Consumer and Community Affairs

The Division of Consumer and Community Affairs (DCCA) has primary responsibility for carrying out the Board's consumer protection, supervision, and community development programs. DCCA augments its expertise in consumer protection law, regulation, and policy with resources from other functions of the Board and the Federal Reserve System to write and interpret regulations, educate and inform consumers, and enforce laws and regulations for consumer financial products and services.

Throughout 2011, the division engaged in significant activities to further consumer protection and community development, while also supporting the transfer of certain rules and supervisory responsibilities to the recently formed Consumer Financial Protection Bureau (CFPB). Key elements of the division's program, include

• drafting and proposing regulations to implement legislation, updating regulations, designing disclosures to provide consumers consistent and vital information on financial products, and prohibiting unfair and deceptive acts and practices
• supervising state member banks and bank holding companies and their nonbank affiliates to enforce consumer protection laws and regulations
• processing consumer complaints and inquiries to help consumers resolve grievances with their financial institutions and to answer their questions
• conducting research on consumer decisionmaking regarding financial services to better understand consumers' choices
• researching the implications of policy on consumer financial markets
• reaching out to national and local government agencies, consumer and community groups, academia, and industry to gain a broad range of perspectives, and to inform policy decisions and highlight effective practices
• supporting national and local agencies and organizations that work to protect and promote community development and economic empowerment for historically underserved communities

On July 21, 2011, much of the Board's rulewriting and some of its supervisory authority regarding consumer protection transferred to the CFPB, which was established under the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act (the Dodd-Frank Act) to conduct rulemaking, supervise large insured depository institutions and credit unions (and their affiliates) for compliance with federal consumer financial laws, and to enforce those laws.¹

The Board retains supervisory authority for state member banks with assets of $10 billion or less, as well as responsibility for examinations of all state member banks, regardless of asset size, for compliance with the Community Reinvestment Act, Fair Housing Act, Servicemembers' Civil Relief Act, and other laws. In addition, DCCA continues to promote community development and neighborhood revitalization, advise the Board on the implications of economic and supervisory policies on consumer protection, and conduct research on consumer financial behaviors and policies.

Rulemaking and Regulations

Mortgage Transactions

In 2011, the Federal Reserve issued proposed and final rules to implement various aspects of the Dodd-Frank Act as it relates to certain home mortgages. Many of the proposed rulemakings transferred to the CFPB to be finalized.

Escrow Accounts

In late February, the Federal Reserve issued a final rule under Regulation Z (Truth in Lending) pursuant to the Dodd-Frank Act that increases the annual percentage rate (APR) 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. Loans subject to this rule are defined as loans exceeding the conforming loan-size limit for purchase by the Federal Home Loan Mortgage Corporation (Freddie Mac), as specified by the legislation. Under this rule, the escrow requirement applies to first-lien jumbo loans only if the loan's APR is higher than the average prime offer rate by 2.5 percentage points or more.

A second rule was proposed under the Dodd-Frank Act that would expand the minimum period for mandatory escrow accounts for first-lien, higher-priced mortgage loans from one year to five years. Under certain circumstances, such as when the loan is delinquent or in default, the minimum period for mandatory escrow could be even longer. The proposed rule would provide an exemption from the escrow requirement for certain creditors that operate in "rural or underserved" counties, as authorized by the legislation. The proposal would also implement the Dodd-Frank Act requirement that consumers receive disclosures at least three business days before consummation of a mortgage loan to explain, as applicable, how the escrow account works or the effects of not having an escrow account if one is not being established. Under the Dodd-Frank Act, consumers must also receive disclosures three days before an escrow account is closed.

One concern that emerged from the mortgage crisis was that some subprime loans did not require an escrow account for taxes and insurance and, as a result, borrowers experienced payment shock when they were required to pay these costs outside of their monthly mortgage payment.

The aim of the final and proposed rules is to ensure more mortgage borrowers are aware of how taxes and insurance associated with a mortgage loan affect the overall costs of the transaction.²

Ability to Repay

In April, the Federal Reserve Board issued a proposed rule that would require creditors to determine a consumer's ability to repay a mortgage before making the loan and would establish minimum mortgage underwriting standards.³

The proposed rule applied to all consumer mortgages, except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans.

The proposal provided four options for a creditor in complying with the ability-to-repay requirement:

1. Consider and verify specified underwriting factors, such as the consumer's income or assets.
2. Make a "qualified mortgage," which provides the creditor with special protection from liability if the loan does not have certain features, such as negative amortization; the fees are within specified limits; and the creditor underwrites the mortgage payment using the maximum interest rate in the first five years.⁴
3. For lenders operating predominantly in rural or underserved areas, make a balloon-payment qualified mortgage. This option was meant to preserve access to credit for consumers located in rural or underserved areas where banks originate balloon loans to hedge against interest rate risk for loans held in portfolio.
4. Refinance a "non-standard mortgage" with risky features into a more stable "standard mortgage" with a lower monthly payment. This option was meant to preserve access to streamlined refinancings.

Provisions of the proposal were designed to also implement Dodd-Frank Act limits on prepayment penalties. The proposed revisions to the regulation, which implement the Truth in Lending Act (TILA), were made pursuant to the Dodd-Frank Act, which also transferred general rulemaking authority for TILA to the CFPB. Thus, the proposed rules were transferred to the CFPB to be finalized.

Credit Cards and Open-End Credit Plans

In March, the Board amended Regulation Z to clarify aspects of rules previously issued by the Board implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Credit Card Act).⁵ The amendments enhance protections for consumers who use credit cards and resolve areas of uncertainty so that card issuers fully understand their compliance obligations.

In order to protect consumers from incurring unaffordable levels of credit card debt, the Credit Card Act requires that, before opening a new credit card account or increasing the credit limit on an existing account, card issuers consider a consumer's ability to make the required payments on the account. As directed by the Credit Card Act, the Board's rule addresses practices that can result in extensions of credit to consumers who lack the ability to pay. Specifically, the rule states that credit card applications generally cannot request a consumer's "household income" because that term is too vague to allow issuers to properly evaluate the consumer's ability to pay. Instead, issuers must consider the consumer's individual income or salary.

In addition, the Board's rule clarifies that promotional programs that waive interest charges for a specified period of time are subject to the same Credit Card Act protections as promotional programs that apply a reduced rate for a specified period. For example, a card issuer that offers to waive interest charges for six months is prohibited from revoking the waiver and charging interest during the six-month period, unless the account becomes more than 60 days delinquent. Under the Board's final rule, application and similar fees that a consumer is required to pay before a credit card account is opened would be covered by the same Credit Card Act limitations as fees charged during the first year after the account is opened.

A lawsuit challenging the provisions of the final rule was filed in July 2011 and was still pending at year-end.

College Credit Card Agreements

In July, the Board released a report containing payment and account information for more than 1,000 agreements between credit card issuers and institutions of higher education or affiliated organizations in 2010.⁶ The Board also updated its online database to include the full text of each agreement that was in effect during 2010 and the payment and accounts information submitted by issuers.⁷ Users may also search for agreements by card issuer, educational institution or organization, or the city or state in which the institution or organization is located.

The report was issued pursuant to the Credit Card Act, which required issuers to submit to the Board annually their agreements with educational institutions or affiliated organizations, such as alumni associations. For each agreement, issuers are also required to submit information regarding payments made to the institution or organization and the number of accounts opened under the agreement.

Credit Score Disclosure

In conjunction with the Federal Trade Commission (FTC), the Board issued final rules in July to implement requirements of the Dodd-Frank Act stipulating that if a credit score is used in setting material terms of credit or in taking adverse action, creditors must disclose credit scores and related information to consumers in notices under the Fair Credit Reporting Act (FCRA).⁸

The final rules amended Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements. The final rules also amended certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA, to reflect the new credit score disclosure requirements.

Consumer Protection for Credit and Leases

In March, the Board adopted two rules to expand the coverage of consumer protection regulations to credit transactions and leases of higher dollar amounts.⁹ These rules amend Regulation Z (TILA) and Regulation M (Consumer Leasing) to implement a provision of the Dodd-Frank Act, which requires that the protections of TILA and the Consumer Leasing Act (CLA) apply to consumer credit transactions and consumer leases up to $50,000. Previously, the law required these protections for transactions and leases up to $25,000. (Private education loans and loans secured by real property (such as mortgages) are subject to TILA regardless of the amount of the loan.) The Dodd-Frank Act requires that this amount be adjusted annually to reflect any increase in the consumer price index; the Board published the first annual adjustment in June.

Remittances

In May, the Board proposed a rule to create new protections for consumers who send remittance transfers to recipients located in a foreign country.¹⁰ The proposal was made under Regulation E (Electronic Fund Transfers) pursuant to the Dodd-Frank Act.

The proposed rule required remittance transfer providers to make certain disclosures to senders of remittance transfers, including information about fees and the exchange rate, as applicable, and the amount of currency to be received by the recipient. In addition, the proposed rule provided error resolution and cancellation rights for senders of remittance transfers. The authority for issuing final rules was transferred to the CFPB in July 2011.

Data Collection by Motor Vehicle Dealers

In September, the Board issued a final rule amending Regulation B to provide that motor vehicle dealers are not required to comply with the new data collection requirements in the Dodd-Frank Act until the Board issues final regulations to implement the statutory requirements.¹¹

The Dodd-Frank Act amended the Equal Credit Opportunity Act to require creditors to collect information about credit applications made by women- or minority-owned businesses and small businesses. The CFPB must implement this provision for all creditors except certain motor vehicle dealers who are subject to the Board's jurisdiction. The CFPB previously announced that creditors are not obligated to comply with the data collection requirements until the CFPB issues detailed rules to implement the law. The Board amended Regulation B to apply the same approach to motor vehicle dealers.

Back to section top

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 at 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 2011, the system continued its 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.¹²

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 2011 reporting period (July 1, 2010, through June 30, 2011), the Reserve Banks conducted 279 consumer compliance examinations of the system's 835 state member banks and two examinations of foreign banking organizations.¹³

Bank Holding Company Consolidated Supervision Program

During 2011, staff in the BHC Consolidated Supervision Program had responsibility for reviewing more than 90 bank and financial holding companies to ensure consumer compliance risk was appropriately incorporated into the consolidated risk assessment for the organization. Through a combination of risk-focused, on-/off-site examination and monitoring activities, supervisory staff were able to assess the impact enterprise-wide consumer issues had on the overall risk profiles of the consolidated entity. In addition, per changes brought about by the Dodd-Frank Act, supervisory functions related to savings and loan holding companies (SLHCs) were transferred to the Board, and SLHCs were added to the portfolio of entities covered by the Consolidated Supervision Program.

BHC Consolidated Supervision Program staff also participated jointly with staff of the Board's Division of Banking Supervision and Regulation on numerous Dodd-Frank Act related implementation projects regarding supervisory assessment fees, consolidated supervision, and thrift holding company integration. Also, as part of the consolidated supervision of BHCs, staff participated in the reviews of mortgage servicing and foreclosure processing at four of the 14 federally regulated mortgage servicers that took place between November 2010 and January 2011, and that resulted in enforcement actions in April 2011. Program staff monitor compliance with the provisions in the consent orders for the servicers and BHCs to ensure that noted deficiencies are corrected, future abuses in the loan modification and foreclosure process are prevented, and borrowers are compensated for financial injury they suffered as a result of errors, misrepresentations, or other deficiencies in the foreclosure process (see box 2).

Throughout 2011, the Federal Reserve System continued to conduct risk-focused consumer compliance supervision of nonbank subsidiaries of BHCs and FBOs with regard to activities covered by consumer protection laws and regulations the Federal Reserve has the authority to enforce, and to investigate certain consumer complaints against nonbank subsidiaries of BHCs and FBOs. This policy was designed to enhance the system's 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.

Supervisory Matters

In July 2011, the Board issued a consent cease and desist order against Wells Fargo & Company and its subsidiary, Wells Fargo Financial, Inc., for lack of sufficient controls in the refinancing of existing home mortgages.¹⁹ The order assessed a $85 million civil money penalty, the largest penalty in a consumer-protection action, and is the first enforcement action taken by a federal banking regulator addressing alleged steering of borrowers to higher-cost loans. The order alleges that Wells Fargo Financial steered borrowers who potentially were eligible for prime rate loans to subprime loans. Additionally, the order addresses allegations that Wells Fargo Financial employees falsified borrowers' income in an effort to qualify the borrowers for loans they otherwise would have not qualified for based on their actual income.

The deficiencies noted in the order allege unsafe and unsound banking practices and unfair or deceptive acts and practices. The order requires Wells Fargo Financial to compensate borrowers affected by the practices between January 2006 and June 2008, and to develop specific plans to identify and compensate the affected borrowers. The Board is required to approve the compensation plans and will monitor ongoing compliance with the approved plans.

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, 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 part within the context of CRA performance
• disseminates information about community development techniques to bankers and the public through Community Development offices at the Reserve Banks

The Federal Reserve assesses and rates the CRA performance of state member banks in the course of examinations conducted by staff at the 12 Reserve Banks. During the 2011 reporting period, the Reserve Banks conducted 250 CRA examinations of state member banks. Of those banks examined, 28 were rated "Outstanding," 215 were rated "Satisfactory," seven were rated "Needs to Improve," and none were rated "Substantial Non-Compliance."

During the summer of 2010, the Federal Reserve and the other federal banking and thrift regulatory agencies held public hearings in four cities (Arlington, Virginia; Atlanta, Georgia; Chicago, Illinois; and Los Angeles, California), and invited public comment on ways that the regulations implementing the CRA could be revised to better reflect current banking practices. In addition to public hearings, the agencies invited written comments, and the Federal Reserve received nearly 1,200 comment letters.²⁰ Input from the hearings and the comment letters continue to be considered as part of the process for updating CRA regulations that has been underway throughout 2011. The agencies are also considering updates to the regulations and examination policies to reflect changes in the financial services industry, including how banking services are delivered to consumers, to ensure that the CRA continues to be effective in encouraging institutions to meet community credit needs.²¹

Mergers and Acquisitions in Relation to the CRA

During 2011, the Board considered and approved 10 banking merger applications that were protested on CRA or fair lending grounds or that raised issues involving consumer compliance or the CRA.²²

• An application by The Goldman Sachs Group, Inc., New York, New York, to retain 9.8 percent of the outstanding common stock of Avenue Financial Holdings, Inc., of Nashville, Tennessee, was approved in March.²³
• An application by First Niagara Financial Group, Inc. and FNFG Merger Sub, Inc., both of Buffalo, New York, to acquire NewAlliance Bancshares, Inc., New Haven, Connecticut, was approved in March.
• An application by M&T Bank Corporation, Buffalo, New York, to acquire Wilmington Trust Corporation, Wilmington, Delaware, was approved in April.
• An application by Hancock Holding Company, Gulfport, Mississippi, to acquire Whitney Holding Corporation, New Orleans, Louisiana, was approved in May.
• An application by Bank of Montreal, Toronto, Canada, to acquire Marshall & Ilsley Corporation, Milwaukee, Wisconsin, was approved in June.
• An application by Comerica, Incorporated, Dallas, Texas, to acquire Sterling Bancshares, Houston, Texas, was approved in July.
• An application by Centennial Bank, Conway, Arkansas, to establish a mobile branch to serve Bay, Calhoun, Franklin, Gulf, Lake, Leon, Liberty, Orange, and Seminole Counties in Florida was approved under delegated authority in July.
• An application by Green Dot Corporation, Monrovia, California, to acquire Bonneville Bancorp, Provo, Utah, was approved in November.
• An application by Brookline Bancorp, Inc., Brookline, Massachusetts, to acquire Bancorp Rhode Island, Inc., Providence, Rhode Island, was approved in December.
• An application by Banco de Brasil, S.A., Brasilia and Caixa de Previdencia dos Funcionarios do Banco do Brasil, Rio de Janeiro, Brazil, to acquire EuroBank, Coral Gables, Florida, was approved in December.

Members of the public had the opportunity to submit comments on these applications; their comments raised various issues. Several commenters cited failure to make credit available to certain minority groups and to low- and moderate-income individuals and in low- and moderate-income geographies. Commenters also cited predatory and discriminatory lending practices with respect to residential mortgages and small business loans as well as failure to provide reverse mortgage candidates with counseling in violation of state law. Other commenters alleged predatory servicing and unethical business practices. Several comments warned of inadequate plans to meet communities' credit needs and a reduction in access to credit for affected communities. Additionally, commenters expressed general concerns about CRA, including concerns that branches in predominantly minority census tracts were not proportionate to the percentage of the population residing in those tracts.

In approving the application by Green Dot Corporation to become a bank holding company, by converting Bonneville Bank from a retail bank to a "monoline" prepaid debit card bank, the Board considered the inherent risks of a bank with one primary product, the safeguards established to reduce those risks, and ways in which the bank would meet its CRA obligations.

In addition, an application by Capital One Financial Corporation, McLean, Virginia, to acquire ING, FSB, Wilmington, Delaware (ING), was filed in July, and more than 900 comments were submitted by individuals and community groups, almost two-thirds of which opposed the merger. The proposal was one of the first of its kind to be subject to the financial stability factor mandated by the Dodd-Frank Act. The Board held three public meetings regarding this proposal: in Washington, D.C., on September 20, 2011; in Chicago, Illinois, on September 27, 2011; and in San Francisco, California, on October 5, 2011. The Board also extended the comment period from August 22, 2011, to October 12, 2011, to allow members of the public additional time to submit comments on the proposal. Commenters expressed concerns about Capital One's undue concentration in credit cards and inadequate affordable mortgage and small business lending given its nationwide credit card lending and deposit-taking activities. Commenters urged the Board to delay or deny the proposal until the CRA regulation has been reformed to accommodate such nationwide lenders as well as internet banks, such as ING. Commenters contended that any public benefits would be inadequate to offset the increase in risk posed to the financial system given projected increases in Capital One's size and complexity. The proposal ultimately was approved in February 2012.²⁴

The Board also considered 89 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. Eighty-one of those applications were approved and eight were withdrawn.

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. The ECOA prohibits creditors from discriminating against any applicant, in any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age. In addition, creditors may not discriminate against an applicant because the applicant receives income from a public assistance program or has exercised, in good faith, any right under the Consumer Credit Protection Act. The 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.

Supervisory Matters

The Federal Reserve supervises approximately 825 state member banks. Pursuant to provisions of the Dodd-Frank Act, effective on July 21, 2011, the CFPB supervises state member banks with assets of more than $10 billion for compliance with the ECOA, while the Board retains supervisory authority for compliance with the Fair Housing Act. For the approximately 800 state member banks with assets of $10 billion or less, the Board retains the authority to enforce both the 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.

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. Alternatively, the DOJ may decide to return the matter to the Board for administrative enforcement. When a matter is returned to the Board, staff ensures that the institution takes all appropriate corrective action.

During 2011, the Board referred the following five matters to the DOJ:

• One referral involved discrimination on the basis of national origin, in violation of the ECOA and the Fair Housing Act. The lender charged borrowers fees that were identified as discount points, but that did not actually result in a proportional decrease in the interest rate (unearned discount points). The practice violated Section 5 of the Federal Trade Commission Act, and had a disparate impact on Hispanic borrowers.
• One referral involved discrimination on the basis of sex, in violation of the ECOA and the Fair Housing Act, and on the basis of familial status, in violation of the Fair Housing Act. The lender failed to consider a woman's employment status and reasonably expected income while she was on unpaid maternity leave under the Family and Medical Leave Act.
• One referral involved discrimination on the basis of marital status and age, in violation of the ECOA. The lender treated unmarried joint applicants differently than married joint applicants and applicants 21 years old or younger differently than older applicants in underwriting for consumer credit.
• One referral involved discrimination on the basis of sex and marital status in credit reporting, in violation of the ECOA. The lender failed to provide information to consumer reporting agencies about the payment history of spouses (almost all of whom were women) that were contractually obligated on the note.
• One referral involved discrimination on the basis of marital status, in violation of the ECOA. The bank 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, 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 action 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 bring public enforcement actions.

Financial Fraud Enforcement Task Force and Other Outreach

As an active member of the Financial Fraud Enforcement Task Force (FFETF), the Board coordinates with other agencies to facilitate consistent and effective enforcement of the fair lending laws. The Director of the Board's Division of Consumer and Community Affairs co-chairs the FFETF's Non-Discrimination Working Group with the Assistant Attorney General for DOJ's Civil Rights Division, the Deputy General Counsel of the U.S. Department of Housing and Urban Development, the Assistant Director of the CFPB's Office of Fair Lending and Equal Opportunity, and the National Association of Attorneys General, represented by the Attorney General for the State of Illinois. The working group monitors new practices and trends to proactively address fair lending issues. The Board has taken a lead 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. The Board and the Non-Discrimination Working Group have also sponsored outreach events for local housing organizations, community groups, and financial institutions. These events have included listening sessions as well as a free interagency webinar that had over 6,000 registrants, most of which were community banks.

In addition, the Federal Reserve participates in numerous meetings, conferences, and trainings sponsored by consumer advocates, industry representatives, and interagency groups. Fair Lending Enforcement staff meets regularly with consumer advocates, supervised institutions, and industry representatives to discuss fair lending matters and receive feedback. Through this outreach, the Board is able to address emerging fair lending issues and promote sound fair lending compliance.

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 2011, the Board imposed civil money penalties against 10 state member banks related to violations of Regulation H. The dollar amount of the penalties, which were assessed via consent orders, totaled $199,700.

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.²⁵ In 2011, the FFIEC member organizations issued the examination procedures and guidance regarding a number of regulations.

• Interagency Examination Procedures for Regulation Z: Mortgage Disclosure.Procedures were revised to incorporate two separate Regulation Z rulemaking changes that had January 2011 effective dates. The first rulemaking implemented the Helping Families Save Their Homes Act of 2009, which amended the Truth in Lending Act and requires that consumers receive notice when their mortgage loans are sold, assigned, or otherwise transferred. The second rulemaking implemented provisions of the Mortgage Disclosure Improvement Act (MDIA), which requires lenders to disclose how borrowers' regular mortgage payments can change over time. Specifically, the MDIA, which amended the Truth in Lending Act, 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. Lenders were required to comply with these MDIA provisions for applications they receive on or after January 30, 2011.

• Revised Interagency Examination Procedures for Regulation Z: Loan Originator Compensation.Procedures were revised to incorporate final Regulation Z rules with an April 1, 2011, effective date. Specifically, the rules prohibit loan originators from receiving compensation that is based on the interest rate or other loan terms, except the amount of credit extended. They also prohibit a loan originator who receives compensation directly from the consumer from also receiving compensation from the lender or another party. Additionally, loan originators are prohibited from directing or "steering" a consumer to accept a mortgage loan that is not in the consumer's interest in order to increase the originator's compensation.

  The examination procedures also incorporated amendments to Regulation Z that implemented the appraisal independence provision of the Dodd-Frank Act. These amendments require that fee appraisers receive customary and reasonable compensation for their services. Finally, the revised procedures also implemented regulatory amendments that increase the APR threshold used to determine whether a mortgage lender is required to establish an escrow account for first lien, "jumbo" mortgage loans.
• Revised Interagency Examination Procedures for Regulation Z: Exempt Transaction Thresholds.Procedures were revised to incorporate Dodd-Frank Act revisions to Regulation Z that increase the thresholds for exempt consumer credit transactions from $25,000 to $50,000, effective July 21, 2011. In addition, the Dodd-Frank Act provides that, on or after December 31, 2011, the threshold must be adjusted annually by any annual percentage increase in the consumer price index. Accordingly, the exemption threshold increased from $50,000 to $51,800 effective January 1, 2012.
• Interagency Examination Procedures for Regulation Z: Credit Card Protections. The Federal Reserve approved a rule amending Regulation Z to clarify previous rules implementing the Credit Card Act. This rule is intended to enhance protections for consumers who use credit cards and to resolve areas of uncertainty so that card issuers fully understand their compliance obligations.²⁶
• Revised Interagency Examination Procedures for Regulation P: Voluntary Model Privacy Notice.Procedures were revised to incorporate Regulation P rulemaking through which several federal regulatory agencies adopted a voluntary model privacy notice form designed to make it easier for consumers to understand how financial institutions collect and share nonpublic personal information. A financial institution can use the model form to obtain a "safe harbor" for compliance with the requirements to notify consumers of its information-sharing practices and their right to opt out of certain sharing practices.²⁷

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 2011, these courses were offered in 10 sessions, and training was delivered to a total of 197 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 2011, staff initiated one curriculum review. The "Introduction to Consumer Compliance Examinations" 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 of consumer laws and regulations that govern deposit operations and non-real estate lending. The course emphasizes the knowledge and practical application of consumer compliance laws, examination techniques, and examination procedures. In addition, a curriculum review of the "Fair Lending Examination Techniques" course was completed and the revised course was successfully piloted in June. 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.

Lifelong Learning

In addition to providing core examiner training, the examiner staff development function emphasizes the importance of continuing lifelong learning. Opportunities for continuing learning include special projects and assignments, self-study programs, rotational assignments, the opportunity to instruct at system schools, mentoring programs, and 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 2011, the system continued to offer "Rapid Response" sessions, which are a powerful training delivery method for just-in-time training. Debuted in 2008, Rapid Response sessions offer examiners teleconference presentations on emerging issues or urgent training needs that result from the implementation of new laws, regulations, or supervisory guidance. A total of five consumer compliance Rapid Response sessions were designed, developed, and presented to system staff during 2011.

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.²⁸

Regulation B (Equal Credit Opportunity)

The FFIEC agencies reported that approximately 89 percent of the institutions examined during the 2011 reporting period were in compliance with Regulation B, compared with 82 percent for the 2010 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
• include the required information in the credit action notification letter, including ECOA-prohibited bases, the name of the federal agency responsible for overseeing compliance with the regulation, and the specific reasons for any adverse action
• 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 Office of the Comptroller of the Currency (OCC) initiated one formal Regulation B-related public enforcement action during the reporting period, while the Office of Thrift Supervision (OTS) initiated six and the Federal Deposit Insurance Corporation (FDIC) initiated 20.²⁹ 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.

Regulation E (Electronic Fund Transfers)

The FFIEC agencies reported that approximately 94 percent of the institutions examined during the 2011 reporting period were in compliance with Regulation E, compared with 93 percent for the 2010 reporting period. The most frequently cited violations involved failure to

• investigate account errors within 10 business days of receiving a notice that an error has occurred, reporting the results of the investigation to the consumer within three business days, and correcting any error within one business day
• follow procedures when the financial institution determines that no account error or a different error occurred, such as providing a written explanation to the consumer
• provide initial disclosures to consumers that contain required information, including the consumer's liability for unauthorized transfers, contact information for reporting unauthorized transfers, fees for electronic fund transfers, etc.

The FDIC initiated nine formal Regulation E-related enforcement actions during the reporting period, while the OCC initiated four, and the OTS initiated two. There were no other enforcement actions by FFIEC agencies. However, the FTC initiated actions against two institutions, continued litigation against two institutions, and settled one case involving Regulation E violations.

Regulation M (Consumer Leasing)

The FFIEC agencies reported that nearly 100 percent of the institutions examined during the 2011 reporting period were in compliance with Regulation M, down slightly from full 100 percent compliance during the 2010 reporting period. The FDIC reported one violation of Regulation M regarding the failure to provide required lease disclosures.

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 2011 reporting period were in compliance with Regulation P, which is the same rate of compliance as the 2010 reporting period. The most frequently cited violations involved failure to provide consumers with

• clear and conspicuous initial privacy notices
• a clear and conspicuous annual notice reflecting the institution's privacy policies and practices
• the required information in initial, annual, and revised privacy notices

The FDIC initiated seven formal Regulation P-related enforcement actions during the reporting period.³⁰ 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 2011 reporting period were in compliance with Regulation Z, compared with 85 percent for the 2010 reporting period. The most frequently cited violations involved 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, for certain residential mortgage transactions
• accurately disclose the finance charges in closed-end credit transactions
• accurately disclose the annual percentage rate (APR)

In addition, 111 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 $350,000 to consumers for understating APRs and/or finance charges in their consumer loan disclosures.

The FDIC initiated 17 formal Regulation Z-related enforcement actions during the reporting period, the OTS initiated five, and the OCC initiated one. The DOT continued to prosecute one air carrier for its alleged improper handling of credit card refund requests and other Federal Aviation Act violations. The FTC continued its law enforcement activities against institutions alleged to have violated Regulation Z, which included settling two cases and continuing litigation against another institution.

Regulation AA (Unfair or Deceptive Acts or Practices)

The FFIEC agencies reported that approximately 99 percent of the institutions examined during the 2011 reporting period were in compliance with Regulation AA, which is the same rate of compliance as for the 2010 reporting period. The most frequently cited violations involved

• providing inaccurate advertising or misrepresenting services, contracts, investments, or financial conditions
• failure to provide clear and conspicuous written notice of credit obligation to each co-signer prior to their becoming obligated on a loan
• participating in unfair or deceptive acts or practices

The OCC initiated five formal Regulation AA-related enforcement actions 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 94 percent of institutions examined during the 2011 reporting period were in compliance with Regulation CC, compared with 90 percent for the 2010 reporting period. The most frequently cited violations involved failure to

• make funds deposited from local and certain other checks available for withdrawal within the times prescribed by the regulation
• ensure that account deposit slips contain required disclosures
• provide written notice to a consumer when placing an exception hold on an account

The FDIC initiated five formal Regulation CC-related enforcement actions during the reporting period, while the OTS and OCC each initiated three actions. There were no other enforcement actions by FFIEC agencies.

Regulation DD (Truth in Savings)

The FFIEC agencies reported that approximately 89 percent of institutions examined during the 2011 reporting period were in compliance with Regulation DD, compared with 86 percent for the 2010 reporting period. The most frequently cited violations involved

• incorrect use of the phrase "annual percentage yield" in an advertisement without providing required additional terms and conditions
• providing misleading or inaccurate advertisements
• failure to provide accurate and complete account disclosures

The FDIC initiated 16 formal Regulation DD-related enforcement actions during the reporting period, while the OTS initiated two and the OCC initiated one. There were no other enforcement actions by FFIEC agencies.

Back to section top

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. 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 2011, System complaint analysts processed 41,631 cases through Federal Reserve Consumer Help (FRCH), which was created in 2007 to centralize the processing of consumer complaints and inquiries. Of these cases, more than half (26,097) were inquiries and the remainder (15,534) were complaints, with most cases received directly from consumers. Approximately 4 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 (at www.federalreserveconsumerhelp.gov), most FRCH consumer contacts occurred by telephone (58 percent). Nevertheless, 38 percent (15,675) of complaint and inquiry submissions were made electronically (including e-mail, online submissions, and fax) and the online form page received more than 350,380 visits during the year.

Consumer Complaints

Complaints against Federal Reserve-regulated entities totaled 4,840 in 2011. Approximately 38 percent of these complaints were closed without investigation pending the receipt of additional information from consumers. Approximately 2 percent of the total complaints are still under investigation. Of the remaining complaints (2,912), 68 percent (1,966) involved unregulated practices and 32 percent (946) involved regulated practices.

Complaints about Regulated Practices

The majority of regulated practice complaints concerned checking accounts (34 percent), real estate loans (23 percent), and credit cards (15 percent).³¹ The most common checking account complaints related to insufficient funds or overdraft charges and procedures (38 percent); disputed withdrawal of funds (13 percent); disputed rates, terms, or fees (10 percent); and funds availability not as expected (9 percent). The most common real estate loan complaints by problem code related to credit denied (11 percent); disputed rates, terms, and fees (10 percent); payment errors or delays (9 percent); flood insurance (9 percent); and escrow account problems (9 percent). The most common credit card complaints related to interest rates, terms, and fees (20 percent); inaccurate credit reporting (15 percent); bank debt collection tactics (15 percent); billing error resolutions (10 percent); and payment errors and delays (8 percent).

FRCH received 17 complaints alleging discrimination under regulated practices; discrimination was alleged on the basis of prohibited borrower traits or rights.³² Thirty-four percent of these discrimination complaints were related to the race, color, national origin, or ethnicity of the applicant or borrower. Fourteen percent of discrimination complaints were related to either the age or handicap of the applicant or borrower. One violation, involving a real estate loan, was identified based on these complaints.

In 85 percent of investigated complaints against Federal Reserve-regulated entities, evidence revealed that institutions correctly handled the situation. Of the remaining 15 percent of investigated complaints, 2 percent were deemed violations of law, 2 percent were identified errors which were corrected by the bank, 1 percent was 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

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 2011, the Board received 1,966 complaints against Federal Reserve-regulated entities that involved these unregulated practices. Most complaints were related to real estate concerns (41 percent), checking account activity (26 percent), and credit cards (4 percent). More specifically, consumers most frequently complained about issues involving debt collection/foreclosures; insufficient funds or overdraft charges; interest rates, terms, and fees; policy and procedure concerns; payment errors/delays; and opening and closing deposit accounts.

Complaints about Loan Modifications and Foreclosures

In 2011, the Federal Reserve received 669 complaints related to loan modifications and foreclosures. Of these, consumers complained primarily about home purchase loans (78 percent), home refinance/closed end loans (9 percent), and adjustable rate mortgage loans (7 percent). The top consumer protection issues documented with specific codes were: debt collection/foreclosure (50 percent) and interest rates, terms, and fees (22 percent).

Complaint Referrals

In 2011, the Federal Reserve forwarded 10,918 complaints against other banks and creditors to the appropriate regulatory agencies and government offices for investigation, including the CFPB after July 21, 2011. To minimize the time required to re-route complaints to these agencies, referrals were transmitted electronically.

The Federal Reserve forwarded 14 complaints to the Department of Housing and Urban Development (HUD) that alleged violations of the Fair Housing Act.³³ The Federal Reserve's investigation of these complaints revealed one instance of illegal credit discrimination.

Consumer Inquiries

The Federal Reserve received 26,097 consumer inquiries in 2011, covering a wide range of topics. Consumers were typically directed to other resources, including other federal agencies or written materials, to address their inquiries.

Back to section top

Consumer Policy and Emerging Issues Analysis

The Policy Analysis function of DCCA provides key insights, information, and analysis on emerging financial services issues that affect the well-being of consumers and communities. Throughout 2011, as financial markets continued to experience dynamic change in response to the economic downturn, monitoring the financial services landscape for new and unintended risks to households remained a top priority. To this end, Policy Analysis staff follow trends and conduct inquiries that help define the issues, identify emerging risks, and inform policy recommendations. The section also manages a cross-functional team charged with coordinating the division's activities and responses on key consumer and community development matters.

Throughout 2011, Policy Analysis staff facilitated the division's activities in response to the foreclosure crisis and recovery of the housing market. These activities included contributing to the efforts of the Board's internal working group for analyzing housing issues, and organizing a policy forum entitled, "The Housing Market Going Forward: Lessons Learned from the Recent Crisis." ³⁴ The forum explored consumer and industry perspectives on factors contributing to the crisis and steps for re-starting the housing market.

Policy Analysis staff also contributed to the division's activities in support of the Board's mortgage servicing reviews and the publication of Interagency Review of Foreclosure Policies and Practices.³⁵ This public report documented the findings of the foreclosure reviews and was followed by enforcement actions against mortgage servicers for deficient practices in residential mortgage loan servicing and foreclosure processing, and by further public communication to increase awareness and transparency about the foreclosure review process.

Back to section top

Supporting Community Economic Development

The Federal Reserve System's Community Development function promotes economic growth and financial stability to underserved populations by informing and improving the research, policy, and practice of community development. As a decentralized function, the Community Affairs Officers (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 community development staff promote and coordinate System-wide priorities; in particular, community development staff focus on five key areas:

• research and community-level data compilation
• economic and small business development and entrepreneurship
• housing markets and neighborhood revitalization
• community development finance
• workforce and human capital development

Community Development Research

Having learned from the subprime crisis that microeconomic issues can have a magnified impact on the macroeconomy, the Community Development function across the Federal Reserve System is engaged in a variety of research initiatives that augment the Board's systemic risk responsibilities. These efforts to gather, analyze, and disseminate data on underserved communities are also useful to policymakers and community development practitioners.

In 2011, Reserve Banks continued to expand the use of applied research and analysis to inform community development policy and practice. This expanded capacity was highlighted at the biennial "Community Affairs Research Conference: The Changing Landscape of Community Development," which drew more than 350 participants and included a number of recognized experts across a range of disciplines.³⁶ Community Development staff members from across the system played key roles in this conference as presenters, moderators, and organizers. In addition, the conference was preceded by an internal system researchers' symposium where Federal Reserve staff discussed research efforts, shared results, and exchanged ideas on emerging research and policy issues.

Community Data Initiative

By leveraging information-sharing and partnership roles with a rigorous analytical capacity, Community Development provides reliable market intelligence that has helped to identify and close data gaps for low- and moderate-income communities. In 2011, the Board coordinated 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 captures current and emerging community development issues. In 2011, 11 Reserve Banks were administering web-based polls and surveys. To provide a national context for the regional results of Reserve Bank polls, the Board continued to survey NeighborWorks® America affiliates and grantees.

While still in an early stage of development, the CDI has the potential to serve as a valuable complement to the information that Community Development staff continue to gather through regional convenings and applied research efforts.

Supporting Small Business Development, Entrepreneurship, and Indian Country

Over the past few years, small businesses have faced weak sales, diminished asset values, elevated uncertainty, and tight credit market conditions. Like owners of large firms, many small business owners have had to lay off employees or defer hiring. Even as credit conditions ease, perceptions of tight credit can discourage some entrepreneurs from even trying to obtain financing. These disruptions on the supply and demand sides of the small business credit market have resulted in notable credit gaps in lines of credit, patient capital, small-dollar loans, and commercial real estate.

In response to these persistent conditions, the Community Development function convened several regional forums to better understand the characteristics of and challenges facing small businesses. The discussions informed the framework of a national convening hosted at the Board in partnership with the Federal Reserve Bank of Atlanta and the Ewing Marion Kauffman Foundation entitled, "Small Business and Entrepreneurship during an Economic Recovery." ³⁷ Research papers presented at the convening noted the importance of new and small firms to the vitality of the economy, the unique challenges experienced by female and minority entrepreneurs, and the need for more timely and relevant small business data.

Given the acute challenges that confront underserved communities, particularly in rural America, the Federal Reserve partnered with nine federal agencies to identify barriers to and opportunities for economic growth in Indian Country.³⁸ More than 750 tribal stakeholders participated in six regional workshops that addressed specific gaps in capital and technical assistance. A national summit that will serve as a springboard for integrated research, policy, and economic development strategies is being planned for 2012.

Housing Markets and Neighborhood Revitalization

Fallout from the economic crisis has included large inventories of foreclosed properties that stand vacant and abandoned and can have significant destabilizing effects on communities, including increased crime and decreased property values. The longer these homes remain unoccupied, the worse the effect on the community and the harder it is to reverse their condition and put them back on the market. The challenge of disposing of these real estate owned (REO) properties often outstrips resources, particularly in low-income communities. Throughout 2011, the Federal Reserve's Community Development function focused on supporting regional efforts to stabilize and stimulate these neighborhoods, providing housing market data and/or convening local stakeholders to discuss ways to use existing data to make strategic investment decisions, such as the disposition of REO properties.

Community Development provided a wealth of resources to communities in crisis, including a video series, publication, and national forum. Videos documenting successful neighborhood stabilization strategies in Cleveland, Ohio; Detroit, Michigan; and Phoenix, Arizona, debuted at the 2011 Community Affairs Research Conference during Governor Elizabeth A. Duke's keynote remarks.³⁹ The publication, Putting Data to Work: Data-Driven Approaches to Strengthening Neighborhoods, comprises case studies that demonstrate how communities can use data to make strategic investment decisions.⁴⁰ Case-study authors were drawn from national nonprofits, community development organizations, local units of government, and academia. The report was distributed at the "Strategic Data-Use to Stabilize Neighborhoods" conference co-hosted by the Board and the Federal Reserve Bank of Richmond.⁴¹

Participants at the conference explored creative uses of data and technology to promote public and private investment in transitional communities.

Other Community Development Initiatives

As households and communities grapple with limited resources and persistent challenges, it is imperative that the Federal Reserve continue to connect with and respond to Main Street. To that end, the Community Development function works to engage communities in new ways and through new technologies. Many Reserve Banks produce webinars and podcasts. Several utilize visual analytics and blogs to share quantitative and qualitative information with their stakeholders.

In the fall of 2011, the Board partnered with the Federal Reserve Bank of St. Louis to launch "Connecting Communities," a communications platform designed to share best practices relating to community development.⁴² In 2011, the platform offered a webinar that focused on the challenges of helping people facing foreclosure and the impact it will have on their credit score; another webinar shared strategies on how microfinance can serve as a catalyst to increasing economic opportunity in low- to moderate-income communities. The webinar series will continue to be a means for sharing system community development information in 2012.

Back to section top

Consumer Advisory Council

On July 21, 2011, the Board's Consumer Advisory Council (CAC) was dissolved pursuant to the Dodd-Frank Act. Nevertheless, the Council--which was established in 1976 to bring together representatives of consumer and community organizations, the financial services industry, academic institutions, and state agencies--advised the Board of Governors on several matters of Board-administered laws and regulations as well as other consumer-related financial services issues through the first half of 2011.⁴³ Council meetings, open to the public, were held in March and June.

Among the significant topics of discussion for the Council in 2011 were

• issues related to foreclosures and neighborhood stabilization
• proposed rules regarding debit card interchange fees and routing
• national mortgage servicing standards
• proposed rules regarding ability to pay for mortgage loans
• the proposed rule regarding risk retention and "qualified residential mortgages"

Foreclosure Assistance

In 2011, the Council discussed loss-mitigation efforts, including the Administration's Home Affordable Modification Program (HAMP), and other issues related to foreclosures. Consumer representatives urged that more funding be provided for housing counseling and legal services programs that assist borrowers facing foreclosure. Some consumer representatives endorsed a focus on principal reductions and the implementation of third-party mediation or settlement programs. One consumer representative also urged continued funding for programs that assist temporarily unemployed borrowers in making their mortgage payments.

Consumer representatives generally expressed the view that servicing problems remain numerous and systemic, noting continuing issues with servicers' capacity and the need for improvements in training. They pointed to issues such as lost or misplaced documentation, delays in making a decision about whether to grant a loan modification, steering of borrowers from HAMP to in-house modification programs with less favorable terms, the lack of a single point of contact, and the lack of response to borrower communications. They also stated that foreclosures continue to be filed while loan modifications are being considered. Some consumer representatives expressed concern that servicers are contributing to borrowers becoming delinquent, such as by inaccurately representing what constitutes eligibility for HAMP or by making errors regarding payments or fees.

Some consumer representatives also called attention to fair housing issues related to loss mitigation, expressing the view that loan-modification outcomes are generally worse for borrowers of color. They urged the Board and other regulators to ensure that fair housing concerns are included in their review of servicers, and emphasized the need for HMDA-like data reporting in the loan-modification context.

In discussing HAMP specifically, several consumer representatives urged more enforcement to ensure servicers' compliance with the program's guidelines. They also expressed concern about the lack of information provided to borrowers who are denied a HAMP modification and emphasized the need for more transparency and more data collection and reporting about HAMP activities.

Members commended the Board and other regulators for conducting the interagency review of servicing issues, but several consumer representatives expressed concern about what constitutes a "wrongful foreclosure" in the context of the review.⁴⁴ The consumer representatives stated that the concept of "wrongful foreclosures" should be defined more broadly, so that it covers foreclosures that are based on servicer errors or those that are filed by a party without an ownership interest in the mortgage.

Neighborhood Stabilization

In 2011, the Council also discussed the effects of foreclosures that extend beyond households to the surrounding community and efforts such as the federal Neighborhood Stabilization Program (NSP) to address the challenges of stabilizing communities. Several members praised the positive effects of NSP efforts but stated that significantly more funding would be required to effectively address the scope of the problem. They also commended recent regulatory changes that allow financial institutions to receive CRA consideration for certain neighborhood stabilization activities.

Consumer representatives described the negative effects of REO and vacant properties on neighborhoods, such as increased blight, vandalism, and crime; the burdens they impose on municipalities; and the impact on the decisionmaking process of other homeowners who are struggling to stay current on their mortgage. They expressed concern about banks and servicers not maintaining REO properties and not complying with protections for tenants. They also expressed concern about lenders and servicers walking away from and not completing foreclosure sales, leading to "toxic titles" and additional vacant properties, and urged federal regulators to increase the oversight of regulated institutions regarding these issues. Several consumer representatives stated that the practices of servicer walkaways and lack of property upkeep are disproportionately concentrated in neighborhoods of color. One consumer representative described the phenomenon whereby new owners of REO properties delay recording their ownership in what may be an attempt to avoid responsibility and liability for the maintenance of the properties.

Both industry and consumer representatives expressed concern about increasing investor purchases of REOs and urged consideration of ways to give potential owner-occupants a better chance to acquire properties. A consumer representative also encouraged lenders and servicers to continue renting to tenants living in REO properties whenever possible, to help prevent additional vacant properties.

An industry representative commented that the Board and the Federal Reserve Banks could help to facilitate conversations about the future of neighborhoods in cities that have been hit hard by the foreclosure crisis.

Finally, members discussed the future of housing finance and recent proposals relating to this issue. An industry representative expressed concern that some proposed policies would block many people, particularly lower-income and minority individuals, from the opportunity of home ownership. Some consumer representatives emphasized the importance of ensuring that home ownership is achieved in a safe, sustainable way and providing counseling so that borrowers recognize the true costs of home ownership; they also noted that renting is appropriate for many people. Several members stated that further attention should be given to explaining and addressing the persistence of lower home ownership rates among minorities.

Debit Card Interchange Fees and Routing

At the March meeting, the Council discussed the Board's proposed rule that would (1) establish debit card interchange fee standards and (2) prohibit network exclusivity arrangements and routing restrictions. Some industry representatives expressed concerns about the proposal, urging the Board to consider certain additional costs involved in interchange transactions and to study the potential impact on consumers, the payment system, and smaller financial institutions. They pointed to the benefits of debit cards in terms of connecting consumers with mainstream financial services and expressed the view that those benefits could be jeopardized if, due to the loss of interchange revenue, banks were to add fees to bank accounts to cover their costs. One industry representative commented that the proposed exemption for small issuers would be difficult to implement effectively and that the loss of interchange revenue would have a severe impact on smaller banks and credit unions.

One industry representative expressed support for the proposal, stating that it represents a return to fairer pricing and a more competitive marketplace after distortions due to consolidation and concentration. Another member commented that some large retailers have engaged in innovative and effective efforts to reach unbanked individuals.

Regarding the prohibition on network exclusivity arrangements, an industry representative endorsed the proposal's first alternative, stating that the second alternative would impede innovations in payments.

Several consumer representatives expressed concern about the proposal's potential impact on consumers, particularly if new fees are imposed on bank accounts. They stated that bank account fees should be reasonably related to the services provided and that there should be some accommodation for low- to moderate-income customers through lower fees. They encouraged regulators to hold financial institutions accountable under CRA for how they respond to these changes and ensure that harmful effects on low-income consumers are minimized.

National Mortgage Servicing Standards

At the June meeting, the Council discussed the creation of national standards for residential mortgage loan servicing, providing views about what principles, policies, and procedures such standards should include. Several consumer representatives generally commended the work of the Board and other regulators in reviewing and reporting on servicing and foreclosure practices and the imposition of formal enforcement actions in connection with the interagency review. Members disagreed about how national servicing standards should interact with standards promulgated by states. Consumer representatives stated that national standards should operate as a floor and states should be able to provide additional protections that address unique circumstances in their particular jurisdiction. Industry representatives stated that national standards should set a high bar that operates as both a floor and a ceiling, providing consistent protections across states.

Consumer representatives recommended a variety of requirements for national servicing standards, including

• a general obligation of good faith and fair dealing
• robust data collection and reporting, especially regarding fair housing issues
• recordkeeping about communications with borrowers
• a single point of contact
• greater transparency about calculations of borrower income and net present value
• streamlined systems for document submission
• monitoring of law firms and other external vendors.

Consumer representatives also expressed the view that the standards should prohibit the dual-track system of proceeding simultaneously with a foreclosure and a loan modification and should address post-foreclosure issues, such as property maintenance obligations and compliance with tenant protections. Other recommendations included mandating an affirmative duty of loss mitigation that could be enforced by a private right of action and allowing borrowers to raise violations of the servicing standards as a defense to foreclosure.

Consumer representatives also stated that national standards should address issues related to servicer compensation. One member expressed the view that the compensation should provide greater incentives for servicers to do affordable, sustainable loan modifications. Another member noted that the compensation should be structured to ensure that servicers have sufficient funding to be able to operate effectively during times of increased delinquencies and foreclosures.

Members also pointed to securitization-related issues that should be addressed in national servicing standards. A consumer representative supported the creation of standardized pooling and servicing agreements that include greater flexibility for servicers to offer loan modifications without having to seek investor approval. An industry representative recommended the adoption, for all securitizations, of the set of standard representations and warranties created by the American Securitization Forum. A consumer representative suggested that trustees should be required to collect and keep up-to-date detailed information about servicers, and that servicing transfers should be registered with trustees. An industry representative recommended the implementation of consistent data fields on a loan-level basis for all securitizations to assist in tracking the performance of the underlying collateral.

Ability-to-Pay Requirement for Mortgage Loans

At the June meeting, the Council discussed a proposed rule under Regulation Z that would require creditors to determine a consumer's ability to repay a mortgage before making the loan and would establish minimum mortgage underwriting standards. There was strong support for ability-to-pay standards among Council members and general agreement that many of the criteria in the proposal represented sound, common-sense underwriting principles.

In considering the definition of "qualified mortgage," both consumer and industry representatives expressed support for including the additional underwriting requirements contained in the proposal's Alternative 2. They encouraged the Board to adopt a rule that sets high, robust standards applying to all mortgage lenders. An industry representative commented that the rule's approach to the definition of "qualified mortgage" should operate as a legal safe harbor rather than as a rebuttable presumption of compliance. Industry representatives also urged the Board to provide additional clarity about the standards that lenders would have to meet to fall within the safe harbor; a consumer representative recommended that the standards not specify particular numbers, such as for debt-to-income ratios or credit scores. Several members expressed concern that 5/1 adjustable-rate mortgages (ARMs) would be considered as qualified mortgages under the proposal; they stated that such ARMs should be subjected to greater regulation. A consumer representative praised the inclusion of a duty for lenders to make a reasonable and good faith determination that the consumer will have a reasonable ability to repay the loan.

A consumer representative and an industry representative expressed support for the proposal's approach to balloon-payment qualified mortgages offered by small creditors operating predominantly in rural or underserved areas. Another consumer representative emphasized the need to ensure that rural borrowers have adequate protection and urged regulators to use CRA exams to increase their scrutiny of financial institutions' performance in rural communities.

Risk Retention and "Qualified Residential Mortgages"

At the June meeting, the Council discussed the interagency proposed rule that would require risk retention for asset-backed securities and would exempt qualified residential mortgages (QRMs) from those requirements. Both industry and consumer representatives expressed concerns about the proposed definition of a QRM, particularly the requirement of a 20 percent down payment for QRM eligibility. Some members questioned the effectiveness of the 20 percent requirement: they commented that programs, such as Ginnie Mae, demonstrate that no- and low-down payment loans can be sound and sustainable and that many loans that are currently performing well would not qualify as a QRM.

Members generally expressed concern about the consequences across the mortgage market if QRM were to be seen as the "gold standard" and to become the primary mortgage product, rather than the narrow exception as intended. Possible consequences that were mentioned included restricted access to credit for consumers who do not qualify for QRMs, higher costs and/or less favorable terms for non-QRM loans, regulatory scrutiny of and limits on non-QRM loans, reputational risk for offering non-QRM loans, and lower ratings for non-QRM securities. Several consumer representatives expressed concern that lower-income individuals and people of color would be locked out of home ownership opportunities or forced to obtain credit at a much higher cost.

Members emphasized the need for a healthy, liquid non-QRM market and for further consideration of how to achieve safe, productive lending to emerging markets. They urged the Board and other regulators to investigate how the markets and investors would likely to react to the proposed QRM standard and what the price difference likely would be between QRM and non-QRM loans.

Other Discussion Topics

At the March meeting, the Council discussed the Board's proposed rule to expand and revise Regulation Z's existing escrow account requirements for certain mortgage loans. Members generally commended the effort to improve disclosures concerning escrow accounts and praised the clear, "plain English" nature of the proposed model forms. Concerns were expressed about the proposed exemption for loans made in "rural or underserved areas" if certain conditions are satisfied. A consumer representative commented that the 100-loan annual originations test could unduly limit lenders' ability to work with higher-risk borrowers and communities. Another consumer representative expressed concern that some money lenders engaging in risky, higher-cost lending would fall under the exemption.

At the June meeting, the Council discussed the Board's proposed rule that would create new protections for consumers who send remittance transfers to recipients located in a foreign country. Members generally supported the proposal, particularly the requirements relating to fee disclosures. Industry representatives noted, however, there can be challenges in determining fees when dealing with an unaffiliated international remittance provider. An industry representative expressed the view that the statutorily mandated 90-day timeframe for remittance transfer providers to provide error resolution is too long.

Back to section top

References

• Other Formats

• Full report (PDF)

• Stay Connected

• Twitter
• YouTube
• Flickr
• RSS Feeds
• Subscribe