Published on Oct 18, 2022
Federal Deposit Insurance Corporation (FDIC) staff members were so concerned about fair lending failings at Flagstar Bancorp (FBC) that they told executives at New York Community Bancorp (NYCB) that they wouldn’t support their proposed $2.6 billion acquisition of the company, according to sources familiar with the matter.
The agency’s rebuff came early this year after months of back and forth between bank executives and staff at two regulators—the FDIC and the Office of the Comptroller of the Currency (OCC). The FDIC is the principal federal regulator for New York Community while the OCC oversees Flagstar.
“No one at the FDIC was comfortable recommending a merger approval for these guys,” one source said. “The banks got the message.”
Instead of abandoning the merger, though, the banks restructured it in April so the OCC would be the primary regulator to review the deal and would oversee the company post merger. The OCC is generally considered the most permissive bank regulator in allowing industry tie-ups.
As part of that announcement, New York Community and Flagstar extended their merger agreement to October 31, 2022. Both banks declined to comment about the FDIC staff comments and the reasoning behind their deals’ restructuring.
The banks might be mistaken if they think they can get their deal approved by sidestepping the FDIC, said Jeremy Kress, a law professor at the University of Michigan.
“There are a few clear-cut issues that can lead bank regulators to deny a merger request, and weak management is one of those issues,” Kress said. “If the FDIC finds faults with a bank’s management, I would expect the OCC is going to find those same faults.”
The Capitol Forum reported this month that DOJ is considering whether to bring a racial discrimination case against Flagstar after regulators determined that the bank’s Black customers paid more for home loans than other borrowers. In the near term, DOJ’s redlining probe, which will likely take several months, will cast the longest shadow over the Flagstar deal, said two sources familiar with the federal reviews.
Still, the same fair lending issues at the center of the Justice Department probe are what drew FDIC scrutiny, sources said.
Even without the allegations, the banks might undergo a more rigorous OCC review than in the past because the agency has become more skeptical of mergers. Michael Hsu, the regulator’s acting head, has said bank merger rules are too lax.
“The frameworks for analyzing bank mergers need updating,” he said at a speech in May. “Without enhancements, there is an increased risk of approving mergers that diminish competition, hurt communities or present systemic risks.”
The FDIC is looking to toughen bank merger rules. Banks that result from a tie-up “should provide greater public benefit than the existing entities,” according to Acting FDIC Chair Martin Gruenberg and Rohit Chopra, the head of the Consumer Financial Protection Bureau (CFPB). Chopra and the OCC’s Hsu have seats on the FDIC Board.
The FDIC is weighing public comments as it considers a new merger review standard.