A Big Deal. On February 7, BB&T and SunTrust announced a “merger of equals” in an all-stock transaction valued at $66 billion. The transaction is the largest U.S. bank merger in over a decade and will create the sixth largest bank in the U.S. by assets and deposits. While the transaction clearly is the result of two large regional banks wishing to create the additional scale necessary to compete more effectively with money center banks, banks of all sizes can draw important lessons from the announcement.

• Fundamentals Are Fundamental. The deal was favorably received by investors because its traditional M&A metrics are solid. The transaction is accretive to the earnings of both banks, is accretive to BB&T’s tangible book value, and results in a 5% dividend increase to SunTrust shareholders. The cultural and market synergies may or may not create “the premier financial institution of the future,” but the deal was compelling from a financial point of view.
• Cost Savings and Scale Remain Critical. If deal fundamentals were the primary reason that the transaction was well-received by investors, cost savings ($1.6 billion by 2022) likely were a close second and remain a driving force in bank M&A. The efficiency ratio for each bank is currently in the low 60s. The projected 51% efficiency ratio of the combined bank, even after giving effect to the $100 million annual investment in technology, shows how impactful cost savings and scale can be. 
• Using Scale to Leverage Investment. Scale is good; how you leverage it is key. The banks cited greater scale for investment in innovation and technology as a driving force behind the deal, with a combined bank that will reinvest $100 million annually into technology and innovation. They view compelling digital offerings as paramount to future success. This reinforces the widely held view that community and regional banks that invest in a strong technology platform, even on a much smaller scale than super regional and money center banks, are more likely to position themselves for success than their peers that do not make such an investment. 
• Mergers of Equals Can Be Done. Many have argued that mergers of equals can’t be done, in large part because there is really no such thing. There is always a buyer and a seller. Although BB&T is technically the buyer in this transaction, from equal board seats, to management succession, to a new corporate headquarters, to a new name, the parties clearly went the extra mile to ensure that the transaction was a true merger of equals, or at least the closest thing you can get to one. Mergers of equals are indeed difficult to pull off. But if two large regionals can do it, smaller banks can too.
• Divestitures Will Create Opportunities. The banks have 740 branches within 2 miles of one another and are expected to close most of these. The Washington, D.C., Atlanta, and Miami markets are expected to see the most branch closures, with significant concentrations also occurring elsewhere in Florida, Virginia, and the Carolinas. Deposit divestitures, which have been estimated at $1.4 billion, could present significant opportunities for other institutions in an extremely competitive deposit gathering environment. The bidding should be competitive and deposit premiums could be high. 
• The Time to Invest in People is Now. The merger and similar future deals have the potential to create an opportunity for community banks and smaller regional banks (particularly in the Southeast) to attract talented employees from the affected banks. While some banks may be hesitant to invest in growth given the somewhat fragile state of the economy and the securities markets, they need to be prepared to take advantage of these opportunities when they present themselves.
• Undeterred by SIFI Status.The combined bank will blow past the recently increased $250 billion asset SIFI threshold. While each bank was likely to reach the threshold on its own soon, they chose to move past it on their own timetable, on their own terms, and in a significant way. Increased scale is still the best way to absorb greater regulatory costs – and that is true for larger and smaller banks alike.
• Favorable Regulatory Environment, For Now. Most experts expect regulators to be receptive to this and other large bank mergers. Although we expect significant public comment and skepticism from members of Congress, these efforts are unlikely to affect banking agency approvals in the current administration. It is possible, however, that the favorable regulatory environment for large bank mergers could end after the 2020 election, which could further motivate other regionals interested in bank mergers to strike now while the iron is hot.
• Additional Deals Likely. The transaction may portend additional consolidation in the year ahead. As always, a changing competitive landscape will present both challenges and opportunities for the smaller community and regional banks in the market. Be ready!

If you are interested in additional information about the implications of the BB&T/SunTrust merger, please contact Matthew Dyckman, Samantha Kirby, Bill Mayer, Regina Pisa or Bill Stern of Goodwin’s Banking Practice.

The Roundup will be on hiatus next week for the Presidents’ Day holiday, and will resume publication on February 27.

Regulatory Developments

CFPB Proposes Rescinding Certain Underwriting Requirements from Its 2017 Payday, Vehicle Title, and Certain High-Cost Installment Loan Rule

On February 6, the Consumer Financial Protection Bureau (CFPB) issued a notice of proposed rulemaking (NPRM) that would rescind portions of the agency’s 2017 final rule regulating payday loans, vehicle title loans, and certain high-cost installment loans (Rule). Among other things, the Rule requires lenders, including banks, to make certain underwriting determinations before making a variety of loans, chiefly small-dollar consumer loans. We previously discussed such requirements in detail in LenderLaw Watch.

Under the NPRM, the CFPB is proposing to rescind the Rule’s provisions that: (a) say it is an unfair and abusive practice to make a covered loan without reasonably determining the borrower’s ability to repay the loan; (b) specify underwriting requirements for evaluating a borrower’s ability to repay; (c) exempt some loans from the underwriting requirements; and (d) supply related definitions, reporting, and recordkeeping requirements.

According to the NPRM, the CFPB has initially determined that the evidence underpinning the Rule’s underwriting provisions was not sufficiently robust and reliable and that, despite the CFPB’s efforts to increase credit access and competition in credit markets, the Rule’s underwriting provisions would restrict such access and reduce such competition.

On February 11, Joseph Otting, Comptroller of the Currency, issued a statement applauding the NPRM, calling the CFPB’s action “an important and courageous step that will allow banks and other responsible lenders to again help consumers meet their short-term small-dollar needs.”

The CFPB will be accepting comments on the NPRM for 90 days after its publication in the Federal Register.

On February 6, in a separate but related notice of proposed rulemaking, the CFPB also proposed extending the August 19, 2019, compliance date for the Rule’s underwriting provisions to November 19, 2020, so that lenders will not have to comply with the provisions that would be rescinded. The CFPB will be accepting comments regarding the extended compliance date for 30 days after publication of the related notice in the Federal Register.

Invitation for Comments: Money Transmission Act - Agent of Payee Regulations

On February 8, the Commissioner of the California Department of Business Oversight began soliciting comments from stakeholders to clarify certain sections of the Money Transmitter Act (Act), in advance of rulemaking surrounding Agent of Payee regulation. The Act prohibits the provision of money transmission services in California, unless “the person is licensed or exempt from licensure under this division.” The Act further defines an exempt transaction as: “[a] transaction in which the recipient of the money or other monetary value is an agent of the payee pursuant to a preexisting written contract and delivery of the money or other monetary value to the agent satisfies the payor’s obligation to the payee.” While legislative history clearly indicates that the exemptions section was designed to exempt marketplace platforms such as Amazon or Airbnb from the licensure requirements, substantial uncertainty surrounds several of the terms of art within the section, specifically “goods or services,” “receipt of goods,” and “receipt of services.” The Department of Business Oversight is inviting comment on how these concepts may be appropriately defined. Comments may be submitted, either by electronic mail or U.S. mail, until April 9, 2019.

MSRB Clarifies Guidance On Dealers Posting Bids On Multiple Platforms

On February 7, the Municipal Securities Rulemaking Board (MSRB) clarified existing guidance on MSRB Rule G-18, which requires dealers to seek the most favorable terms reasonably available for retail customer transactions in municipal securities (i.e., best execution). The MSRB noted that some market participants have voiced concerns that the practice of simultaneously soliciting bids on multiple alternative trading systems (ATSs) or via multiple broker’s brokers in an attempt to achieve best execution may have harmful effects on dealers, investors, and the municipal market. In addition, the MSRB noted that such simultaneous solicitation of bids is not prohibited by Rule G-18, and that it may be consistent with a dealer’s best-execution obligation, as well as beneficial to customers. In light of the fact that a single ATS or broker’s broker can provide exposure to multiple dealers and markets, the MSRB amended existing guidance to further clarify that a dealer is not required to subscribe to every ATS or to solicit bids on multiple fixed-income ATSs or via multiple broker’s brokers to meet its best-execution obligation.

Enforcement & Litigation

Goodwin Releases Consumer Finance Year in Review

The rapid and sweeping changes many in the consumer finance industry expected in 2018 following President Donald Trump’s appointment of Mick Mulvaney as the Acting Director of the CFPB in 2017 did not occur as anticipated. Instead, the CFPB moved slowly, filed fewer public enforcement actions but surprisingly did not abandon certain existing ones, throttled back the pace of investigatory activities, and met its statutory mandate by issuing multiple requests for information about how the CFPB’s processes and outcomes could be improved. Analyzing the key developments from last year will allow financial services companies looking ahead to 2019 to anticipate and prepare for changes in the law, new regulatory interpretations, and shifting legislative and enforcement priorities.

To help our clients stay competitive in this evolving legal landscape, we are proud to present our Consumer Finance Year In Review. In this year-end review, we synthesize our prior coverage of 2018’s most significant developments and actions from both our LenderLaw Watch and Consumer Finance Enforcement Watch blogs, and use our detailed industry and regulatory knowledge to offer our predictions on what the industry might expect in 2019 in the mortgage, credit card, student lending, credit reporting, auto lending, debt collection, Telephone Consumer Protection Act (TCPA), payday lending, FinTech, and appellate areas. To review the online Year In Review, click here.

Southern District of California Dismisses TCPA Case For Failure to Plead ATDS Element

On January 16, the Southern District of California dismissed a TCPA claim against Lyft because the plaintiff failed to support the automatic telephone dialing system (ATDS) element of his claim. Like many similar TCPA plaintiffs, the plaintiff in Bodie v. Lyft, No. 3:16-cv-02558-L-NLS (S.D. Cal.), sought to state a TCPA claim by simply asserting that Lyft used an ATDS to send him text messages without providing factual allegations to support his claim. The Southern District of California found this was insufficient and dismissed the case. Given the prevalence of TCPA complaints that pay short shrift to the ATDS element, defendants should consider whether a similar strategy could pay dividends. Read the LenderLaw Watch blog post.