Board of Governors of the Federal Reserve System

Consumer and Community Affairs

The Division of Consumer and Community Affairs (DCCA) has primary responsibility for carrying out the Board of Governors' role in consumer financial protection and community development. DCCA conducts consumer supervision and oversight of community development programs, research, and policy analysis, as well as implements relevant statutory requirements for community reinvestment. Through these efforts, the division works to ensure that consumer and community perspectives inform Federal Reserve policy, research, and actions that advance DCCA's mission to promote a fair and transparent consumer financial services marketplace and effective community reinvestment.

Throughout 2016, the division engaged in numerous consumer and community-related functions and policy activities in the following areas:

• Formulating consumer-focused supervision and examination policy to ensure that financial institutions for which the Federal Reserve has authority comply with consumer protection laws and regulations and meet requirements of community reinvestment laws and regulations. The division provided oversight for the Reserve Bank consumer compliance supervision and examination programs in state member banks and bank holding companies (BHCs) through its policy development, examiner training, and supervision oversight programs. This involves policy setting and oversight of state member banks' performance under the Community Reinvestment Act (CRA); assessment of compliance with and enforcement of a wide range of consumer protection laws and regulations including those related to fair lending, unfair or deceptive acts or practices (UDAP), and flood insurance; analysis of bank and BHC applications in regard to consumer protection, convenience, and needs and the CRA; and processing of consumer complaints.
• Conducting research, analysis, and data collection to inform Federal Reserve and other policymakers about consumer protection risks and community economic development issues and opportunities. The division analyzed ongoing and emerging consumer financial services and community risks, practices, issues, and opportunities in order to understand and act on their implications for supervisory policies, as well as to gain insight into consumer decisionmaking related to financial services, implications of the financial crisis on young workers, and access to credit for small businesses.
• Engaging and convening key stakeholders to identify emerging issues and advance what works in community reinvestment and consumer protection. The division continued to promote fair and informed access to financial markets for all consumers, particularly underserved populations, by engaging lenders, government officials, and community leaders. Throughout the year, DCCA convened programs to share information on the financial and economic needs in low- and moderate-income (LMI) communities and research on effective community development policies and strategies.
• Writing and reviewing regulations that effectively implement consumer protection and community reinvestment laws. The division manages the Board's regulatory responsibilities with respect to certain entities and specific statutory provisions of the consumer financial services and fair lending laws. In 2016, DCCA participated in drafting interagency regulations, interpretations, and compliance guidance for the industry and the Reserve Banks.

Supervision and Examinations

DCCA develops supervisory policy and examination procedures for consumer protection laws and regulations, as well as for the CRA, as part of its supervision of the organizations for which the Board has authority, including holding companies, state member banks,¹ and foreign banking organizations. The division also administers the Federal Reserve System's risk-focused program for assessing consumer compliance risk at the largest bank and financial holding companies in the System, with division staff ensuring that consumer compliance risk is effectively integrated into the consolidated supervision of the holding company.

The division oversees the efforts of the 12 Reserve Banks to ensure that consumer protection laws and regulations are rigorously and consistently enforced for the approximately 829 state member banks that the Federal Reserve supervises for compliance with consumer protection and community reinvestment laws and regulations. Division staff provide guidance and expertise to the Reserve Banks on consumer protection laws and regulations, bank and BHC application analysis and processing, examination and enforcement techniques and policy matters, examiner training, and emerging issues. Finally, staff members participate in interagency activities that promote consistency in examination principles, standards, and processes.

Examinations are one of the Federal Reserve's methods of ensuring compliance with consumer protection laws and assessing the adequacy of consumer compliance risk-management systems within regulated entities. During 2016, the Reserve Banks completed 209 consumer compliance examinations of state member banks and 48 examinations of foreign banking organizations, 2 examinations of Edge Act corporations, and 2 examinations of agreement corporations.²

Bank Holding Company
Consolidated Supervision

During 2016, staff reviewed 121 bank and financial holding companies to ensure consumer compliance risk was appropriately incorporated into the consolidated risk-management program of the organization. Division staff participated with staff from the Board's Division of Supervision and Regulation on numerous projects related to ongoing implementation of the Dodd-Frank Act, including standards for assessing corporate governance and continued integration of savings and loan holding companies (SLHCs) under Federal Reserve supervision.³

Mortgage Servicing and Foreclosure

Payment Agreement Status

Throughout 2016, Board staff continued to work to oversee and implement the enforcement actions that were issued by the Federal Reserve and the Office of the Comptroller of the Currency (OCC) against 16 mortgage loan servicers between April 2011 and April 2012. At the time of the enforcement actions, along with other requirements, the two regulators directed servicers to retain independent consultants to conduct comprehensive reviews of foreclosure activity to determine whether eligible⁴ borrowers suffered financial injury because of servicer errors, misrepresentations, or other deficiencies. The file review initiated by the independent consultants, combined with a significant borrower outreach process, was referred to as the Independent Foreclosure Review (IFR).

In 2013, the regulators entered into agreements with 15 of the mortgage loan servicers to replace the IFR with direct cash payments to all eligible borrowers and other assistance (the Payment Agreement).⁵ The participating servicers agreed to pay an estimated $3.9 billion to 4.4 million borrowers whose primary residence was in a foreclosure process in 2009 or 2010. The Payment Agreement also required the servicers to contribute an additional $5.8 billion in other foreclosure prevention assistance, such as loan modifications and forgiveness of deficiency judgments. For the participating servicers, fulfillment of the agreement satisfied the foreclosure review requirements of the enforcement actions issued by the regulators in 2011 and 2012. The Payment Agreement did not affect the servicers' continuing obligations under the enforcement actions to address deficiencies in their mortgage servicing and foreclosure policies and procedures.

A paying agent, Rust Consulting, Inc., (Rust) was retained to administer payments to borrowers on behalf of the participating servicers. Beginning in April 2013, a letter with an enclosed check was sent to borrowers who had a foreclosure action initiated, pending, or completed in 2009 or 2010 with any of the participating servicers. Letters with checks were mailed to eligible borrowers through 2016. During this timeframe, checks were reissued upon the borrower's request due to expiration, a request for a change in payee, or a request by borrowers to split the check amongst the borrowers on the loan. For checks that have not been cashed or were returned undeliverable, the agencies directed Rust to expand its efforts to locate more-current address information for the unpaid borrowers. For nearly all borrowers, at least two, and in most cases, three attempts were made to reach each borrower.

As of March 31, 2016, all outstanding checks from the initial distribution of funds expired, with $3.5 billion distributed through 3.9 million checks, representing nearly 91 percent of the total value of the funds. Receiving a payment under the agreement did not prevent borrowers from taking any action they may wish to pursue related to their foreclosure. Servicers were not permitted to ask borrowers to sign a waiver of any legal claims they may have against their servicer in connection with receiving payment.⁶

In November 2015, the Federal Reserve announced it would direct Rust to redistribute any funds remaining after all outstanding checks expired on March 31, 2016, to eligible borrowers of Federal Reserve supervised servicers who had cashed or deposited their initial checks. This direction applied only to funds related to mortgage servicers supervised by the Federal Reserve and was consistent with the Federal Reserve's intention to distribute the maximum amount of funds to borrowers potentially affected by deficient servicing and foreclosure practices. The redistribution of remaining funds occurred in August, with Rust mailing checks totaling just over $80 million to nearly 650,000 borrowers of servicers supervised by the Federal Reserve. Under the redistribution, every eligible loan received a payment of $124.30. Borrowers cashed approximately $59 million of the $80 million prior to the December 31, 2016, expiration date for the redistribution checks, resulting in a cash rate of nearly 73 percent.

Foreclosure Prevention Actions

The Payment Agreement also required servicers to undertake well-structured loss-mitigation efforts focused on foreclosure prevention, with preference given to activities designed to keep borrowers in their homes through affordable, sustainable, and meaningful home preservation actions within two years from the date the agreement in principle was reached. The foreclosure prevention actions are expected to provide significant and meaningful relief or assistance to qualified borrowers and, as stated in the agreement, "should not disfavor a specific geography within or among states, nor disfavor low and/or moderate income borrowers, and not discriminate against any protected class."

Servicers could fulfill their obligations through three specific consumer-relief activities set forth in the National Mortgage Settlement, including first-lien loan modifications, second-lien loan modifications, and short sales or deeds-in-lieu of foreclosure. Servicers were given the option, subject to non-objection from their regulator, to meet their foreclosure prevention assistance requirements by paying additional cash into the qualified settlement funds to be used for direct payments to consumers or by providing cash or other resource commitments to borrower counseling or education. Several of the participating servicers chose this option and have met their foreclosure prevention obligations.

All servicers were required to submit reports detailing the consumer-relief actions they had taken to satisfy these requirements. The foreclosure prevention assistance actions reported included loan modifications, short sales, deeds-in-lieu of foreclosure, debt cancellation, and lien extinguishment. In order to receive credit toward the servicer's total foreclosure prevention obligation, the actions submitted must be validated by the regulators. A third party completed this validation to ensure that the foreclosure prevention assistance amounts met the requirements of the amendments to the enforcement actions. As stated in the Independent Foreclosure Review Report (July 2014),⁷ the Federal Reserve expects to publish data in 2017 regarding the final status of the cash payments and the foreclosure prevention assistance focused primarily on servicers regulated by the Federal Reserve.

Servicer Efforts to Address Deficiencies

In addition to the foreclosure review requirements, the enforcement actions required mortgage servicers to submit acceptable written plans to address various mortgage loan servicing and foreclosure processing deficiencies. In the time since the enforcement actions were issued, the banking organizations have been implementing the action plans, including enhanced controls, and improving systems and processes. To date, the supervisory review of the mortgage servicers' action plans has shown that the banking organizations under the enforcement actions have implemented significant corrective actions with regard to their mortgage servicing and foreclosure processes, and for most servicers, those corrective actions appear to be sustainable. For some servicers, additional actions need to be taken and those actions are currently in process. Federal Reserve supervisory teams will continue to monitor and evaluate the servicers' progress on implementing the action plans to address unsafe and unsound mortgage servicing and foreclosure practices as required by the enforcement actions.

Supervisory Matters

Enforcement Activities

Fair Lending and UDAP Enforcement

Through its supervision and enforcement teams, DCCA is committed to ensuring that the institutions it supervises comply fully with the federal fair lending laws--the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA). The ECOA prohibits creditors from discriminating against any applicant, in any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age. In addition, creditors may not discriminate against an applicant because the applicant receives income from a public assistance program or has exercised, in good faith, any right under the Consumer Credit Protection Act. The FHA prohibits discrimination in residential real estate related transactions, including the making and purchasing of mortgage loans, on the basis of race, color, religion, sex, handicap, familial status, or national origin.

The Board supervises all state member banks for compliance with the FHA. The Board and the CFPB both have supervisory authority for compliance with the Equal Credit Opportunity Act (ECOA). For state member banks with assets of $10 billion or less, the Board has the authority to enforce the ECOA. For state member banks with assets over $10 billion, the CFPB has this authority.

With respect to the Federal Trade Commission Act (FTC Act), which prohibits unfair or deceptive acts or practices (UDAP), the Board has supervisory and enforcement authority over all state member banks, regardless of asset size. The Board is committed to ensuring that the institutions it supervises comply fully with the prohibition on unfair or deceptive acts or practices as outlined in the FTC Act. An act or practice may be found to be unfair where it causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. A representation, omission, or practice is deceptive if it is likely to mislead a consumer acting reasonably under the circumstances and is likely to affect a consumer's conduct or decision regarding a product or service.

Fair lending and UDAP reviews are conducted regularly within the supervisory cycle. Additionally, examiners may conduct fair lending and UDAP reviews outside of the usual supervisory cycle, if warranted by fair lending and UDAP risk. When examiners find evidence of potential discrimination or potential UDAP violations, they work closely with DCCA's Fair Lending and UDAP Enforcement sections, which provide additional legal and statistical expertise and ensure that fair lending and UDAP laws are enforced consistently and rigorously throughout the Federal Reserve System.

With respect to fair lending, pursuant to the ECOA, if the Board has reason to believe that a creditor has engaged in a pattern or practice of discrimination in violation of the ECOA, the matter must be referred to the Department of Justice (DOJ). The DOJ reviews the referral and determines whether further investigation is warranted. A DOJ investigation may result in a public civil enforcement action or settlement. Alternatively, the DOJ may decide to return the matter to the Board for administrative enforcement. When a matter is returned to the Board, staff ensure that the institution takes all appropriate corrective action.

During 2016, the Federal Reserve referred the following seven matters to the DOJ:

• Two referrals involved redlining, or discrimination against potential borrowers based upon the racial composition of their neighborhoods, in violation of the ECOA and the FHA. Based on an analysis of each bank's lending practices, its marketing, the location of its branches, and its delineated assessment area under the CRA, the Board determined that the banks avoided lending in minority neighborhoods.
• One referral involved discrimination on the basis of national origin, in violation of the ECOA. The lender charged Hispanic borrowers higher interest rates than non-Hispanic borrowers for unsecured consumer loans. Legitimate pricing factors failed to explain the pricing disparities.
• Four referrals involved discrimination on the basis of marital status, in violation of the ECOA. The banks improperly required spousal guarantees on loans, in violation of Regulation B.

If there is a fair lending violation that does not constitute a pattern or practice under ECOA or a UDAP violation, the Federal Reserve takes action to ensure that the violation is remedied by the bank. Most lenders readily agree to correct fair lending and UDAP violations, often taking corrective action as soon as they become aware of a problem. Thus, the Federal Reserve frequently uses informal supervisory tools (such as memoranda of understanding between banks' boards of directors and the Reserve Banks, or board resolutions) to ensure that violations are corrected. When necessary, the Board can bring public enforcement actions.

In 2016, the Board issued a consent order to cease and desist and assessed a civil money penalty of $960,000 for deceptive practices associated with deposit accounts that were in violation of the FTC Act. The actions addressed in this order involved several practices that, at various points in the financial aid refund selection process, misled students about significant aspects of the account, including terms and fees.⁸ Specifically, the website and marketing materials associated with the deposit product omitted material information about the fees, features, and limitations of the product. The enrollment process also omitted information relating to the location and availability of fee-free ATMs where students could access their financial aid disbursements without additional cost. The bank's agent was subject to an enforcement action in 2015 and undertook corrective action to address these and other violations prior to the entry of the order against the bank in 2016.⁹

Given the complexity of this area of supervision, the Federal Reserve seeks to provide transparency on its perspectives and processes to the industry and the public. Fair Lending and UDAP Enforcement staff meet regularly with consumer advocates, supervised institutions, and industry representatives to discuss fair lending and UDAP issues and receive feedback. Through this outreach, the Board is able to address emerging fair lending and UDAP issues and promote sound fair lending and UDAP compliance. For example, in 2016, the Board sponsored a free interagency webinar on fair lending supervision through Compliance Outlook Live, which was attended by almost 6,000 registrants, most of which were community banks.¹⁰ In addition, DCCA staff participate in numerous meetings, conferences, and trainings sponsored by consumer advocates, industry representatives, and interagency groups.

Flood Insurance

The National Flood Insurance Act imposes certain requirements on loans secured by buildings or mobile homes located in, or to be located in, areas determined to have special flood hazards. Under the Federal Reserve's Regulation H, which implements the act, state member banks are generally prohibited from making, extending, increasing, or renewing any such loan unless the building or mobile home, as well as any personal property securing the loan, are covered by flood insurance for the term of the loan. The law requires the Board and other federal financial institution regulatory agencies to impose civil money penalties when they find a pattern or practice of violations of the regulation.

In 2016, the Federal Reserve issued two formal consent orders and assessed $33,485 in civil money penalties against state member banks to address violations of the flood regulations. These statutorily mandated penalties were forwarded to the National Flood Mitigation Fund held by the Department of the Treasury for the benefit of the Federal Emergency Management Agency.

The Board and four other federal agencies issued a proposal in November 2016 to implement provisions relating to lenders' acceptance of private flood insurance policies, as stipulated under the Biggert-Waters Flood Insurance Reform Act of 2012 (see "Consumer Laws and Regulations" later in this section).

Community Reinvestment Act

The CRA requires that the Federal Reserve and other federal banking and thrift regulatory agencies encourage financial institutions to help meet the credit needs of the local communities in which they do business, consistent with safe and sound operations. To carry out this mandate, the Federal Reserve

• examines state member banks to assess their performance under the CRA;
• considers state member banks' and bank holding companies' CRA performance in context with other supervisory information when analyzing applications for mergers and acquisitions; and
• disseminates information about community development techniques to bankers and the public through Community Development offices at the Reserve Banks.

The Federal Reserve assesses and rates the CRA performance of state member banks in the course of examinations conducted by staff at the 12 Reserve Banks. During the 2016 reporting period, the Reserve Banks completed 206 CRA examinations of state member banks. Of those banks examined, 12 were rated "Outstanding," 188 were rated "Satisfactory," 6 were rated "Needs to Improve," and none were rated "Substantial Non-Compliance."

During the 2016 review period, the Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) published in the Federal Register "Interagency Questions and Answers Regarding Community Reinvestment" (Q&As) in July 2016.¹¹ The document provides additional guidance to financial institutions and the public on the agencies' CRA regulations. The revisions to the Q&As primarily consist of nine revisions to existing Q&As and seven newly added Q&As dealing with community development-related issues, the availability and effectiveness of retail banking services, innovative or flexible lending practices, and other definitional issues.

Mergers and Acquisitions

The Federal Reserve analyzes expansionary applications by banks or BHCs, taking into account the likely effects of the acquisition on competition, the convenience and needs of the communities to be served, the financial and managerial resources and future prospects of the companies and banks involved, and the effectiveness of the company's policies to combat money laundering. As part of this process, DCCA evaluates whether the institutions are currently meeting the convenience and needs of their communities and the effectiveness of existing managerial resources, as well as the institutions' ability to meet the convenience and needs of their communities and the adequacy of their managerial resources after the proposed transaction.

The depository institution's CRA record is a critical component of this analysis. The CRA requires the Federal Reserve to consider a depository institution's record of helping to meet the credit needs of its local communities in evaluating applications for mergers, acquisitions, and branches. An institution's most recent CRA performance evaluation is a particularly important, and often controlling, consideration in the applications process because it represents a detailed on-site evaluation of the institution's performance under the CRA by its federal supervisor.

As part of the analysis of managerial resources, the Federal Reserve reviews the institution's record of compliance with consumer protection laws and regulations. The institution's most recent consumer compliance rating is central to this review because, like the CRA performance evaluation, it represents the detailed findings of the institution's supervisory agency.

Less-than-satisfactory CRA or consumer compliance ratings or other significant consumer compliance issues can pose an impediment to the processing and approval of the application. Federal Reserve staff gather additional information about CRA and consumer compliance performance in many circumstances, such as when the financial institution(s) involved in an application have less-than-satisfactory CRA or compliance ratings or recently identified consumer compliance issues, or when the Federal Reserve receives comments from interested parties that raise CRA or consumer compliance issues. To further enhance transparency about this process, the Board issued guidance to the public in 2014 describing the Federal Reserve's approach to applications and notices, highlighting those that may not satisfy statutory requirements for approval of a proposal or that otherwise raise supervisory or regulatory concerns.¹²

The Board provides information on its actions associated with these merger and acquisition transactions, issuing press releases and Board Orders for each.¹³ The Federal Reserve also publishes semiannual reports that provide pertinent information on applications and notices filed with the Federal Reserve.¹⁴ The reports include statistics on the number of proposals that had been approved, denied, and withdrawn as well as general information about the length of time taken to process proposals. Additionally, the reports discuss common reasons that proposals have been withdrawn from consideration.

Because these applications are of interest to the public, they often generate comments that raise various issues for Board staff to consider in their analyses of the supervisory and lending records of the applicants. With respect to consumer compliance and community reinvestment, one of the more common allegations is that either or both the target and the acquirer fail to make credit available to certain minority groups and to LMI individuals. Commenters also often express concerns about branch closures or the banks' record of lending to small businesses in LMI geographies.

In evaluating the applications and the merits of public comments, the Board considers information provided by applicants and analyzes supervisory information, including examination reports with evaluations of compliance with fair lending and other consumer protection laws and regulations, and confers with other regulators, as appropriate, for their supervisory views. If warranted, the Federal Reserve will also conduct pre-membership exams for a transaction in which an insured depository institution will become a state member bank or in which the surviving entity of a merger would be a state member bank.¹⁵

During 2016, the Board considered over 100 applications, with topics ranging from change in control notices, to branching requests, to mergers and acquisitions. DCCA staff analyzed the following 14 unrelated notices and applications for transactions involving bank mergers and branching that involved adverse public comments on CRA issues or consumer compliance issues, such as fair lending, which the Board considered and approved:¹⁶

• Frost Bank, San Antonio, Texas, to establish branches at 314 South WW White Road, San Antonio, and 2421 East Seventh Street, Austin, Texas, was approved in March.
• Goldman Sachs Bank USA, New York, New York, to assume certain deposits of, and acquire certain assets from, GE Capital Bank, Holladay, Utah, was approved in March.
• Republic Bancorp, Inc., Louisville, Kentucky, to merge with Cornerstone Bancorp, Inc., and thereby indirectly acquire Cornerstone Community Bank, both of St. Petersburg, Florida, was approved in May.
• Origin Bank, Choudrant, Louisiana, to establish a branch at 2049 West Gray Street, Houston, Texas, and a mobile branch in Harris County, Texas, was approved in May.
• BNC Bancorp, High Point, North Carolina, to acquire Southcoast Financial Corporation and thereby indirectly acquire Southcoast Community Bank, both of Mt. Pleasant, South Carolina, was approved in June.
• Compass Bank, Birmingham, Alabama, to establish a branch at 5900 Quebec Street, Fort Worth, Texas, was approved in June.
• Bank of the Ozarks, Inc., Little Rock, Arkansas, to merge with Community & Southern Holdings, Inc., and thereby indirectly acquire Community & Southern Bank, both of Atlanta, Georgia, was approved in June.
• KeyCorp, Cleveland, Ohio, to acquire First Niagara Financial Group, Inc., and thereby indirectly acquire First Niagara Bank, National Association, both of Buffalo, New York, was approved in July.
• Huntington Bancshares Incorporated, Columbus, Ohio, to merge with FirstMerit Corporation and thereby indirectly acquire its wholly owned subsidiary, FirstMerit Bank, N.A., both of Akron, Ohio, was approved in July.
• Chemical Financial Corporation, Midland, Michigan, to merge with Talmer Bancorp, Inc., and thereby indirectly acquire Talmer Bank and Trust ("Talmer Bank"), both of Troy, Michigan; and Chemical Bank, Midland, Michigan, to merge with Talmer Bank and to establish and operate branches at the locations of Talmer Bank's main office and branches, were approved in August.
• BNC Bancorp to merge with High Point Bank Corporation and thereby indirectly acquire High Point Bank and Trust Company, all of High Point, North Carolina, was approved in October.
• Wintrust Financial Corporation, Rosemont, Illinois, to merge with First Community Financial Corporation and thereby indirectly acquire First Community Bank, both of Elgin, Illinois; and St. Charles Bank & Trust Company, St. Charles, Illinois, to merge with First Community Bank and to establish and operate a branch at the main office and at a branch of First Community Bank, were approved in October.
• First Midwest Bancorp, Inc., Itasca, Illinois, to merge with Standard Bancshares, Inc. and thereby indirectly acquire Standard Bank and Trust Company ("SB&T"), both of Hickory Hills, Illinois; and First Midwest Bank, Itasca, Illinois, to merge with SB&T and to establish and operate branches at the locations of SB&T's main office and branches, were approved in November.
• BOK Financial Corporation, Tulsa, Oklahoma, to acquire MBT Bancshares, Inc., and thereby indirectly acquire Missouri Bank and Trust Company of Kansas City, both of Kansas City, Missouri, was approved in November.

Coordination with the Consumer Financial Protection Bureau

During 2016, staff continued to coordinate on supervisory matters with the CFPB in accordance with the Interagency Memorandum of Understanding on Supervision Coordination with the CFPB. The agreement is intended to establish arrangements for coordination and cooperation among the CFPB and the OCC, the FDIC, the National Credit Union Association (NCUA), and the Board of Governors. The agreement strives to minimize unnecessary regulatory burden and to avoid unnecessary duplication of effort and conflicting supervisory directives amongst the prudential regulators. The regulators work cooperatively to share exam schedules for covered institutions and covered activities to plan simultaneous exams, provide final drafts of examination reports for comment, and share supervisory information.

Coordination with Other Federal
Banking Agencies

The Board regularly coordinates with other federal banking agencies, including through the development of interagency guidance, in order to clearly communicate supervisory expectations. The Federal Reserve also works with the other member agencies of the Federal Financial Institutions Examination Council (FFIEC) to develop consistent examination principles, standards, procedures, and report formats.¹⁷ In 2016, the banking agencies continued to work together on various initiatives.

Updating Examination Procedures

In April, the FFIEC developed examination procedures reflecting a July 2015 interagency rulemaking addressing force placement of flood insurance, escrow of flood insurance premiums and fees, and the exemption to the mandatory purchase of flood insurance requirement for certain detached structures.

In June, the FFIEC developed revised interagency examination procedures for Regulation P. The revised examination procedures incorporate amendments made by section 75001 of the Fixing America's Surface Transportation Act (FAST Act) to section 503 of the Gramm-Leach-Bliley Act (GLBA). GLBA section 503, which is implemented by Regulation P, generally requires a financial institution to provide annual notice to its customers of its policies and practices with respect to disclosing and protecting nonpublic personal information. Section 75001 of the FAST Act was effective upon enactment on December 4, 2015, and establishes an exception to this annual privacy notice requirement.

In September, the FFIEC also developed revised interagency examination procedures for the Military Lending Act (MLA). The revised procedures reflect amendments to the MLA implementing regulation made by the U.S. Department of Defense (DOD) in a final rule issued in July 2015. Among a range of other amendments, the DOD amended the regulation to extend the protections of the MLA to a wider range of closed-end and open-end credit products, including credit cards.

Coordinating Transfer of Regulation C (HMDA) Data Operations

Also in 2016, the FFIEC continued to implement its plan for the transfer of Regulation C (Home Mortgage Disclosure Act (HMDA)) data operations to the CFPB in January 2018. The Board will administer and maintain the current HMDA data operations system and continue to collect and process HMDA data through December 2017.

Uniform Interagency Consumer Compliance Ratings System

In November 2016, the FFIEC announced the issuance of an updated Uniform Interagency Consumer Compliance Rating System (CC Rating System).¹⁸ The CC Rating System is a supervisory policy for evaluating financial institutions' adherence to consumer compliance requirements. The CC Rating System provides a general framework for assessing risks during the supervisory process using certain compliance factors and assigning an overall consumer compliance rating to each federally regulated financial institution. The primary purpose of the CC Rating System is to ensure that regulated financial institutions are evaluated in a comprehensive and consistent manner, and that supervisory resources are appropriately focused on areas exhibiting risk of consumer harm and on institutions that warrant elevated supervisory attention. The new CC Rating System is designed to better reflect current consumer compliance supervisory approaches and to more fully align the CC Rating System with current risk-based, tailored examination processes. The revisions to the CC Rating System were not developed to set new or higher supervisory expectations for financial institutions and their adoption will represent no additional regulatory burden. For more on the new system, see box 1.

Guidance on Deposit Reconciliation Practices

In May, the Board, CFPB, FDIC, NCUA, and OCC issued guidance to explain the agencies' supervisory expectations regarding institutions' account deposit reconciliation practices. Among other things, the guidance highlights the requirement in the Expedited Funds Availability Act, as implemented by Regulation CC, 12 CFR part 229, that financial institutions make funds that have been deposited in a transaction account available for withdrawal within prescribed time limits, as well as the FTC Act's prohibition against unfair or deceptive acts or practices.

Examiner Training

Ensuring that financial institutions comply with laws that protect consumers and encourage community reinvestment is a fundamental aspect of the bank examination and supervision process. As the complexity of both consumer financial transactions and the regulatory landscape has increased, timely and responsive training for consumer compliance examiners is vitally important. The examiner staff development function is responsible for the ongoing development of the professional consumer compliance supervisory staff, from an initial introduction to the Federal Reserve System through the development of proficiency in consumer compliance topics sufficient to earn an examiner's commission. DCCA's role is to ensure that examiners have the skills necessary to meet their supervisory responsibilities now and in the future.

Consumer Compliance Examiner
Training Curriculum

Currently, the consumer compliance examiner training curriculum consists of five courses focused on consumer protection laws, regulations, and examining concepts. In 2016, these courses were offered in 10 sessions, and training was delivered to a total of 198 Federal Reserve consumer compliance examiners and staff members and 7 state banking agency examiners. These courses are principally conducted by traditional classroom method. Board and Reserve Bank staff regularly review the core curriculum for examiner training, updating subject matter and adding new elements as appropriate.

Throughout 2016, DCCA continued its partnership with Reserve Bank personnel to design and develop a modernized consumer compliance examiner training program. Modeled after existing programs in Division of Supervision & Regulation, the modernization effort was launched in 2015 with the assembly of a development team of dedicated examiners and instructional design experts. A multiyear effort slated for completion in late 2020, the goal of the modernization is to transition from traditional classroom-based training to virtual, self-directed, and blended delivery methods, designed by experts in adult learning and directed by System subject-matter experts, with additional oversight direction provided by Board staff. Thus far, the modernization teams have completed their analyses of the examination tasks to be captured, as well as the formulation of design documents. They are now involved in the development of storyboards, which serve as the curriculum narrative. As the modernization is fully implemented over the next three calendar years, continuing professional development and on-the-job training will be incorporated into the program.

Ongoing Training Opportunities

In addition to providing core examiner training, the examiner staff development function emphasizes the importance of continuing, lifelong learning. Opportunities for continuing learning include special projects and assignments, self-study programs, rotational assignments, the opportunity to instruct at System schools, mentoring programs, and a consumer compliance examiner forum held every 18 months where senior consumer compliance examiners receive information on emerging compliance issues and are able to share best practices from across the System. To accommodate those individuals unable to attend the forum in-person, a live-stream option was also added.

In 2016, the System continued to offer Rapid Response sessions. Introduced in 2008, Rapid Response sessions offer examiners one-hour teleconference webinars on emerging issues or urgent training needs that result from the implementation of new laws, regulations or supervisory guidance as well as case studies. Eight consumer compliance Rapid Response sessions were designed, developed, and presented to System staff during 2016. The topics covered the following:

• Fair Lending

  • Fair Lending Tool 6.0: Portfolio Analysis
  • 2015 Year-End Review
  • Risk Assessment: Overview
  • Risk Assessment: Mortgage Pricing
  • Risk Assessment: Redlining
• Risk Focused Supervision Program Horizontal Review
• Consumer Complaints
• Community Reinvestment - Interagency Q&A

Outreach and Training to Agency and
Industry Stakeholders

During 2016, the Federal Reserve System collaborated with its supervisory agency partners to offer seven Outlook Live and FFIEC Examiner Exchange webinars focused on delivering timely, relevant compliance information to the banking industry as well as to experienced examiners and other regulatory personnel. In 2016, Outlook Live webinars addressed the following topics:

• Community Reinvestment-Related Issues (February and November)
• "Know Before You Owe" Mortgage Disclosure Rule - Lessons Learned Post-Implementation (March and April)
• Interagency Fair Lending Hot Topics (October)
• Interagency Discussion of Overdraft Services (November)
• Military Lending Act Compliance (December)

Responding to Consumer Complaints
and Inquiries

The Federal Reserve investigates complaints against state member banks and selected nonbank subsidiaries of BHCs (Federal Reserve regulated entities), and forwards complaints against other creditors and businesses to the appropriate enforcement agency. Each Reserve Bank investigates complaints against Federal Reserve regulated entities in its District. The Federal Reserve also responds to consumer inquiries on a broad range of banking topics, including consumer protection questions.

In late 2007, the Federal Reserve established Federal Reserve Consumer Help (FRCH) to centralize the processing of consumer complaints and inquiries. In 2016, FRCH processed 34,350 cases. Of these cases, 24,724 were inquiries and the remainder (9,626) were complaints, with most cases received directly from consumers. Approximately 7 percent of cases were referred to the Federal Reserve from other federal and state agencies.

While consumers can contact FRCH by a variety of different channels, most FRCH consumer contacts occurred by telephone (66 percent). Nevertheless, 31 percent (10,762) of complaint and inquiry submissions were made electronically (via e-mail, online submissions, and fax), and the online form page received 20,355 visits during the year.

Consumer Complaints

Complaints against Federal Reserve regulated entities totaled 2,805 in 2016. Approximately 5 percent (134) of these complaints were closed without investigation, pending the receipt of additional information from consumers. Nine percent of the total complaints were still under investigation in December 2016. Sixty-two percent (1,750) involved unregulated practices and 22 percent (621) involved regulated practices. (Table 1 shows the breakdown of complaints about regulated practices by regulation or act; table 2 shows complaints by product type.)

Table 1. Complaints against state member banks and selected nonbank subsidiaries of bank holding companies about regulated practices, by regulation/act, 2016

 

 

Table 2. Complaints against state member banks and selected nonbank subsidiaries of bank holding companies about regulated practices, by product type, 2016

 

 

Complaints about Regulated Practices

The majority of regulated practices complaints concerned checking accounts (27.7 percent), credit card accounts (27.1 percent), and real estate (10.6 percent).¹⁹ The most common checking account complaints related to funds availability not as expected (33 percent), insufficient funds/overdraft charges and procedures (16 percent), disputed withdrawal of funds (12 percent), and alleged forgery/fraud/embezzlement/theft (6 percent). The most common credit card complaints related to inaccurate credit reporting (32 percent), billing error resolution (12 percent), account opening or closing (11 percent), and payment errors/delays (11 percent). The most common real estate complaints by problem code related to debt collection/foreclosure concerns (15 percent), escrow problems (14 percent), payment errors/delays (12 percent), and disputed rates, terms, and fees (9 percent).

Eleven regulated practices complaints alleging discrimination based on prohibited borrower traits or rights were received in 2016. Seven discrimination complaints were related to the race, color, national origin, or ethnicity of the applicant or borrower. Four discrimination complaints were related to either the age, handicap, familial status, or religion of the applicant or borrower. Of the closed complaints alleging discrimination based on a prohibited basis in 2016, there was one violation related to illegal credit discrimination.

In 83 percent of investigated complaints against Federal Reserve regulated entities, evidence revealed that institutions correctly handled the situation. Of the remaining 17 percent of investigated complaints, 7 percent were identified errors which were corrected by the bank, 6 percent were deemed violations of law, and the remainder included matters involving litigation or factual disputes, withdrawn complaints, internally referred complaints, or information was provided to the consumer.

Complaints about Unregulated Practices

The Board continued to monitor complaints about banking practices not subject to existing regulations. For example, a consumer complaint about poor service received at a bank is not subject to a regulation, and therefore is considered a complaint about an unregulated practice. In 2016, the Board received 1,750 complaints against Federal Reserve regulated entities that involved these unregulated practices. The majority of the complaints were related to electronic transactions/prepaid products (44 percent), credit cards (24 percent), checking account activity (11 percent), and real estate loans (5 percent).

Complaint Referrals

In 2016, the Federal Reserve forwarded 6,868 complaints to other regulatory agencies and government offices for investigation. To minimize the time required to re-route complaints to these agencies, referrals were transmitted electronically.

The Federal Reserve forwarded 15 complaints to the Department of Housing and Urban Development (HUD) that alleged violations of the Fair Housing Act²⁰ and were closed in 2016. The Federal Reserve's investigation of these complaints revealed no instances of illegal credit discrimination.

Consumer Inquiries

The Federal Reserve received 24,724 consumer inquiries in 2016 covering a wide range of topics. Consumers were typically directed to other resources, including other federal agencies or written materials, to address their inquiries.

Consumer Laws and Regulations

Throughout 2016, DCCA continued to administer the Board's regulatory responsibilities with respect to certain entities and specific statutory provisions of the consumer financial services and fair lending laws. This included drafting regulations and issuing interpretations and compliance guidance for the industry and the Reserve Banks.

Flood Insurance Proposal

In November 2016, the Board, along with the Farm Credit Administration, the FDIC, the NCUA, and the OCC jointly issued a proposed rule to amend regulations applicable to loans secured by improved real estate or mobile homes located in special flood hazard areas.²¹ Regulated lending institutions must ensure that flood insurance is purchased for such loans, consistent with the requirements of the National Flood Insurance Act. The November 2016 proposal would implement provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) relating to lenders' acceptance of private flood insurance policies.

Consistent with the Biggert-Waters Act, the proposal would require regulated lending institutions to accept private flood insurance policies that meet the criteria set forth in the statute (mandatory acceptance). The proposal also would establish a compliance aid to help regulated lending institutions determine which private insurance policies they would be required to accept under the mandatory acceptance provision.

Under the proposal, regulated lending institutions would retain the ability to accept, at their discretion, other flood insurance policies issued by private insurers (discretionary acceptance), provided the policies meet a subset of the criteria for mandatory acceptance as specified in the rules. Regulated lending institutions would also be permitted under the proposal to accept policies issued by mutual aid societies, which typically do not meet all of the discretionary acceptance criteria, if, among other things, the appropriate supervisory agency determines that the policy qualifies as flood insurance for purposes of the Federal flood insurance statutes.

Threshold Adjustment Calculation

In November 2016, the Board and the CFPB issued final revisions to Official Staff Interpretations detailing the method for calculating annual inflation adjustments to the dollar thresholds for exempting certain consumer credit transactions under the Truth in Lending Act and certain consumer leasing transactions under the Consumer Leasing Act.²² Similarly, the Board, the CFPB, and the OCC issued final revisions to Official Staff Interpretations detailing the method for calculating annual inflation adjustments to the dollar threshold for exempting small loans from special appraisal requirements.²³

The revised Official Staff Interpretations provide that the existing dollar thresholds will remain unchanged if the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) decreases or stays the same. The revised Official Staff Interpretations also explain the method for making adjustments in years following a year in which the exemption threshold was not adjusted because the CPI-W did not increase from the previous year. In that case, the annual percentage increase in the CPI-W will not be added to the existing dollar threshold (which was unchanged as a result of the decrease in the CPI-W). Instead, the dollar threshold will be calculated by applying the annual percentage increase in the CPI-W to the dollar amount that would have resulted if the decreases and any subsequent increases in the CPI-W had been taken into account. This calculation method ensures that the thresholds keep pace with the CPI-W.

Consumer Research and Emerging-Issues and Policy Analysis

Throughout 2016, DCCA analyzed emerging issues in consumer financial services policies and practices in order to understand their implications for the market-risk surveillance and supervisory policies
that are core to the Federal Reserve's functions, as well as to gain insight into consumer financial decisionmaking.

Researching Issues Affecting Consumers and Communities

In 2016, DCCA explored various issues related to consumers and communities by convening experts, conducting original research, and fielding new and ongoing surveys. The information gleaned from these undertakings provided insights into the factors affecting consumers and households.

Household Economics and Decisionmaking

In order to better understand consumer decisionmaking in the rapidly evolving financial services sector, DCCA periodically conducts Internet panel surveys to gather data on consumers' experiences and perspectives on various issues of interest.

Results of DCCA's Survey of Household Economics and Decisionmaking (SHED) were published in the Report on the Economic Well-Being of U.S. Households in 2015, released in May 2016. DCCA launched the survey to better understand consumer decisionmaking in the wake of the Great Recession, with the aim to capture a snapshot of the financial and economic well-being of U.S. households. In doing so, the SHED collects information on households that is not readily available from other sources or is not available in combination with other variables of interest. It also oversamples LMI households in order to obtain additional precision regarding findings among these populations.

Among its key findings, the survey found that overall in 2015, individuals and their families continued to express mild improvements in their overall well-being relative to that seen in 2013 and 2014. However, a number of adults still said they were experiencing financial challenges, and optimism about the future tempered in 2015. Sixty-nine percent of adults reported that they were either "living comfortably" or "doing okay," compared to 65 percent in 2014 and 62 percent in 2013. However approximately 76 million adults in 2015 were either "struggling to get by" or are "just getting by."

The survey also asked respondents about specific aspects of their financial lives, including the following areas:

• income and savings
• economic preparedness
• banking and credit
• housing and living arrangements
• car purchasing and auto lending
• education and human capital
• education debt and student loans
• retirement

For a fuller discussion of survey results, see the report at www.federalreserve.gov/2015-report-economic-well-being-us-households-201605.pdf.

Emerging-Issues Analysis

The Policy Analysis function of DCCA provides key insights, information, and analysis on emerging financial services issues that affect the well-being of consumers and communities. To this end, Policy Analysis staff analyze and anticipate trends, lead division-wide issues working groups, and organize expert roundtables to identify emerging consumer risks and inform policy recommendations.

In 2016, the Policy Analysis team developed analyses on a broad range of issues in financial service markets that potentially pose risks to consumers. Among the priority issue areas were subprime auto lending, small-dollar lending, bank and alternative-lender provision of small business credit, and disparities in households' income and wealth by race. In addition, the team conducted a suite of activities focused on trends in student lending.

Student Lending

Lifetime returns on investments in higher education are generally positive and substantial, but depend largely upon the institution the student attends, their field of study, and whether they graduate. The financing of higher education poses a daunting challenge for many students. While counseling can help students make the financial and educational choices that are best for them, many students lack access to quality financial advice. To gain a general understanding of how financial aid counselors work with students and how students make decisions about paying for their education, especially with student loans, the Policy Analysis team, in partnership with the National Association of Student Financial Aid Administrators (NASFAA) and the Texas Guaranteed Student Loan Corporation, conducted focus group research with several financial aid administrator members of NASFAA.

A Board report, Student Loan Counseling Challenges and Opportunities, was released in November.²⁴ Among the findings, participants noted that resource, administrative, regulatory, and legal constraints limit their ability to provide effective counseling to students. The counselors also indicated that offering general financial education to students in primary and secondary grades could help make financial aid counseling at the college level more effective.

The Policy Analysis team also hosted a public conference on the theme of the financial risks of pursuing postsecondary education, featuring researchers and university administrators from across the country. Presenters noted that certain groups--including students of color and those that do not complete their degrees--are at higher risk of low or negative returns to their investments in postsecondary education. Participants also offered proposals that they believe would reduce these risks. These include government-matched savings accounts for children, income-share agreements, and deferred tuition models. Researchers also described ongoing experiments that explore how insights from behavioral economics can be leveraged to empower students to make informed financial decisions. The networks and information generated from this conference will help inform the Board's ongoing monitoring of the student loan market.

Community Development

The Federal Reserve System's Community Development function promotes economic growth and financial stability--particularly for underserved households and communities--by informing research, policy, and action. As a decentralized function, the Community Affairs Officers at each of the 12 Reserve Banks design activities to respond to the specific needs of the communities they serve, with oversight from Board staff to promote and coordinate Systemwide priorities.

Exploring Economic Vitality of Rural Communities and Housing Markets

The Federal Reserve's mission is to promote a healthy economy and strong financial system. The financial crisis and the Great Recession demonstrated, in an unmistakable manner, the vulnerability of a significant portion of American families and communities. Clearly, those who struggled before the crisis--those with insufficient education, incomes, and assets--were disproportionately affected. Similarly, a protracted and uneven recovery meant that these families and communities did not share equally in the economic gains. This is particularly true for rural areas such as the Mississippi Delta, Appalachia, colonias,²⁵ and native communities that face challenges associated with persistent, generational poverty.

In response, Community Development staff at the Federal Reserve hosted "The Future of Rural Communities: Implications for Housing," a national policy forum in partnership with the U.S. Department of Agriculture's Rural Development. Forum participants explored changing demographic and economic trends that exacerbate the misalignment of existing housing and community development policy in rural communities as well as promising models for addressing community needs resulting from collaboration between policymakers and practitioners. Given the lack of data on rural consumers and housing markets--particularly as to how their characteristics and needs differ from urban America--the forum surfaced unanswered research and policy questions that could contribute to developing evidence-based solutions for improving access to credit and financial stability in rural America.

Community Development staff will continue to convene national thought leaders to frame future research and policy considerations that would facilitate the flow of capital and economic investment in rural communities in 2017.

Informing the Board on the Evolving Financial Services Marketplace

In 2016, the Federal Reserve undertook efforts to better understand the intersections of banking and emerging financial technology (fintech) including marketplace lending to consumers and small businesses. Marketplace lenders have demonstrated the potential to increase the access to credit and financial services by providing more efficient ways for borrowers to find, apply for, and secure financing. The growth in the fintech sector naturally raises questions about the risks that marketplace lenders present to consumers and small businesses. In response, the DCCA held a roundtable discussion with a broad range of industry experts to explore the evolving landscape of marketplace lending; the changing financial behavior of borrowers, particularly of traditionally underserved households; and the evolving role of traditional financial institutions and nonbank partners. Moving forward, DCCA will continue to assess supervisory policies that can foster financial innovation while still protecting borrowers, and analyze the impact of new business models and the competitive landscape on financial institutions and consumers.

Exploring Experiences and Expectations in the Labor Market

Many individuals (entrant, current, and former workers) search for ways to earn supplemental or self-employment incomes and stop-gap measures to generate income to make ends meet. The Federal Reserve seeks to better understand the experiences and expectations of these individuals in order to identify potential implications for the labor market. In 2016, Community Development staff published the findings from a survey that examined the extent to which individuals are increasingly acting as their own agents of employment rather than as employees of a particular firm to supplement or supplant income. See box 2 for more details. In addition, staff published a report on findings from the Survey of Young Workers, which examined the perceptions and experiences of adults ages 18 to 30 in the labor market.²⁶ That survey attempted to better understand the connection between educational choices and employment opportunities.

Footnotes