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' core activity of consumer protection and community development to promote fair and transparent financial service markets, protect consumers' rights, and ensure that its policies and research take into account consumer and community perspectives. This charge includes assessing and taking corrective actions to address consumer risks among financial institutions it supervises while also fostering proven programs in consumer compliance and community investment.

Throughout 2017, 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 of state member banks and bank holding companies (BHCs) through its policy development, examiner training, and supervision oversight programs. This includes policy setting and oversight of state member banks' performance under the Community Reinvestment Act (CRA); conducting oversight of and providing guidance to Reserve Bank staff on consumer compliance in BHC matters; 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 to understand and act on their implications for supervisory policy as well as to gain insight into consumer decisionmaking related to financial services 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, research on effective community development policies and strategies, and best practices in the management and control of consumer compliance risks.
• 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 2017, DCCA participated in drafting interagency regulations 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 bank and financial holding companies, state member banks, foreign banking organizations, Edge Act corporations, and agreement corporations.¹ The division also administers the Federal Reserve System's risk-focused program for assessing consumer compliance risk at the largest banks 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. DCCA staff monitor trends in consumer products to inform the risk-based supervisory planning process. Quantitative risk metrics and screening systems use data to assess market activity, consumer complaints, and supervisory findings to assist with the determination of risk levels at firms.

The division oversees the efforts of the 12 Reserve Banks to ensure that the Federal Reserve's consumer compliance supervisory program reflects its commitment to promoting financial inclusion and compliance with applicable federal consumer protection laws and regulations in the 815 state member banks it supervises. Division staff coordinate with the prudential regulators and the Consumer Financial Protection Bureau (CFPB) as part of the supervisory coordination requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), and ensure that consumer compliance risk is appropriately incorporated into the consolidated risk-management program of the approximately 135 bank and financial holding companies with assets over $10 billion. 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 the Federal Reserve's primary method of ensuring compliance with consumer protection laws and assessing the adequacy of consumer compliance risk-management systems within regulated entities. During 2017, the Reserve Banks completed 225 consumer compliance examinations of state member banks, 193 CRA examinations of state member banks, 52 examinations of foreign banking organizations, 4 examinations of Edge Act corporations, and no examinations of agreement corporations.

Mortgage Servicing and Foreclosure

Payment Agreement Status

Throughout 2017, Board staff continued 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 eligible² 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).³ 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. For checks that had 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.

More than $3.5 billion was distributed to eligible borrowers 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.⁴

At the direction of the Federal Reserve, in August 2016, Rust redistributed any funds remaining after all outstanding initial checks expired, 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 approximately $80 million in remaining funds resulted in nearly $59 million being cashed or deposited by borrowers of servicers supervised by the Federal Reserve. The borrower payment process concluded at the end of 2016. Once the audit of the final reconciliation of the payment funds has been completed, any funds remaining that were provided by servicers supervised by the Federal Reserve as part of the Payment Agreement will be remitted to the U.S. Treasury.

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 were 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."

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),⁵ the Federal Reserve expects to publish data in 2018 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. 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. As a result, the majority of the enforcement actions were terminated on January 12, 2018.⁶ For the remaining servicers, Federal Reserve supervisory teams 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 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, 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 if it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers 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. 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 2017, the Federal Reserve referred to the DOJ three matters that involved discrimination on the basis of marital status, in violation of the ECOA. The banks improperly required spousal signatures on commercial and consumer loans, in violation of Regulation B.

If there is a fair lending violation that does not constitute a pattern or practice under the 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.

The Board brought two public enforcement actions for UDAP violations in 2017. In October, the Board issued a consent order against a bank for deceptive practices related to balance transfer credit cards issued to consumers through third parties. The order required the bank to pay approximately $5 million in restitution to nearly 21,000 consumers and take other corrective actions.⁷ In November, the Board issued another consent order against a bank for deceptive residential mortgage origination practices. The institution told certain borrowers that they were paying an additional amount for discount points that would lower the borrowers' interest rate. However, many borrowers did not receive a reduced rate. The enforcement action required the bank to pay approximately $2.8 million into an account to provide restitution to these borrowers.⁸

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 2017, the Board sponsored a free interagency webinar on fair lending supervision through Compliance Outlook Live, which had approximately 6,000 registrants, most of which were community banks.⁹ 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 2017, the Federal Reserve issued seven formal consent orders and assessed more than $1.6 million in civil money penalties against state member banks to address violations of the flood regulations. An action against one bank accounted for the majority of the civil money penalties issued.¹⁰ 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.

Community Reinvestment Act

The CRA requires that the Federal Reserve and other federal banking 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 banks' 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.¹¹

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 2017 reporting period, the Reserve Banks completed 193 CRA examinations of state member banks. Of those banks examined, 22 were rated "Outstanding," 165 were rated "Satisfactory," 6 were rated "Needs to Improve," and none were rated "Substantial Non-Compliance."

During the 2017 review period, the Board, the Federal Deposit Insurance Corporation (FDIC), and the OCC published in the Federal Register a final rule amending their respective CRA regulations primarily to conform to changes made by the CFPB to Regulation C, which implements HMDA. Since 1995, certain definitions in the CRA regulations have conformed to the scope of loans reported under Regulation C, and the three agencies believe that continuing to do so results in a less burdensome CRA performance evaluation process. In addition to these conforming changes, the final rule contained technical corrections and removed obsolete references to the Neighborhood Stabilization Program.¹² The three agencies are also working on a long-term project to evaluate the interagency examination procedures to determine where meaningful updates and guidance can be incorporated.

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 bank'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 has 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.¹³

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 and communities. 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.¹⁴

The Board provides information on its actions associated with these merger and acquisition transactions, issuing press releases and Board Orders for each.¹⁵ The Federal Reserve also publishes semiannual reports that provide pertinent information on applications and notices filed with the Federal Reserve.¹⁶ 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.

During 2017, the Board considered over 100 applications, with topics ranging from change in control notices, to branching requests, to mergers and acquisitions. DCCA staff analyzed 23 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.¹⁷

Coordination with the Consumer Financial Protection Bureau

During 2017, 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, 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.¹⁸ In 2017, the banking agencies continued to work together on various initiatives.

Updating Examination Procedures

In August, the FFIEC developed HMDA Examiner Transaction Testing Guidelines that include sampling, verification, and resubmission procedures for use in connection with HMDA data collected beginning on January 1, 2018, pursuant to the CFPB's amendments to Regulation C. The guidelines describe how to validate the accuracy of such HMDA data and the circumstances in which examiners may direct institutions to correct and resubmit data.

In October, the Board, the FDIC, and the OCC developed a revised list of HMDA key data fields for examiners to use in connection with validating the accuracy of HMDA data collected beginning on January 1, 2018, pursuant to the CFPB's amendments to Regulation C. These HMDA key fields are those that the Federal Reserve, the FDIC, and the OCC collectively determined to be most critical to the integrity of analyses of overall HMDA data.

Coordinating Transfer of HMDA Data Operations

Also in 2017, the FFIEC continued to implement its plan for the transfer of HMDA data operations to the CFPB in January 2018. The Board collected and processed submissions of HMDA data through December 2017 and will administer the legacy HMDA data operations system, including collecting and processing any resubmissions of HMDA data that were originally submitted prior to January 2018.

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).¹⁹ 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.

Federal Reserve examiners began applying the updated rating system to consumer compliance examinations of state member banks that started on or after March 31, 2017. To ensure that examiners were prepared to consistently apply the new rating system, consumer compliance examiners attended a mandatory web-based training session, followed by in-person case study training. Additionally, the Federal Reserve published an article entitled "Implementing the New Uniform Interagency Consumer Compliance Rating System" in the first 2017 issue of its Consumer Compliance Outlook newsletter.²⁰ To assist financial institution management teams in understanding the new rating system, this article highlighted the foundational principles of the CC Rating System, discussed the framework on which the CC Rating System is based, and explained how examiners will apply the CC Rating System in evaluating a financial institution's consumer compliance management system.

Supporting Financial Institutions and Borrowers Affected by Hurricanes Harvey and Irma

The Federal Reserve, along with the OCC, FDIC, and state bank regulators recognized the serious impact of Hurricanes Harvey and Irma on the customers and operations of many financial institutions on August 26 and September 6, 2017, respectively.²¹ The agencies issued the statements on supervisory practices regarding institutions and borrowers affected by the hurricanes. The agencies offered to provide regulatory assistance to affected institutions subject to their supervision and issued a statement encouraging institutions in the affected areas to meet the financial services needs of their communities. The agencies' statements included guidance on the following areas.

• Lending. Bankers should work constructively with borrowers in communities affected by Hurricanes Harvey and Irma. Understanding the transitory nature of the circumstances, the agencies indicated they would consider the unusual circumstances they face and recognized that efforts to work with borrowers in communities under stress can be consistent with safe-and-sound banking practices as well as in the public interest.
• Community Reinvestment Act. Financial institutions may receive CRA consideration for community development loans, investments, or services that revitalize or stabilize federally designated disaster areas in their assessment areas or in the states or regions that include their assessment areas.
• Investments. Bankers should monitor municipal securities and loans affected by the hurricanes, as the agencies realize local government projects may be negatively affected.

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

The consumer compliance examiner training curriculum has historically consisted of five courses focused on consumer protection laws, regulations, and examining concepts. In 2017, these courses were offered in 10 sessions, and training was delivered to a total of 94 Federal Reserve consumer compliance examiners and staff members and 11 state banking agency examiners. These courses have been conducted principally by traditional classroom delivery method. Board and Reserve Bank staff have played an active role in regularly reviewing the core curriculum, updating subject matter, and adding new elements as appropriate.

While the examiner training program has consistently exhibited strengths, the Federal Reserve began efforts in 2015 to institute elements of curriculum modernization. Other business lines within Supervision Learning had completed, or were in the process of, converting their curriculum into self-directed, online, and blended delivery methods. These modernized features offered learners and Reserve Banks an ability to customize and to meet training demands more individually and cost effectively. This flexibility significantly enhances the Consumer Compliance training program.

Following the establishment of a dedicated modernization program in early 2016, the project has continued throughout 2017 and is slated for completion in late 2020. Throughout 2016 and 2017, DCCA continued its partnership with Reserve Bank personnel, both subject-matter experts and professional instructional designers, who together are assessing and excerpting the critical elements from the existing curriculum and adapting the material for incorporation into the modernized format.

During calendar-year 2017, the development team focused its efforts on the components of the first regulation-based course in the traditional curriculum, Introduction to Consumer Compliance (CA I). The team completed its analysis of the examination tasks to be captured, sub-dividing the first week of the two-week course into three broad areas: Examination Overview, Deposits, and the Basics of Operations. For the section Examination Overview, the team developed design documents; drafted narrative storyboards; beta-tested; and during the fourth quarter of 2017, launched the section as an independent "learning unit" available to potential learners through the Banking Supervision Learning Center. The two remaining components are slated to be launched in early 2018. The team will next turn its attention to the broad regulatory area of lending and credit-related regulations that, together, will replace the remaining portion of the CA I course and the Real Estate Lending Examination Techniques course.

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, most recently in September 2017, 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 is also offered.

In 2017, the System continued to offer Rapid Response sessions. Introduced in 2008, Rapid Response sessions offer examiners 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. Six consumer compliance Rapid Response sessions were designed, developed, and presented to System staff during 2017. In addition, examiner training is also developed and presented through the FFIEC Examiner Exchange program, a partnership with the Federal Reserve Bank of St. Louis to provide FFIEC-sponsored interagency webinars and calls through its Center for Learning Innovation.

Outreach and Training to Agency and Industry Stakeholders

During 2017, the Federal Reserve System collaborated with its supervisory agency partners to offer an Outlook Live session entitled "2017 Interagency Fair Lending Topics."²² These specialty sessions are focused on delivering timely, relevant compliance information to the banking industry as well as to experienced examiners and other regulatory personnel.

Additionally, in 2017 two volumes of Consumer Compliance Outlook were issued. Consumer Compliance Outlook discusses consumer compliance issues of interest to compliance professionals. This publication, managed by the Federal Reserve Bank of Philadelphia, is distributed to state member banks and bank and savings and loan holding companies supervised by the Federal Reserve.

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.

The Federal Reserve Consumer Help (FRCH) centralizes the processing of consumer complaints and inquiries that come to the Federal Reserve. In 2017, FRCH processed 30,180 cases. Of these cases, 20,153 were inquiries and the remainder (10,027) were complaints, with most cases received directly from consumers. Approximately 8 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 (63 percent). Nevertheless, 33 percent (10,104) of complaint and inquiry submissions were made electronically (via email, online submissions, and fax), and the online form page received 17,019 visits during the year.

Consumer Complaints

Complaints against Federal Reserve regulated entities totaled 2,624 in 2017. Approximately 2 percent (49) of these complaints were closed without investigation, pending the receipt of additional information from consumers. One percent of the total complaints were still under investigation in December 2017. Fifty-two percent (1,376) involved unregulated practices, and 47 percent (1,229) 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, 2017

Table 2. Complaints against state member banks and selected nonbank subsidiaries of bank holding companies about regulated practices, by product type, 2017

Complaints about Regulated Practices

The majority of regulated practices complaints concerned credit card accounts (53.2 percent), checking accounts (19.8 percent), and real estate (6 percent).²³ The most common credit card complaints related to inaccurate credit reporting (57 percent), forgery/fraud (9 percent), payment errors/delays (6 percent), and billing error resolution (5 percent). The most common checking account complaints related to funds availability not as expected (26 percent), deposit error resolution (17 percent), insufficient funds/overdraft charges and procedures (11 percent), and disputed withdrawal of funds (9 percent). The most common real estate complaints by problem code related to escrow problems (18 percent), inaccurate credit reporting (16 percent), debt collection/foreclosure concerns (12 percent), and payment errors/delays (12 percent).

Twenty-three regulated practices complaints alleging credit discrimination on the basis of prohibited borrower traits or rights were received in 2017. Thirteen discrimination complaints were related to the race, color, national origin, or ethnicity of the applicant or borrower. Eight discrimination complaints were related to either the age, handicap, familial status, or religion of the applicant or borrower. Of the closed complaints alleging credit discrimination based on a prohibited basis in 2017, there were no violations related to illegal credit discrimination.

In 77 percent of investigated complaints against Federal Reserve regulated entities, evidence revealed that institutions correctly handled the situation. Of the remaining 23 percent of investigated complaints, 4 percent were identified errors that were corrected by the bank, 2 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. In 2017, the Board received 1,376 complaints against Federal Reserve regulated entities that involved these unregulated practices. The majority of the complaints were related to electronic transactions/prepaid products (33 percent), checking account activity (21 percent), credit cards (17 percent), and real estate loans (3 percent).

Complaint Referrals

In 2017, the Federal Reserve forwarded 7,290 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 19 complaints to the Department of Housing and Urban Development (HUD) that alleged violations of the Fair Housing Act²⁴ and were closed in 2017. The Federal Reserve's investigation of these complaints revealed no instances of illegal credit discrimination.

Consumer Inquiries

The Federal Reserve received 20,153 consumer inquiries in 2017 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 2017, 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 compliance guidance for the industry and the Reserve Banks and fulfilling the division's role in consulting with the CFPB on consumer financial services and fair lending regulations for which it has rulemaking responsibility.

Conforming CRA Regulations to HMDA Regulation

In December, the federal bank regulatory agencies amended their respective CRA regulations primarily to conform to changes made by the CFPB to Regulation C, which implements the Home Mortgage Disclosure Act.

In addition, the final rule contains technical corrections and removed obsolete references to the Neighborhood Stabilization Program.

The agencies' CRA regulations specify the type of lending and other activities that examiners evaluate to assess a financial institution's CRA performance. The regulations provide several categories of loans that may be evaluated to determine an institution's performance under the retail lending test, one of which is home mortgage loans.

Since 1995, the Board, the FDIC, and the OCC have conformed certain definitions in their respective CRA regulations to the scope of loans reported under the HMDA rules. The agencies believe that continuing to do so produces a less burdensome CRA performance evaluation process. Accordingly, based on changes the CFPB recently made to the HMDA rules, the agencies amended their CRA regulations to revise the definitions of "home mortgage loan" and "consumer loan" as well as the public file content requirements.²⁵ These revisions maintain consistency between the agencies' CRA regulations and the CFPB's amendments that become effective on January 1, 2018.

Previously, the CRA regulations defined a "home mortgage loan" to mean a "home improvement loan," "home purchase loan," or a "refinancing" as those terms are currently defined in the HMDA regulation. The CFPB's revisions to Regulation C revise the scope of loans reportable under HMDA. In some cases, the revised scope of loans reported under Regulation C is broader, and in other cases more limited. For example, the revised HMDA rules now require covered financial institutions to report applications for, and originations and purchases of, an open-end line of credit secured by a dwelling. However, home improvement loans that are not secured by a dwelling, which were previously required to be reported under HMDA, are no longer reportable transactions under the revised Regulation C.

To conform the CRA definition of "home mortgage loan" to the revisions in Regulation C that became effective on January 1, 2018, the agencies revised the current definition of "home mortgage loan" in their CRA regulations to mean a "closed-end mortgage loan" or an "open-end line of credit," as those terms are defined under the new HMDA regulation. As a result of the revisions to the "home mortgage loan" definition, the manner in which some loan transactions are considered under CRA will be affected.

Annual Indexing of Exempt Consumer Credit and Lease Transactions

In November 2017, the Board and the CFPB announced the revised dollar thresholds in Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) that will apply in 2018 for determining exempt consumer credit and lease transactions. These thresholds are set pursuant to statutory changes enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act that require adjusting these thresholds annually based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Transactions at or below the thresholds are subject to the protections of the regulations.²⁶

Threshold for Small Loan Exemption from Appraisal Requirements for Higher-Priced Mortgage Loans

In November, the Board, the CFPB, and the OCC announced that the threshold for exempting loans from special appraisal requirements for higher-priced mortgage loans would increase for 2018.²⁷ The Dodd-Frank Act amended the Truth in Lending Act to add special appraisal requirements for higher-priced mortgage loans, including a requirement that creditors obtain a written appraisal based on a physical visit to the home's interior before making a higher-priced mortgage loan. The rules implementing these requirements contain an exemption for loans of $25,000 or less and also provide that the exemption threshold will be adjusted annually to reflect increases in the CPI-W.

Annual Adjustment to CRA Asset-Size Threshold for Small and Intermediate Small Institutions

In addition, in December the Board and other federal bank regulatory agencies announced the annual adjustment to the asset-size thresholds used to define small bank, small savings association, intermediate small bank, and intermediate small savings association under the CRA regulations.²⁸

Financial institutions are evaluated under different CRA examination procedures based upon their asset-size classification. Those meeting the small and intermediate small institution asset-size thresholds are not subject to the reporting requirements applicable to large banks and savings associations unless they choose to be evaluated as a large institution.

Annual adjustments to these asset-size thresholds are based on the change in the average of the CPI-W, not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million.

As a result of the 2.11 percent increase in the CPI-W for the period ending in November 2017, the definitions of small and intermediate small institutions for CRA examinations were changed as follows:

• "Small bank" or "small savings association" means an institution that, as of December 31 of either of the prior two calendar years, had assets of less than $1.252 billion.
• "Intermediate small bank" or "intermediate small savings association" means a small institution with assets of at least $313 million as of December 31 of both of the prior two calendar years and less than $1.252 billion as of December 31 of either of the prior two calendar years.

These asset-size threshold adjustments took effect January 1, 2018.

Updates to Consumer Compliance Regulations

In December, the Board announced the repeal of one regulation and the revision of a second to reflect the transfer of certain consumer protection rulemaking authority to the CFPB.²⁹

With the CFPB issuing final rules to implement the Home Mortgage Disclosure Act, the Board published a final rule to repeal its Regulation C. In addition, the Board published a proposal to revise its Regulation M, which implements the Consumer Leasing Act (CLA), to reflect changes in the coverage of the Board's rule under the Dodd-Frank Act.

Prior to enactment of the Dodd-Frank Act, the CLA was implemented solely by the Board's Regulation M, which applied to all types of lessors. Rulemaking authority for the CLA currently rests with the CFPB, with the exception of rules applicable to certain motor vehicle dealers. The proposed amendments to the Board's Regulation M would clarify the scope of the Board's rule, which applies only to lessors that are excluded under the Dodd-Frank Act from coverage by the CFPB's leasing regulation.

Consumer Research and Analysis of Emerging Issues and Policy

Throughout 2017, 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 2017, DCCA explored various issues related to consumers and communities by convening experts, conducting original research, and fielding 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 2016, released in May 2017.³⁰ 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.

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

• employment and informal work
• income and savings
• economic preparedness
• banking and credit
• housing and living arrangements
• education and human capital
• education debt and student loans
• retirement

Among its key findings, the survey found that overall in 2016, individuals and their families continued to express modest improvements in their overall well-being relative to that seen in recent years. However, those with more education appear to have driven most of the observed gains in well-being relative to the previous year. Seventy percent of adults reported that they were either "living comfortably" or "doing okay," compared to 69 percent in 2015 and 62 percent in 2013. However, approximately 73 million adults in 2016 were either "finding it difficult to get by" or are "just getting by financially." Income volatility remains a concern for individuals, especially those with less education and among racial and ethnic minorities. Forty-four percent of adults said they could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money. This metric has continued to improve from the 50 percent who were ill-prepared for this magnitude of expense when first asked in 2013.

Understanding Disparities in the Labor Market

Labor market outcomes vary widely across demographic groups, including those defined by race/ethnicity, gender, and geography. Accordingly, economic analyses that focus exclusively on aggregate outcomes may overlook important disparities in how various groups experience the labor market. In September 2017, the Board hosted a conference that brought together diverse networks of researchers and policy analysts to examine the causes of these disparities, to explore the implications for aggregate economic performance, and to brainstorm new directions for research and policy.³¹ The papers presented included research from both Federal Reserve System staff as well as external researchers. The presentations and discussion examined disparities in unemployment, earnings, and other labor market outcomes by race/ethnicity, gender, culture, and geography and provided insights on factors contributing to these gaps.

Analysis of Emerging Issues

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, staff analyze and anticipate trends, form working groups, and organize expert roundtables to identify emerging consumer risks and inform supervision, research, and policy.

In 2017, staff developed analyses on a broad range of issues in financial services markets that potentially pose risks to consumers.

• Auto lending. Staff have continued explorations of developments in the auto finance market and their impact on consumers, especially subprime auto borrowers. Topics of particular focus in 2017 included trends in loan terms, such as loan-to-value ratios and loan maturities, and their relationship to loan performance among various categories of borrowers.
• Gender wealth gap. DCCA's ongoing efforts to better understand household financial stresses and well-being was augmented in 2017 through the exploration of gender wealth disparities with researchers and practitioners in the field. This work, which will continue in the coming year, aims to shed light on economic factors contributing to gaps in income and wealth levels by gender.
• Retail banking.Policy Analysis team members have been collaborating with colleagues throughout the division to monitor trends in retail banking, such as rising numbers of branch closures and increasing adoption of online and mobile technologies by consumers for their banking needs. As part of an ongoing effort, over the past year, the team has organized listening sessions with consumer groups to better understand how branch closures are affecting consumers and communities.
• Small business lending. Smaller firms' access to affordable credit is of particular interest to DCCA because the finances of these businesses and their owners frequently are intertwined. They often lack both the financing options available to larger firms and in-house financial expertise to guide their credit decisions. DCCA has been exploring how changes in the small business credit landscape affect these smaller firms. Issues analyzed by the team range from trends in commercial credit provided by large and small banks, to new online credit products offered by nonbanks, and to financial challenges facing certain segments of potential borrowers, including minority- and women-owned small businesses. The team also conducts extensive outreach with banks, online lenders, and borrower advocates to stay abreast of developments and emerging issues in both traditional and online small business small-dollar credit.
• Student lending. In 2017, the team collaborated with the Trellis Company (formerly Texas Student Loan Guarantee Corporation) and the National Association of Student Financial Aid Administrators to conduct an in-depth survey of and report about financial aid administrators' experiences with student loan counseling and the challenges they encounter.³² This work expanded on findings from a 2016 report based on focus groups conducted with financial aid counselors.³³ Key findings from both reports include that counselors generally perceive low levels of financial literacy among the majority of their students; that aid administrators overwhelmingly rely on the U.S. Department of Education's online counseling tool to provide mandatory entrance and exit loan counseling; and that better-resourced financial aid offices are more likely to proactively reach out to targeted groups of students that they believe are at highest risk of struggling to repay their student loans.

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. Board staff provide oversight for alignment with Board objectives and coordinate System priorities. The System's Community Development functions routinely collaborate to leverage expertise and resources to support research and best practices that advance community economic development--most notably, the biennial research conference. For more information, see box 1.

Exploring Opportunities for Economic Growth through Regional Food Systems Investments

Building on its efforts to better understand the economic and financial conditions in rural communities, Community Development staff across the Federal Reserve explored the connection between the strength of regional food systems and a community's economic, social, and physical vitality. In partnership with the U.S. Department of Agriculture, the Federal Reserve published Harvesting Opportunity: The Power of Regional Food System Investments to Transform Communities. The book highlights ways in which regionally focused food systems promote economic opportunity and security as well as how capital providers and other partners are working together to invest in the sector. Additionally, the Federal Reserve collaborated with stakeholders from across the country to further conversations in their communities about how the findings in Harvesting Opportunity can advance local efforts to promote regional food systems.

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 2018.

Supporting Rising Community Leaders

A key purpose of the Community Development function at the Federal Reserve is to ensure that the voices and concerns of consumers and communities are represented at the U.S. central bank. An important part of achieving the function's mission is ensuring that the Federal Reserve hears the perspectives of representatives from both new and well-established organizations. To that end, the Community Development units at the Board and the 12 Reserve Banks have hosted nearly 100 rising community leaders since 2013 as part of the Community Leaders Forum (CLF). The goals of the forum are to (1) strengthen the community development field through peer-to-peer learning that promotes applied research and innovative community strategies and (2) from those directly involved, improve the Federal Reserve's understanding of and response to emerging trends and their impact on consumers and communities, particularly those that are traditionally underserved.

In November 2017, the Board and the Federal Reserve Bank of Dallas hosted a CLF meeting that reunited the six cohorts of community leaders from all 12 Reserve Banks. The main goal of the meeting was to support CLF members to increase their influence and impact in local communities. For example, the Federal Reserve Bank of Dallas hosted a workshop entitled "Casting a Vision and Aligning Your Priorities." Though most of the participants had not met prior to Dallas, by the end of two days together, they set in motion a virtual network that intends to collectively address complex community problems across Reserve Bank districts.

Footnotes