Banking and Finance Law Daily Wrap Up, MERGERS AND ACQUISITIONS—New AFR filing more forcefully opposes Capital One’s proposed acquisition of Discover, (May 31, 2024)

By Justin Marcus Smith, J.D.

The Americans for Financial Reform Education Fund said Capital One’s “spotty compliance record” and the “unlawful” risk of the merger to the stability of the banking or financial system require regulatory disapproval.

The nonprofit group, Americans for Financial Reform Education Fund (AFREF), has released a new brief opposing the Capital One-Discover merger, titled, “Bank Merger Act Requires Rejection of Capital-One Discover Merger.” This new brief, which was submitted to the Office of the Comptroller of the Currency and the Federal Reserve Board, closely follows an April 20, 2024 AFREF report, “The Anticompetitive Effects of the Proposed Capital One-Discover Merger,” urging regulators to reject the merger on grounds of harm to competition (see Banking and Finance Law Daily Wrap Up, April 23, 2024).

Background. In February 2024, Capital One announced plans for a $35.3 billion acquisition of Discover Financial Services. The combined entity would have $624 billion in consolidated domestic assets. According to the companies, the acquisition will create a global payments platform with more than 70 million merchant acceptance points in more than 200 countries and territories, and it positions the combined company to compete with larger payment companies. The transaction is subject to regulatory and shareholder approvals. Capital One and Discover said they expect the transaction to close in late 2024 or early 2025 (see Banking and Finance Law Daily, February 21, 2024).

Bank Merger Act. AFREF contended the transaction fails to meet critical considerations of the Bank Merger Act and Bank Holding Company Act that direct regulators to reject mergers that fail to meet three critical considerations: 1) convenience and needs of communities served; 2) sufficient managerial resources and solid financial prospects; and, 3) safety with respect to banking system stability. AFREF cited here to 12 U.S.C. §1828(c)(5)(B); 12 U.S.C. §1842(c)(2) and (7).

Community needs. AFREF stated the merger will not meet the statutory convenience and needs of lower-income, Black, and Latin consumers insofar as the banks’ credit card offerings target them through the use of “aggressive and unlawful collection practices.” AFREF appeared to deprecate Community Reinvestment Act (CRA) ratings inasmuch as nearly all banks have “satisfactory” or “outstanding” CRA ratings. AFREF continued to describe how credit card debt burdens disproportionately harm Black and Latin families and communities. It said this calls for careful regulatory evaluation of Capital One’s record of serving its primary market, credit card customers, in light of putatively high complaint rates, a “pattern of deceptive and abusive credit card marketing[,]” and “aggressive debt collection” of debt, in some cases, allegedly already charged-off or even discharged in bankruptcy. AFREF warned the merger will enable Capital One to raise interest rates and fees in a way that will disproportionately harm Black and Latin consumers who are more likely to carry balances.

In addition, AFREF warned of community layoffs. AFREF alleged that Capital One has already closed more than two-thirds of its branches after acquiring Hibernia National Bank, North Fork Bancorp, and Chevy Chase Bank, closures that had a “disproportionate impact” on low-income, Black, and Latin communities. AFREF also described Capital One layoffs in California, Oregon, and South Dakota after acquiring HSBC in 2012. It said the proposed Discover merger would also likely involve “significant layoffs” to eliminate duplicative credit card operations. It said Capital One already eliminated 400 call center workers in 2017 at its own Chicago call center. It related that the Chicago Tribune has expressed concern about potential loss of jobs on Chicago’s South Side presently employing “hundreds of local workers in the lower-income, predominantly Black area.”

Managerial resources. AFREF noted the merger would “combine two banks with persistent and significant problems with regulatory compliance” calling for regulatory rejection under the managerial resources consideration, as reflected in the Office of Comptroller of the Currency (OCC) merger application evaluation and OCC Licensing Manual on mergers. AFREF appeared to be critical here of the Federal Reserve’s approval of earlier Capital One mergers with Hibernia National Bank, North Fork Bancorp, Chevy Chase Bank, and ING, despite having noted “ongoing regulatory compliance issues.” AFREF described how a 2019 Capital One data breach allegedly exposed the personal information of 100 million people, including 140,000 Social Security numbers and 80,000 bank account numbers. It also described “shortcomings” with respect to money laundering, as evidenced by a 2015 OCC consent order charging that the bank failed to adopt and implement a compliance program that met Anti-Money Laundering and Bank Secrecy Act requirements. AFREF argued these and similar “regulatory shortcomings” demonstrated Capital One’s “failure to keep the commitments it made in prior merger approvals.”

Risk of instability. Last, AFREF argued that the proposed merger would undermine the future prospects of a combined firm “lopsided in credit card loan assets” leaving it vulnerable to financial distress. It said this consideration, too, goes against Bank Merger Act and Bank Holding Company Act regulatory requirements. AFREF said Capital One and Discover both have “higher-than-average credit card delinquency and charge off rates” and that they are “also charging off an increasing share of non-performing credit card loans.” AFREF contended these factors could affect not only the stability of the combination but “could ultimately pose risks to the broader economy and banking system.” AFREF offered a critical review of how banks that rapidly grew through acquisitions, like Wachovia and Washington Mutual, fared during the 2008 financial crisis. AFREF concluded the proposed merger poses an “unlawful” risk to the stability of the banking or financial system.

Companies: Americans for Financial Reform Education Fund; Capital One Financial Corporation; Chevy Chase Bank; Discover Financial Services; HSBC; Hibernia National Bank; ING; North Fork Bancorp

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