Annual Report 2010

The Board of Governors and the
Government Performance and Results Act

Overview

The Government Performance and Results Act (GPRA) of 1993 requires that federal agencies, in consultation with Congress and outside stakeholders, prepare a strategic plan covering a multiyear period and submit an annual performance plan and performance report. Although the Federal Reserve is not covered by the GPRA, the Board of Governors voluntarily complies with the spirit of the act.

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Strategic Plan, Performance Plan, and Performance Report

The Board's strategic plan articulates the Board's mission, sets forth major goals, outlines strategies for achieving those goals, and discusses the environment and other factors that could affect their achievement. It also addresses issues that cross agency jurisdictional lines, identifies key quantitative measures of performance, and discusses the evaluation of performance.

The performance plan includes specific targets for some of the performance measures identified in the strategic plan and describes the operational processes and resources needed to meet those targets. It also discusses validation of data and verification of results. The performance report discusses the Board's performance in relation to its goals.

The strategic plan, performance plan, and performance report are available on the Board's website, at www.federalreserve.gov/boarddocs/rptcongress. The Board's mission statement and a summary of the Federal Reserve's strategic and performance goals, as set forth in the most recently released strategic and performance plans, are listed below. Updated documents will be posted on the website as they are completed.

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Mission

The mission of the Board is to foster the stability, integrity, and efficiency of the nation's monetary, financial, and payment systems to promote optimal macroeconomic performance.

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Goals and Objectives

The Federal Reserve has six primary strategic goals with interrelated and mutually reinforcing elements. To achieve these strategic goals, which cover four different functional areas, the Board has established a number of annual performance goals, which are described in this section.

Monetary Policy Function

Strategic Goal

Conducting monetary policy that promotes the achievement of the Federal Reserve's statutory objectives of maximum employment and stable prices

Annual Performance Goals

Informed monetary policy: Staying abreast of recent developments in and prospects for the U.S. and global economies and financial markets so that monetary policy decisions are well informed

Understanding of macroeconomics and markets: Enhancing our knowledge of the structural and behavioral relationships in the macroeconomic and financial markets, and improving the quality of the data used to gauge economic performance, through developmental research activities

Effective implementation of monetary policy: Implementing monetary policy effectively in highly unusual economic, financial, and monetary circumstances

Contribution to international efforts: Contributing to the development of U.S. international policies and procedures, in cooperation with the U.S. Department of the Treasury and other agencies, with respect to global financial markets, international organizations, and participation in international groups

Expanded public awareness of monetary policy: Promoting understanding of Federal Reserve policy among other government officials and the general public

Supervisory and Regulatory Function

Payment System Policy and Oversight Function

Internal Board Support

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Federal Legislative Developments

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) (Pub. L. No. 111-203), enacted on July 21, is one of the most significant pieces of legislation affecting the U.S. financial regulatory framework in many years. The act includes many of the reforms championed by the Federal Reserve to help strengthen the financial system and reduce the likelihood of future financial crises. For example, the legislation creates an interagency council to monitor and coordinate responses to emerging threats to the financial system; requires that large bank holding companies and systemically designated financial firms be subject to enhanced prudential standards to reduce the risks they may present to the financial system; provides for the consolidated supervision of all systemically important financial institutions; gives the government an important additional tool to safely wind down financial firms whose failure could pose a threat to U.S. financial stability; and provides for the strengthened supervision of systemically important payment, settlement, and clearing utilities. In addition, the act enhances the transparency of the Federal Reserve while preserving the Federal Reserve's independence, which is crucial to the effective implementation of monetary policy.

The Small Business Jobs Act of 2010 (the Jobs Act) (Pub. L. No. 111-240), enacted on September 27, established a $30-billion Small Business Lending Fund (SBLF), which is designed to promote small business lending through Treasury investment in capital instruments issued by eligible banking organizations.

Following is a summary of the key provisions of the Dodd-Frank Act as they relate to the Federal Reserve, as well as a more detailed overview of the SBLF.

The Dodd-Frank Act

Financial Stability Oversight Council

The act establishes a new Financial Stability Oversight Council (FSOC) charged with a number of important duties, including monitoring and identifying emerging risks to financial stability across the entire financial system, identifying potential regulatory gaps, and coordinating the agencies' responses to potential systemic risks. The FSOC is composed of the Treasury Secretary (who is also chairperson of the FSOC); the Chairman of the Federal Reserve Board; the heads of the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC), Federal Deposit Insurance Corporation (FDIC), Commodities Futures Trading Commission (CFTC), Federal Housing Finance Agency (FHFA), and National Credit Union Administration (NCUA); and an independent member with insurance expertise appointed by the President and confirmed by the Senate.

The act instructs the FSOC to designate as systemically important large, interconnected nonbank financial companies and financial market utilities (FMUs) that could pose a threat to U.S. financial stability. Further, the act identifies the Board as the consolidated supervisor of any nonbank financial firm designated by the FSOC as systemically important (referred to in the act as "nonbank financial companies supervised by the Board").

The act requires the FSOC to annually report to and testify before Congress on significant financial market and regulatory developments, potential emerging threats to U.S. financial stability, and recommendations for promoting market discipline and maintaining investor confidence. With the submission of the annual report to Congress, each voting member of the FSOC must either state that he or she believes the FSOC, the government, and the private sector are taking all reasonable steps to ensure financial stability and mitigate systemic risk, or identify what actions he or she believes need to be taken.

The act also establishes a new Office of Financial Research (OFR) within the Treasury Department to collect, standardize, and analyze data for the FSOC and member agencies in connection with the FSOC's duties. The OFR will be headed by a director appointed by the President with the advice and consent of the Senate.

Systemic Designations and Enhanced Prudential Standards for Financial Firms

The act requires the Board to establish heightened prudential standards for nonbank financial companies supervised by the Board and for bank holding companies (BHCs) with assets of $50 billion or more.¹ These heightened standards must be more stringent than the standards that apply to other nonbank financial companies and BHCs that do not pose similar risks to the financial system. In particular, these heightened standards must include risk-based capital and leverage requirements, liquidity requirements, overall risk-management requirements, concentration limits, and "living will" and credit exposure reporting requirements. In addition to the mandatory heightened standards, the Board may establish standards for designated nonbank financial companies and BHCs with assets of $50 billion or more relating to contingent capital, enhanced public disclosure, short-term debt limits, and such other prudential standards as deemed appropriate.

The act also requires the Board to conduct and publish summary results of annual stress tests of systemic nonbank financial firms and BHCs with $50 billion or more in assets. Such firms also are required to conduct their own stress tests on a semiannual basis. The act requires financial firms with more than $10 billion in assets to conduct annual stress tests in accordance with regulations established by the respective primary federal financial regulatory agency.

Changes to Banking Regulation and Supervision

The act makes a variety of changes to the laws designed to protect the safety and soundness of banking organizations and that are administered by the Federal Reserve. For example, section 171 of the act establishes floors for regulatory capital requirements applied to domestic BHCs, savings and loan holding companies (SLHCs), and designated nonbank financial companies supervised by the Board. Specifically, section 171 requires the minimum leverage and risk-based capital requirements for such institutions to be no lower than the requirements applied to insured depository institutions at any time in the future and not quantitatively lower than the requirements applied to insured depository institutions on July 21, 2010. The Board's Basel II Advanced rules, proposed on December 15, 2010, incorporate the floors prescribed by the act. In addition, the act sets guidelines for whether certain instruments may be counted as regulatory capital.

Sections 608, 609, and 615 of the act enhance the limitations on transactions among a BHC, a subsidiary bank, and its affiliates. Specifically, the act clarifies that a "covered transaction" for the purposes of sections 23A and 23B of the Federal Reserve Act includes any credit exposure of a bank to an affiliate arising from derivative transactions or securities borrowing and lending transactions with such affiliate. In addition, the act eliminates certain exemptions from sections 23A and 23B for subsidiaries of BHCs and requires that any purchase of assets by a bank from an insider must be on market terms.

The act also requires the Board to incorporate a financial stability factor into certain regulatory determinations. Specifically, for certain transactions governed by the Bank Holding Company Act and Bank Merger Act, sections 163 and 604 require the Board to take into account risks to the stability of the U.S. banking or financial system. Moreover, section 173 adds financial stability to the list of factors that the Board may consider when acting on an application by a foreign bank to open an office in the United States. Specifically, the Board may consider whether the foreign bank's home country has adopted or is making demonstrable progress toward adopting a financial regulatory system that mitigates risk to the stability of the U.S. financial system. Section 604 of the act authorizes the Board to incorporate financial stability into its supervision of BHCs.

Section 606(a) of the act provides that a BHC must be well capitalized and well managed at the holding company level in order to become and remain a financial holding company (FHC) eligible to engage in expanded activities. In addition, section 163(b) provides that in order to use authority under section 4(k) of the Federal Reserve Act to acquire a nonbank company with $10 billion or more in assets, a nonbank financial company that is supervised by the Board or a BHC with $50 billion or more in consolidated assets must obtain the Board's prior approval. Further, section 164 applies restrictions on management interlocks to nonbank financial companies supervised by the Board.

Section 956 of the act requires the Board to issue a joint rulemaking or guidance with other federal regulators to prohibit incentive-based compensation arrangements at institutions with $1 billion or more in assets (covered financial institutions) that encourage inappropriate risks by providing excessive compensation, or potentially leading to material financial loss. In addition, the regulations or guidance must require covered financial institutions to disclose to their appropriate federal regulator sufficient information concerning the structure of incentive-based compensation arrangements to monitor compliance with these restrictions. These new regulations or guidelines will supplement the guidance the Board and other federal banking regulators issued on June 21, 2010, to ensure that incentive compensation arrangements at financial organizations take into account risk and are consistent with safe and sound practices.

Section 165(d) requires the Board and the FDIC to jointly issue a rule requiring that nonbank financial companies supervised by the Board and BHCs with $50 billion or more in total consolidated assets prepare and update plans for orderly resolution under the Bankruptcy Code and report (1) credit exposures to other significant financial firms and (2) credit exposures of significant financial firms to the reporting company.

Further, the act generally eliminates the limitations under the Gramm-Leach-Bliley Act that restricted the Board's ability to examine, obtain reports from, or take enforcement action against a functionally regulated subsidiary of a BHC, such as a broker-dealer or insurance company. The Board, however, must continue to rely on examinations conducted by the subsidiary's primary bank supervisors or functional regulators to the fullest extent possible and notify such supervisors before conducting an examination of the subsidiary.

Separately, section 605 of the act requires the Board to examine the activities of nonbank subsidiaries of BHCs--other than functionally regulated subsidiaries--that are permissible for the organization's subsidiary banks in the same manner, subject to the same standards, and with the same frequency as if such activities were conducted in the organization's lead subsidiary depository institution. Section 612 of the act prohibits a depository institution that is subject to a formal enforcement order or memorandum of understanding with respect to a significant supervisory matter from converting its charter unless the current and proposed supervisors establish a plan that addresses the problems at the depository institution and that will be implemented and monitored by the new supervisor.

Section 939A of the act requires all federal agencies to review their regulations, including capital rules, and remove any reference to credit ratings. Each agency must substitute an alternative standard of credit-worthiness that it deems appropriate. On August 10, 2010, the federal banking agencies issued an advance notice of proposed rulemaking regarding alternatives to the use of credit ratings in risk-based capital rules for banking organizations.

Finally, effective July 21, 2011, section 627 of the act repeals the prohibition on payment of interest on demand deposits currently implemented by the Board's Regulation Q.

Savings and Loan Holding Companies

The act transfers all supervisory and regulatory authority over SLHCs to the Board from the Office of Thrift Supervision (OTS). Effective on July 21, 2011, the act grants the Board the authority to examine, obtain reports from, and establish consolidated capital standards for SLHCs. The FDIC and OCC will exercise similar authority over thrift institutions. On January 25, 2011, the Board, in conjunction with the OTS, OCC, and FDIC, issued a report to Congress on the agencies' plans to implement the transfer of OTS authorities.

The act contains several provisions designed to preserve the traditional separation of banking and commercial activities and support the Board's supervision and regulation of SLHCs. First, the act provides that an SLHC will be allowed to conduct expanded activities permissible to an FHC, such as insurance underwriting, only if such SLHC satisfies the same capital, managerial, and Community Reinvestment Act criteria that govern whether a BHC qualifies as an FHC. In addition, the act instructs the Board to issue regulations establishing criteria for determining when a grandfathered unitary SLHC that engages in commercial activities must form an intermediate holding company (IHC) through which to conduct its financial activities. Such IHCs would be subject to Board supervision as an SLHC, and the Board may promulgate regulations to restrict or limit transactions between the IHC and any affiliate.

The "Volcker Rule": Prohibitions against Proprietary Trading and Other Activities

Section 619 of the act generally prohibits banking entities from engaging in proprietary trading or from investing in, sponsoring, or having certain relationships with a hedge fund or private equity fund. Proprietary trading does not include transactions entered into on behalf of customers or in connection with underwriting or market-making-related activities, risk-mitigating hedging activities, or investments in small business investment companies or other similar qualifying investments. The act also provides that nonbank financial companies supervised by the Board that engage in such activities or have such investments will be subject to additional capital requirements, quantitative limits, or other restrictions. These prohibitions and other provisions of section 619 are commonly known as the "Volcker Rule."

As required by the act, on January 18, 2011, the FSOC issued a study and made recommendations on the implementation of the Volcker Rule. The Board, OCC, FDIC, CFTC, and SEC are responsible for developing and adopting regulations to implement the prohibitions and restrictions of the Volcker Rule, and must adopt implementing rules not later than October 18, 2011.

The Board alone is responsible for adopting rules to implement the conformance provisions of the Volcker Rule, which provide a banking entity or a nonbank financial company supervised by the Board a period of time after the effective date of the Volcker Rule to bring its activities into compliance with the Volcker Rule and the agencies' implementing regulations. On February 9, 2011, the Board issued a final rule implementing the conformance period.

Financial Sector Concentration Limit

Section 622 of the act establishes a financial sector concentration limit that generally prohibits a financial company from merging or consolidating with, or acquiring, another company if the resulting company's consolidated liabilities would exceed 10 percent of the aggregate consolidated liabilities of all financial companies. As required by the act, on January 18, 2011, the FSOC completed a study of the concentration limit's effect on financial stability and other factors and made recommendations regarding modifications to the concentration limit that the FSOC believes would more effectively implement section 622.

The Board is required to adopt regulations to implement the financial sector concentration limit that reflect, and are in accordance with, the FSOC's recommendations. The Board must prescribe these rules no later than October 18, 2011.

Regulation of Derivatives Markets and Products

The act makes a number of significant changes to the regulation of derivatives, which it refers to as "swaps" and "security-based swaps," and participants in the derivatives markets. The act divides the regulation of the derivatives markets between the SEC, which will regulate security-based swaps, and the CFTC, which will regulate all other swaps. The act generally requires (1) all standardized derivatives to be centrally cleared and traded on an exchange or registered execution facility; (2) all derivatives to be reported to registered data repositories; (3) all derivatives dealers ("swap dealers") and major market participants ("major swap participants") to register with the SEC and/or the CFTC; and (4) the establishment of new, regulated organizations to support the derivatives market, including exchanges, clearing organizations, and data repositories. In general, the act mandates that the SEC and CFTC consult with the Board before issuing rules to implement the new regulatory regime applicable to derivatives.

In addition, the Board and the other federal banking agencies are required to adopt joint rules that establish capital and margin requirements for banks, BHCs, SLHCs, foreign banks, foreign bank branches, and Edge Act and agreement corporations that are swap dealers or major swap participants.

Derivatives "Push-Out"

Section 716 of the act, commonly referred to as the derivatives "push-out" provision, prohibits banks and other institutions receiving certain kinds of federal assistance from engaging in derivatives activities, except for derivatives used for hedging or other risk-mitigating purposes and derivatives involving interest or other rates; derivatives that reference assets that are eligible for bank investment (including foreign exchange, gold, and silver); and cleared credit default swaps. These institutions will be required to push out all other derivatives activities, including derivatives on agricultural commodities, energy, and other metals; equity derivatives; and uncleared credit default swaps to a separately capitalized affiliate. The Board and the other federal banking agencies must establish a transition period of up to 24 months after the effective date of the derivatives push-out provision for institutions to bring their activities into compliance with the derivatives push-out restrictions.

Credit-Risk Retention Study and Regulations

Section 941(b) of the act imposes certain credit-risk retention obligations on securitizers or originators of assets securitized through the issuance of asset-backed securities. Section 941 also requires the Board, in conjunction with other federal agencies, to jointly prescribe regulations implementing these credit-risk retention requirements. On October 19, 2010, the Board issued a report on the effect of the new risk-retention requirements to be developed and implemented by the federal agencies, and of Statements of Financial Accounting Standards Nos. 166 and 167.² The report highlights the significant differences in market practices and performance across securitizations backed by different types of assets.

Payment, Settlement, and Clearing Activities and Utilities

Sections 112(a)(2)(J) and 804(a) of the act give the FSOC the authority to identify and designate as systemically important an FMU if the FSOC determines that failure of or a disruption to the FMU could create or increase the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system. In addition, the FSOC may designate payment, clearing, or settlement activities it determines are systemically important. On November 23, 2010, the FSOC issued an advanced notice of proposed rulemaking on the criteria and analytical framework that it should apply in designating FMUs under the act.

In addition, section 805(a) of the act authorizes the Board to prescribe risk-management standards governing the operations of designated FMUs (except for designated FMUs that are registered with the CFTC as derivative clearing organizations or registered with the SEC as clearing agencies, which are subject to the applicable risk-management standards contained in regulations prescribed by the CFTC or SEC, respectively). Under section 807, the Board may examine and take enforcement action against designated FMUs for which it is the supervisory agency. In addition, the Board may consult on and participate in any examination of a designated FMU led by another supervisory agency and recommend the supervisory agency take enforcement action against the designated FMU. Section 809 of the act also authorizes the Board to require a designated FMU to submit reports and data in order to assess the safety and soundness of the utility and the systemic risk that the FMU's operations pose to the financial system.

Section 806(a) of the act also makes designated FMUs eligible for Federal Reserve services. Specifically, the Board may authorize a Reserve Bank to establish and maintain an account for and provide deposit and payment services to the designated FMU. In addition, section 806(b) of the act states that, in unusual and exigent circumstances and when a designated FMU demonstrates that it is unable to secure adequate credit accommodations from other banking institutions, the Board, after consultation with the Secretary of the Treasury, may authorize a Reserve Bank to provide discount and borrowing privileges to the designated FMU.

Debit Interchange

Section 1075 of the act restricts the interchange fees that issuers may receive for electronic debit card transactions. Specifically, the interchange fee an issuer receives for a particular transaction must be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. The act requires the Board to set standards for determining whether an interchange fee is reasonable and proportional to the issuer's cost and permits the Board to adjust the interchange fee to account for an issuer's fraud-prevention costs. It also authorizes the Board to prescribe regulations in order to prevent circumvention or evasion of the interchange fee restrictions. The interchange fee restrictions do not apply to issuers that, together with affiliates, have less than $10 billion in assets, to debit cards issued pursuant to government-administered payment programs, or to certain general-use prepaid cards. In addition, the act requires the Board to prescribe rules prohibiting network exclusivity arrangements and routing restrictions in connection with electronic debit card transactions. On December 16, 2010, the Board requested comment on proposed rules implementing section 1075 of the act.

Resolution Framework

The act creates a special resolution process that allows the government to wind down a failing systemically important financial institution whose disorderly collapse would pose substantial risks to the financial system and the broader economy. Specifically, title II of the act permits the FDIC to be appointed as receiver for a failing nonbank financial company. This optional resolution framework is triggered only by a recommendation of two-thirds of the Federal Reserve Board and the FDIC's board of directors and a determination by the Secretary of the Treasury, in consultation with the President, that (1) the company is in default or in danger of default, (2) the failure of the company and its resolution under otherwise applicable federal or state law would have serious adverse effects on financial stability in the United States, and (3) resolution under the new regime would avoid or mitigate these adverse effects. The SEC would substitute for the FDIC in the recommendation process if the firm or its largest subsidiary is a broker-dealer.

The act vests in the FDIC, as receiver for the failed company, powers similar to those it has when acting as a receiver for a failed bank. Specifically, the FDIC may stabilize the company with loans or guarantees, sell assets or operations, and transfer assets and liabilities to a bridge company. The act requires the FDIC to ensure that creditors and shareholders of the failed company bear losses and that directors and management responsible for the company's failure are removed. The act also allows the FDIC to obtain temporary funding for a resolution by borrowing from the Treasury, subject to certain limits. Importantly, any borrowings from the Treasury must be repaid through proceeds from the sale of the failed company's operations. If such proceeds are insufficient to fully repay all borrowings from the Treasury, assessments would be made on certain creditors of the failed firm and, if necessary, on financial companies that have $50 billion or more in total assets.

Federal Reserve Lending, Transparency, and Governance

Lending

The act eliminates the Board's authority to authorize a Federal Reserve Bank to extend credit to a specific individual, partnership, or corporation under section 13(3) of the Federal Reserve Act. Importantly, however, the act provides that the Board may authorize a Federal Reserve Bank to extend credit under section 13(3) to an individual, partnership, or corporation as part of a program or facility with broad-based eligibility, with the approval of the Secretary of the Treasury. The Board must, in consultation with the Secretary of the Treasury, promulgate rules and procedures for section 13(3) lending. Such policies and procedures must ensure that collateral is of sufficient quality to protect taxpayers from losses, credit is extended to provide liquidity and not to assist a failing financial company, and the Federal Reserve Bank assigns a lendable value to all collateral for the purposes of determining that the loan is secured.

Transparency

As required by the act, on December 1, 2010, the Board publicly identified each entity, including foreign central banks, that had participated in or received assistance between December 1, 2007, and July 21, 2010, through the Term Auction Facility, the Agency Mortgage-Backed Securities Purchase Program, foreign currency liquidity swap lines, or facilities established under section 13(3). In the case of broad-based facilities, details provided by the Board included the name of the borrower, the amount borrowed, the date the credit was extended, the interest rate charged, information about collateral, and other relevant credit terms. Similar information was provided for the draws of foreign central banks on their dollar liquidity swap lines with the Federal Reserve. For agency mortgage-backed securities transactions, details included the name of the counterparty, the security purchased or sold, and the date, amount, and price of the transaction. Going forward, the act requires the Board to publicly disclose certain information regarding participants in all future credit facilities established under section 13(3), and borrowers or counterparties in discount window and open market transactions. All such disclosure is required within one year after the termination of any section 13(3) facility or two years after any discount window or open market transaction occurs.

Additionally, the act directs the Government Accountability Office (GAO) to conduct audits of certain Federal Reserve functions. Specifically, the act requires the GAO to conduct a one-time audit of any liquidity program or facility established between December 1, 2007, and July 21, 2010. GAO is instructed to analyze the operational integrity, accounting, financial reporting, and internal controls of each facility; the effectiveness of security and collateral policies in mitigating risk to the Federal Reserve and taxpayers; whether one or more specific participants were favored over other eligible institutions; the use of contractors for the facility or program; and the existence of any conflicts of interest. The act also allows the GAO to conduct similar operational audits of future credit facilities and discount window and open market transactions.

The act further requires the GAO to conduct an audit of Reserve Bank governance to examine whether the selection process for Class B and Class C directors fulfills the Federal Reserve Act's public interest requirement and whether the selection of Class A directors by member banks creates actual or potential conflicts of interest. Class A directors of each Reserve Bank represent the stockholding member banks of the Federal Reserve District. Class B and Class C directors represent the public and are chosen by member banks and by the Board of Governors, respectively, with due, but not exclusive, consideration to the interests of agriculture, commerce, industry, services, labor, and consumers. Class B and Class C directors may not be officers, directors, or employees of any bank. In addition, Class C directors may not be stockholders of any bank. The Board annually designates one Class C director at each District Bank as chair of the board of directors and another Class C director as deputy chair.

Governance

The act modifies the procedures for appointing Reserve Bank presidents by excluding Class A directors from the appointment process. Accordingly, Reserve Bank presidents will be chosen only by the Class B and Class C directors. The act also prevents the Board from delegating to the Reserve Banks certain Board responsibilities, including the establishment of policies relating to supervision and regulation.

Pursuant to section 342 of the act, the Board, and each Reserve Bank, has established an Office of Minority and Women Inclusion responsible for matters relating to diversity in management, employment, and business activities.

The act also establishes a new Vice Chairman for Supervision at the Board, to be appointed by the President with the advice and consent of the Senate. The Vice Chairman for Supervision will be responsible for developing policy recommendations for the Board regarding the supervision and regulation of financial firms, and for overseeing the supervision and regulation of such firms. The Vice Chairman for Supervision must also testify semiannually before Congress.

Consumer Financial Protection

Establishment of the Consumer Financial Protection Bureau

Title X of the act creates within the Federal Reserve an independent Consumer Financial Protection Bureau (CFPB) to ensure that consumers have access to financial markets and that such markets are fair, transparent, and competitive. The CFPB will be led by a director selected by the President and confirmed by the Senate. The CFPB will assume rulemaking authority for most federal consumer protection statutes. It also will have exclusive authority to conduct examinations, require reports, and take enforcement actions regarding the federal consumer protection laws with respect to nondepository institutions that are engaged in certain markets, such as the mortgage business, or that are otherwise larger participants in the consumer financial services industry. With respect to large depository institutions (with $10 billion or more in total assets), the CFPB will have exclusive authority to conduct examinations and require reports and primary authority to take enforcement actions with respect to the federal consumer protection laws. Employees of the Federal Reserve and other federal agencies who are necessary to the administration of federal consumer protection laws will be transferred from their current agency to the CFPB. The Secretary of the Treasury, in consultation with the affected regulatory agencies, has designated July 21, 2011, as the transfer date to the CFPB.

Additional Enhancements to Consumer Financial Protection

The act prohibits certain mortgage lending practices and places new restrictions on predatory lending. Many of these statutory reforms are similar to recent regulatory initiatives by the Board. For example, similar to final rules issued by the Board in August 2010, section 1403 of the act prohibits mortgage originators from receiving compensation based on loan terms other than principal amount and from steering consumers to unaffordable or predatory mortgages. Other mortgage provisions in the act bear resemblance to the Board's 2008 rules for higher-priced loans under the Home Ownership and Equity Protection Act and broaden some rules to apply to all mortgages. For instance, the act prohibits creditors from making residential mortgage loans unless the consumer has a reasonable ability to repay the loan.

Further, section 1461 of the act requires escrow accounts for taxes and insurance on higher-priced first-lien mortgages. This section also amends the Truth in Lending Act to provide a separate, higher threshold for mortgage loans that exceed the maximum principal balance eligible for sale to Freddie Mac in determining coverage of the escrow requirement. The Board requested comment on August 16, 2010, on a proposed rule to increase the annual percentage rate threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien jumbo mortgage loans.

In addition, the act instructs the Board to prescribe interim final rules to ensure the independence of real estate appraisers, with final rules to be issued jointly by the federal banking agencies, the CFPB, and FHFA. The Board issued such interim final rules on October 18, 2010. The act also requires certain new disclosures for negative amortization, adjustable rate mortgages, and escrows.

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The Small Business Jobs Act

The Jobs Act established the SBLF and authorized the Secretary of the Treasury to purchase up to $30 billion in tier 1-qualifying preferred stock or equivalents from eligible financial institutions with no more than $10 billion in consolidated assets. The SBLF promotes lending to small businesses by conditioning a participating institution's dividend rate on the amount by which it increases its small business lending.

The dividend rate on SBLF funding will begin at 5 percent and may be reduced to as low as 1 percent, depending on the amount by which the participating institution increases lending to small businesses. If the institution does not increase lending in the first two years, however, the rate will increase to 7 percent. After 4.5 years, the rate will increase to 9 percent unless the institution has not already repaid the SBLF funding.

To apply, eligible institutions must provide a small business lending plan to the institution's primary federal regulator. An institution may not participate in the program if it or any of its subsidiary depository institutions (as applicable) are on the FDIC's problem bank list or have been on the list in the past 90 days. A participating institution may exit the program by repaying the SBLF funding at any time with the approval of its primary federal regulator. Subject to certain conditions, participating institutions may refinance capital purchase program instruments they previously issued to Treasury through the SBLF.³

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