Under the BHC Act, a bank holding company must obtain FRB’s approval before merging with or acquiring another bank holding company. In reviewing an application filed by a bank holding company, FRB is required to consider several factors, including the financial and managerial resources of the applicant, the future prospects of both the applicant and the bank holding company that is to be acquired, the competitive effects of the merger, and the convenience and needs of the community to be served. Even before CRA was enacted, FRB’s regulations called for public comments in connection with the merger applications pursuant to the BHC Act obligation of FRB to ensure that the merger would meet the convenience and needs of the local community. The Board of Governors has the authority to delegate its application authority to the Reserve Banks if the application fits certain criteria. However, an application may raise several issues that might require Board Action under such factors as the financial, managerial, and convenience and needs of the community, including the CRA performance of the applicant. FRB approved the six BHC mergers in our study. With the exception of NBD’s acquisition of First Chicago and Bank One’s acquisition of NBD First Chicago, the lead bank subsidiaries also took actions to merge their operations. Bank subsidiaries are also required to receive approval from their primary regulators for such combinations. For three BHC mergers, the lead bank subsidiaries of the merging BHCs submitted their applications to their primary regulators after FRB approved their BHC applications. CRA requires all federal bank and thrift regulators—FRB, the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the Federal Deposit Insurance Corporation (FDIC)—to encourage depository institutions under their jurisdiction to help meet the credit needs in all areas of the community that the institution is chartered to serve, consistent with safe and sound operations. CRA requires that the appropriate federal supervisory authority (1) assess the institution’s record of meeting the credit needs of its entire community, including LMI areas, and (2) take that record into account in its evaluation of bank expansion applications. Such applications include those to establish or relocate a branch or home office and applications for mergers, consolidations, or the purchase of assets or assumption of liabilities of a regulated financial institution. Assessment areas, also called delineated areas, represent the communities for which the regulators are to assess an institution’s record of CRA performance. CRA also requires the regulators to periodically assess an institution’s community lending performance during examinations. Only insured banks and thrifts are subject to the provisions of CRA. On the basis of the findings of the examination, depository institutions are assigned a rating—that is, outstanding, satisfactory, needs to improve, or substantial noncompliance. Nonbank financial institutions, such as mortgage companies, are not subject to CRA provisions. Unlike certain other banking laws, CRA does not provide regulators with the authority to take enforcement action on the basis of findings of noncompliance resulting from the examination process. The CRA application evaluation process is the exclusive mechanism for enforcing the statute. Regulations proposed in 1993 and 1994 by the regulators included a new set of sanctions to enforce CRA. According to the proposed regulations, a poor CRA rating would have been considered a violation of a bank’s affirmative obligation to meet the credit needs of its entire community. A bank that received a CRA rating of substantial noncompliance would have been subject to enforcement actions authorized by the Federal Deposit Insurance Act. In a letter to OCC dated December 15, 1994, the Department of Justice (Justice) concluded that the agencies lack legal authority to use cease and desist orders and civil money penalties to combat noncompliance with CRA. The final regulations did not contain the enforcement provisions, but, consistent with the statute, did require that the CRA record be taken into account in the application process. Since the initial enactment of CRA, the regulations that implement the act have been amended. In 1993, the Clinton Administration instructed the federal bank regulators to revise the CRA regulations by moving from a process- and paperwork-based system to a performance-based system focusing on results, especially the results in LMI areas of an institution’s communities. Based on these instructions, the federal banking agencies replaced the qualitative CRA examination system with a more quantitative system that is based on actual performance. For large retail institutions, CRA performance is measured through the use of three tests as follows. The lending test entails a review of an institution’s lending record, including originations and purchases of home mortgage, small business, small farm, and, at the institution’s option, consumer loans throughout the institution’s service area, including the LMI areas. The lending test is weighted more heavily than the investment and service tests in the institution’s overall CRA rating. The investment test evaluates an institution’s investment in community development activities. The service test requires the examiner to analyze an institution’s system for delivering retail banking services and the extent and innovativeness of its community development services. In May 1995, the bank regulators issued the new CRA regulations (the performance-based CRA regulations). For large institutions, the performance-based CRA regulations became effective on July 1, 1997. Therefore, CRA ratings that FRB relied upon in the six merger applications we considered were mostly from the previous process- and paperwork- based system. Most of the bank subsidiaries of the BHCs we reviewed were national banks regulated by OCC. The exception was Chemical Bank, which is a state-chartered bank regulated by FRB and the New York State Banking Supervisor. HMDA was enacted to provide regulators and the public with information on home mortgage lending so that both could determine whether institutions were serving the credit needs of their communities. HMDA was amended in 1989 to include the collection of data on the race, sex, and income of applicants and the action taken on the application. Home mortgage lenders that are required to report are to submit HMDA data files for each loan application. HMDA reporting requirements first only applied to banks and their subsidiaries. Over the years, Congress has expanded HMDA’s coverage to include mortgage banking subsidiaries of bank holding companies and independent mortgage companies that have assets above a certain level and a home or branch office in a metropolitan statistical area (MSA). For data collection in 1998, depository institutions with an office in an MSA are covered if they had more than $29 million in assets as of December 31, 1997. Nondepository lenders are covered if they were located in or made loans in metropolitan areas and had assets of more than $10 million or if they originated 100 or more home purchase loans in the preceding year. FRB’s Regulation BB describes the data that depository institutions are required to collect and maintain for CRA purposes. Under revisions of Regulation BB, depository institutions defined as “large” were required, beginning in 1996, to collect and report data annually on the number and dollar amount of their originations and purchases of small loans to businesses and farms and on any community development loans. Only independent institutions with total assets of $250 million or more and institutions of any size if owned by a holding company that has assets of $1 billion or more are subject to the data reporting requirements. The Federal Financial Institutions Examination Council (FFIEC) made the CRA data on 1996 small business lending available to the public in October 1997. The data on business and farm lending reported under the CRA regulations are more limited in scope than data reported on home mortgage lending under HMDA. In particular, the CRA data include information only on loans originated or purchased, not on applications that are turned down or withdrawn by the customer. Also, unlike HMDA data, the CRA data do not include the income, sex, or racial or ethnic background of applicants. Finally, again unlike HMDA data, the CRA data are not reported and disclosed application by application; rather, the data are aggregated into three loan-size categories and then reported at the census tract level. To determine FRB’s legal responsibilities for assessing CRA performance, we reviewed the BHC Act and CRA, their legislative histories, regulations promulgated under each act, and related published materials. To assess FRB’s process for reviewing BHC merger applications for CRA performance, we used a case study approach. We selected, on the basis of the assets of the acquired BHC, the two largest BHC mergers in 1995, the single largest BHC merger in 1996 and again in 1997, and the two largest BHC mergers in 1998. We reviewed the CRA public evaluation reports of the lead bank subsidiaries of the BHCs included in our case studies, internal FRB memorandums and analyses conducted in conjunction with the six merger applications, orders publicly issued by the Board of Governors containing approval of each merger, public comment letters, and FRB summaries of concerns raised in public comment letters. The scope of our reported findings on how FRB addressed the principal public concerns was limited by the confidentiality of particular FRB analyses and conclusions. FRB’s process for the six mergers in our study cannot be generalized to all large BHC mergers because of the small sample size (i.e., six mergers) and the judgment involved in selecting the sample. We focused on FRB’s BHC merger application process in reviewing the six mergers. We did not assess the quality of previous CRA examinations conducted by primary banking regulators or the accuracy of public comments. We also did not verify the accuracy of data and other inputs relied upon by FRB in its review of the six merger applications. To address the third objective on premerger and postmerger home mortgage lending for three of the six mergers completed in 1995 and 1996, we obtained and analyzed HMDA data. We did not verify the accuracy of the HMDA data.