Fair Lending, CRA, Diversity and Inclusion in Bank M&A

by Wes Scott and Richard Hills

As a result of the COVID-19 pandemic, bank merger activity in 2020 was down substantially from the previous year. However, a significant change of course is expected in 2021 and 2022 based upon the general health and capital strength of the industry at large.

Once deal volume begins to increase, a host of novel issues will require the attention of parties to a transaction that were not as prominent (or nonexistent) in the days before COVID. In addition to the traditional economic and management variables involved in the analyses of bank merger transactions, 2020 witnessed the emergence of new criteria unrelated to COVID that must be seriously considered by potential acquirers before entering the M&A market in 2021. These factors include issues related to fair lending and diversity, climate change, and the process undertaken by the Department of Justice in reviewing specific transactions as discussed below.

As part of their review of a bank merger application, the applicable regulatory agency is required to consider “the convenience and needs of the community to be served.” The “convenience and needs” consideration includes an analysis of relevant banks’ records of compliance with fair lending laws and records of serving low-to-moderate income communities under the Community Reinvestment Act.

Accordingly, compliance with fair lending laws is a necessity for institutions seeking to grow through acquisitions. In previous years, potential acquirers have been placed in a regulatory “penalty box” for fair lending compliance violations. Financial institutions involved in mergers or acquisitions need to pay particular attention to their CRA and Fair Lending compliance, including disparate impact. Disparate impact occurs when a neutral policy causes a disproportionate negative impact on a prohibited basis group that is not supported by a valid business justification or necessity. Merger activity will lead to closer scrutiny of compliance performance by regulators and the public. Compliance violations will, at a minimum, delay consummation of a merger and could result in disapproval of a transaction by regulators.

In August, the Consumer Financial Protection Bureau issued a request for information seeking public and industry input related to the Equal Credit Opportunity Act and Regulation B. The CFPB submitted this request in an effort to create a regulatory regime that expands consumer access to credit while ensuring that consumers remain protected from credit transaction discrimination. The CFPB presented 10 questions in its request related to: disparate impact; Limited English Proficiency products, special purpose credit programs; affirmative advertising to disadvantaged groups; small business lending; sexual orientation and gender identity discrimination; scope of federal preemption of state law; public assistance income; the use of artificial intelligence and machine learning; and ECOA adverse action notices.

The CFPB sought comments on the actions it can take or should consider taking to prevent credit discrimination, encourage responsible innovation, promote fair, equitable, and nondiscriminatory access to credit, address potential regulatory uncertainty, and develop viable solutions to regulatory compliance challenges under ECOA and Regulation B. As a result, potential acquirers are encouraged to take proactive measures to address the 10 questions raised by the CFPB, as they are likely to be considered in evaluating fair lending compliance in connection with an application to approve a merger transaction.

The importance of addressing these questions was highlighted by Congresswoman Maxine Waters, chairwoman of the House Financial Services Committee, who said in a press release regarding the recently announced merger between PNC and BBVA: “The DOJ and relevant regulators must fully scrutinize this proposal and assess the merger’s potential impact on the banks’ customers, workers at the banks, and communities served by the banks, especially communities of color that have been hardest hit by the pandemic.”

She emphasized that regulators need to stop “rubber-stamping bank mergers” without an stringent, multifaceted review. “Regulators must also evaluate whether the banks are making diversity and inclusion an intentional priority, and must rigorously review whether the proposed merger truly satisfies all relevant requirements and creates a public benefit.”

In addition, on Dec. 2, Nasdaq submitted a proposal to the SEC to adopt new rules for companies listed on the stock exchange that would require them to publicly disclose diversity statistics regarding their boards of directors. Under the proposal, most Nasdaq-listed firms would be required to demonstrate – or explain why they do not have – at least two board members who represent Nasdaq-designated categories, including at least one individual who self-identifies as female and at least one who self-identifies either as a member of a racial or ethnic minority or as LGBTQ+.

Companies would have to disclose this information within one year of the SEC’s approval of the rule, and all companies will be expected to have at least one diverse director within two years of the SEC’s approval of the listing rule. Companies that are not in a position to meet the board composition objectives within the required timeframes will be required to provide a public explanation of their reasons for not meeting the objectives.

Mergers and acquisitions have always drawn attention to the importance of Fair Lending and Community Reinvestment Act compliance. Given the focus of the Biden administration on addressing diversity, equity and inclusion issues (“DEI”), potential acquirers should be similarly ready to address DEI issues in connection with an application for approval of a merger transaction.

Given the historically low level of merger activity and the likelihood that deal volume is not expected to increase until the second half of 2021, now is the time for potential acquirers and sellers to take a closer look at these issues. Those financial institutions that plan and prepare will be well-positioned to execute on accretive acquisition opportunities that loom on the horizon.

If your management team and board of directors are interested in or are actively exploring M&A opportunities, or if you have questions about the article, please contact either of the article authors.


Wes Scott is a partner at Waller. Public and private financial institutions, including banks, bank holding companies and investment banks, as well as healthcare companies, including clinical trial and medical device companies, rely upon Scott’s experience, judgment and business acumen to close their capital market transactions. Richard Hills is also a partner at Waller. Helping financial institutions reach their goals is the singular focus of Hills’ legal practice. Whether  representing a de novo community bank or a well-established bank holding company with regional operations, he has earned a reputation for his ability to solve problems for financial services clients with unique needs and specific strategic objectives.