Annual Report 2010

Rulemaking and Regulations

Credit Card Reform

Throughout 2010, the Federal Reserve worked to implement the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Credit Card Act). Consistent with the effective dates set by Congress, the Federal Reserve's rulemakings to implement the Credit Card Act were divided into three stages. As discussed in the Federal Reserve's 2009 Annual Report, the first stage was completed in 2009 and the second stage in January 2010. In June 2010, the Board completed the third stage of rulemaking, which is discussed in greater detail below. Subsequently, the Board proposed clarifications to the rules implementing the Credit Card Act. In addition, the Board released reports on credit card use by small businesses and on college credit card agreements.

Implementing the Credit Card Act: Stage Three

In June, the Board approved a final rule to protect credit card users from unreasonable late payment and other penalty fees and to require credit card issuers to reconsider interest rate increases imposed since the beginning of 2009. This rule went into effect on August 22, 2010.¹ With the approval of this rule, the Board's rulemaking to implement the provisions of the Credit Card Act was complete.

Reasonable Penalty Fees

The final rule requires that penalty fees imposed by card issuers be reasonable and proportional to the violation of the account terms. Among other things, the rule prohibits credit card issuers from charging a penalty fee of more than $25 for paying late or otherwise violating the account's terms, unless the consumer has engaged in repeated violations or the issuer can show that a higher fee represents a reasonable proportion of the costs it incurs as a result of violations. The rule also prohibits credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer's violation. For example, card issuers will no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee cannot exceed $20. In addition, the rule bans "inactivity" fees, such as fees imposed when a consumer doesn't use the account to make new purchases. Lastly, the rule prevents issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.

Reevaluation of Interest Rate Increases

The rules also require issuers that have increased a consumer's interest rates to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate. Specifically, the rule requires credit card issuers to reevaluate at least every six months annual percentage rates increased on or after January 1, 2009. In addition, the rule requires that notices of rate increases for credit card accounts disclose the principal reasons for the increase.

Clarifications

In October, the Board proposed clarifications to its rules implementing the Credit Card Act.² The proposal is intended to enhance consumer protections and to resolve areas of uncertainty so that card issuers fully understand their compliance obligations. In particular, the proposal would clarify that:

• the same protections exist for promotional programs that waive interest charges for a specified period of time as exist for promotional programs that apply a reduced rate for a specified period;
• fees charged to consumers prior to the opening of a credit card account are covered by the same limitations as fees charged during the first year after the account is opened; together, these fees may not exceed 25 percent of the account's initial credit limit; and
• a card issuer must consider a consumer's individual income, not household income, when evaluating the consumer's ability to make the required payments for a new credit card or for a higher credit limit on an existing account.

Small Business Credit Card Use and Credit Card Market

In May, the Board released a Report to Congress on the Use of Credit Cards by Small Businesses and the Credit Card Market for Small Businesses.³ The report was submitted to Congress in accordance with a provision of the Credit Card Act requiring the Board to conduct a review of the use of credit cards by businesses with no more than 50 employees and of the credit card market for these businesses. In performing its review and preparing the report, the Board gathered data and other information from a number of sources: major issuers of small business credit cards, trade associations representing small business owners, and two consumer credit reporting agencies. Board staff also worked with a small business trade association to help develop some credit card-related questions for inclusion in their survey of small business owners, added special questions to a quarterly Board survey of banks' senior loan officers, and obtained from a vendor data regarding credit card direct mail offers to small businesses. Board staff reviewed the results of consumer testing conducted from 2006 to 2008 pertaining to disclosures given in connection with consumer credit card accounts, and considered customer complaint information maintained within the Board's own databases and provided by small business credit card issuers. Finally, Board staff reviewed existing surveys, studies, reports, and research related to small businesses' use of credit cards.

Among other things, the report discusses how small businesses use credit cards and describes issuers' practices in marketing and pricing small business credit cards. The report also summarizes small businesses' access to new credit cards during 2009 and small business credit card terms and conditions. In addition, the report reviews disclosures provided to small business credit card customers and other issuer practices. Finally, the report considers the potential benefits and adverse effects of applying disclosure and substantive requirements similar to those in the Truth in Lending Act, as amended by the Credit Card Act, to small business credit cards.

College Credit Card Agreements

In October, the Board released a report that contains payment and account information about more than 1,000 agreements between credit card issuers and institutions of higher education or affiliated organizations that provide for the issuance of credit cards to students.⁴ The Credit Card Act requires issuers to submit to the Board annually their agreements with educational institutions or affiliated organizations, such as alumni associations. The Board's report covers 1,044 agreements that were in effect during 2009. Among other things, the report lists the largest agreements by the dollar amount of payments made to the institution or organization during 2009, by the total number of accounts opened under the agreement during 2009, and by the total number of accounts opened under the agreement that remained open at the end of 2009 (regardless of when the account was opened).

In addition, the Board launched a new online database, www.federalreserve.gov/collegecreditcardagreements, which provides additional information about the agreements submitted to the Board. Users can access the complete agreement text to see the information submitted by card issuers regarding payments and accounts. Users may also search for agreements by card issuer, by educational institution or organization, or by the city or state in which the institution or organization is located.

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Overdraft Services and Gift Card Rules

Restrictions on Overdraft Fees

In May, the Board announced final clarifications to aspects of its November 2009 final rule under Regulation E (Electronic Fund Transfers) and its December 2008 final rule under Regulation DD (Truth in Savings) pertaining to overdraft services.⁵ The final clarifications address questions that have arisen under both the Regulation E and DD final rules and provide further guidance regarding compliance with certain aspects of the final overdraft rules. In particular, the final clarifications explain that the prohibition in Regulation E on assessing overdraft fees without the consumer's affirmative consent applies to all institutions, including those with a policy and practice of declining automated teller machine (ATM) and one-time debit card transactions when an account has insufficient funds. The final clarifications also make certain technical corrections and conforming amendments.

Restrictions on Fees and Expiration Dates for Gift Cards

In March, the Board announced final rules to restrict the fees and expiration dates that may apply to gift cards.⁶ The rules protect consumers from certain unexpected costs and require that gift card terms and conditions be clearly stated. The final rules prohibit dormancy, inactivity, and service fees on gift cards unless (1) the consumer has not used the certificate or card for at least one year, (2) no more than one such fee is charged per month, and (3) the consumer is given clear and conspicuous disclosures about the fees. In addition, expiration dates for funds underlying gift cards must be at least five years after the date of issuance, or five years after the date when funds were last loaded. The new rules generally cover retail gift cards, which can be used to buy goods or services at a single merchant or affiliated group of merchants, and network-branded gift cards, which are redeemable at any merchant that accepts the card brand. The final rules, which had an effective date of August 22, 2010, were issued under Regulation E to implement the gift card provisions in the Credit Card Act.

In August, the Board announced an interim final rule implementing recent legislation modifying the effective date of certain disclosure requirements applicable to gift cards under the Credit Card Act.⁷ For gift certificates, store gift cards, and general-use prepaid cards produced prior to April 1, 2010, the legislation and interim final rule delay the August 22, 2010 effective date of these disclosures until January 31, 2011, provided that several conditions are met. In October, after a public comment period, the Board finalized the August interim final rule.⁸

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Mortgage Reform

Throughout 2010, the Board proposed significant new rules designed to enhance consumer protections and disclosures for home mortgage transactions, including reverse mortgages. The Board also proposed a rule to revise the coverage of escrow account requirements for first-lien "jumbo" mortgages, in order to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). In addition, the Board adopted final rules to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices, as well as rules to implement provisions of the Mortgage Disclosure Improvement Act of 2008 (MDIA) and the Helping Families Save Their Homes Act of 2009.

Consumer Protections and Disclosures for Home Mortgage Transactions

In August, the Board proposed enhanced consumer protections and disclosures for home mortgage transactions.⁹ The proposal includes significant changes to Regulation Z and represents the second phase of the Board's comprehensive review and update of the mortgage lending rules. The proposed changes reflect the results of consumer testing by the Board.

Reverse Mortgages

Reverse mortgages are complex products available to older consumers, some of whom may be more vulnerable to abusive practices. To help consumers understand these products, the Federal Reserve's proposal would require creditors to provide improved disclosures that explain particular features unique to reverse mortgages. In order to protect consumers from unfair practices related to reverse mortgages, the proposal also would:

• prohibit creditors from conditioning a reverse mortgage on the consumer's purchase of another financial or insurance product, so that consumers are not forced to buy financial products that can be costly or may not be beneficial, such as annuities or long-term care insurance;
• require that a consumer receive counseling about reverse mortgages before any nonrefundable fee can be imposed (except a fee for the counseling itself) or the loan can be closed, to help ensure that consumers understand these complex products before they become obligated on the loan; and
• prohibit creditors from steering consumers to specific reverse mortgage counselors or compensating counselors or counseling agencies, to ensure that the counseling is unbiased.

Right of Rescission

A consumer generally has three business days after the loan closing to rescind certain home-secured loans, but this right may be extended for up to three years if the creditor fails to provide the consumer with certain disclosures or the notice of the right to rescind. The proposed revisions would:

• simplify and improve the notice of the right to rescind provided to consumers at closing;
• revise the list of disclosures that, if not properly made, can trigger an extended right to rescind, to focus on disclosures that testing shows are most important to consumers; and
• clarify creditors' obligations when the extended right to rescind is asserted.

In addition, the Board's proposal includes other amendments related to home-secured credit. For example, the proposed rules would ensure that consumers receive new disclosures when the parties agree to modify the key terms of an existing mortgage loan and clarify loan servicers' duty to respond within a reasonable amount of time when a consumer requests information about the owner of the loan.

Protections against Mortgage Loan Originator Practices

In August, the Board issued final rules to protect mortgage borrowers from unfair or abusive practices related to loan originator compensation.¹⁰ The new rules apply to mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders.

Yield Spread Premiums

Previously, lenders commonly compensated loan originators more if a borrower accepts an interest rate higher than the rate required by the lender (commonly referred to as a "yield spread premium"). Under the new rule, however, a loan originator may not receive compensation that is based on the interest rate or other loan terms. This will prevent loan originators from providing consumers loans with higher interest rates or other less-favorable terms to increase their own compensation. Loan originators can continue to receive compensation that is based on a percentage of the loan amount, which is a common practice.

The rule also prohibits a loan originator that receives compensation directly from the consumer from also receiving compensation from the lender or another party. In consumer testing, the Board found that consumers generally are not aware of the payments lenders make to loan originators and how those payments can affect the consumer's total loan cost. The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through the interest rate, thereby paying more in total compensation than they realize.

Anti-Steering Protections

The final rule prohibits loan originators from directing, or "steering," a consumer to accept a mortgage loan that is not in the consumer's best interest in order to increase the originator's compensation. To facilitate compliance with the anti-steering rule, loan originators would be deemed to comply by ensuring that consumers can choose from loan options that include the loan with the lowest interest rate and the loan with the least amount of points and origination fees, rather than the loans that maximize the originator's compensation.

The final rules take effect on April 1, 2011.¹¹

Disclosures for Mortgage Payment Changes

In August, the Board issued an interim final rule revising the disclosure requirements for closed-end mortgage loans under Regulation Z, in order to implement provisions of the MDIA that require lenders to disclose how borrowers' regular mortgage payments can change over time.¹² The MDIA, which amended TILA, seeks to ensure that mortgage borrowers are alerted to the risks of payment increases before they take out mortgage loans with variable rates or payments. Accordingly, under the interim rule, lenders' cost disclosures must include a payment summary in the form of a table, stating the following:

• the initial interest rate together with the corresponding monthly payment;
• for adjustable-rate or step-rate loans, the maximum interest rate and payment that can occur during the first five years and a "worst case" example showing the maximum rate and payment possible over the life of the loan; and
• the fact that consumers might not be able to avoid increased payments by refinancing their loans.

The interim rule also requires lenders to disclose certain features, such as balloon payments or options to make only minimum payments that will cause loan amounts to increase. All of the disclosures required in the interim rule were developed through several rounds of qualitative consumer testing, including one-on-one interviews with consumers around the country.

Lenders must comply with the interim rule for applications they receive on or after January 30, 2011, as specified in the MDIA.

In December, the Board approved an interim rule amending Regulation Z to clarify certain aspects of the August interim rule implementing provisions of the MDIA, in response to public comments.¹³ Creditors have the option of complying with either the Board's August 2010 interim rule as originally published or as revised by the December interim rule until October 1, 2011, at which time compliance with the December interim rule will become mandatory.

Rules for Jumbo Mortgage Escrow Accounts

In August, the Board proposed a rule to revise the escrow requirements for higher-priced first-lien "jumbo" mortgages, in order to implement a provision of the Dodd-Frank Act.¹⁴ Jumbo mortgages are loans that exceed the conforming loan-size limit for purchase by Freddie Mac, as specified in the Dodd-Frank Act. The proposed rule would increase the annual percentage rate (APR) threshold that determines whether a mortgage lender must establish an escrow account for property taxes and insurance for first-lien jumbo mortgages. In July 2008, the Board issued rules requiring creditors to establish escrow accounts for first-lien loans if a loan's APR is 1.5 percentage points above the applicable prime offer rate. Under the proposed revisions, the escrow requirements would apply for jumbo mortgages only if the loan's APR is 2.5 percentage points or more above the applicable prime offer rate. The APR threshold for non-jumbo mortgages remains unchanged.

Notifying Consumers When Mortgages Are Sold or Transferred

In August, the Board issued final rules amending Regulation Z to implement a provision of the Helping Families Save Their Homes Act of 2009 requiring that consumers receive notice when their mortgage loan is sold or transferred.¹⁵ The new disclosure requirement became effective when the statute was enacted and aims to ensure that consumers know who owns their mortgage loan. Consistent with the statute, the final rule requires purchasers or assignees that acquire loans to provide written disclosures notifying consumers of the sale or transfer of their mortgage loans within 30 days.

To provide compliance guidance, the Board had issued interim rules in November 2009. Compliance with the August 2010 final rules is mandatory on January 1, 2011.

Real Estate Appraisals

In October, the Board issued an interim final rule to ensure that real estate appraisers are free to use their independent professional judgment in assigning home values without influence or pressure from those with interests in the transactions.¹⁶ The rule also seeks to ensure that appraisers receive customary and reasonable payments for their services. The interim final rule includes several provisions that protect the integrity of the appraisal process when a consumer's home is securing the loan. The interim final rule

• prohibits coercion and other similar actions designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment;
• prohibits appraisers and appraisal management companies hired by lenders from having financial or other interests in the properties or the credit transactions;
• prohibits creditors from extending credit based on appraisals if they know beforehand of violations involving appraiser coercion or conflicts of interest, unless the creditors determine that the values of the properties are not materially misstated;
• requires that creditors or settlement service providers that have information about appraiser misconduct file reports with the appropriate state licensing authorities; and
• requires the payment of reasonable and customary compensation to appraisers who are not employees of the creditors or of the appraisal management companies hired by the creditors.

The interim final rule is required by the Dodd-Frank Act, and compliance is mandatory as of April 1, 2011.

Public Hearings on Regulation C

Between July and September 2010, the Board held a series of four public hearings on Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), at the Federal Reserve Banks of Atlanta, San Francisco, and Chicago, and at the Board in Washington, D.C.¹⁷ The purpose of these hearings was threefold: (1) to evaluate whether revisions to Regulation C in 2002 helped gather useful and accurate information on the mortgage market, (2) to assess the need for additional data and other improvements, and (3) to identify areas for future research on emerging mortgage market issues.

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Oversight and Enforcement

The Board's Division of Consumer and Community Affairs develops and supports supervisory policy and examination procedures for consumer protection laws and regulations, as well as the Community Reinvestment Act (CRA), as part of its supervision of state-chartered, depository institutions, and foreign banking organizations that are members of the Federal Reserve System. The division also administers the Federal Reserve System's risk-focused program for assessing consumer compliance risk in the largest bank and financial holding companies in the System. Division staff ensure consumer compliance risk is effectively integrated into the consolidated supervision of the holding company. The division also oversees the efforts of the 12 Reserve Banks to ensure that consumer protection laws and regulations are fully and fairly enforced. Division staff provide guidance and expertise to the Reserve Banks on consumer protection regulations, bank and bank holding company application analysis and processing, examination and enforcement techniques and policy matters, examiner training, and emerging issues. Staff also review Reserve Bank supervisory reports, examination work products, and consumer complaint analyses and responses. Finally, staff members participate in interagency activities that promote uniformity in examination principles, standards, and processes.

In addition, throughout 2010, the System established and implemented a policy for conducting risk-focused consumer compliance supervision of, and the investigation of consumer complaints against, nonbank subsidiaries of bank holding companies (BHCs) and foreign banking organizations (FBOs) with activities covered by the consumer protection laws and regulations the Federal Reserve has the authority to enforce. This policy is designed to enhance understanding of the consumer compliance risk profile of nonbank subsidiaries and to guide supervisory activities for these entities. Initial supervisory activities first targeted those nonbank subsidiaries considered to be of highest risk to the Federal Reserve System.¹⁸

Examinations are the Federal Reserve's primary method of enforcing compliance with consumer protection laws and assessing the adequacy of consumer compliance risk-management systems within regulated entities. During the 2010 reporting period, the Reserve Banks conducted 300 consumer compliance examinations of the System's 858 state member banks and three examinations of foreign banking organizations.¹⁹

Community Reinvestment Act Compliance

The CRA requires that the Federal Reserve and other federal banking and thrift agencies encourage financial institutions to help meet the credit needs of the local communities in which they do business, including low and moderate income areas, consistent with safe and sound operations.

To carry out this mandate, the Federal Reserve

• examines state member banks to assess their compliance with the CRA,
• analyzes applications for mergers and acquisitions by state member banks and bank holding companies in relation to CRA performance, and
• disseminates information on community development techniques to bankers and the public through Community Development offices within 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 Reserve Banks. During the reporting period, the Reserve Banks conducted CRA examinations of 267 banks. Of those banks, 24 were rated "Outstanding," 237 were rated "Satisfactory," five were rated "Needs to Improve," and one was rated "Substantial Non-Compliance."

In September 2010, the Federal Reserve and other federal banking and thrift regulatory agencies announced a final rule to implement a provision of the Higher Education Opportunity Act (HEOA), which requires the agencies to consider low-cost higher education loans to low-income borrowers as a positive factor when assessing a financial institution's record of meeting community credit needs under the CRA. In addition, the rule also incorporated a CRA statutory provision that allows the agencies to consider a financial institution's capital investment, loan participation, and other ventures with minority-owned financial institutions, women-owned institutions, and low-income credit unions as factors in assessing the institution's CRA record.

In December 2010, the Federal Reserve and the other federal banking and thrift regulatory agencies revised the CRA regulations to support community stabilization activities in neighborhoods affected by high numbers of foreclosures. The final rule encourages depository institutions to support, enable, or facilitate projects or activities that meet the "eligible uses" criteria described in section 2301(c) of the Housing and Economic Recovery Act of 2008 (HERA), as amended, and that are conducted in designated target areas identified in plans approved by the U.S. Department of Housing and Urban Development (HUD) under the Neighborhood Stabilization Program (NSP).

In addition to this revision to the CRA regulations, the Federal Reserve and the other federal banking and thrift regulatory agencies held public hearings in four cities (Arlington, VA; Atlanta, GA; Chicago, IL; and Los Angeles, CA) and invited the public to comment on ways that the CRA regulations should be revised to better reflect current banking practices. The agencies are considering ways to update the regulations to reflect changes in the financial services industry, including how banking services are delivered to consumers, to ensure that CRA continues to encourage institutions to meet community credit needs effectively. In addition to public hearings, the agencies invited written comments through August 31, 2010. The Federal Reserve received nearly 1,200 comment letters.

Mergers and Acquisitions in Relation to the CRA

During 2010, the Board considered and approved six banking merger applications.

• An application by First Niagara Financial Group, Inc., Buffalo, NY, to acquire Harleysville National Corp., Harleysville, PA, was approved in March.
• An application by Premier Commerce Bancorp, Inc., Palos Hills, IL, to acquire G.R. Bancorp, Ltd., Grand Ridge, IL, was approved in July.
• An application by The Toronto-Dominion Bank, Toronto, Canada, to acquire The South Financial Group, Inc. Greenville, SC, was approved in July.
• An application by Metcalf Bank, Lees Summit, MO, to purchase certain assets and assume certain liabilities of The First National Bank of Olathe, Olathe, KS, was approved in September.
• An application by SKBHC Holdings, LLC, Corona Del Mar, CA, to acquire Starbuck Bancshares, Inc., Starbuck, MN, was approved in October.
• An application by Caja de Ahorros de Valencia, Catellon Y Alicante, Valencia, Spain to become a bank holding company by acquiring control of CM Florida Holdings, Inc., Coral Gables, FL, and City National Bancshares, Inc. and its subsidiary, City National Bank of Florida, both of Miami, FL, was approved in December.

(Four other protested applications were withdrawn by the applicants.)

Members of the public had the opportunity to submit comments on the applications; their comments raised various issues. Several comments referenced a failure to make credit available to certain minority groups and to low- and moderate-income individuals and in low- and moderate-income geographies, including insufficient branch presence in low-income geographies. Other comments cited predatory and discriminatory lending practices with respect to residential mortgages, credit card loans, and small business loans. Another comment alleged enabling predatory servicing and loss mitigation practices, as well as unethical business practices, as evidenced by a recent U.S. Securities and Exchange Commission civil lawsuit. Several comments warned of inadequate plans to meet communities' credit needs and a reduction in access to credit for affected communities.

The Board also considered 75 applications with outstanding issues involving compliance with consumer protection statutes and regulations, including fair lending laws and the CRA. Some of those issues involved unfair and deceptive practices, as well as concerns about stored value cards. Sixty of those applications were approved and 15 were withdrawn.

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Fair Lending Enforcement

The Federal Reserve 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. Fair lending reviews are conducted regularly within the supervisory cycle. Additionally, examiners may conduct fair lending reviews outside of the usual supervisory cycle, if warranted by fair lending risk. When examiners find evidence of potential discrimination, they work closely with the division's Fair Lending Enforcement Section, which brings additional legal and statistical expertise to the examination and ensures that fair lending laws are enforced consistently and rigorously throughout the Federal Reserve System.

The Federal Reserve enforces the ECOA and the provisions of the Fair Housing Act that apply to lending institutions. 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 or 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 Fair Housing Act 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.

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 will be referred to the U.S. 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. The DOJ may decide instead to return the matter to the Federal Reserve for administrative enforcement. When a matter is returned to the Federal Reserve, staff ensures that the institution takes all appropriate corrective action.

During 2010, the Board referred eight matters to the DOJ.

• Three referrals involved redlining, or discrimination against potential borrowers based upon the racial composition of their neighborhoods, in violation of the ECOA and the Fair Housing Act. 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 in mortgage pricing, in violation of the ECOA and the Fair Housing Act. The lender charged African-American borrowers higher APRs than non-Hispanic white borrowers for mortgage loans originated through its wholesale channel and guaranteed by the Federal Housing Administration or the Department of Veterans Affairs. Legitimate pricing factors failed to explain the pricing disparities.
• One referral involved discrimination in the pricing of unsecured and automobile loans 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 and automobile loans, and the disparities could not be explained by legitimate pricing factors.
• Three referrals involved discrimination on the basis of marital status, in violation of the ECOA. The banks improperly required spousal guarantees and signatures on commercial or agricultural loans, in violation of Regulation B.

If a fair lending violation does not constitute a pattern or practice that is referred to the DOJ, the Federal Reserve acts on its own to ensure that the violation is remedied by the bank. Most lenders readily agree to correct fair lending violations. In fact, lenders often take corrective steps as soon as they become aware of a problem. Thus, the Federal Reserve generally uses informal supervisory tools (such as memoranda of understanding between the bank's board of directors and the Reserve Bank) or board resolutions to ensure that violations are corrected. If necessary to protect consumers, however, the Board can and does bring public enforcement actions.

Monitoring Emerging Fair Lending Issues

The Federal Reserve continues to carefully monitor credit markets for emerging fair lending risks. Developments in the financial industry surrounding loan modification and credit-tightening practices continue to raise potential fair lending concerns. Mortgage servicers face challenges managing the fair lending risk of their activities in the midst of increasing modification activity. Additionally, some lenders have adopted policies that could potentially pose a disproportionate impact on minorities, such as branch closings and tighter credit standards in specific geographic markets. In response to these trends, the Federal Reserve continues to carefully monitor lenders' practices for potential fair lending violations. In accordance with the Interagency Fair Lending Examination Procedures, the Federal Reserve conducts examinations to evaluate whether lenders' policies may violate fair lending laws by having an illegal disparate impact on minorities, and to identify steering, redlining, reverse redlining, and other fair lending violations. These risk-focused examinations include loan modification reviews when appropriate. Loan modification fair lending reviews include an analysis of servicer data for any evidence of potential disparate treatment or impact.

Financial Fraud Enforcement Task Force

As an active member of the Financial Fraud Enforcement Task Force (FFETF), the Federal Reserve coordinates with other federal agencies to ensure consistent and collaborative enforcement of the fair lending laws. The director of the Federal Reserve's Division of Consumer and Community Affairs co-chairs the FFETF's Nondiscrimination Working Group with the assistant attorney general for DOJ's Civil Rights Division, deputy general counsel of HUD, and the attorney general for the State of Illinois. One of the Working Group's key initiatives, led by HUD, DOJ, and the Federal Reserve, is to ensure that discrimination does not occur when borrowers receive loans backed by the Federal Housing Administration (FHA). In addition, the Federal Reserve is taking a leading role in the Working Group's effort to analyze data on Treasury's Home Affordable Modification Program for any evidence of potential discrimination by participating servicers.

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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. The civil money penalties are payable to the Federal Emergency Management Agency (FEMA) for deposit into the National Flood Mitigation Fund.

During 2010, the Board imposed civil money penalties (CMPs) against three state member banks. The dollar amount of the penalties, which were assessed via consent orders, totaled $33,010.

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Coordination with Other Federal Banking Agencies

The member agencies of the Federal Financial Institutions Examination Council (FFIEC) develop uniform examination principles, standards, procedures, and report formats. In 2010, the FFIEC member organizations issued the examination procedures and guidance regarding a number of regulations.

• Interagency Examination Procedures for the Regulation on Risk-Based Pricing Notices (Regulation V).The revised examination procedures address changes to the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act of 2003. The regulation requires a creditor to provide a consumer with a notice when, based on the consumer's credit report, the creditor provides credit to the consumer on materially less favorable terms than it provides to other consumers. The regulation provides creditors with several methods for determining which consumers must receive risk-based pricing notices. As an alternative to providing risk-based pricing notices, the regulation permits creditors to provide consumers who apply for credit with a free credit score and information about their score.²⁰
• Interagency Examination Procedures for Regulation E-Electronic Fund Transfers (revised).The revised examination procedures incorporate the Board's revisions to the gift card provisions of Regulation E. For cards produced prior to April 1, 2010, the revisions modify the effective date of certain disclosure and card expiration requirements in the gift card provisions of the Credit Card Act.²¹
• Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks.The interagency guidance addresses the compliance and reputation risks associated with reverse mortgages and focuses on ways in which lenders can mitigate several areas of regulatory concern, including misleading communication with consumers through marketing and advertisements, and potential conflicts of interest and abusive practices in connection with reverse mortgage transactions.²²
• Interagency Examination Procedures for Regulation Z-Truth in Lending (revised).The revised examination procedures incorporate the 2009 amendments to Regulation Z, as a result of the Credit Card Act. The Credit Card Act amended TILA and established a number of new requirements for open-end consumer credit plans. The Credit Card Act provisions were effective in three stages, and these procedures reflect the third and final stage of revisions, which incorporate rules to protect credit card users from unreasonable late payment fees and other penalty fees. They also require credit card issuers to evaluate interest rate increases imposed since January 1, 2009.²³ (These procedures were superseded by revised Regulation Z examination procedures issued on January 28, 2011, and ultimately by revised procedures issued on March 18, 2011.)
• Interagency Examination Procedures for Regulation DD-Truth in Savings (revised).The revised examination procedures incorporate the 2010 technical clarifications to Regulation DD. These clarifications require use of the term Total Overdraft Fees when disclosing such fees on periodic statements and provide guidance for disclosing consumer account balance information through automated systems for retail sweep accounts.²⁴
• Interagency Supervisory Guidance for Institutions Affected by the Deepwater Horizon Oil Spill.This guidance reminds financial institutions that they retain the flexibility to work with borrowers that may need additional time to resolve financial uncertainties related to the effects of the oil spill.²⁵
• Interagency Examination Procedures for Regulation E-Electronic Fund Transfers (revised).The revised examination procedures incorporated the Board's recent amendments to Regulation E regarding overdraft fees and gift cards, which went into effect on July 1, 2010, and August 22, 2010, respectively. Section 205.17 of amended Regulation E prohibits financial institutions from charging fees for overdrafts on ATM and one-time debit card transactions, unless a consumer opts in to the overdraft service for those types of transactions. Section 205.20 of amended Regulation E restricts the fees and expiration dates that may apply to gift cards. The rules protect consumers from certain unexpected costs and require that gift card terms and conditions be clearly stated. The rules generally cover retail gift cards, which can be used to buy goods or services at a single merchant or affiliated group of merchants, and network-branded gift cards, which are redeemable at any merchant that accepts the card brand.²⁶ (These procedures were superseded by revised Regulation E examination procedures issued, on October 22, 2010.)
• Interagency Examination Procedures for Regulation Z-Truth in Lending (revised).The revised examination procedures incorporated amendments to Regulation Z that became effective, on July 1, 2010, which revised the requirements for credit card disclosures provided with applications and solicitations, at account opening, and on periodic statements. The new disclosure requirements were also imposed for convenience checks and advertisements.²⁷ (These procedures were initially superseded by revised Regulation Z examination procedures issued on August 20, 2010, which were then replaced by revised examination procedures issued on January 28, 2011, and ultimately by revised procedures issued on March 18, 2011.)
• Interagency Examination Procedures Regarding the Duties of Furnishers of Information.These examination procedures incorporate the 2010 changes to Regulation V, which implements the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003. The changes require furnishers of consumer information to (1) implement written policies and procedures regarding the accuracy and integrity of consumer information that it furnishes to a consumer reporting agency, (2) consider the interagency guidelines concerning information accuracy and integrity when developing written policies and procedures, and (3) conduct a reasonable investigation of disputes submitted by consumers concerning the accuracy of any information contained in a consumer report that pertains to an account or other relationship that the furnisher has or had with the consumer.²⁸
• Revised Interagency Questions and Answers on Community Reinvestment.The interagency questions and answers interpret the CRA regulations and provide guidance to financial institutions and the public. The revised questions and answers provide examples of ways an institution could determine that its community services are targeted to low- and moderate-income individuals. In addition, the agencies revised the question and answer on reporting requirements for community development loans and made a conforming change to the question and answer that provides examples of "other loan data."²⁹
• Interagency Examination Procedures for Regulation Z-Truth in Lending (revised).The revised examination procedures incorporate the 2009 amendments to Regulation Z, as a result of the Credit Card Act. The Credit Card Act amended TILA and established a number of new requirements for open-end consumer credit plans. The Credit Card Act provisions were effective in three stages, and these procedures reflect the second stage of revisions, which protect consumers from unexpected increases in credit card interest rates on existing balances, require card issuers to consider a consumer's ability to make the required payments, establish special requirements for extensions of credit to consumers who are under the age of 21, and limit the assessment of fees for exceeding the credit limit on a credit card account. The examination procedures also implemented provisions of HEOA that became effective on February 14, 2010. Under the HEOA amendments, creditors that extend private education loans must provide disclosures about loan terms on or with the loan application, when the loan is approved, and when the loan is consummated.³⁰ (These procedures were initially superseded by revised Regulation Z examination procedures issued on June 25, 2010, then January 28, 2011, and ultimately replaced by revised examination procedures issued on March 18, 2011.)

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Training for Bank Examiners

Ensuring that financial institutions comply with laws that protect consumers and encourage community reinvestment is an important part of the bank examination and supervision process. As the number and complexity of consumer financial transactions grow, training for examiners of the organizations under the Federal Reserve's supervisory responsibility becomes even more important. The staff development function is responsible for the ongoing development of the professional consumer compliance supervisory staff, and ensuring that these staff members 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 consists of six courses focused on various consumer protection laws, regulations, and examining concepts. In 2010, these courses were offered in 10 sessions, and training was delivered to a total of 165 System consumer compliance examiners and staff members, and 12 state banking agency examiners.

When appropriate, courses are delivered via alternative methods, such as the Internet or other distance-learning technologies. For instance, several courses use a combination of instructional methods: (1) classroom instruction focused on case studies and (2) specially developed computer-based instruction that includes interactive self-check exercises.

Board and Reserve Bank staff regularly review the core curriculum for examiner training, updating subject matter and adding new elements as appropriate. During 2010, staff initiated one curriculum review. The Fair Lending Examination Techniques (FLET) course was reviewed in order to incorporate technical changes in policy and laws, along with changes in instructional delivery techniques. This course is designed to equip assistant level examiners with the skills and knowledge to plan and conduct a risk-focused fair lending examination, and incorporates the FFIEC fair lending examination procedures. The risk-focused examination approach and the procedures require considerable examiner judgment in the planning stages of an examination.

In addition, a real estate workshop was held to train consumer compliance examiners. The workshop provided an overview of new and revised mortgage regulations, including in-class exercises for participants to apply their knowledge. Subsequent to the workshop, staff produced and distributed compact discs of the workshop to the 12 Reserve Banks for use in "train-the-trainer" sessions.

Life-long Learning

In addition to providing core examiner training, the Staff Development function emphasizes the importance of continuing life-long 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 an annual consumer compliance examiner forum, where senior consumer compliance examiners receive information on emerging compliance issues, and are able to share best practices from across the System.

In 2010, the System continued to offer "Rapid Response" sessions, which are a powerful delivery method for just-in-time training. Debuted in 2008, Rapid Response sessions offer examiners one-hour teleconference presentations on emerging issues or urgent training needs that result from the implementation of new laws, regulations, or supervisory guidance. A total of six consumer compliance Rapid Response sessions were designed, developed, and presented to System staff during 2010.

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Agency Reports on Compliance with Consumer Protection Laws

The Board reports annually on compliance with consumer protection laws by entities supervised by federal agencies. This section summarizes data collected from the 12 Federal Reserve Banks, the FFIEC member agencies, and other federal enforcement agencies.³¹

Regulation B (Equal Credit Opportunity)

The FFIEC agencies reported that approximately 82 percent of the institutions examined during the 2010 reporting period were in compliance with Regulation B, compared with 81 percent for the 2009 reporting period. The most frequently cited violations involved

• failure to provide a timely and/or accurate notice of approval, counteroffer, or adverse action within 30 days after receiving a completed credit application;
• improperly requiring a borrower to obtain the signature of a spouse or other person in order to be considered for credit approval; and
• failure to collect information about applicants seeking credit primarily for the purchase or refinancing of a principal residence, including applicant race, ethnicity, sex, marital status, and age, for government monitoring purposes.

The Board and the Office of the Comptroller of the Currency (OCC) each initiated one formal Regulation B-related public enforcement action during the reporting period, while the Office of Thrift Supervision (OTS) initiated five and the Federal Deposit Insurance Corporation (FDIC) initiated 15.³² There were no other enforcement actions by FFIEC agencies.

The other agencies that enforce the ECOA--the Federal Trade Commission (FTC), the Farm Credit Administration (FCA), the Department of Transportation (DOT), the Securities and Exchange Commission (SEC), the Small Business Administration, and the Grain Inspection, Packers and Stockyards Administration of the Department of Agriculture--reported substantial compliance among the entities they supervise. The FCA's examination activities revealed that most Regulation B violations involved either (1) creditors' failure to request or provide information for government monitoring purposes or (2) creditors providing inadequate and/or untimely statements of specific reasons for adverse actions. None of these agencies initiated formal enforcement actions relating to Regulation B during the reporting period.

Regulation E (Electronic Fund Transfers)

The FFIEC agencies reported that approximately 93 percent of the institutions examined during the 2010 reporting period were in compliance with Regulation E, compared with 94 percent for the 2009 reporting period. The most frequently cited violations involved failure to

• provide a written explanation to the consumer when an investigation determines that no account error or a different error has occurred;
• provisionally credit the consumer's account for the amount of an alleged error when an investigation into the alleged error cannot be completed within 10 business days; and
• provide initial disclosures that contain required information, including limitations on the types of transfers permitted and error-resolution procedures, at the time a consumer contracts with an institution for an electronic fund transfer service.

The FDIC initiated 12 formal Regulation E-related enforcement actions during the reporting period. There were no other enforcement actions by FFIEC agencies or the SEC. The FTC filed one action against a company for violating a 2008 court order related to, among other things, a Regulation E violation.

Regulation M (Consumer Leasing)

The FFIEC agencies reported that 100 percent of the institutions examined during the 2010 reporting period were in compliance with Regulation M, which is the same compliance rate as the 2009 reporting period. The FFIEC agencies did not issue any public enforcement actions specific to Regulation M during the period.

Regulation P (Privacy of Consumer Financial Information)

The FFIEC agencies reported that approximately 98 percent of the institutions examined during the 2010 reporting period were in compliance with Regulation P, which is the same rate of compliance as the 2009 reporting period. The most frequently cited violations involved failure to

• provide clear and conspicuous initial privacy notices to customers,
• provide customers with a clear and conspicuous annual notice reflecting the institution's privacy policies and practices, and
• disclose the institution's information sharing practices in initial, annual, and revised privacy notices.

The OCC initiated two formal Regulation P-related enforcement actions during the reporting period, while the FDIC initiated six.³³ There were no other enforcement actions by FFIEC agencies.

Regulation Z (Truth in Lending)

The FFIEC agencies reported that approximately 82 percent of the institutions examined during the 2010 reporting period were in compliance with Regulation Z, compared with 92 percent for the 2009 reporting period. The most frequently cited violations involved

• failure to accurately disclose the finance charges in closed-end credit transactions;
• for certain residential mortgage transactions, failure to provide a good faith estimate of the required disclosures before consummation, or not later than three business days after receipt of a written loan application; and
• failure to provide complete and accurate disclosures for open-end credit secured by a consumer's dwelling (home equity plans).

In addition, 170 banks supervised by the Federal Reserve, FDIC, OCC, and OTS were required, under the Interagency Enforcement Policy in Regulation Z, to reimburse a total of approximately $2.12 million to consumers for understating APRs and/or finance charges in their consumer loan disclosures.

The Board initiated one formal Regulation Z-related enforcement action during the reporting period, the OTS initiated one, the OCC initiated four, and the FDIC initiated 18. The DOT continued to prosecute one air carrier for its alleged improper handling of credit card refund requests and other Federal Aviation Act violations.

Regulation AA (Unfair or Deceptive Acts or Practices)

The FFIEC agencies reported that approximately 99 percent of the institutions examined during the 2010 reporting period were in compliance with Regulation AA, which is the same rate of compliance as for the 2009 reporting period. The OTS initiated three formal Regulation AA-related enforcement actions, the OCC initiated three, and the FDIC initiated seven during the reporting period. There were no other enforcement actions by FFIEC agencies.

Regulation CC (Availability of Funds and Collection of Checks)

The FFIEC agencies reported that approximately 90 percent of institutions examined during the 2010 reporting period were in compliance with Regulation CC, which is the same rate of compliance as for the 2009 reporting period. The most frequently cited violations involved failure to

• make available on the next business day the lesser of $100 or the aggregate amount of checks deposited that are not subject to the next-day availability requirement,
• make funds deposited from local and certain other checks available for withdrawal within the times prescribed by the regulation, and
• provide required information to the consumer when placing an exception hold on an account.

The OCC initiated two formal Regulation CC-related enforcement actions during the reporting period, while the FDIC initiated seven. There were no other enforcement actions by FFIEC agencies.

Regulation DD (Truth in Savings)

The FFIEC agencies reported that approximately 86 percent of institutions examined during the 2010 reporting period were in compliance with Regulation DD, compared with 87 percent for the 2009 reporting period. The most frequently cited violations involved

• failure to provide required initial account disclosures;
• inappropriate use of the phrase "annual percentage yield" in an advertisement without providing required additional terms and conditions; and
• failure to provide account disclosures clearly and conspicuously, in writing, and in a form that the consumer may keep.

The FDIC initiated 17 formal Regulation DD-related enforcement actions during the reporting period. There were no other enforcement actions by FFIEC agencies.

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Responding to Consumer Complaints and Inquiries

The Federal Reserve investigates complaints against state member banks and selected nonbank subsidiaries of bank holding companies (Federal Reserve Regulated Entities), and forwards complaints against other creditors and businesses to the appropriate enforcement agency.³⁴ Each Reserve Bank investigates complaints against state member banks and selected nonbank subsidiaries 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 2010, FRCH processed 49,525 cases. Of these cases, more than half (26,324) were inquiries and the remainder (23,201) were complaints, with most cases received directly from consumers. Approximately 3 percent of cases were referred to the Federal Reserve from other agencies.

While consumers can contact FRCH by telephone, fax, mail, e-mail, or online, most FRCH consumer contacts occurred by telephone (51 percent). Nevertheless, 44 percent (21,563) of complaint and inquiry submissions were made electronically (including e-mail, online submissions, and fax) and the online form page received over 406,000 visits during the year.

Consumer Complaints

Complaints against Federal Reserve Regulated Entities totaled 7,461 in 2010. Approximately 33 percent (2,468) of these complaints were closed without investigation pending the receipt of additional information from consumers. Nearly 2 percent (140) of the total complaints are still under investigation. Of the remaining complaints, 69 percent (3,343) involved unregulated practices and 31 percent (1,510) involved regulated practices.

Complaints about Regulated Practices

The majority of regulated practice complaints concerned checking accounts (32 percent), real estate (27 percent), and credit cards (11 percent). The most common checking account complaints related to insufficient funds or overdraft charges and procedures (52 percent), disputed withdrawal of funds (10 percent), funds availability not as expected (7 percent), and disputed crediting of funds (5 percent). The most common real estate complaints by problem code related to: credit denied--other (13 percent), payment errors and delays (10 percent), credit-- rates, terms, and fees (10 percent), and escrow account problems (9 percent). Complaints by product code related to: home-purchase loans (60 percent), home refinance and closed-end loans (25 percent), and home equity credit lines (10 percent).³⁵ The most common credit card complaints related to interest rates, terms, and fees (17 percent), payment errors and delays (11 percent), billing error resolutions (11 percent), and bank debt collection tactics (10 percent).

Forty-six regulated complaints alleging discrimination were received. Of these, 22 complaints (less than 2 percent of total regulated complaints) alleged discrimination on the basis of prohibited borrower traits or rights.³⁶ Twenty-eight percent of discrimination complaints were related to the race, color, national origin, or ethnicity of the applicant or borrower. Thirteen percent of discrimination complaints were related to either the age or handicap of the applicant or borrower. There were two violations where discrimination was alleged; one involved a real estate loan and the other involved a motor vehicle loan.

In 87 percent of investigated complaints against Federal Reserve Regulated Entities, evidence revealed that institutions correctly handled the situation. Of the remaining 13 percent of investigated complaints, 34 percent were deemed violations of law, 21 percent were identified errors which were corrected by the bank, 8 percent were referred to other agencies, and the remainder were matters involving litigation or factual disputes, withdrawn complaints, internally referred complaints, or information was provided to the consumer. The most common violations involved real estate loans and checking accounts.

Complaints about Unregulated Practices

As required by section 18(f) of the Federal Trade Commission Act, the Board continued to monitor complaints about banking practices not subject to existing regulations, with a focus on instances of potential unfair or deceptive practices. In 2010, the Board received 3,343 complaints against Federal Reserve Regulated Entities that involved these unregulated practices. Most complaints were related to real estate concerns (37 percent), checking account activity (33 percent), and credit cards (6 percent). More specifically, consumers most frequently complained about issues involving insufficient funds or overdraft charges and procedures; debt collection/foreclosures; interest rates, terms, and fees; depository forgery, fraud, embezzlement, or theft; opening and closing deposit accounts; procedure and policy concerns; and disputed withdrawals of funds.

Complaints about Loan Modifications and Foreclosures

In 2010, the Federal Reserve received 1,050 complaints related to loan modifications and foreclosures. Of these, consumers complained primarily about home purchase loans (79 percent), home refinance/closed-end loans (9 percent), and adjustable rate mortgage loans (6 percent). The top three consumer protection issues documented with specific codes were: debt collection/foreclosure (47 percent); interest rates, terms, and fees (27 percent); and credit denied (4 percent).

Complaint Referrals

In 2010, the Federal Reserve forwarded 15,505 complaints against other banks and creditors to the appropriate 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 21 complaints to HUD that alleged violations of the Fair Housing Act.³⁷ The Federal Reserve's investigation of these complaints revealed no evidence of illegal credit discrimination.

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Consumer Inquiries

The Federal Reserve received 26,324 consumer inquiries in 2010, covering a wide range of topics. The top three consumer protection issues documented with specific codes were: adverse action notices received pursuant to the Equal Credit Opportunity Act (7 percent), exchange or issuance of coin or currency (2 percent), and credit denials for reasons other than prohibited basis (2 percent). Consumers were typically directed to other resources, including other federal agencies or written materials, to address their inquiries.

The System's FRCH also empowers consumers in recognizing and reporting scams. The site contains consumer information alerting consumers to characteristics of a scam and provides a link for reporting information on a product or service they suspect of being a scam. Fifty-four scams were tracked through FRCH in 2010, and sent to the appropriate federal authorities for investigation and prosecution.

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Supporting Community Economic Development

The Federal Reserve System's Community Affairs Offices (CAOs) work to promote community economic development and fair access to credit for low- and moderate-income communities and populations. As a decentralized function, the CAOs 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. They provide information and promote awareness of investment opportunities to financial institutions, government agencies, and organizations that serve low- and moderate-income communities and populations. Similarly, the Board's CAO promotes and coordinates Systemwide, high-priority efforts; in particular, Board community affairs staff focus on issues that have public policy implications.

Small Business Finance and Mobile Banking Issues

The financial crisis and the economic downturn resulted in constrained credit conditions during 2010, raising significant concerns regarding access to credit for small businesses. To gain a better understanding of the issues, needs, and programs and policies that would be helpful, the CAOs undertook a comprehensive initiative to convene small business owners, lenders, community leaders, and government officials to support small businesses' access to credit. (See "Box 1. Credit Where Credit Is Due: Supporting Small Business Access to Credit", for more details.)

In addition, DCCA recognized the importance of understanding and gaining insight into the fast-evolving dynamics in mobile banking. In 2010, staff convened an emerging issues forum entitled Cash, Check, or Cell Phone? Protecting Consumers in a Mobile Finance World. The forum brought together banking and industry leaders, vendors of mobile financial services, researchers, consultants, payment services firms, consumer advocates, and regulators to discuss the new opportunities and challenges presented by emerging technologies in banking and payments. The forum proceedings, including podcasts and presentations, are available to the public through the Board's website.³⁸ The important innovations in mobile finance now underway will change the way consumers conduct financial transactions with their bank, merchants, and other consumers. As mobile finance technologies, standards, and business models continue to advance, DCCA will continue to monitor their evolution to ensure that consumers are adequately protected as they take advantage of promising new products and services.

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Vacant Properties and Neighborhood Stabilization

In 2010, issues related to high rates of foreclosure continued to dominate the System's community affairs agenda. While each Reserve Bank addressed the impact of foreclosure on low- and moderate-income communities--through programming tailored to the particular needs of communities in their Districts--the CAOs of the 12 Reserve Banks (under the sponsorship of their presidents) worked closely with the Board to develop the Mortgage Outreach and Research Efforts (MORE) Initiative.³⁹ The goal of MORE is to leverage the Federal Reserve's substantial knowledge of and expertise in mortgage markets in ways that are useful to policymakers, community organizations, financial institutions, and the public.⁴⁰

As a key element of the MORE initiative, the System produced a volume on real estate owned (REO) properties and neighborhood stabilization issues. More specifically, with the goal of helping communities to address the effects of concentrated foreclosures, the Board worked with the Federal Reserve Banks of Boston and Cleveland to produce a special volume of research that examines important questions about lender-owned real estate.

The publication, REO and Vacant Properties: Strategies for Neighborhood Stabilization, consists of a series of papers that explore regional differences and present perspectives from the various participants involved in REO disposition--sellers, buyers, nonprofits, and municipalities.⁴¹ The authors were drawn from national nonprofits, large holders of servicers of REOs, community affairs researchers, and academics. Chapters in the publication addressed a wide range of questions: What factors can bring about stability in a high-foreclosure neighborhood? and What are the incentives of the various parties to REO transactions? The publication was made public at the REO and Vacant Property Strategies for Neighborhood Stabilization Summit, a Board-hosted event that examined the community impacts of foreclosed and vacant properties, held in September 2010. At the summit, key findings from a Federal Reserve research project on local uses of NSP funds initiated in 2009 were also released.

In an effort to address the current foreclosure issues, the Board also continued its partnership with NeighborWorks America® (NWA), which was initiated in 2009 to continue to leverage the System's resources with those of the NWA.⁴² As part of the partnership, the Board has coordinated the development and distribution of a new quarterly survey to the NWA organizations and the National Foreclosure Mitigation Counseling (NFMC) Program grantees and sub-grantees. The survey is intended to gather information on loan modification efforts, rental housing, unemployment, and key emerging issues faced by low- and moderate-income communities. The survey was distributed to approximately 850 organizations.

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Community Data Initiative

By complementing information-sharing and partnership roles with a rigorous analytical capacity, community affairs is able to provide reliable information that has helped to identify and close data gaps for low- and moderate-income communities. In 2010, the Board launched the Community Data Initiative (CDI), a CAO collaborative research project. The goal of the CDI project is to provide Board and Reserve Bank leadership with systematic and relevant community conditions and trend information on a consistent basis. The quarterly or biannual e-polling of selected district community stakeholders provides ongoing intelligence of current and emerging community development issues. To date, there are seven beta site Reserve Banks that are administering web-based polls and surveys. Two additional Reserve Banks are reviewing their capacity and resources for launching community stakeholder polls in 2011.

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CRA Public Hearings

Throughout 2010, the Board partnered with the FDIC, OCC, and OTS to hold a series of joint public hearings in four cities to receive public comments as they consider updates to regulations governing procedures for assessing a financial institution's performance under the CRA.⁴³

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Other Community Development Initiatives

In 2010, the Board began working with the Federal Reserve Bank of San Francisco to prepare for the 2011 biennial Community Affairs Research Conference.⁴⁴ A call for papers was released in May and submissions were due in September. Community Affairs expanded its paper submission review committee to include a number of key economists from the Board's Division of Research and Statistics, as well as the Board's DCCA staff, in order to tap the Board's pool of subject matter experts.

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Consumer Advisory Council

The Consumer Advisory Council--whose members represent consumer and community organizations, the financial services industry, academic institutions, and state agencies--advises the Board on matters of Board-administered laws and regulations as well as other consumer-related financial services issues. Council meetings, open to the public, were held in March, June, and October of 2010. See a list of Council members; also, visit the Board's website for transcripts of Council meetings.⁴⁵

Among the significant topics of discussion for the Council in 2010 were

• the Credit Card Act,
• proposed changes to Regulation Z to enhance consumer protection and improve disclosures for reverse mortgage transactions and other home mortgage loans,
• HMDA,
• CRA, and
• issues related to foreclosures and neighborhood stabilization.

The Credit Card Act

In its March meeting, the Council discussed proposed amendments to Regulation Z that would implement the provisions of the Credit Card Act requiring that credit card penalty fees be reasonable and proportional and that credit card issuers reevaluate annual percentage rate increases at least once every six months. Members generally commended the overall shift toward transparency and simplicity in credit card terms and pricing represented by the regulations implementing the Credit Card Act. They commented that additional and clearer up-front information would benefit consumers in their shopping and help credit card issuers to be more competitive.

The members also engaged in discussions regarding the requirement to reevaluate rate increases, as well as the issue of defining penalty fee provisions, with several consumer representatives and an industry representative urging the Board to set specific dollar amounts for penalty fees and expressing concern about giving discretion to issuers to set penalty fees.

On the other hand, several industry representatives expressed the view that the Board should not set specific penalty fees, but rather that issuers should be permitted to set the fees based on the Board's rules about what factors should be considered and how certain calculations should be made. They also noted that other Credit Card Act provisions require clear disclosures of penalty fees to consumers. Regarding the provisions about costs incurred as a result of violations of account terms, some industry representatives expressed concern about the restrictiveness of the proposed standards and urged the Board to allow consideration of a broader range of costs related to violations.

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Proposed Rules Regarding Home Mortgage Transactions

In its October meeting, the Council discussed the Board's proposed rules to amend Regulation Z to enhance consumer protection and improve disclosures for reverse mortgage transactions and other home mortgage loans.

Reverse Mortgages

Members praised the Board's steps to improve the disclosures for reverse mortgages, pointing particularly to the proposed revision of the total annual loan cost disclosure so that it shows how the reverse mortgage balance grows over time in dollar amounts. A consumer representative urged the Board to go further and develop standard disclosures that all reverse mortgage creditors must use. Both consumer and industry representatives also supported the requirement that borrowers obtain counseling from a counselor or counseling agency that meets the counselor qualification standards established by HUD, with members emphasizing the importance of in-person, one-on-one counseling and the need for counseling in languages other than English.

Members also supported the provision to prohibit creditors from requiring a consumer to purchase another financial or insurance product as a condition of obtaining a reverse mortgage. Consumer representatives expressed concern about the proposed 10-day safe harbor in the anti-tying rule, urging the Board to designate a longer time period or not to establish a safe harbor at all.

Right of Rescission

Consumer representatives criticized proposed changes to the right to rescission under Regulation Z that would require the consumer to tender the principal balance less interest and fees, and any damages and costs, before the creditor is required to release its security interest. Consumer representatives noted that few borrowers would be able to tender the principal and expressed preference for the current form of the rescission process, which gives borrowers some leverage and temporarily halts the foreclosure process so that the lender and borrower can negotiate a workout.

Members had a mixed reaction to the Board's consumer-tested, proposed revised notice of the right to rescind, which would include a "tear-off" form for consumers to sign and send to the creditor and also would require creditors to provide only one copy of the rescission notice to the consumer. While some members supported the one-copy requirement and tear-off format as a way to simplify paperwork, others held the view that consumers should continue to receive two copies, and still others urged the Board to develop a standard form for the rescission notice that all lenders must use.

In the discussion about the proposed rules relating to material disclosures, some consumer representatives expressed their opposition to the provision allowing a $100 tolerance for erroneous disclosure of the monthly payment amount, stating that $100 is a significant amount for many borrowers and that an error of that magnitude should be considered material.

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Home Mortgage Disclosure Act (HMDA)

Members discussed the advantages and disadvantages of suggested changes to Regulation C, which implements HMDA, including a proposal to collect additional information. Industry representatives urged the Board to take into account the time and resource burdens that would be imposed on institutions, particularly smaller institutions, in collecting and ensuring the integrity of an expanded set of data, as well as potentially reporting it more quickly. They also indicated that there should be a clear purpose and benefit for requiring any additional data collection and recommended waiting until other financial regulatory reforms have been implemented before making significant changes to HMDA.

Consumer representatives supported the collection of more data so that regulators and policymakers can better identify and track problematic products and practices, such as fair lending issues, and more effectively direct resources to particular populations or communities. They expressed the view that the value of additional data outweighs the costs of collecting and reporting it. Consumer representatives recommended several additions to the data, including applicants' credit score, age, and primary language, as well as additional loan information, such as loan-to-value ratio, originator channel, and underwriting characteristics (interest rate, prepayment penalty, fees). The inclusion of expanded underwriting data was supported by an industry representative, who noted that such information could be helpful in clarifying whether disparate pricing is justified.

Both consumer and industry representatives pointed to privacy issues that could arise with the collection of more data. Some members recommended the adoption of a model like that of the U.S. Census, using a credentialing and monitoring system to give limited data access to trusted researchers. Members also commented on the need to standardize and streamline data-collection efforts across government agencies and to coordinate with other data requirements of the Dodd-Frank Act.

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Community Reinvestment Act (CRA)

In the context of the interagency hearings, Council members discussed possible ways to modernize the regulations that implement the CRA to reflect changes in the financial services industry, changes in how banking services are delivered to consumers today, and current housing and community development needs. Members praised the Federal Reserve and other federal regulators for the proposed rule to expand existing CRA consideration for neighborhood stabilization activities. Two consumer representatives expressed the view that institutions' performance related to REO properties, such as maintaining properties and paying taxes, should be carefully scrutinized under the CRA and recommended deductions for institutions engaging in practices that negatively impact communities.

Both consumer and industry representatives supported extending CRA coverage beyond depository institutions to include all institutions that offer certain financial products and services, such as nonbank affiliates of depository institutions, credit unions, and other non-bank financial services providers.

Consumer and industry members also agreed that regulators should differentiate among strong, mediocre, and inadequate CRA performance more consistently and effectively. In particular, they recommended the implementation of incentives to encourage institutions to strive for an "Outstanding" rating, such as a longer time between examinations or other operational or financial benefits that would decrease institutions' costs and whose savings could be reinvested in communities.

Consumer and industry members stated that community development services get relatively little credit currently in CRA examinations and supported giving more weight to such activities by allocating a larger percentage of the service test to them or by creating a new community development test. The activities for which they recommended more credit included community development loans, particularly those other than single-family lending; products and services to reach unbanked or formerly banked consumers; loan modifications; financial education and asset-building efforts; and indirect services and lending through partners.

Members presented a variety of views related to geographic coverage under the CRA, but both industry and consumer members urged regulators to loosen the constraints that the assessment-area analysis puts on banks' investments in national funds, which often direct resources to rural areas and other underserved markets. Members stated that, under the current approach, banks are limited to investing in proprietary funds directed toward their geographic assessment areas. However, some industry representatives also recommended that the geographic scope continue to incorporate a connection to the local deposit base and to the physical distribution of products and services through local branches.

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Foreclosures and Neighborhood Stabilization

Throughout 2010, the Council discussed loss-mitigation efforts, including the Administration's Home Affordable Modification Program (HAMP), neighborhood stabilization initiatives and challenges, and other issues related to foreclosures.

In the discussions about HAMP and other loss-mitigation efforts, some consumer representatives noted that they had seen slight improvement in mortgage servicers' capacity, but generally held the view that servicing problems continued to be numerous and systemic. They pointed to issues such as lost or misplaced documentation, delays in making a decision about whether to grant a loan modification, delays in moving borrowers from trial modifications to permanent modifications, steering of borrowers to in-house modification programs with less favorable terms, a lack of response to borrower communications, and the use of "foreclosure mill" law firms that charge high fees to borrowers to make the modification effective. They also stated that foreclosures continue to be filed while borrowers are in the trial modification period. In addition, consumer representatives expressed concern about the lack of information provided to borrowers who are denied a HAMP modification and the absence of a process to appeal the denial.

Later in 2010, members discussed reports of improper "robo-signing" activities by servicers, with several consumer representatives noting that housing counselors had long warned about such problematic practices and questioning why regulators had not scrutinized them sooner. Though members generally expressed hesitation about the advisability of a national moratorium, consumer representatives urged servicers and lenders to halt foreclosures until they had reviewed their processes and corrected any deficiencies. They also urged regulators to investigate carefully servicers' practices, particularly payments by volume for affidavits and other documentation work performed by outside vendors.

Industry representatives expressed support for the corrective action to address problematic practices but stated that many financial institutions had targeted significant resources to address the increasing volume of foreclosures with the goal of keeping borrowers in their homes. They also noted that institutions must balance the sometimes competing interests of borrowers, investors, and safety and soundness considerations.

Members provided a variety of perspectives about HAMP itself and possible areas of improvement for the program. Both consumer and industry members expressed support for the change in HAMP requiring up-front income verification and for the HAMP effort targeting unemployed borrowers. Noting the qualification limits for the HAMP unemployment initiative, members pointed to the need for other approaches to help unemployed and underemployed borrowers, such as the successful programs used in Pennsylvania and other states. Both industry and consumer representatives expressed concerns about HAMP's net-present-value (NPV) model, such as the way redefault rates are assigned and the results produced for borrowers with second liens or with substantial equity in their home

Several consumer and industry representatives endorsed a focus on principal write-downs as a key way to achieve sustainable modifications. Some consumer representatives also expressed support for judicial mortgage modifications in the bankruptcy context as an additional tool to deal with foreclosures.

Throughout 2010, the Council also discussed the effects of foreclosures that extend beyond households to the surrounding community and efforts such as the federal NSP to address the challenges of stabilizing communities. Members expressed concern about banks not maintaining their REO properties or not completing foreclosure sales, leading to "toxic titles," and urged federal regulators to increase oversight of regulated institutions regarding these issues. A consumer representative emphasized the need for post-foreclosure solutions to prevent prolonged negative impacts particularly on lower-income communities and communities of color, where properties are likely to remain REO status for much longer than in other areas. In addition, an industry representative expressed concern about increasing investor purchases of REOs and urged consideration of ways to give potential owner-occupants a better chance to acquire properties. Several members pointed to the importance of collaborative efforts among public, private, and nonprofit entities and initiatives that strategically target particular neighborhoods.

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Other Discussion Topics

At the March meeting, Council members discussed short-term, small-dollar loan products offered by depository institutions, including tax refund anticipation loans (RALs), and consumer protection issues related to such products. Both consumer and industry representatives agreed that RALs should be strictly regulated and recommended more education about the timing of tax refunds and more outreach to unbanked consumers, particularly at tax time, about saving and building wealth.

Members also encouraged regulated financial institutions to offer affordable, sustainable small-dollar loans and expressed concern about unregulated entities offering such loans with problematic features, including high APRs that result from the short term and fees of these loans. Some members expressed the view that the APR is not a useful shopping tool for consumers. An industry representative noted the challenges in the business model for this product, stating that institutions face reputational risk. A consumer representative urged the Board and other regulators to help improve the development of this product by clarifying capital requirements and assisting to define what constitutes a responsible, profitable small-dollar loan product.

At the June meeting, the Council addressed issues relating to the flow of credit to small businesses, including specific credit gaps, the role of small business support service providers, promising practices related to technical assistance, and alternative lending sources. Several members noted the need to give particular attention to small businesses in rural areas, which are often undercapitalized. Some members also recommended measures to make the Treasury Department's New Markets Tax Credit program more amenable to investments in small businesses. A consumer representative praised the Board for its ongoing dialogue with the Small Business Administration (SBA) and expressed support for efforts to highlight SBA programs and ensure their continued effectiveness, such as by bolstering the secondary market for certain SBA loans.

A consumer representative commented that small business credit is often closely connected with personal credit and encouraged lenders to consider alternative credit data related to personal credit history when underwriting small business borrowers. One member expressed support for additional consumer protections for small business credit cards, much like the protections provided by the Credit Card Act of 2009 for consumer credit cards.

At the October meeting, Council members discussed the Board's interim final rule to ensure that real estate appraisers are free to use their independent professional judgment in assigning home values without influence or pressure from those with interests in the transactions. Members generally agreed that the appraisal independence requirements should apply not only to consumer credit transactions secured by a consumer's principal dwelling but also to consumer loans secured by other dwellings, such as a second home. Members disagreed, however, about whether appraisers should be permitted to consider the sales contract in connection with rendering an opinion of value.

Regarding other appraisal issues, one member urged the Board to impose bonding, insurance, or capitalization requirements on appraisers so that judgments against them can be effective. An industry representative expressed concern about the quality of appraisals generally, particularly for those from appraisal management companies with high volume, and commented that the proposed rules would help to improve appraisal quality. Some consumer representatives commented on the importance of being able to communicate with appraisers, especially those who are not familiar with a certain community or neighborhood, to help inform them about the area.

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