KeyCorp's $4.1 billion bid to buy First Niagara Financial Group Inc. is facing scrutiny over a U.S. investigation into First Niagara's minority lending practices, according to two people familiar with the matter.
The Justice Department more than two years ago began examining whether First Niagara violated a federal law that prohibits discrimination in issuing loans, said the people, who requested anonymity because the probe hasn't been disclosed publicly. The investigation has prompted questions from U.S. regulators who must sign off on the bank's sale to Cleveland-based KeyCorp, the people said. It couldn't be determined whether the scrutiny is holding up the deal, which the banks announced in October and is still months away from the expected completion date.
KeyCorp is seeking approval from the Federal Reserve and the Office of the Comptroller of the Currency for an acquisition that would increase its assets by about $40 billion to $133 billion. The combined company would probably be among the top 20 U.S. banks by assets, according to data compiled by banking agencies.
First Niagara "will continue to engage in safe, sound and fair banking practices that focus on the underserved," said David Lanzillo, a company spokesman who declined to comment on the investigation or its implications on the sale. Jack Sparks, a KeyCorp spokesman, and spokesmen for the Justice Department and the bank regulators declined to comment.
Buffalo, N.Y.-based First Niagara lends in New York and surrounding states. It couldn't be determined what, if anything, was found, what part of the bank's territory the probe focused on or whether the Justice Department plans to take action.
Under the Fair Housing Act's redlining provision, denying loans or granting them on more stringent terms "must be justified on the basis of economic factors and without regard to race." The Justice Department's fair-lending unit has increasingly emphasized cases involving credit to minorities after inner cities suffered from high foreclosure rates amid the 2008 financial crisis. Some of the biggest U.S. lenders have settled federal fair-lending claims without admitting wrongdoing, including Bank of America Corp. agreeing to a $335 million settlement and Wells Fargo & Co. paying about $235 million.
It's been almost a decade since U.S. bank regulators last released a public assessment of First Niagara's community lending practices. In the 2007 report from the now-defunct Office of Thrift Supervision, the bank's share of loans in poorer areas was slightly below the industry norm, and it had higher-than-average activity in wealthier neighborhoods. The report deemed the company's geographic distribution of mortgages as "adequate."
First Niagara's most recent filings under the Home Mortgage Disclosure Act show that about 9% of the home loans it originated in the Buffalo area in 2014 went to minority borrowers — less than the 12% at M&T Bank Corp. or the 18% at Bank of America in the same geographical area. New York Fed data show about 19% of residents in the Buffalo metropolitan area are non-white.
Critics of the sale to KeyCorp, who have expressed concern about the public’s access to credit, highlighted First Niagara's lending discrepancies.
"Though poverty, unemployment and other economic factors can impact originations, there is little to explain the gaps in lending to minority borrowers," John Washington of People United for Sustainable Housing in Buffalo, wrote in a December letter to regulators, objecting to the merged banks continuing the same service to minority borrowers that he argued needs "significant improvements."
New York politicians have criticized the merger for unrelated reasons, including U.S. Sen Chuck Schumer, who wrote a letter expressing concern that the deal would have a major effect on jobs in the state, and Gov. Andrew Cuomo, who warned of a "devastating impact on the retail banking industry and consumer access."
First Niagara — doing business since 1870 — has changed rapidly since 2007, with purchases of Great Lakes Bancorp, dozens of former National City Corp. branches, Connecticut-based NewAlliance Bancshares Inc. and branches of HSBC Holdings Plc's banking unit in New York.
A similar redlining revelation cropped up in the recent merger between M&T and Hudson City Bancorp. That matter was resolved when Hudson City agreed, without admitting wrongdoing, to pay more than $30 million in a settlement last year with the Justice Department and the Consumer Financial Protection Bureau. The sale to M&T got final government approval days later.
In the same region that's home to First Niagara, Evans Bancorp Inc. settled allegations by New York Attorney General Eric Schneiderman that it discriminated in lending in Buffalo's East Side neighborhoods. Evans agreed to settle without admitting misconduct.
In the KeyCorp-First Niagara merger, the Justice Department and Federal Reserve also reviewed whether the deal could be anti-competitive. The banks agreed to sell 18 branches in the Buffalo area to Northwest Bancshares Inc. to address that concern.
