwodirectorstoAlbinaBank’sboardof directors,which 24 ThecommentersalsoraisedconcernsastowhethertheboardsofdirectorsofOnePacBancorpandOne PacificCoastBank,respectively,couldreplaceMs.Taylor,thepresidentandchiefexecutiveofficerofOnePac BancorpandOnePacificCoastBank,giventhesignificantfinancialcontributionsshehasmadetoaugmentthe capitalofthoseinstitutions.Ms.Taylor’sserviceontheboardsissimilartothatofamajorityshareholderofa bankholdingcompanyanddoesnotraiseheightenedconcernsinthiscase.

174 FederalReserveBulletin|November2013 isexpectedtoaugmentAlbinaBank’smanagement.Inaddition,OnePacBancorpwould adviseAlbinaBankwithrespecttoitsrisk-managementpolicies,procedures,andcontrols. TheBoardalsohasconsultedwiththeFDIC,theprimaryfederalsupervisorof Albina Bank.TheFDICdoesnotobjecttotheproposedtransaction. TheBoardalsohasconsideredthefutureprospectsof Applicants,OnePacificCoastBank, andAlbinaBank,inlightof thefinancialandmanagerialresourcesinvolvedandtheproposedbusinessplan,includingApplicants’proposaltooperateOnePacificCoastBankand AlbinaBankseparately.Inthisregard,theBoardhasconsideredApplicants’successful integrationof thebankingoperationsof OneCaliforniaBankandShoreBankPacificin August2010.25Applicants’integrationrecord,financialandmanagerialresources,and plansforoperatingOnePacificCoastBankandAlbinaBankafterconsummationprovide areasonablebasistoconcludethatfutureprospectsareconsistentwithapproval.Basedon allthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothefinancial andmanagerialresourcesandfutureprospectsof theorganizationsinvolvedintheproposalareconsistentwithapproval,asaretheothersupervisoryfactors. B.ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).26TheBoardmustalsoreviewtherecordsof performance undertheCRAof therelevantinsureddepositoryinstitutionswhenactingonanotice undersection4of theBHCActtoacquirevotingsecuritiesof aninsuredsavingsassociation.27 TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,28andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.29 TheBoardhasconsideredtheconvenienceandneedsfactorandtheCRAperformance recordof OnePacificCoastBankandAlbinaBankinlightof allthefactsof record.As partof itsconsiderationof convenienceandneeds,theBoardhasexaminedtheCRAperformancerecordsof OnePacificCoastBankandAlbinaBank.OnePacificCoastBank receivedaCRAratingof “satisfactory”fromtheOfficeof ThriftSupervisionatitsmost recentCRAperformanceevaluationdatedDecember31,2009.Asnotedabove,One PacificCoastBankhasbeenaparticipantintheCDFIprogram,whichprovidesfundsfor increasingcommunitydevelopmentactivitiesineconomicallydistressedcommunities. AlbinaBankreceivedaCRAratingof “satisfactory”fromtheFDICatitsmostrecent CRAperformanceevaluationdatedJune1,2011.Applicantshaverepresentedthatthe acquisitionof AlbinaBankbyApplicantswouldallowAlbinaBanktoexpanditsexisting CRAactivities,suchasprovidingfinancialcounselingandassistance,administeringIndi- 25 ShoreBankPacificwasasubsidiaryofShoreBankCorporation,abankholdingcompany,whoseothersubsidiarydepositoryinstitution,ShoreBank,wasclosedbytheIllinoisDepartmentofFinancial&Professional RegulationinAugust2010. 26 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 27 See,e.g.,NorthForkBancorporation,Inc.,86FederalReserveBulletin767(2000). 28 12U.S.C.§2901(b). 29 12U.S.C.§2903.

LegalDevelopments:ThirdQuarter,2013 175 vidualDevelopmentAccounts,collaboratingwithlocalnonprofitorganizations,and extendingcredittoimproveandstabilizeneighborhoods.Basedonareviewof theentire record,theBoardhasconcludedthatconsiderationsrelatingtoconvenienceandneedsconsiderationsandtheCRAperformancerecordsof therelevantinsureddepositoryinstitutionsareconsistentwithapproval. C.FinancialStability TheBoardhasconsideredinformationrelevanttotherisktothestabilityof theUnited Statesbankingorfinancialsystem.TheBoardgenerallypresumesthatamergerthat involvesanacquisitionof lessthan$2billioninassets,orresultsinafirmwithlessthan $25billionintotalconsolidatedassets,willnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors. Suchadditionalriskfactorsarenotpresentinthiscase.TheBoard,therefore,concludes thatfinancialstabilityconsiderationsinthisproposalareconsistentwithapproval. PublicBenefits Asnotedabove,theBoardhasalsoreviewedtheproposalinaccordancewiththestandards insections4(c)(8)and4(j)of theBHCAct.TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof asavingsassociationbyabankholdingcompanyissoclosely relatedtobankingastobeaproperincidentthereto,forpurposesof section4(c)(8)of the BHCAct.30TheFoundationwouldengageincommunitydevelopmentactivities31and activitiesrelatedtoextendingcredit,aswellasoperationof asavingsassociation.32Specifically,theFoundationseekstocontinuetoprovidefundingandothersupport33toOne PacificCoastBanktosupportvariouscommunitydevelopmentprograms,includingOne PacificCoastBank’sloanstoLMIindividualsthatserveasalternativestopaydayandauto titleloans,andmicroloanstosmallbusinessesandnonprofitorganizationsineconomically disadvantagedareas.34Inaddition,theFoundationseekstocontinuetoprovidedisadvantagedcommunitiesservedbyOnePacificCoastBankwithaccesstofinancialeducation workshopsandonlinebusiness-buildingmaterials.TheFoundationsponsorsexchanges amongbusinessleadersdesignedtoidentifysegmentsof disadvantagedcommunities servedbyOnePacificCoastBankwhereOnePacificCoastBankcanprovideproductsand financing.ThisprogramalsoservesasaneducationaltoolfortheFoundation’sboardof directorsandkeystaff aboutpotentialmarketsintowhichOnePacBancorpcouldexpand. Finally,theFoundationconductsresearchtoidentifygapsinthefinancingof underbankedcommunitieswhereOnePacificCoastBankmayfurtheritsmissionthrough, amongotheractivities,conductingfocusgroupstudiesandretainingconsultantstoassist indesigningprogramsthatarerelevantforabankthathasbeencertifiedasaCDFI(such asOnePacificCoastBank). 30 12U.S.C.§§1843(c)(8)and1843(j);225.28(b)(4)(ii). 31 Section225.28(b)(12)oftheBoard’sRegulationYauthorizesbankholdingcompaniestoengageincommunity developmentactivities. 32 Section225.28(b)(2)oftheBoard’sRegulationYauthorizesbankholdingcompaniestoengageinanyactivity usualinconnectionwithmaking,acquiring,brokering,orservicingloansorotherextensionsofcredit.12CFR 225.28(b)(2). 33 Forexample,theFoundationhasprovidedthedevelopmentresourcesnecessaryforOnePacificCoastBankto launchtheprogramsdescribedhereinandprovidescollateralfortheloansthatOnePacificCoastBankmakes toLMIindividualsandbusinessesoperatinginunderservedareasundercertainprograms. 34 TheFoundationprovidescollateraltoOnePacificCoastBanktomakeloanstoLMIindividualsandbusinesses operatinginunderservedcommunities,whichwouldbepermissiblebothasacommunitydevelopmentactivity undersection225.28(b)(12)ofRegulationYandasanactivityusualinconnectionwithmaking,acquiring, brokering,orservicingloansorotherextensionsofcreditundersection225.28(b)(2).

176 FederalReserveBulletin|November2013 TheBoardpreviouslyhasrecognizedthebenefitof allowingbankholdingcompaniesto participateincommunitydevelopmentactivitiesbasedontheiruniqueroleinthecommunity.35UnderRegulationY,theFederalReserveBoardhasbroadlyconstruedthenature andscopeof permissiblecommunitydevelopmentactivities.36Section225.28(b)(12)of RegulationYauthorizesbankholdingcompaniesto(i)makeequityanddebtinvestments incorporationsorprojectsdesignedprimarilytopromotecommunitywelfare,suchasthe economicrehabilitationanddevelopmentof low-incomeareasbyprovidinghousing,services,orjobsforresidents;and(ii)provideadvisoryandrelatedservicesforprograms designedprimarilytopromotecommunitywelfare.37TheBoardpreviouslyhasdetermined thatactivitiessimilartothoseinwhichtheFoundationseekstocontinuetoengageare permissiblecommunitydevelopmentactivitiesoractivitiesrelatedtoextendingcredit.Section225.28(b)(12)alsoauthorizesbankholdingcompaniestoinvestinandprovidefinancingtoaCDFI,suchasOnePacificCoastBank,thatisorganizedandoperatedpursuantto section103(5)of theCommunityDevelopmentBankingandFinancialInstitutionsActof 1994.38 Inreviewingtheproposal,theBoardisrequiredbysection4(j)(2)(A)of theBHCActto determinethattheproposal“canreasonablybeexpectedtoproducebenefitstothepublic, suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweigh possibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfair competition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof the UnitedStatesbankingorfinancialsystem.”39 TheBoardexpectsthattheproposedtransactionwouldresultinbenefitstothepublicthat outweighanypossibleadverseeffectsfromthetransaction.Therecordindicatesthatconsummationof theproposalwouldcreateastrongerandmorediversifiedfinancialservices organizationandwouldprovidethecurrentandfuturecustomersof OnePacBancorpand AlbinaBankwithexpandedfinancialproductsandservices.Asnotedpreviously,One PacificCoastBankhasbeenaparticipantintheCDFIprogram,whichprovidesfundsfor increasingcommunitydevelopmentactivitiesineconomicallydistressedcommunities.The proposedacquisitionof AlbinaBankbyApplicantswouldallowOnePacBancorpto expanditscommunitydevelopmentactivitiestothemarketsservedbyAlbinaBankto includefinancialcounseling,education,andassistanceactivities,administeringIndividual DevelopmentAccounts,collaboratingwithlocalnonprofitorganizations,andextending credittoindividualsandsmallbusinessesinunderservedcommunitiestohelpimproveand stabilizeneighborhoods. Forthereasonsdiscussedabove,andbasedontheentirerecord,theBoardhasdetermined thatApplicants’continuedoperationof thesavingsassociation,andtheFoundation’s proposaltocontinueengagingincommunitydevelopmentactivitiesandactivitiesrelatedto extendingcreditwithintheframeworkof RegulationYandBoardprecedent,arenotlikely 35 See12CFR225.127fortheBoard’sinterpretationofpermissibleinvestmentsdesignedprimarilytopromote communitywelfare(“bankholdingcompaniespossessauniquecombinationoffinancialandmanagerial resourcesmakingthemparticularlysuitedforameaningfulandsubstantialroleinremedyingoursocialills”). 36 TheBoardnotedthatwhiletheinterpretationsetforthinsection225.127“primarilyfocusesonlow-andmoderate-incomehousing,itisnotintendedtolimitprojectsunder[section225.28(b)(12)]tothatarea.Other investmentsprimarilydesignedtopromotecommunitywelfareareconsideredpermissiblebuthavenotbeen defined,inordertoprovidebankholdingcompaniesflexibilityinapproachingcommunityproblems.”12CFR 225.127. 37 12CFR225.28(b)(12). 38 12U.S.C.§4702(5).Seealso12CFR225.127(f).Therefore,thefinancialsupportthattheFoundationproposes toprovidetoOnePacificCoastBank,aregisteredCDFI,tosupportvariouscommunitydevelopmentprograms ispermissibleundersection225.28(b)(12). 39 12U.S.C.§1843(j)(2)(A).

LegalDevelopments:ThirdQuarter,2013 177 toresultinsignificantlyadverseeffects,suchasundueconcentrationof resources, decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orasignificantrisktothestabilityof theUnitedStatesbankingorfinancialsystemthatwould outweighthepublicbenefitsof theproposaldiscussedabove. Section4(j)(2)(A)of theBHCActalsorequirestheBoardtoconsiderwhethertheproposal islikelytoposeasignificantrisktothestabilityof theUnitedStatesbankingorfinancial system.Asdescribedabove,giventhesizeof theentitiesinvolvedinthistransaction,the typesof activitiesproposed,andtheavailabilityof substituteprovidersof theproposed financialservices,thistransactionwouldnotresultinasignificantincreaseintherisktoor interconnectednessof thefinancialsystem.Basedontheseandalltheotherfactsof record, theBoardhasdeterminedthatconsiderationsrelatingtofinancialstabilityareconsistent withapproval. Accordingly,theBoardhasdeterminedthatthebalanceof thepublicbenefitsunderthe standardsof section4(j)(2)of theBHCActisconsistentwithapprovalof theproposal. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheproposalshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyApplicantswithalltheconditionsimposedinthisorderandthecommitmentsmadetotheBoardinconnectionwiththeproposal,includingreceiptof allrequired regulatoryapprovals.TheBoard’sapprovalalsoissubjecttoalltheconditionssetforthin RegulationY,includingthoseinsections225.7and225.25(c),40andtotheBoard’sauthoritytorequiresuchmodificationorterminationof theactivitiesof abankholdingcompany oranyof itssubsidiariesastheBoardfindsnecessarytoensurecompliancewith,andto preventevasionof,theprovisionsof theBHCActandtheBoard’sregulationsandorders issuedthereunder.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof SanFrancisco,actingpursuantto delegatedauthority. Byorderof theBoardof Governors,effectiveSeptember25,2013. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsTarullo, Raskin,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard 40 12CFR225.7and225.25(c).

178 FederalReserveBulletin|November2013 Order Issued Under Federal Reserve Act Adams Bank & Trust Ogallala, Nebraska OrderApprovingEstablishmentof aBranch FRBOrderNo.2013-6(September4,2013) AdamsBank&Trust(“AdamsBank”),astatememberbanksubsidiaryof ADBANC, Inc.,bothof Ogallala,Nebraska,hasrequestedtheBoard’sapprovalundersection9of the FederalReserveAct(“Act”)1toestablishabranchat370NorthFranklinAvenueinColby, Kansas. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedinaccordancewiththeBoard’sRulesof Procedure.2Thetimeforfiling commentshasexpired,andtheBoardhasconsideredthenoticeandallcommentsreceived inlightof thefactorsspecifiedintheAct. AdamsBankisthe20thlargestdepositoryinstitutioninNebraska,controllingapproximately$331millionindeposits,whichrepresents0.6percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate.3AdamsBank’smainofficeisinOgallala, withnineadditionalbranchesthroughoutwesternNebraska.AdamsBankoperatessix branchesinColorado,andtheproposedbranchwouldbethefirstinKansas. Section9(3)of theActallowsastatememberbanktoestablishandoperatebranches, includingabranchtobeoperatedinastateotherthanthehomestateof thestatemember bank,onthesametermsandconditionsasanationalbank.4Assuch,theBoardmay approveanapplicationbyastatememberbanktoestablishadenovointerstatebranchat anylocationatwhichabankcharteredbythehostStatecouldestablishabranch.5Kansas, theprospectivehostState,wouldallowaKansas-charteredbanktoestablishabranchin Colby.6 Whenactingonabranchapplication,theBoardisrequiredbysection9(4)of theActto considerthefinancialconditionof theapplyingbank,thegeneralcharacterof itsmanagement,andwhetheritscorporatepowersareconsistentwiththepurposesof theAct.7 UndertheBoard’sregulationimplementingsection9(4),8thefactorsthattheBoardmust considerinactingonbranchapplicationsinclude:(1)thefinancialhistoryandconditionof theapplyingbankandthegeneralcharacterof itsmanagement;(2)theadequacyof the bank’scapitalanditsfutureearningsprospects;(3)theconvenienceandneedsof thecom- 1 12U.S.C.§321etseq. 2 12CFR262.3(b). 3 DataareasofJune30,2012,themostrecentavailable,andareupdatedtoreflectmergersthroughthatdate.In thiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks. 4 12U.S.C.§321.Seealso12U.S.C.§36(g). 5 12U.S.C.§36(g)(1)(A),asamendedbysection613(a)oftheDodd-FrankWallStreetReformandConsumer ProtectionAct.Therequirementsofsection102oftheRiegle-NealInterstateBankingandBranchingEfficiencyActof1994fortheestablishmentofadenovointerstatebranchhavealsobeenmet.Thoseprovisions requirethatAdamsBankcomplywithStatefilingrequirementsandsubmitacopyofthebranchapplicationto thehostStatebanksupervisor,andthattheBoardtakeintoaccountAdamsBank’scompliancewithcommunityreinvestmentlawsandevaluateitscapitalandmanagement.See12U.S.C.§36(g)(2);12U.S.C.§1831u(b)(1), (3),(4). 6 Kan.Stat.Ann.§9-1111(b)(1). 7 12U.S.C.§322. 8 12CFR208.6(b).

LegalDevelopments:ThirdQuarter,2013 179 munitytobeservedbythebranch;(4)inthecaseof brancheswithdeposit-takingcapability,thebank’sperformanceundertheCommunityReinvestmentAct(“CRA”);9and (5)whetherthebank’sinvestmentinbankpremisesinestablishingthebranchsatisfiescertainlimitations. TheBoardhasconsideredtheapplicationinlightof thesefactorsandpubliccomments receivedfromprospectivecompetingbanksinColbyandfromresidentsof thesurrounding areas.Thecommentersassertthattheircommunity’sdemographicandeconomiccharacteristicswouldnotprofitablysupportanotherbranchandthatthearea’sfinancialservices needsareadequatelymetbythefinancialinstitutionscurrentlyoperatingthere. Inconsideringthefinancialhistoryandcondition,earningsprospects,andcapital adequacyof AdamsBank,theBoardhasreviewedreportsof examination,othersupervisoryinformation,publiclyreportedandotherfinancialinformation,informationprovided byAdamsBank,andthecommentsreceived.AdamsBankiswell-capitalizedandwould remainsoonconsummationof theproposal.TheBoardalsohasreviewedAdamsBank’s businessplanandfinancialprojectionsforthebranch,includingtheprojectionsfordeposits,income,andcosts.Aftercarefullyconsideringallthefactsof record,theBoardhasconcludedthatthefinancialhistoryandcondition,capitaladequacy,andfutureearningsprospectsof AdamsBankareconsistentwithapprovalof theproposal.TheBoardalsohas reviewedAdamsBank’sproposedinvestmentforabranchinColbyandconcludedthatits investmentisconsistentwithregulatorylimitationsoninvestmentinbankpremises.10 InconsideringAdamsBank’smanagerialresources,theBoardhasreviewedthebank’s examinationrecord,includingassessmentsof itsmanagement,risk-managementsystems, andoperations.TheBoardalsohasconsidereditssupervisoryexperienceswithAdams Bankandthebank’srecordof compliancewithapplicablebankinglaw,includinganti– moneylaunderinglaws.AdamsBankisconsideredtobewell-managed.Basedonthis reviewandallthefactsof record,theBoardhasconcludedthatthecharacterof Adams Bank’smanagementisconsistentwithapprovalof theproposal. TheBoardalsohasconsideredtheconvenienceandneedsof thecommunitytobeserved, takingintoaccountthecommentsreceivedandthebank’sperformanceundertheCRA. AdamsBankreceiveda“Satisfactory”ratingbytheFederalReserveBankof KansasCity atitsmostrecentCRAperformanceevaluation,asof June20,2011.11TheBoardgenerally considerstheentryof anewcompetitorinacommunitytobeapositivefactorwhen assessingtheeffectof aproposalontheconvenienceandneedsof thecommunitybecause newentryprovidesadditionalalternativesforconsumersandbusinesses.AdamsBankrepresentsthatitsbusinessrelationshipsalreadyextendintonorthwestKansasandthatthe proposedbranchwouldallowittobetterservetheresidentsof Colbyandthesurrounding communities.12Forthesereasonsandbasedonareviewof theentirerecord,theBoardhas concludedthattheconvenienceandneedsconsiderationsandAdamsBank’srecordof performanceundertheCRAareconsistentwithapprovalof theproposal. 9 12U.S.C.§2901etseq. 10 12CFR208.21(a). 11 Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationinthe applicationsprocessbecauseitrepresentsadetailed,on-siteevaluationoftheinstitution’soverallrecordofperformanceundertheCRAbyitsappropriatefederalsupervisor.SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642(2010). 12 Forexample,abranchintheregionwillallowAdamsBank:toofferlong-term,fixedrateloansonagricultural realestateandhomesteadpropertyexceeding15acres;toofferFarmerMacloans,HealthSavingsAccounts andHealthAccessAccounts;andtoprovideaself-brandedmobilebankingapplicationinthearea.

180 FederalReserveBulletin|November2013 Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.TheBoard’sapprovalisspecificallyconditioned onAdamsBank’scompliancewithallcommitmentsmadetotheBoardinconnectionwith theproposal.ThecommitmentsandconditionsreliedonbytheBoardaredeemedtobe conditionsimposedinwritinginconnectionwithitsfindingsanddecisionand,assuch, maybeenforcedinproceedingsunderapplicablelaw. Approvalof thisapplicationisalsosubjecttotheestablishmentof theproposedbranch withinoneyearof thedateof thisorder,unlesssuchperiodisextendedbytheBoardorthe FederalReserveBankof KansasCity,actingunderauthoritydelegatedbytheBoard. Byorderof theBoardof Governors,effectiveSeptember4,2013. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsTarullo, Raskin,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard

181 Federal Reserve BULLETIN Index A Dodd-FrankWallStreetReformand AmericanCommunitySurvey(ACS),2 ConsumerProtectionAct Annualpercentagerate(APR),22,63, (Dodd-Frank),32,39,126,140, 79–82 150,163 Averageprimeofferrate(APOR),9, F 23–24,31 FannieMae,8,15,42 B FarmServiceAgency(FSA),9 BankHoldingCompanyAct(BHC FarmerMac,15 Act),ordersissuedunder FederalDepositInsuranceCorporation FirstMeritCorporation,129–141 (FDIC),147 HanaFinancialGroup FederalFinancialInstitutions Inc.,159–163 ExaminationCouncil LiveOakBancshares,164–167 (FFIEC),1–2,9,23–24 MitsubishiUFJFinancialGroup, FederalHousingAdministration Inc.,95–110 (FHA),3,12,18–19,40 OnePacificCoastBancorp, FederalRegister,95,112,118,129,142, Inc.,167–176 159,164,168 RiverValleyBancorp,112–117 FederalReserveAct(FRA),order SumitomoMitsuiFinancialGroup, issuedunder Inc.,118–126 AdamsBank&Trust,178–179 TrustmarkCorporation,142–151 FederalReserveBankof NewYork BaselCommitteeonBanking ConsumerCreditPanel/Equifax Supervision (CCP),32,39,70 BaselICapitalAccord,155 FederalReserveBulletin,80 Bhutta,Neil,1–54 FinancialActionTaskForce (FATF),155 C Financial Canner,GlennB.,1–54 Product(s),61 CommunityReinvestmentAct ForeignBankSupervision (CRA),4,42,101,116,134,146 EnhancementAct,152 ConsumerFinancialProtectionBureau FreddieMac,8,15,23,42 (CFPB),1,137–139 Consumer G Decisions,decisionmaking,78–81 GinnieMae,15 CreditCardAccountability Government-sponsored ResponsibilityandDisclosure enterprise(s)(GSEs),15 Act(CreditCardAct),59,63, GreatRecession,7,15,59,68–69 71,89 H Credit Herfindahl-HirschmanIndex Card(s),59–63,94 (HHI),97,113,120,144,170 Directmailsolicitation,73–75 HomeAffordableRefinanceProgram Limits,71–72 (HARP),8 Risk,66–67,75 HomeMortgageDisclosureAct Score(s),3,33–39,46,67 (HMDA),1–54,101,106–107, D 134,147 Departmentof JusticeBankMerger HomeOwnershipandEquity CompetitiveReview ProtectionActof 1994 guidelines,97,113–114,120,131, (HOEPA),22–24 144 I Departmentof Justice(DOJ),98 InternationalBankingAct,order Departmentof VeteransAffairs issuedunder (VA),3,12,18,40 NongHyupBank,152–156

182 FederalReserveBulletin|Index J N JapaneseFinancialServicesAgency NationalAgriculturalCooperative (JFSA),121 Federation,152 NewYorkPost,152 K KoreanNationalAgricultural O CooperativeFederationAct,152 Officeof theComptrollerof the Currency(OCC),137–139 L OhioEquityFundLimitedPartnership Lending funds,136 Applicationdenialrates,3,22,28, 31 P Delinquency,3,4,41,43 Payment-to-income(PTI)ratio(s),4,39 Fair,28,31,107,124,135,137,149 Privatemortgageinsurance Homepurchase,3,6,9,101 (PMI),12–13 Junior-lien,13–15 Manufacturedhomes,11 R Nonconventional,9,25 RegulationC,51 Non-owner-occupant,8–9 RegulationK,96,119,153,160 Piggyback,13 RegulationY,164–167,168,176,177 Refinance,6–8 RuralHousingService(RHS),9 Low-and-middle-income(LMI) Borrowers,censustracts,incomes, S neighborhoods,3,18,34,41, SmallBusinessAdministration 101,106–107,135,146,148 (SBA),102–103,150 M T Mortgage TruthinLendingAct(TILA),63,93 Borrowerincome,18–19 Originations,3,5,15

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