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Merging or Acquiring Another Institution? Don’t Forget your Compliance Due Diligence

If you have filed a federal regulatory application for a bank merger or acquisition recently, you probably noticed a new question in the standard application form. Bank regulators are now routinely asking for a description of the acquirer’s due diligence review of the target institution, as well as the scope of resources committed to the review, any significant adverse findings and, if applicable, the corrective actions to be taken to address those findings. Essentially, the regulators want to make sure you have done your homework. They will also use the provided information to issue-spot in connection with their review of the transaction and as a piggy-back for any related examinations. In our experience, regulators take responses to the due diligence question very seriously, and an incomplete or shallow response can result in significant delays in obtaining regulatory approval.

If you are genuinely considering a merger or acquisition, chances are good that you have carefully looked at most things that could affect the safety and soundness of the target institution or the combined institution following the proposed transaction. You and your accountants/consultants have combed through the target’s loan portfolio, reviewed its audited financial statements, scoured its securities portfolio and prepared pro-forma financial statements and capital ratios. But have you considered consumer compliance? If not, it is time to add that to the list.

In its most recent issue of Supervisory Insights, the FDIC dedicated almost ten pages to emphasizing the importance of effective compliance due diligence in every merger or acquisition transaction. The FDIC stated that such diligence helps to “ensure a smooth transition for the surviving institution and the maintenance of a satisfactory compliance posture.” It is therefore safe to assume that the FDIC and the other federal regulators will expect banks to provide a thorough description of the scope and findings of their consumer compliance diligence in every application requesting approval of a merger or acquisition. This will be a substantial addition to the existing pre-acquisition workload, but there is some good news. At least in this case, the regulators have been clear about what they want. In its recent article, the FDIC provided detailed framework for the scope and substance of the consumer compliance diligence it is looking for. An itemized checklist addressing applicable consumer protection laws, rules, and regulations during the due diligence process can be found on the FDIC’s website by following this link.

In light of the FDIC’s recommendation, banks considering mergers or acquisitions should review the provided compliance checklist and incorporate it early into the due diligence process. Banks that wait until an application has been filed to start their compliance diligence could encounter significant delays in obtaining regulatory approval. Also, given the heightened regulatory scrutiny and potential liability surrounding consumer compliance issues in the current banking environment, appropriate diligence in this area is a good idea even if the regulators weren’t requiring it.