A top Federal Reserve official is calling for changes to the way the agency reviews branch and merger applications as community group protests, which are sometimes deemed unfounded, surge and lead to prolonged approval timelines.
Vantage Bank Texas recently experienced how adverse comment letters can elongate an approval process when two comment letters related to fair lending kicked its branch application up to the Fed Board of Governors level, even though the bank's most recent Community Reinvestment Act (CRA) rating was "satisfactory." It took five months for the bank to secure approval for the lone branch in Houston, compared to a median of 22 days in 2022 for branch applications from banks with between $1 billion and $10 billion in assets, according to Fed data.
That situation is indicative of a larger trend in which adverse public comment letters are increasingly sending branch and merger applications to the Board level, even if they make claims that are inconsistent with a bank's recent supervisory exams. Generally, branch and merger applications are delegated to one of the 12 regional Reserve Banks, but just one substantive adverse public comment letter sends that application up to the Board, which considerably slows the approval process.
The Vantage Bank Texas situation caught the attention of Fed Governor Michelle Bowman, who released a statement in conjunction with the approval saying she believes the Board "should improve its approach to processing applications in cases where a member of the public has made an adverse comment, particularly when the recent supervisory record addresses the concerns raised and is consistent with approval."
Vantage Bank Texas President and CEO Jeff Sinnott agrees with Bowman, he said in a statement to S&P Global Market Intelligence.
"It is always a good practice to continually seek the most effective and efficient process," Sinnott said. "The process for comments is important as is protecting the merit of the process. Understanding the context of comments, the accuracy of comments and the weighing of these against a bank's recent and historic CRA performance is an important early consideration."
With her statement, Bowman is joining industry participants' yearslong calls for rethinking how unfounded adverse comment letters are handled in the approval process.
"Governor Bowman recently articulated what we have been saying for years, namely that the Federal Reserve — and the other regulators — should improve their approach to processing applications when adverse public comments seem inconsistent with the bank's supervisory record," John Geiringer, a partner in the Financial Institutions Group at Barack Ferrazzano Kirschbaum & Nagelberg LLP, wrote in an email. "Such public comments should be given enhanced scrutiny by the regulators, and banks only should need to respond to them during the application process if they raise novel concerns."
If the Fed changes its process to not require an application to go to the Board level if it becomes subject to a protest but has recent supervisory findings that negate the claims, that would cut down on banks' branch and merger approval timelines that have only gotten longer in recent years as protests surged.
"If you have resources at the Reserve Bank level that you can use to evaluate the materiality of a comment as a threshold matter, that would definitely speed the merger process," Gary Lax, partner at Luse Gorman PC, said in an interview.
In the case of Vantage Bank Texas' branch application, the Fed received two adverse letters — one alleging that the bank, among other things, failed to provide small business and consumer lending services to African American communities in Fort Worth, and another alleging that the bank discriminated against African American neighborhoods and individuals with respect to its marketing and provision of lending and credit products.
Responding to the commenters, Vantage Bank Texas pointed to its "satisfactory" CRA rating and said the Federal Reserve Bank of Dallas found "no evidence of discriminatory or other illegal credit practices inconsistent with helping to meet community needs."
"The problem is, in cases like this, even though it's a 'substantive' comment, it's not supported by the kind of facts that the examination team has reviewed to come up with a contrary position on the lending or assessment areas," Joseph Silvia, a member at Dickinson Wright PLLC who advises financial institutions on M&A and regulation, said in an interview.
In her public statement, Bowman suggests that "there ought to be a process to sort of weed out these kinds of protests that don't have legitimate findings and legitimate support and stop them from slowing down the wheels of progress because anytime they slow down the wheels of progress, that costs somebody money and typically [it's] the financial institutions," Thomas Vartanian, a former general counsel of the Federal Savings and Loan Insurance Corp. and the Federal Home Loan Bank Board in the Reagan administration, said in an interview.
Unfounded adverse comment letters from "serial" protestors who "abuse the process" are a growing issue, according to Stephanie Kalahurka, a partner at Fenimore Kay Harrison LLP whose work includes M&A for financial institutions.
"There has been recent and frequent abuse of the CRA notice and comment process by a few 'serial' protestors," Kalahurka wrote in an email, speaking broadly and not about any specific application. "These protestors often don't even bother to change the bank's name on their protest submissions. ... The regulators need to find an appropriate balance between giving appropriate attention to good faith CRA protests, and promptly dismissing frivolous and false claims from serial protestors who abuse the process."
The Dallas Fed called out a serial protestor in November 2018 when an adverse comment letter it received regarding PlainsCapital Bank's branch application seemed "ungrounded in any verifiable facts or evidence" and had very similar material as the same group's comments on other applications.
"We note that you have cited to the same percentages in support of substantively identical comments submitted in connection with more than 20 applications filed by nine different banks since 2014," the Dallas Fed said in a letter to the commenter. "Many of these applications were acted on by the Board, and in no case did the Board find merit to your claims."
Potential process changes
It is up to the 12 Reserve Banks to approve branch and merger applications, but they lose discretion under delegated authority "in any merger in which a protest is filed, regardless of the acquiring bank's CRA record and regardless of whether the protest is filed by a serial protestor and is inconsistent with the bank's supervisory record," Neil Grayson, partner and head of Nelson Mullins Riley & Scarborough LLP's financial institutions corporate and regulatory practice group, wrote in an email.
While he is unsure if there is a formal rule requiring all applications that receive protests be sent to the Board level, "it seems to be pretty consistent practice," Grayson said. "So I agree with Governor Bowman that the Board should improve its approach to processing applications in cases where a member of the public has made an adverse comment, particularly when the recent supervisory record addresses the concerns raised and is consistent with approval."
However, the Fed could face political pushback if it makes the changes Bowman called for.
"I don't think they want to take the political criticism they'll get for doing that," Vartanian said. "I think they're more willing to take criticism from the banks for slowing down a transaction over a less-than-credible protest than take the political backlash they'll get from trying to eliminate or cut down the protest business."
If they do make changes, they will have to walk a fine line between still encouraging legitimate protests and discouraging unfounded ones.
"You want to invite legitimate protests to deal with those issues. You don't want to create a situation where everybody protests every merger and every branch to see what they can get out of it," Vartanian said. "Finding that balance is the job the Fed's got here."