Order Approving Acquisition of a Savings Association

J.P. Morgan Chase & Co.
New York, New York
Order Approving Acquisition of a Savings Association
J.P. Morgan Chase & Co. (“Morgan Chase”), a financial holding
company within the meaning of the Bank Holding Company Act (“BHC Act”), has
requested the Board’s approval to acquire all the voting shares of Chase FSB,
Newark, Delaware, a de novo federal savings bank, pursuant to section 4(c)(8) and
4(j) of the Bank Holding Company Act (12 U.S.C. § 1843(c)(8) and 1843(j))
(“BHC Act”) and section 225.24 of the Board’s Regulation Y (12 C.F.R. 225.24).1
Notice of the proposal, affording interested persons an opportunity to
submit comments, has been published (68 Federal Register 68,925 (2003)), and the
time for filing comments has expired. The Board has considered the proposal and
all comments received in light of the factors set forth in section 4 of the BHC Act.
Morgan Chase, with total consolidated assets of $771 billion, is the
second largest banking organization in the United States.2 Morgan Chase controls
$194.5 billion in deposits in depository institutions nationwide, representing
approximately 4 percent of the total deposits in insured depository institutions in
the United States.3 Morgan Chase proposes to operate Chase FSB as a direct
1 Morgan Chase has previously received the required approvals to establish Chase
FSB from the Office of Thrift Supervision (“OTS”) on November 28, 2003, and
from the Federal Deposit Insurance Corporation on December 3, 2003.
2 Asset data for Morgan Chase are as of December 31, 2003, and nationwide
ranking data are as of September 30, 2003.
3 Deposit data are as of September 30, 2003. In this context, depository
institutions include commercial banks, savings banks, and savings associations.
subsidiary that will market and originate certain retail and consumer finance
products currently offered by other Morgan Chase subsidiaries. Morgan Chase has
represented that it intends for Chase FSB to principally serve the national market,
which Morgan Chase describes as the United States outside the tri-state area of
New York, New Jersey, and Connecticut. Morgan Chase would continue to serve
its retail banking customers in the tri-state area principally through JPMorgan
Chase Bank, New York, New York (“JPMCB”), Morgan Chase’s lead subsidiary
bank. Chase FSB’s activities would initially focus on home mortgage lending,
marketing of credit cards, and automotive finance.4 To facilitate these activities,
302 offices throughout the United States of Chase Manhattan Mortgage
Corporation, Edison, New Jersey (“CMMC”), which is Morgan Chase’s principal
mortgage lending subsidiary, would become offices of Chase FSB.5
The Board previously has determined by regulation that the operation
of a savings association by a bank holding company is closely related to banking
for purposes of section 4(c)(8) of the BHC Act.6 The Board is required to review
each proposal by a bank holding company to acquire a savings association.7 In
reviewing the proposal, the Board is required by section 4(j)(2)(A) of the BHC Act
to determine that the acquisition of Chase FSB by Morgan Chase “can reasonably
4 Chase FSB will market credit cards issued by Chase Manhattan Bank USA,
N.A., Newark, Delaware (“Chase USA”), which currently issues all Morgan Chase
credit cards. Chase USA’s automotive finance business will be transferred to
Chase FSB.
5 Of these 302 offices, 19 will be administrative offices not open to the public.
The remainder will be loan production offices of Chase FSB.
6 12 C.F.R. 225.28(b)(4)(ii).
7 12 U.S.C. § 1843(j) and 1843(k)(6)(B).
be expected to produce benefits to the public … that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair competition,
conflicts of interests, or unsound banking practices.”8 As part of its evaluation of a
proposal under these public interest factors, the Board reviews the financial and
managerial resources of the companies involved as well as the effect of the
proposal on competition in the relevant markets.9 In acting on notices to acquire a
savings association, the Board also reviews the records of performance of the
relevant insured depository institutions under the Community Reinvestment Act
(12 U.S.C. § 2901 et seq.) (“CRA”).10
Competitive Considerations
As part of its consideration of the public interest factors under
section 4 of the BHC Act, the Board has considered carefully the competitive
effects of the proposal in the relevant markets in light of all the facts of record.
The proposal involves the formation of a de novo savings association that would
operate nationwide.
Commencement of activities de novo is presumed under Regulation Y
to result in benefits to the public through increased competition in the market for
banking and similar services.11 The proposed acquisition would have no adverse
effect on the concentration of banking resources in any relevant banking market.
Moreover, the Board has received no objections to the proposal from the
Department of Justice or any federal banking agency. In light of all the facts of
8 12 U.S.C. § 1843(j)(2)(A).
9 12 C.F.R. 225.26.
10 See, e.g., Banc One Corporation, Inc., 83 Federal Reserve Bulletin 602 (1997).
11 See 12 C.F.R. 225.26(c).
record, the Board concludes that consummation of the proposed transaction would
not result in a significantly adverse effect on competition or on the concentration of
banking resources in any relevant banking market, and that competitive factors are
consistent with approval.
Financial and Managerial Factors
In reviewing the proposal under section 4 of the BHC Act, the Board
also has carefully reviewed the financial and managerial resources of Morgan
Chase and Chase FSB. The Board has reviewed these factors in light of all the
facts of record, including confidential reports of examination assessing the
financial and managerial resources of Morgan Chase and its subsidiary banks,
information provided by Morgan Chase, and public comments on the proposal.12
In addition, the Board has consulted with the OTS, which will be the primary
federal regulator of Chase FSB. The Board notes that Morgan Chase and its
12 A commenter opposing the proposal cited press reports of Morgan Chase’s
connection to investigations, lawsuits, and settlements relating to Enron Corp. and
asserted that these issues reflected unfavorably on the managerial resources of
JPMCB. The commenter also provided press reports of litigation involving the
acquisition of a small number of mortgage loans from a mortgage broker by
CMMC and asserted that Morgan Chase and CMMC lacked adequate policies and
procedures for monitoring the acquisition of loans on the secondary market. The
Board previously has considered these comments in the context of a recent
application by JPMCB to acquire trust deposits from subsidiary banks of Bank One
Corporation, Chicago, Illinois, and hereby adopts the findings in that case.
See JPMorgan Chase Bank, 89 Federal Reserve Bulletin 511, 512 (2003)
(“JPMCB/Bank One Order”).
In addition, the commenter raised concerns about an investigation by the
Oregon Department of Justice (“Oregon DOJ”) into the alleged use by borrowers
of fraudulent Social Security numbers in three mortgage loans underwritten by
CMMC. By a letter dated June 10, 2003, to CMMC, the Oregon DOJ closed its
inquiry into this matter due to “insufficient evidence.”
subsidiary depository institutions currently are well capitalized and are expected to
remain so after consummation of the proposal. Chase FSB also would be well
capitalized at consummation. Based on all the facts of record, the Board concludes
that the financial and managerial resources of the institutions involved are
consistent with approval of the proposal.13
Records of Performance Under the Community Reinvestment Act
As previously noted, the Board reviews the records of performance
under the CRA of the relevant insured depository institutions when acting on a
notice to acquire any insured depository institution, including a savings
association. The CRA requires the Board to assess each insured depository
institution’s record of meeting the credit needs of its entire community, including
low- and moderate-income neighborhoods, consistent with the institution’s safe
and sound operation, and to take this record into account in evaluating bank
holding company notices.14
The Board has carefully considered the CRA performance records of
each subsidiary insured depository institution of Morgan Chase in light of all the
facts of record, including public comments on the proposal. A commenter
opposing the proposal has alleged, based on data reported under the Home
Mortgage Disclosure Act (“HMDA”),15 that CMMC denied home mortgage loan
13 After consulting with the OTS and reviewing all the facts of record, including in
particular its approval of Morgan Chase’s application to form Chase FSB
(OTS Order No. 2003-60 (Nov. 28, 2003)), the Board also has determined that, on
consummation of the proposal, Chase FSB would be well managed for purposes of
section 4(l) of the BHC Act (12 U.S.C. § 1843(l)).
14 12 U.S.C. § 2903.
15 12 U.S.C. § 2801 et seq.
applications from minorities more frequently than it denied applications from
nonminorities in certain Metropolitan Statistical Areas (“MSAs”).16
A. CRA Performance Examinations
An institution’s most recent CRA performance evaluation is a
particularly important consideration in the notice process because it represents a
detailed, on-site evaluation of the institution’s overall record of performance under
the CRA by its appropriate supervisor.17 JPMCB and Chase USA have each
received “Outstanding” ratings from their respective regulators at their most recent
examinations for CRA performance.18 Examiners commended the community
development lending of both JPMCB and Chase USA. JPMCB was also found to
have an excellent level of qualified investments and to be a leader in providing
community development services. Examiners also praised Chase USA’s flexible
loan programs and found it to be very responsive to the credit and community
development needs of its assessment area.
16 The commenter expressed concern that the formation of Chase FSB would
permit Morgan Chase to transfer its retail lending operations to an OTS-regulated
institution with the result that consumer protection laws of the individual states
would be preempted. As noted above, bank holding companies are permitted by
law to own and control federal savings associations. 12 C.F.R. 225.28(b)(4)(ii).
The applicability of state laws to federal savings associations is a matter within the
jurisdiction of the OTS to determine.
The commenter also alleged that CMMC’s purchase of certain mortgage
loans on the secondary market enabled predatory lending by an unaffiliated
consumer lender. The Board previously considered the remedial steps taken by
CMMC in this matter and hereby adopts its conclusions in that case.
See JPMCB/Bank One Order at 512.
17 See Interagency Questions and Answers Regarding Community Reinvestment,
66 Federal Register 36,620 and 36,639 (2001).
18 Ratings as of November 12, 2001, by the New York State Banking Department
and March 3, 2003, by the Office of the Comptroller of the Currency, respectively.
The record of Morgan Chase in operating these insured depository
institutions indicates that it has the experience and expertise to establish and
implement appropriate CRA policies and programs at Chase FSB. The OTS will
evaluate Chase FSB’s record of CRA-related lending based on its actual lending
performance after Chase FSB opens for business. Chase FSB intends to invest in
funds that develop low-income residential rental properties in states where it is a
major mortgage lender and to seek community development service opportunities
in its assessment area.19 Chase FSB also intends to provide grants to community
development organizations in its assessment area and to large regional and national
organizations that are active in Chase FSB’s top national markets.
B. HMDA Data and Fair Lending Record
The Board has carefully considered the lending records and HMDA
data of JPMCB, CMMC, and Chase USA in light of the comments received.20
Based on 2002 HMDA data, the commenter alleged that CMMC
disproportionately excluded or denied African-American and Hispanic applicants
for home mortgage loans in various MSAs in twelve states and the District of
Columbia.21 The commenter asserted that CMMC’s denial rates for minority
19 In approving Morgan Chase’s application to organize Chase FSB, the OTS
concluded that Chase FSB has satisfactorily demonstrated that it will meet its CRA
objectives. OTS Order No. 2003-60 (Nov. 28, 2003).
20 The Board has reviewed HMDA data reported by JPMCB, CMMC, and
Chase USA in 2001 and 2002 in the markets of concern to the commenter. The
Board included data submitted by Chase USA in its review because, as noted
above, Chase USA was the parent of CMMC until March 2002. CMMC is now a
subsidiary of JPMCB.
21 In response, JPMCB noted that the commenter’s analysis was based on data
from only a few MSAs and included only conventional home purchase loans
applicants were higher than the rate for nonminority applicants, and that CMMC’s
denial disparity ratios compared unfavorably with those ratios for the aggregate of
lenders in the MSAs.22 In the JPMCB/Bank One Order, the Board considered
substantially similar comments about Morgan Chase’s HMDA data for MSAs in
eight of these states and the District of Columbia, and the Board’s analysis of
Morgan Chase’s HMDA data in that order is incorporated by reference.23
For the MSAs cited by the commenter in Colorado, Mississippi,
Oregon, and Washington, the denial disparity ratios reflected in the 2002 HMDA
data reported by JPMCB, CMMC, and Chase USA generally were more favorable
than or comparable with the ratios reported by the aggregate of lenders in three of
the four markets reviewed. The denial disparity ratio approximated, but was
somewhat less favorable than, the ratio for the aggregate in the Portland MSA for
African Americans.
The HMDA data do not indicate that JPMCB, CMMC, or Chase USA
has excluded any segment of the population or any geographic area on a prohibited
basis. The Board, nevertheless, is concerned when the record of an institution
indicates disparities in lending and believes that all banks are obligated to ensure
originated by CMMC in 2002, and that the sample, therefore, was too small to
represent JPMCB’s overall mortgage lending performance.
22 The denial disparity ratio equals the denial rate for a particular racial category
(for example, African American) divided by the denial rate for whites.
23 The MSAs reviewed by the Board in the JPMCB/Bank One Order were Benton
Harbor and Detroit, both in Michigan; Boston, Massachusetts; Dallas, Texas;
Memphis, Tennessee; Raleigh, North Carolina; Richmond, Virginia;
San Francisco, California; St. Louis, Missouri; and Washington, DC. The new
MSAs reviewed in connection with this order are Denver, Colorado; Jackson,
Mississippi; Portland, Oregon; and Seattle, Washington.
that their lending practices are based on criteria that ensure not only safe and sound
lending, but also equal access to credit by creditworthy applicants regardless of
race or income level. The Board recognizes, however, that HMDA data alone
provide an incomplete measure of an institution’s lending in its community
because these data cover only a few categories of housing-related lending. HMDA
data, moreover, provide only limited information about covered loans.24 HMDA
data, therefore, have limitations that make them an inadequate basis, absent other
information, for concluding that an institution has not assisted adequately in
meeting its community’s credit needs or has engaged in illegal lending
Because of the limitations of HMDA data, the Board has considered
these data carefully in light of other information, including examination reports
that provide on-site evaluations of compliance with fair lending laws by JPMCB
and its predecessor bank, Chase Manhattan Bank, New York, New York.25
Examiners found no evidence of prohibited discrimination or other illegal credit
practices at JPMCB, Chase Manhattan Bank, Chase USA, or CMMC.
24 The data, for example, do not account for the possibility that an institution’s
outreach efforts may attract a larger proportion of marginally qualified applicants
than other institutions attract and do not provide a basis for an independent
assessment of whether an applicant who was denied credit was, in fact,
creditworthy. Credit history problems and excessive debt levels relative to income
(reasons most frequently cited for a credit denial) are not available from HMDA
25 JPMCB was formed in the fourth quarter of 2001 by the merger of Chase
Manhattan Bank and Morgan Guaranty Trust Company. The CRA performance of
Chase Manhattan Bank was last evaluated by the Federal Reserve Bank of New
York as of July 9, 2001.
As noted in the JPMCB/Bank One Order, JPMCB and CMMC have
taken several affirmative steps to ensure compliance with fair lending laws.
Management at JPMCB and CMMC conduct comparative file reviews for most of
their loan products. JPMCB and CMMC have a secondary review process that
includes regression analysis of all applications to identify possible instances or
indications of disparate treatment, and JPMCB indicated that it acts promptly to
correct inappropriate underwriting decisions that are identified, including sending
offers of credit to individuals whose applications were denied in error. In addition,
an independent review team, under the direction of the fair lending unit, reviews
applications identified by the regression analysis and reports its findings to the
audit department quarterly.
The Board also has considered the HMDA data in light of other
information, including the CRA performance records of JPMCB, Chase Manhattan
Bank, and Chase USA. The Board concludes that, in light of the entire record, the
HMDA data indicate that JPMCB’s record of performance in helping to serve the
credit needs of its community is consistent with approval of the proposal.
C. Conclusion on CRA Performance Records
The Board has carefully considered all the facts of record, including
reports of examination of CRA records of the institutions involved, information
provided by Morgan Chase, all comments received and responses to the comments,
and confidential supervisory information. Based on a review of the entire record,
and for the reasons discussed above, the Board concludes that the CRA
performance records of the institutions involved are consistent with approval.
Other Considerations
As part of its evaluation of the public interest factors, the Board also
has carefully reviewed the public benefits and possible adverse effects of the
proposal. The record indicates that consummation of the proposal would result in
benefits to consumers and businesses. The proposal would enable Morgan Chase
to streamline the way in which it provides consumer finance products and services
to customers throughout the national market, by creating a single institution
through which customers can obtain home and automobile financing and credit
card products and services now offered by different Morgan Chase affiliates.
Morgan Chase expects that additional retail products and services will eventually
also be offered in the national market through Chase FSB. Based on all the facts of
record, the Board has determined that consummation of the proposal can
reasonably be expected to produce public benefits that would outweigh any likely
adverse effects under the standard of section 4(j)(2) of the BHC Act.
Based on the foregoing and all the facts of record, the Board has
determined that the notice should be, and hereby is, approved. The Board’s
approval is specifically conditioned on compliance by Morgan Chase with all the
commitments made in connection with the notice and all the conditions in this
order. The Board’s determination also is subject to all the conditions set forth in
Regulation Y, including those in sections 225.7 and 225.25(c)
(12 C.F.R. 225.7 and 225.25(c)), and to the Board’s authority to require such
modification or termination of the activities of a bank holding company or any of
its subsidiaries as the Board finds necessary to ensure compliance with, and to
prevent evasion of, the provisions of the BHC Act and the Board’s regulations and
orders thereunder. For purposes of this action, the commitments and conditions
relied on by the Board in reaching its decision are deemed to be conditions
imposed in writing by the Board in connection with its findings and decision and,
as such, may be enforced in proceedings under applicable law.
The proposal may not be consummated later than three months after
the effective date of this order, unless such period is extended for good cause by
the Board or by the Federal Reserve Bank of New York, acting pursuant to
delegated authority.
By order of the Board of Governors,26 effective January 30, 2004.
Robert deV. Frierson
Deputy Secretary of the Board
26 Voting