Online Event Archive Recorded April 3, 2024
Director of the Consumer Financial Protection Bureau (CFPB) Rohit Chopra provides remarks and answers questions from the National Community Reinvestment Coalition’s (NCRC) President and CEO Jesse Van Tol at NCRC’s Just Economy Conference.
Transcript:
NCRC video transcripts are produced by a third-party transcription service and may contain errors. They are lightly edited for style and clarity.
Chopra 00:15
Well, thank you, Sabrina. Thank you all for being here.
So as you know, recently, there has been a lot more interest in the role that banks play in local economies and communities, particularly when it comes to very, very big mergers. The failure of Silicon Valley Bank, Signature Bank and First Republic Bank generated a lot of talk. And those of you who had been community groups on the front line, NCRC and so many others, have been asking some tough questions about what are we doing to make sure that banks are serving the community. And more recently, there’s been some announcements of big, big proposed mergers between credit card giants. In February, the banking industry sued the regulators regarding Community Reinvestment Act.
So I thought I’d spend a little time today talking about how we should think about why banks serve cities, towns, communities, and neighborhoods. I think a lot of people want to believe that banks are serving the underserved because it’s charitable.
So I’m going to first discuss some of the history about banking law and the term convenience and needs. Next, I’m going to discuss the bank merger act and all the ways the regulator’s drifted from the original legal purpose over time. I’m going to close by highlighting a few provisions of a new proposed policy on bank merger review as it relates to the needs of the community.
So throughout the history of our country, the government has recognized that certain sectors of the economy, telecommunications, transportation, energy, and banking are special. They are effectively economic and social infrastructure that facilitate words: democracy, money, commerce, and so much that underpins our society. So when they turn off, like the power grid are shut down, like the roads, chaos erupts, and opportunity is foreclosed. If access is unavailable or limited, for certain segments of the populations, their lives are diminished, and the American dream becomes fake.
It’s one of the reasons I’m personally so drawn to the business of banking and finance. It’s as essential to all of our lives as the electricity or the roads. Its banks that control a lot of the flow of money, payments and credit that we need to succeed. So for these industries that I mentioned energy, communications, the government provides a lot of public privileges, and in turn, the companies face special obligations to serve the public.
That’s really been the basic bargain at the heart of our laws on essential infrastructure and utilities.
The state and federal laws governing utility industries includes public interest provisions reflecting this covenant. A very common phrase in our statutes at state and federal law relates to the requirement that the convenience and needs are sometimes called convenience and necessity of the community to be served.
So in the middle to late 1800s after the Civil War, the states began adopting this standard primarily as a threshold for approving new entrance or greenlighting new projects in utility industries. And in the early 1900s, the phrasing was adopted in federal law as a consideration for so many different actions requiring regulatory approval.
And we looked it up: Transportation Act of 1920, Communications Act of 1934, Natural Gas Act of 1938, Motor Carrier Act of 1935. And our banking laws contain some of the same words, state and federal laws governing the chartering of banks. And the granting of deposit insurance like the National Bank Act, the Federal Deposit Insurance Act, they too included this language as a core requirement for considering application.
So my view is this a plain reading of the law suggests that there are two questions in this standard. Does the application or the project address a gap or unmet need that would truly be in the community’s interest? Does the application improve access to products, services, outcomes that the community needs to benefit from?
And this interpretation that I’m sharing is by no means creative. It’s supported by a review we’ve done of 19th century and early 20th century case law and orders issued by all sorts of regulators.
So this standard meant that a company could meet financial safety or other qualifications, but if the new firm was not having obligations, or meeting public interest and convenience and needs of the community, then it was a no go. The application could be denied. And this standard is designed to ensure that the privileged position of banks or other companies advances the interest of our nation, our local neighborhoods, towns and cities and not simply exploited for private gain.
So we fast forward a little bit. In 1955, an outfit called Chase National Bank, the third largest commercial bank in the country, merged with a company called the Bank of the Manhattan Company, the 15th largest bank, to form Chase Manhattan. And this was just one of a wave of bank mergers in the 1950s that really created significant public concern. So in response, Congress passed the Bank Merger Act in 1960 to rein in the merger spree. And initially, there were a couple of factors three, in particular, for the regulators to think about; competition, financial and managerial resources and the prospects for the company like a business plan, and yes, convenience and needs of the community.
And then the Supreme Court states in 1968, on a case involving the Bank Merger Act, Congress concluded that a merger should be judged in terms of its effect on the public interest. So this was not just some random free market play whatever it is a recognition that banking is infrastructure, and banking is required to meet the needs of local communities.
Now, after evaluating a range of merger approval orders from the past few decades – and we’ve been looking at this carefully with many of you – it is clear that the robust review and connection to the community from that 1960 law slowly whittled away into mush. For example, agencies have increasingly relied on the merging banks Community Reinvestment Act rating as a proxy for the convenience and needs of the community factor and merger review.
Now we know CRA was passed after – there’s a whole host of problems with the approach. First, the CRA rating is backwards looking. It rates the rating judges how well banks met the needs of the community in the past. And given how infrequent some of these CRA rating cycles are, the ratings that the regulators give could actually be quite stale. And in addition, the rating represents the judgment how each individual bank was doing. It doesn’t provide much information and at best, it’s a muddled picture of how the combined entity would serve the community. And we all know this.
The target bank may be really good at mortgage lending to certain neighborhoods are really good at serving local poultry growers or others in rural areas. The large bank that’s going on the merger spree may have absolutely no experience in that or no interest in doing that. So surprise, surprise, what do we often see closing down those business lines, converting the branches, not to a place where you can actually talk to someone and get information about a loan, but you go in and they say, here’s the one 800 number you can call.
The large acquiring bank has a different set of incentives. And, of course, Community Reinvestment Act is an important statute, but it asks a different question than regulators should be asking when reviewing a merger application. And this shift away from responsibility to the community and the public that was baked into the law – it really has created a void.
We see so many individual towns, cities, communities, have dealt with the harms inflicted by the creep of consolidation across the banking sector. And so many of you, local groups, have attempted to step up to fill the void. You go up there, you negotiate agreements with emerging banks, you sometimes know, you won’t be able to stop the merger, but you use your voices, your relationships and your own community organizing to convince banks to come to the table, and have some semblance of basic service and provision of credit to those who you represent.
And as we’ve talked to all of you, over the past years, I think you rightfully point out, there’s really some problems with this approach. First, community groups don’t have the authority to enforce those terms of the agreements. They can sign something, but you can’t easily go to court to make sure that it actually happens. You can’t go to court to undo the merger. And of course, if banks know the convenience and needs factor is not going to lead to a denial, if it’s just something that is part of the process that ultimately leads to a rubber stamp anyway, you will ultimately have less leverage. So we’re going to change that.
I want to talk about what we’re doing and some of the features of our new proposed policy that we have voted on by the FDIC Board. And these are intended to address all of this and restore a reconnection to service to the community and the public. And make sure that mergers don’t end up harming the local residents and small businesses that we have seen too often suffering.
So it’s important to reiterate first, the review of convenience and needs is totally distinct from the evaluation of an effect on competition. In fact, we may know that anti-competitive mergers also end up leading to harms to the community. But at its core, a transaction and this is under existing law, a transaction that undermines competition will have a negative effect on the community. And there are very rare exceptions for when those types of mergers should be allowed. So, first, our policy statement sets a clear standard for review. The community should be better served by the combined institution not just showing that it won’t be worse. It has to be forward-looking. And the burden of proof is on the applicant to provide actual evidence, not corporate platitudes developed by consultants and lawyers.
We have to have answers to the questions. Does the merger address a gap or unmet need in the community? Will the merger improve the product services and delivery channels the community already has or doesn’t have now? In other words, is there any benefit at all?
There are strong laws and incentives that we know to ensure that in a merger, shareholders and executives will benefit, but the law requires that bank mergers factor in the impact on the communities that the merger will affect. This is real, it’s in the law, and we should enforce that properly.
So what we’ve advocated is when there’s no clear benefit, we deny the application. I think we’ve tried to make clear that the ink on the rubber stamp has dried up. And we now need to make sure we are thinking about this in ways that actually benefit.
Now, I also want to add the proposed policy also restore some accountability for the regulators. If the banks make representations or commitments in the application, about how the community will be better off, and as well as if they’re inking agreements with you all, we may make these requirements formal conditions of approval.
This means that, and I’ll just say, I’ve shared this with some of you, I think we have to be a little bit skeptical sometimes about these time-bound pledges. If there are concerns about the long-term impact of the transaction that may or may lead to short, short-term benefit, I think we’ve seen this. There’s mergers, they say, ‘oh well, you know, we’re gonna keep we’re gonna keep doing this type of lending.’ And then a few years later, poof, it’s gone. And I think we want to make sure that we’re putting it in as conditions sometimes, so that they face real sanctions when they don’t live up to it.
Third, the proposed policy asserts that the agency will absolutely consider branch closures in the review of convenience and needs. Over the past 15 years, I think the regulators have too often ignored branch branch closures in the context of merger review. So we looked at some of the data on this. Since 2009, branches have decreased by 15% nationally. Recently, this trend has been driven by very large mega-mergers and closures by the largest banks. Since 2019, the banks with the largest net reduction and branches were Truist, Wells Fargo, PNC, Bank of America and US Bank. These banks accounted for more than 50% of the net branch reductions from 2019 to 2023. And during the same period, smaller banks and lenders with $10 billion or less in assets increase their branches by 1.1%.
So even as online and mobile banking functionality has proliferated, people still find it very useful to visit a bank branch and talk to a real person. And I think we all intuitively know this; identity theft, dealing with complex transactions, dealing with cash, the list goes on and on. I mean, I sometimes ask people, you don’t, you don’t just like text, your parents, you also call them, you also visit them, there are things you do to maintain a relationship. And I think if we look in 2019, 83% of households with a bank account did visit a branch.
So I think it’s just a myth that everyone is just solely being digital. And of course, we want there to be fairness in digital interactions to because we know that that is important, but I don’t think it’s one of the two, it’s both.
Updated 2021 data shows that 15% of households with a bank account use a branch as their primary method of accessing their account. And we know that this is especially important in lower-income neighborhoods, older families and rural households. And to be honest, I think these households have been the ones who have been most impacted by all these branch closures over the past 15 years.
So at the CFPB, we’ve seen this firsthand. I have some of my colleagues here too. We’ve heard from people in rural communities across the country in New Mexico, Montana, and one, Union Town, Alabama, where Cadence Bank recently closed the town’s last remaining branch. Bank branches in these communities are so vital for the health of their economies. And you know, we’ve seen this after branch closures, small business lending and mortgage lending can dry up. Businesses may not be able to access credit, they may close shop, leave town, jobs are lost, and the local economy suffers.
So I just want to finally highlight our proposed policies discussion of the merging banks record of compliance with consumer protection, fair lending and fair dealing laws. Now, just speaking intuitively, I’m not sure it makes sense to permit a bank that has repeatedly violated the law to expand its reach. That simply puts more consumers and businesses in harm’s way and mergers themselves can further aggravate a repeat offender’s propensity to engage in more unlawful conduct.
And let me explain why from our observation. As the bank becomes bigger and more complex, it becomes more difficult to manage. And I think we’ve seen this with many examples. One of the best knowns is Wells Fargo, as the firm grew through big acquisitions before and during the financial crisis, it clearly lost control of its financial empire, and consumers and the public became the collateral damage.
A lot of the consumer harm we see in the wake of mergers, both in the near-term and long-term can be tied to botched IT systems integration, complex governance, misaligned incentives throughout the whole expanding empire.
I guess I’m over time I see. Ultimately, I’d say this, the purpose of the banking system is to provide a neutral source of power for businesses and people to get ahead, to buy a home to start their business. And that’s a very privileged position that banks hold within our economy and society. So I really hope we all reflect that what we are expecting is not charity. It is the original meaning of the founding laws, really in our country. And I think it’s really important that some of those basic ideas carry through when it comes to reviewing these big mergers. Thank you so much.
Van Tol 22:28
How about another round of applause for Director Chopra?
Van Tol 22:37
Wow, what a lot. You’re covered there, Director Chopra. You know, I’m reminded in some sense, the history of banking is a history of failure of implosion, necessitating various government interventions. And I think maybe people forget that, really the banking system that we have, it’s not a fully private system. It’s insured by the FDIC, but not just insured by the FDIC. Lots of other things we’ve done to make sure that banking markets work effectively. And well, the creation of the CFPB itself, the Qualified Mortgage rule, other things were critical components in restoring faith in US mortgage markets for foreign investors. And you’ve really laid out a basis for public interest in banking. Because really, the chassis upon which banking is built, is a public one. Could you talk a little bit more?
Chopra 23:42
Yeah, I think we often don’t think about banks this way. I think many in this room, of course, everyone will sometimes point to some of the practices that they don’t, that they find objectionable, but we also probably would agree, the reason we focus on it a lot, is because they’re so important. They can make the difference about the lives of so many. And I think they are infrastructure of the society. They don’t, they don’t, they’re not as physical, but they’re as important. And you’re right, Jesse, that we as the citizens of the country, and the people of the country provide a lot to them. You know, when they get in trouble, they can borrow at the Federal Reserve’s discount window. We give them exclusive rights when it comes to collecting deposits. So I hope that we remind ourselves that this is actually a creation of we as people and it is a different type of business, and I hope that we always remember the history. And constantly, I worry that people will forget about the devastation of the financial crisis, not just sort of financially but emotionally and socially. We forget the history. And we read these in our social studies books in high school, like the panics. It was a panic, people thought overnight, they would lose all their money and their future. And so this banking really is a covenant between the public and those individuals we do reward richly for making decisions about pricing and intermediating credit, but it is a joint venture.
Van Tol 25:40
And mergers are really important time, and banks are chartered by the government, charters historically were really designed to maintain the power of the government over the chartered entity. If you look back historically, to you know, Columbus’s voyage, for example, other types of charters. But practically speaking, we don’t really reexamine a charter, except that, that a merger is a time when two charters get combined. And so that public interest standard that comes in this notion that the public benefits should really outweigh any adverse effects from a merger. So a really important aspect of your proposed policy statement is that the convenience and needs review is a forward looking analysis, not a retrospective one, how well did you do on CRA, but what is going to happen as a result of of the merger that’s good for consumers, good for communities, and that it can’t be just fluff and platitudes. And I’m reminded historically, you know, when Capital One bought ING Direct, there was a public benefit statement. It was kind of more ATMs, and an ING Direct customers will get access to Capital One’s mortgage, of course, they got out of mortgage. So what was the public benefit? Could you talk a bit more about the type of evidence you’d be looking to see, to offer, that the community is going to be better off the consumers and communities will benefit from the transaction?
Chopra 27:13
Yes. So just to give context, we have a different tradition in the US than I think, in Europe, where the history of our country is one that is more suspicious of what boardrooms would call inorganic growth. So obviously, if you’re growing, gaining customers markets, because your products and services are great, our laws, pretend to prefer that and have more suspicion about takeovers. Because we should be suspicious, why are you taking it over? Is it a catch and kill acquisition? Are you just trying to rub out and get rid of your key competitor, and that really animated a lot of the debate in the late 1800s. And so when you fast forward today, in the context of banks, you have to ask, ‘Well, why do you want to do this?’ And I think a lot of the response is, well, we’re gonna get to just serve more. And it’s like, well, it’s obvious you’re doing it because you want to make more money. But what is the actual benefit? And I think we’ve lost that a little bit in terms of tangible evidence. So I think, as I mentioned earlier, we are going to be looking at the issue of branches and service, we’re going to be looking at the business plans and how long there will be continued offerings of products. Will there be expanded offerings of products? What are we looking at in terms of how are they going to make things more affordable? I think in some ways, hewing back to the core law is calling the bluff on the platitudes, because I think we’ve heard it when we do retrospective analysis on where there are lots of benefits for mergers, the picture is not so great. So I think that is going to also help and really force a bit more in the merger process upfront. I think they’re going to be consulting groups more, their customer base more to figure out how they can actually serve them better.
Van Tol 29:41
And how do you see that overlap and the types of evidence that would show a public benefit, a consumer benefit? And the types of commitments and targets that do get made and community benefits agreements?
Chopra 29:53
Well, well, you know that I’m going to say this, I really want everyone here to file formal feed back on what we’ve done, because I think you’re very close to the ground on engaging with the institutions and coming up with the agreements, because I think we want to make sure that the fact and evidence base is real, and that there is some enforcement teeth behind it. So I hope that as part of the process, too, there will be, we have proposed in the policy, public hearings for major transactions, more input through the process, so that there’s also a little bit more tangible evidence about whether it’s going to be good or not.
Van Tol 30:37
And you’ve talked about how the agencies really retreated from a comprehensive public interest analysis and how communities have had to step in for that reason. And that’s, that’s totally correct. I mean, we came up with our community benefits agreement framework. And the argument was that listen, the regulators are not enforcing the public interest standard. You don’t just need to look at CRA, you need to look at a prospective statement of what will happen. Community benefits agreement is one way to do that. What we’ve always argued for is for that to be put right in the application. How do you see as regulators return to this notion, given the FDIC is new policy statement? How do you see though, the interplay between the regulators and committed groups, because we have a concern that, given that history of failure, a failure to really enforce this, that the what we don’t want is the banks and the regulators saying what community needs are, there needs to be a way to really ascertain what those needs are?
Chopra 31:44
Yeah, it’s it’s not an easy one, because on one hand, you want the regulator’s to be held accountable too for their actions, because we do have concerns when the order to approve doesn’t condition the merger on the agreement but it footnotes it, but it’s very hard to actually enforce it, and what are the sanctions if they don’t actually live up to it? So I think, well, Jesse, I know you will tell us but everyone should tell us, what’s the right process to make sure that the regulator’s are not dreaming up some sort of thing about what the needs are, and what’s the way in which they can ascertain that. I’ll tell you that my hope is that there’s ways to be able to be clear, when it comes to business lines, not just mortgage, small business, but also really some demographic type cuts. You know, I see this a lot, that they just really stopped serving a lot of smaller farmers, or they stopped serving certain types of businesses. And I think that’s really relevant to thinking about competition, but also the needs of the community.
Van Tol 33:01
You know, it’s interesting people, people forget that that is in your mission statement, ensuring competitive markets. And how do you think about that, Rohit, in the context of the power that some of these financial institutions have, you know, Adam Smith, original theory of market-based capitalism was really a radical notion today, right? It was, it was based on the notion of mutual benefit to each party, but the presumed perfect information on both sides. And so much of what the CFPB does is about competition and transparency. I wonder if you could talk just a little bit…
Chopra 33:40
Yeah, so I think, take a look at what we’ve recently published about credit cards. Some of you know, I care a lot about subprime credit cards, I think, is one of the major ways in which so many people really can get by month to month. And what we have found in our analysis is pretty interesting. So the credit card market is really dominated by a small set of big credit card issuers. And interestingly, even when we control for credit tier, subprime to, you know, prime, the largest banks are offering materially higher interest rates, sometimes several 100 basis points higher than their smaller competitors, their credit unions and community banks. And of course, I think we back of the envelope and did some other analysis, that’s maybe an extra $25 billion in interest that that people are paying even when you look at the rate increases across the market. We also found, Jesse, that the credit card companies have increased their interest rates way more than the Fed has increased interest rates. So the amount of profit from that is, it’s almost not profit, this margin is one of the highest, since we’ve been tracking it. So this obviously begs the question for us. A lot of times with these mergers, they say, ‘Oh, this is going to allow us to pass through lower rates to everybody.’ And I, I just want us to be able to see it. And I think often, it’s hard to see it when there’s fewer people in play, or when they create barriers to switching, making it tough to switch your bank account, your credit card or others. So we’re trying to think about how do we create, like competition, that’s a Race to the Top not race to the bottom in terms of predatory practices.
Van Tol 35:52
And I think what you’re getting at I mean, not only has there not been a public benefit, in some cases, there’s been a public harm of consolidation. That there are adverse effects; could be higher prices, could be less product availability, branch closures. Important to not just document what the public benefit is, but also what the adverse effect is. And one of those adverse effects, of course, you know, the sort of bad actors that are allowed to grow banks that have compliance issues. You’ve talked about and the FDIC proposal policy statement has talked about stronger language coordinating with state and federal agencies that may have some insight into banks, legal compliance record other information pertinent to the transaction. Can you talk about the importance of that coordination?
Chopra 36:43
Yeah, I think, and I’ve talked to some of you about it. I think people ask a very legitimate question. Why is a bank caught for redlining allowed to merge? And so I think that you need to be able to really look at what are the issues and what are the data about an entity’s record when it comes to following the law. And honestly, what it’s not that they’re being stopped from growing, they can grow, by opening branches and more neighborhoods, they can grow by expanding their products, competing more aggressively. A takeover of another competitor, I think that has to be a major, a significant look. And, frankly, whether they are fit to be able to grow. I mean, we’ve seen just last year, we ended up having to use emergency powers to assist Silicon Valley Bank, who had not only merged, they took over Boston Private, they grew so quickly. And I think there just needs to be more due diligence about why would you want, why would we be okay with a firm that if a firm has a repeated violations of laws or serious problems? Why isn’t the merger almost going to make it worse?
Van Tol 38:15
Well, I think that’s certainly been our view. So you’re, you’re speaking music to our ears. I want to thank you, Director Chopra for coming. I want to give another NCRC warm round of applause and thanks for your work, which is so important.
