Hudson City Minority Loans Faces Probe as M&T Deal Idles

Hudson City Bancorp faces a U.S. government investigation into discriminatory lending practices, according to two people familiar with the matter, posing a potential new hurdle in the bank’s long-delayed sale to M&T Bank Corp.

The Justice Department and Consumer Financial Protection Bureau are examining whether 147-year-old Hudson City violated the Fair Housing Act, the people said. A preliminary CFPB review concluded that the firm denied loans to people in minority communities, including those in the New York area, the people said.

Michael Zabel, a spokesman for M&T, declined to comment on any investigation or impact on the proposed purchase and said M&T has earned good marks for lending practices in New York City. Susan Munhall, a representative of Hudson City, didn’t respond to phone calls and e-mails seeking comment. Sam Gilford, a CFPB spokesman, and the Justice Department’s Dena Iverson declined to comment.

It’s unclear how the investigation, which is in the preliminary stages, could affect the proposed transaction, which has been held up for almost three years because regulators weren’t satisfied with M&T’s anti-money-laundering controls. Both sides have a lot to lose if the deal doesn’t go through.

Hudson City’s market value, which has soared almost 50 percent to about $5 billion since the deal was announced, could tumble 70 percent if the agreement collapses, Morgan Stanley analyst Ken Zerbe wrote in an April 6 note. M&T shares could fall as much as 11 percent, Zerbe said.

Biggest Deal

The acquisition of Hudson City by Buffalo, New York-based M&T, initially priced at $3.7 billion, is the biggest banking deal pending. It would create the nation’s 13th-biggest commercial bank with combined assets of about $133 billion, according to data compiled by Bloomberg.

The acquisition, announced in August 2012, has already been extended three times over the money-laundering issue. The latest delay came April 3 when the Federal Reserve told M&T it wouldn’t be able to finish its review by an April 30 deadline. Either firm can pull out if the deadline isn’t extended again. The departing party may be required to pay a $125 million breakup fee.

‘Committed to Merger’

The banks have signaled they’re interested in sticking with the proposed transaction. Hudson City, based in Paramus, New Jersey, said the deal is still attractive, and it would have to study the potential impact of the delay before moving forward, in an April 6 statement. M&T Chairman and Chief Executive Officer Robert Wilmers said that his bank is still “committed to the merger,” in a statement the same day.

Hudson City shares dropped as much as 6.9 percent, before paring the decline to close down 0.4 percent to $9.38 in New York. Morgan Stanley’s Zerbe said in the April 6 note that the stock could tumble to $3 if the deal falls apart. M&T declined 1.3 percent in 2015.

M&T and Hudson City had said in 2012 that they foresaw no regulatory hurdles to completing the deal. The banks also declared that since 2010, they hadn’t received any special demands from government agencies. Since then, M&T has come under scrutiny from regulators and law enforcement.

In addition to the Fed’s money-laundering concerns, the Justice Department is investigating M&T’s Wilmington Trust unit over financial reporting and securities filings, as well as commercial real estate-lending relationships. That probe was begun before M&T bought Wilmington Trust in 2011, the bank has said in regulatory filings.

Fair-lending Unit

The Justice Department’s fair-lending unit has emphasized cases involving credit for minorities, and state and local officials have pursued related lawsuits. Some of the biggest U.S. lenders, including Bank of America Corp. and Wells Fargo & Co. have settled federal fair-lending claims. Evans Bancorp Inc. was sued by New York Attorney General Eric Schneiderman, and Providence, Rhode Island, sued Santander Bank NA.

Inner cities, disproportionately targeted by subprime lenders in the run-up to the 2008 financial crisis, have suffered from high foreclosure rates and have seen most properties bought by investors instead of people who want to live in them.

Under the Fair Housing Act’s redlining provision, denying loans or granting loans on more stringent terms “must be justified on the basis of economic factors and without regard to race.”

Lending Performance

With $36.6 billion in assets -- $21.5 billion of that in residential loans -- Hudson City operates 135 offices throughout New Jersey, New York and Connecticut.

Hudson City’s lending performance in a wide region around New York City was rated “low satisfactory,” showing no violations of fair-lending laws, according to a publicly posted regulatory evaluation in 2011, the most recent rating available.

The bank’s market share of mortgage originations for lower-and moderate-income borrowers was “much lower” than its overall market share of loans, according to a report by the Office of Thrift Supervision.

The bank disproportionately denied home loans to black borrowers -- 3.21 times more frequently than whites in the greater New York area in 2011 -- according to an analysis of public data by Matthew Lee, founder and executive director of Fair Finance Watch, who wrote a 2012 letter to the Fed critical of the M&T acquisition.

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