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Consumer and Community Affairs

Among the Federal Reserve's responsibilities in the areas of consumer and community affairs are

These responsibilities are carried out by the members of the Board of Governors, the Board's Division of Consumer and Community Affairs, and the consumer and community affairs staff of the Federal Reserve Banks.

Implementation of Statutes Designed to Inform and Protect Consumers

The Board of Governors writes regulations to implement federal laws involving consumer financial services and fair lending. The Board revises and updates these regulations to address the introduction of new products and technologies, to implement legislative changes to existing laws, and to address problems consumers may encounter in their financial transactions. To interpret and clarify the regulations, Board staff issues commentaries and other guidance.

During 2005, the Board, with the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA), issued joint guidance on overdraft-protection programs. The guidance is intended to help insured depository institutions responsibly administer and provide appropriate disclosures for these programs. To improve the uniformity and adequacy of information consumers receive about overdraft protection services, the Board also issued final rules amending its Truth in Savings Act regulation (Regulation DD) and the associated commentary. The Board, FDIC, and OCC jointly revised certain provisions of their rules implementing the Community Reinvestment Act (CRA). In addition, the Board amended its regulation implementing the Electronic Fund Transfer Act (Regulation E) to address the regulation's coverage of electronic check conversion services; a separate interim final rule under Regulation E dealt with payroll card accounts. The Board issued final rules with the FDIC, NCUA, OCC, and Office of Thrift Supervision (OTS) to implement provisions of the Fair and Accurate Credit Transactions Act of 2003 (the FACT Act) that govern the use of medical information in connection with credit-eligibility determinations. Furthermore, the Board raised the threshold that triggers additional requirements under the Home Ownership and Equity Protection Act (HOEPA) and raised the exemption threshold for depository institutions required to collect data under the Home Mortgage Disclosure Act (HMDA).

Interagency Guidance on Overdraft-Protection Programs

In February, the Board issued guidance jointly with the FDIC, NCUA, and OCC on overdraft-protection programs at insured depository institutions. These services, sometimes referred to as "bounced-check protection" or "courtesy overdraft protection," pay customer's checks or allow other overdrafts when a customer has insufficient funds in his or her account. Typically, an overdraft-protection program is an automated service provided to transaction account customers as an alternative to a traditional overdraft line of credit.

In June 2004, the agencies published for comment proposed interagency guidance on overdraft-protection programs, in response to concerns about the marketing, disclosure, and implementation of these programs. The final guidance responds to comments the agencies received from consumer and community groups, individual consumers, depository institutions, trade associations, vendors offering overdraft-protection products, other industry representatives, and state agencies. 1

The final joint guidance has three primary sections: Safety and Soundness Considerations, Legal Risks, and Best Practices. The safety and soundness discussion seeks to ensure that financial institutions offering overdraft-protection programs have adequate policies and procedures to address the credit, operational, and other risks associated with these programs. The legal risks discussion alerts institutions to the importance of complying with all applicable federal and state laws, and it advises institutions to have legal counsel review their overdraft-protection programs--before implementation--to ensure the overall compliance of the programs. The best practices section addresses the marketing and communication of overdraft protection programs as well as disclosures and other operational aspects of these programs.

Amendments to Regulation DD (Truth in Savings)

In May, the Board published final amendments to Regulation DD, which implements the Truth in Savings Act, and to the regulation's official staff commentary. The amendments address concerns about the uniformity and adequacy of information provided to consumers when they overdraw their deposit accounts, and some of the amendments specifically address overdraft-protection programs, which are offered by many depository institutions.

To address concerns about the marketing of overdraft services, the Board expanded the regulation's prohibition against misleading advertisements to cover institutions' communications with current customers about their existing accounts. The Board also revised the staff commentary to the regulation to provide examples of misleading advertisements for overdraft-protection services. To help consumers distinguish overdraft-protection services from the traditional lines of credit offered by an institution, the final rule requires that institutions promoting the payment of overdrafts include, in their advertisements, certain disclosures about the terms of the service.

In addition, the final rule includes provisions to enhance the uniformity and adequacy of the cost disclosures institutions provide to consumers about overdraft and returned-item fees. Institutions that promote the payment of overdrafts in an advertisement must separately disclose, on their periodic statements, the total dollar amount imposed on the account for paying overdrafts and the total dollar amount of fees charged for returning items unpaid. These disclosures must be provided for the statement period and for the calendar year to date, for any account to which the advertisement applies. To help institutions comply with this requirement, the staff commentary provides specific examples of when an institution is promoting the payment of overdrafts in an advertisement. The final rule also requires institutions to state, in their account-opening disclosures, the categories of transactions for which an overdraft fee may be imposed, for example, by specifying that fees are imposed for overdrafts created by checks, ATM withdrawals, or other electronic transactions, as applicable.

The amendments to Regulation DD become effective on July 1, 2006.

Community Reinvestment Act Rules

In July, the Board, FDIC, and OCC approved a joint final rule to revise certain provisions of their rules implementing the Community Reinvestment Act (CRA). (Regulation BB is the Board's CRA regulation.) The revised rules are intended to reduce regulatory burden on community banks and make CRA evaluations more effective tools for encouraging banks to meet community development needs.

The final rules raise the small bank asset-size threshold from less than $250 million in assets to less than $1 billion in assets without regard to holding company affiliation. Accordingly, the new rules reduce data collection and reporting burden for "intermediate small banks" (banks with assets at least $250 million and less than $1 billion) and, at the same time, encourage these banks to engage in meaningful community development lending, investment, and services.

Under the new rules, intermediate small banks will no longer need to collect and report CRA loan data. Nevertheless, examiners will continue to evaluate bank lending activity during their CRA examinations of intermediate small banks and will disclose those results in the public evaluation. Intermediate small banks will be evaluated under two separately rated tests: (1) the small bank lending test and (2) a new, flexible community development test that includes an evaluation of community development loans, investments, and services in light of the community's needs and the bank's capacity. Satisfactory ratings are required on both tests to obtain an overall satisfactory CRA rating.

For banks of any size, the new rules expand the definition of community development to include activities that revitalize or stabilize designated disaster areas and distressed or underserved rural areas. By doing so, the agencies seek to recognize banks' community development efforts in these areas and encourage further efforts in other rural areas. The rules also clarify when a bank's (or its affiliate's) discrimination or other illegal credit practices will adversely affect an evaluation of its CRA performance. The joint final rule became effective September 1, 2005.

FACT Act Rules on Medical Information

In November, the Board, FDIC, NCUA, OCC, and OTS issued final rules under the Fair Credit Reporting Act (FCRA). (The Board's rules are Regulation V and Regulation FF.) The rules create exceptions to the statutory prohibition against creditors' obtaining or using medical information in connection with their credit-eligibility determinations. The final rules also address the sharing of medically related information among affiliates.

Section 411 of the Fair and Accurate Credit Transactions Act of 2003 (the FACT Act) amended the FCRA to provide that a creditor may not obtain or use medical information in connection with any determination of a consumer's eligibility, or continued eligibility, for credit, except as permitted by regulations. The FACT Act requires the agencies to prescribe regulations that permit creditors to obtain and use medical information for credit-eligibility purposes when necessary and appropriate to protect legitimate operational, transactional, risk-management, and other needs. The final rules permit creditors to obtain and use medical information that is typically considered in credit underwriting. Under the final rules, all creditors can rely upon the exceptions for obtaining and using medical information.

Section 411 of the FACT Act also amended the FCRA to limit the ability of creditors and others to share medically related information among their affiliates, except as permitted by the statute or by regulation or order. The final rules specify the circumstances in which certain creditors may share medically related information among affiliates without becoming consumer reporting agencies, which are subject to additional requirements.

Final rules will become effective April 1, 2006.

Amendments to Regulation E (Electronic Fund Transfers)

In December, the Federal Reserve Board announced final amendments to Regulation E, which implements the Electronic Fund Transfer Act. The amendments clarify the responsibilities of parties involved in electronic check conversion transactions and require that consumers receive written notification in advance of these transactions. Additional revisions to the regulation's official staff commentary provide guidance on preauthorized transfers from consumers' accounts, error resolution, and disclosures at ATMs.

Among other provisions, the final rule specifies that merchants and other payees that convert consumers' check payments into electronic fund transfers must provide the consumer with a notice and obtain his or her authorization for the electronic fund transfer. Merchants and other payees must also notify consumers that

Revisions to the official staff commentary on Regulation E clarify the error resolution obligations of financial institutions and clarify the disclosure obligations of ATM operators with respect to the fees they charge a consumer for initiating an electronic fund transfer or for using an ATM to make a balance inquiry.

The mandatory compliance date for the final rule is January 1, 2007.

Interim Final Rule Governing Payroll Cards

In December, the Board adopted a separate interim final rule on payroll card accounts. Under the interim final rule, payroll card accounts that are established to provide salary, wages, or other employee compensation on a recurring basis are accounts covered by Regulation E. The interim final rule grants flexibility to financial institutions that must provide account transaction information to payroll card users. The interim final rule will become effective July 1, 2007.

Other Regulatory Actions

The Board also took the following regulatory actions during 2005:

Economic Effects of the Electronic Fund Transfer Act

As required by the Electronic Fund Transfer Act (EFTA), the Board monitors what effects the act has on compliance costs for financial institutions, as well as the benefits of the act to consumers.

According to data from the most recent triennial Survey of Consumer Finances (conducted in 2004), approximately 91 percent of U.S. families that year used or had access to one or more EFT services, for example, automated teller machine (ATM) services, debit card services, or direct deposit or payment services--up from approximately 88 percent in 2001. The 2004 Survey of Consumer Finances also reported that approximately 74 percent of U.S. families had an ATM card. In 2004, the number of ATM transactions per month averaged approximately 919 million, and the number of installed ATMs rose about 3 percent from 2003, to 383,000.

About 71 percent of U.S. families had funds deposited directly into their checking or savings account by direct deposit in 2004. Use of the service appears even more common in the public sector; during fiscal year 2005, approximately 76 percent of all government payments were made using EFT, including 81 percent of Social Security payments, 99 percent of federal salary and retirement payments, and 49 percent of federal income tax refunds.

About 59 percent of U.S. families had debit cards in 2004; consumers can use these cards at merchant terminals to pay for purchases. Approximately 17.6 billion debit card transactions took place in 2004, an increase of approximately 9 percent from the previous year's volume. Direct payment appears to be the least widely used EFT payment mechanism. About 47 percent of U.S. families had payments automatically deducted from their accounts in 2004.

The incremental costs associated with the EFTA are difficult to quantify because it is difficult to determine how industry practices would have evolved in the absence of statutory requirements. The benefits of the EFTA are also difficult to measure, as they cannot be isolated from consumer protections that would have been provided in the absence of regulation. The available evidence suggests no serious consumer problems with EFTA. (See "Agency Reports on Compliance with Consumer Protection Laws" later in this chapter.)

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Supervision for Compliance with Consumer Protection and Community Reinvestment Laws

Activities Related to the Community Reinvestment Act

The Community Reinvestment Act (CRA) requires that the Board and other banking agencies encourage financial institutions to help meet the credit needs of the local communities in which they do business, consistent with safe and sound business practices. To carry out this mandate, the Federal Reserve

Examinations for Compliance with the CRA

The Federal Reserve assesses and rates the CRA performance of state member banks in the course of examinations conducted by staff at the twelve Reserve Banks. During the 2005 reporting period, the Reserve Banks conducted 163 CRA examinations. Of the banks examined, 35 were rated "outstanding" in meeting community credit needs, 127 were rated "satisfactory," none was rated "needs to improve," and 1 was rated as being in "substantial noncompliance." 2

Analysis of Applications for Mergers and Acquisitions in Relation to the CRA

During 2005, the Board of Governors considered applications for several significant banking mergers, including the application by Citigroup, Inc., New York, New York, to acquire First American Bank, Bryan, Texas. The Board approved Citigroup's application in March, after considering information from ongoing examinations of Citigroup, publicly disclosed investigations, and domestic and foreign financial supervisory authorities, in addition to confidential information on Citigroup's compliance with anti-money-laundering laws. Citigroup acknowledged some deficiencies in its compliance and internal controls for the areas being investigated and stated that it had developed plans to address those weaknesses. The Board noted the improvements Citigroup had made to parts of its compliance structure; the Board also expected that the company would fully implement its plan to enhance oversight of its operations. To that end, the Board further expected that Citigroup would not undertake significant expansion during this implementation period.

Several other significant applications are listed below.

The public submitted comments on each of these applications. Most of the commenters expressed concerns that an institution's lending to lower-income communities and minority populations was insufficient or that the institution failed to address the convenience and needs of affected communities. Many of the comments referenced the new pricing information on residential mortgage loans that was required to be reported for 2004 Home Mortgage Disclosure Act (HMDA) data; the new data raised concerns that minority applicants were more likely than nonminority applicants to receive high-cost mortgages. 3 Other commenters raised concerns about potentially predatory lending practices by subprime and payday lenders, as well as the potential adverse effects of branch closings.

In total, the Board acted on twenty-three bank and bank holding company applications that involved protests by members of the public concerning the CRA performance of insured depository institutions. The Board also reviewed twenty-nine applications involving other issues related to CRA, fair lending, or compliance with consumer credit protection laws. 4

Other Consumer Compliance Activities

The Division of Consumer and Community Affairs supports and oversees the supervisory efforts of the Federal Reserve Banks to ensure that consumer protection laws and regulations are fully and fairly enforced. Division staff provides guidance and expertise to the Reserve Banks on consumer protection regulations, examination and enforcement techniques, examiner training, and emerging issues. They develop and update examination policies, procedures, and guidelines, as well as review Reserve Bank supervisory reports and work products. They also participate in interagency activities that promote uniformity in examination principles and standards.

Examinations are the Federal Reserve's primary means of enforcing compliance with consumer protection laws. During the 2005 reporting period, the Reserve Banks conducted 239 consumer compliance examinations--220 of state member banks and 19 of foreign banking organizations (FBO). 5

The Board periodically issues guidance for Reserve Bank examiners on consumer protection laws and regulations. In addition to updating examination procedures for a number of regulations in concert with the other federal financial institution regulatory agencies, the Board issued guidance that Federal Reserve consumer compliance examiners are to use when evaluating cases that may involve any pattern or practice of flood insurance violations.

Fair Lending

The Board has a responsibility to ensure that the banks under its jurisdiction comply with the federal fair lending laws--the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. The ECOA prohibits all 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. As provided by the ECOA, the Board enacted Regulation B to fully implement the act and periodically reviews that regulation and modifies it as needed. Congress assigned responsibility for administrative enforcement of the ECOA to the Board for banks under its jurisdiction, to other regulators for creditors that they regulate, and to the Federal Trade Commission for all other creditors.

The Fair Housing Act covers credit for the purchase, construction, improvement, repair, or maintenance of a dwelling. Under the act, it is unlawful for a creditor to deny any form of financial assistance, or discriminate in fixing the amount, interest rate, or any other terms or conditions of any financial assistance, on the basis of race, color, religion, national origin, handicap, familial status, or sex.

The ECOA also obligates the Board and other agencies with enforcement responsibilities under the act to refer any pattern or practice of ECOA violations to the Department of Justice (DOJ). When a violation of the ECOA also violates the Fair Housing Act, the matter may be referred to the Department of Housing and Urban Development. To promote consistency in how fair lending issues are analyzed throughout the System, Division of Consumer and Community Affairs staff coordinate the investigation of potential fair lending violations with Reserve Bank staff and develop recommendations for the division director regarding whether referral is necessary or appropriate.

During 2005, division staff received and analyzed five reports from Reserve Banks regarding possible referral matters. Three of these reports dealt with potentially discriminatory underwriting standards--two involved potential discrimination on the basis of applicants' marital status and one involved potential discrimination on the basis of an applicant's sex. In one report, a bank's apparent discriminatory loan-pricing practices affected borrowers on the basis of their marital status. The fifth report involved discriminatory redlining on the basis of race. In one of the cases, the Board determined that a referral was not warranted; one case was referred to DOJ; and three cases are pending.

Since 1994, the Federal Reserve has used a two-stage statistical regression program to help assess fair lending compliance by high-volume mortgage lenders. The program uses reported HMDA data for a stage one analysis to identify banks having significant disparities in their loan-denial rates for loan applications submitted by black and Hispanic applicants and those submitted by white applicants; the program then targets these banks for a stage two analysis that considers extensive additional information taken from a sample of a bank's loan files. As a result of 2002 amendments to Regulation C and the receipt of expanded HMDA data for 2004, the regression program has been modified. Differences among groups of loan applicants are now identified using two additional criteria: (1) the incidence of higher-priced lending and (2) differences in the mean spread paid by borrowers who obtained higher-priced loans. The modified statistical program, like the denial-rate review, can target lenders for a more intensive fair lending review that would include the collection and assessment of additional loan-level information, such as credit scores and debt-to-income and loan-to-value ratios.

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 in general are prohibited from making, extending, increasing, or renewing any such loan unless the building or mobile home and any personal property securing the loan are covered by flood insurance for the term of the loan. The act requires the Federal Reserve to impose civil money penalties when it finds a pattern or practice of violations of the regulation. The civil money penalties are payable to the Federal Emergency Management Agency for deposit into the National Flood Mitigation Fund.

During 2005, the Board imposed civil money penalties on ten state member banks. The penalties, which were assessed via consent orders, totaled $219,810.

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. 6 In 2005, the FFIEC revised examination procedures for the Fair Credit Reporting Act (FCRA) to reflect amendments to the FCRA by the Fair and Accurate Credit Transactions Act (the FACT Act). The FFIEC also issued examination procedures on the Federal Communications Commission's telemarketing rules and its CAN-SPAM Act (Controlling the Assault of Non-Solicited Pornography and Marketing Act). The new procedures address the requirements each of these rules lays out for electronic communications with consumers. Finally, the Board, OCC, and FDIC issued examination procedures for reviewing the Community Reinvestment Act (CRA) performance of intermediate small banks. Following the issuance of new CRA regulations last year, these agencies also published for comment proposed questions and answers on their new regulations.

The FFIEC issues guidance to the agencies' consumer compliance examination staff and to supervised financial institutions. The agencies issued final guidance on overdraft-protection programs (see "Interagency Guidance on Overdraft-Protection Programs" earlier in this chapter). In addition, the Board, OCC, and FDIC issued new templates for preparing CRA performance evaluations for intermediate small banks; these agencies also revised the existing templates in order to reflect the amended definition of community development that now applies to all banks, as the term is defined in the new CRA regulations. Finally, the Board, OCC, and FDIC updated the host-state loan-to-deposit ratios used to determine compliance with section 109 of the Riegle--Neal Interstate Banking and Branching Efficiency Act of 1994.

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 state member banks under the Federal Reserve's supervisory responsibility becomes even more important. The consumer affairs curriculum is composed of six courses focused on various consumer protection laws, regulations, and examining concepts. In 2005, these courses were offered in ten sessions to more than 190 consumer compliance examiners and System staff members.

Board and Reserve Bank staff regularly review the consumer affairs curriculum, updating subject matter and adding new elements as appropriate. During 2005, staff conducted a curriculum review of the Commercial Lending Essentials for Consumer Affairs course to incorporate different instructional methods (for example, an expanded case study). This course provides consumer compliance examiners with a basic understanding of how a loan officer underwrites and prices commercial loans.

In addition to providing core training, the examiner curriculum emphasizes the importance of continuing professional development (CPD). Opportunities for continuing development include special projects and assignments, self-study programs, rotational assignments, the opportunity to instruct at System schools, and mentoring programs.

Reporting on Home Mortgage Disclosure Act Data

The Home Mortgage Disclosure Act (HMDA), enacted by Congress in 1975, requires most mortgage lenders located in metropolitan areas to collect data about their housing-related lending activity, report the data annually to the government, and make the data publicly available. In 1989, Congress expanded the data required by HMDA to include information about loan applications that did not result in a loan origination, as well as information about the race, sex, and income of applicants and borrowers. Since 1989, mortgage markets have changed dramatically as information technology has improved, permitting more-efficient and more-accurate risk assessment and management. These developments have made it feasible for institutions to lend to higher-risk borrowers, albeit at prices commensurate with the higher risk. In the past, many of the borrowers who now receive higher-priced loans were often denied lower-priced credit.

Although a positive development, the growth of the subprime market has also raised public policy concerns. One concern is whether consumers who obtain higher-priced loans are sufficiently informed about the loan options available to them, allowing them to shop effectively and protect themselves from unfair or deceptive lending practices. This concern has contributed to an ongoing debate about how adequate and effective proposed or existing mortgage lending disclosures and limitations are in protecting consumers from abuse. In addition, the wider range of loan prices available in today's marketplace has raised concerns about whether price variations reflect, even in part, unlawful discrimination rather than legitimate risk- and cost-related factors.

2004 HMDA Data and Fair Lending

The 2004 HMDA data included, for the first time, information on "higher-priced loans," or loans whose pricing (interest rates and fees) exceeded certain thresholds. An analysis of this new data offers some insights about where higher-priced lending is more prevalent and what types of borrowers are more likely to receive a higher-priced loan. While these statistics alone cannot explain the reasons why higher-priced lending was concentrated in some geographic areas or among some borrowers, the 2004 data are still an important tool for fair lending enforcement.

The incidence of higher-priced borrowing--the proportion of borrowers who obtain higher-priced loans--varies widely by race and ethnicity. In 2004, blacks and Hispanics were much more likely than non-Hispanic whites to receive higher-priced loans, and Asians were less likely than non-Hispanic whites to receive such loans. For example, 32 percent of black borrowers, and 20 percent of Hispanic borrowers, received higher-priced home purchase loans, but only 9 percent of non-Hispanic white borrowers did. In other words, black homebuyers received higher-priced loans more than three times as often as non-Hispanic white homebuyers, and Hispanic homebuyers received higher-priced loans more than two times as often. In general, differences of this magnitude persist across borrowers with different income levels and across neighborhoods with different median incomes (for example, low-income versus middle-income). The differences in the incidence of higher-priced loans shrink minimally when individual borrowers are matched by, for example, their income, the amount of their loan, and the location of the property being financed--which are the principal loan-pricing factors reported in the HMDA data.

In large part, the differences in what groups of borrowers were more likely to receive a higher-priced loan reflect the segmentation of the home loan market. That is, a major reason that black and Hispanic borrowers were much more likely than non-Hispanic white borrowers to obtain higher-priced mortgage loans is the fact that black and Hispanic borrowers were much more likely to obtain mortgage loans from institutions that specialize in higher-priced lending.

Some, perhaps much, of the market segmentation and the related price differences for mortgages are the result of differences in legitimate price-determining factors, such as a borrower's credit risk. Credit risk is typically measured by a borrower's credit score, his or her debt-to-income ratio, the loan-to-value ratio, and other information. But the HMDA data do not include this type of information. Therefore, the data do not yield any conclusions about the reasons behind racial and ethnic differences in the incidence of higher-priced lending; the data also cannot be used to prove (or disprove) the legitimacy of any speculated reasons for these differences.

Notwithstanding the limitations of the HMDA loan-pricing data, the data can be used to improve enforcement of the laws that prohibit racial and ethnic discrimination in mortgage lending: the Federal Reserve and the other agencies that enforce these laws can use the data as a screening tool to determine which institutions' pricing practices warrant scrutiny. For example, Board staff used the 2004 data to determine (1) which lenders exhibited a highly statistically significant difference in their higher-priced lending to black and Hispanic borrowers, on the one hand, and to non-Hispanic white borrowers, on the other, and (2) when that difference could not be explained by a difference in borrower income, loan amount, or property location. Board staff shared statistical reports about the identified lenders with the relevant state and federal agencies, who can use the data, as appropriate, in their fair lending enforcement and supervision efforts.

In response to these concerns, the Federal Reserve updated Regulation C, the regulation that implements HMDA. The revisions, which were effective in 2004, required lenders to collect price information for loans they originated in the higher-priced segment of the home loan market. Lenders report the number of percentage points (if any) by which a loan's annual percentage rate (known as the "APR") exceeds a threshold; the threshold is 3 percentage points above the yield on comparable Treasury securities for first-lien loans, and 5 percentage points above that yield for junior-lien loans. Loans with rates above this threshold are referred to as "higher-priced loans." The HMDA data collected in 2004 and released to the public in 2005 provide the first publicly available loan-level data about loan prices.

An article published by Federal Reserve staff in the Summer 2005 issue of the Federal Reserve Bulletin uses the 2004 data to describe the market for higher-priced loans and patterns of lending across loan products, geographic markets, and borrowers and neighborhoods of different races and incomes. 7 Relatively few lenders account for most higher-priced originations. In 2004, only 500 of the 8,850 reporting home lenders made 100 or more higher-priced loans; the 10 home lenders with the largest volume accounted for about 40 percent of all such loans. Higher-priced lending is also concentrated by price: in 2004 the vast majority of higher-priced loans had annual percentage rates within 1 or 2 percentage points of the reporting thresholds. Furthermore, a relatively small share of loan originations are higher-priced loans--16 percent in 2004.

The prevalence of higher-priced lending varies widely, however. First, it varies by product type. For example, 15.5 percent of first-lien refinance loans were higher-priced in 2004 compared with 27.4 percent of comparable junior-lien loans. Manufactured-home loans show the greatest incidence of higher pricing across all loan products, a result consistent with the elevated credit risk associated with such lending. Second, higher-priced lending varies widely by geography. Most of the metropolitan areas with the greatest incidence of higher-priced lending are in the southern region of the country (in many metropolitan areas in the South and Southwest, 30 to 40 percent of homebuyers who obtained conventional loans in 2004 received higher-priced loans), whereas metropolitan areas with the lowest incidence are much more dispersed. Third, the incidence of higher-priced borrowing varies greatly among borrowers of different races and ethnicities (see related box "2004 HMDA Data and Fair Lending"). All of these patterns are expected to be the subject of further research.

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 twelve Federal Reserve Banks, the FFIEC member agencies, and other federal enforcement agencies. 8

Regulation B (Equal Credit Opportunity)

The FFIEC agencies reported that 85 percent of the institutions examined during the 2005 reporting period were in compliance with Regulation B, compared with 88 percent for the 2004 reporting period. The most frequent violations involved failure to take one or more of the following actions:

During this reporting period, the OTS issued two cease-and-desist orders against savings associations for their alleged violations of the ECOA and Regulation B, as well as other consumer regulations. For these violations, the associations paid civil money penalties that totaled $17,500. The other FFIEC agencies did not issue any formal enforcement actions relating to Regulation B during the reporting period.

The Federal Trade Commission (FTC) entered into one settlement with a mortgage corporation for its alleged violations of the ECOA and Regulation B, as well as other statutes. The defendants were required to pay consumer restitution for their alleged violations of the Truth in Lending Act (see the discussion under Regulation Z).

The other agencies that enforce the ECOA--the Farm Credit Administration (FCA), the Department of Transportation, the Securities and Exchange Commission (SEC), the Small Business Administration, and the Grain Inspection, Packers and Stockyards Administration of the Department of Agriculture--reported substantial compliance among the entities they supervise. The FCA's examination activities revealed that most Regulation B violations involved either creditors' providing inadequate statements of specific reasons for denial or creditors' failure to request or provide information for government-monitoring purposes. As reported by the SEC, the National Association of Securities Dealers, Inc., (NASD) found that one of its member firms could not produce evidence that its customers were notified about the denial of their applications for margin accounts. In addition, a different NASD firm could not demonstrate that it sent required annual margin disclosure statements to its customers. However, none of these other agencies initiated any formal enforcement actions relating to Regulation B during 2005.

Regulation E (Electronic Fund Transfers)

The FFIEC agencies reported that approximately 95 percent of the institutions examined during the 2005 reporting period were in compliance with Regulation E, which is comparable to the level of compliance for the 2004 reporting period. The most frequent violations involved failure to comply with the following requirements:

The OTS issued one cease-and-desist order for violations of a number of consumer regulations, including Regulation E. The savings association paid a civil money penalty of $10,000 for the violations. The other FFIEC agencies and the SEC did not issue any formal enforcement actions relating to Regulation E during the period.

Regulation M (Consumer Leasing)

The FFIEC agencies reported that more than 99 percent of the institutions examined during the 2005 reporting period were in compliance with Regulation M, which is comparable to the level of compliance for the 2004 reporting period. The few violations noted involved failure to adhere to specific disclosure requirements. The FFIEC agencies did not issue any formal enforcement actions relating to Regulation M during the period.

Regulation P (Privacy of Consumer Financial Information)

The FFIEC agencies reported that 97 percent of the institutions examined during the 2005 reporting period were in compliance with Regulation P, compared with 96 percent for the 2004 reporting period. The most frequent violations involved failure to comply with the following requirements:

The OCC issued a civil money penalty of $180,000 to a mortgage company subsidiary of a national bank for its failure to properly and securely dispose of confidential customer information. The OTS issued one cease-and-desist order to a former institution-affiliated party for violations of Regulation P and another consumer regulation. The individual paid a civil money penalty of $2,000 for the violations. The other FFIEC agencies did not issue any formal enforcement actions relating to Regulation P during the reporting period.

Regulation Z (Truth in Lending)

The FFIEC agencies reported that 80 percent of the institutions examined during the 2005 reporting period were in compliance with Regulation Z, compared with 84 percent for the 2004 reporting period. The most frequent violations involved failure to take one or more of the following actions:

In addition, 93 banks supervised by the Federal Reserve and the FDIC were required, under the Interagency Enforcement Policy on Regulation Z, to reimburse a total of approximately $591,000 to consumers for understating the annual percentage rate or the finance charge in their consumer loan disclosures.

The OCC entered into a formal agreement with a bank and its mortgage company subsidiary for violations of the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Federal Trade Commission Act. The subsidiary was required to reimburse borrowers who were harmed and was directed to set aside at least $14 million to fund these reimbursements.

The OCC also issued a prohibition and cease-and-desist order, as well as a civil money penalty of $20,000, against a former bank vice president for making tax lien loans that violated the Home Ownership Equity Protection Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Federal Trade Commission Act. The OCC had previously ordered the bank to reimburse affected customers and had issued a cease-and-desist order against the company that marketed, originated, and serviced the loans.

The OTS issued five cease-and-desist orders for violations of a number of consumer regulations, including Regulation Z, during the reporting period. Three of the banks paid civil money penalties totaling $18,900. The FDIC issued one cease-and-desist order for violations of a number of consumer regulations, including Regulation Z. The other FFIEC agencies did not issue any formal enforcement actions relating to Regulation Z during the reporting period.

The FTC settled charges against an individual defendant and a group of mortgage brokers for their alleged violations of the Truth in Lending Act and Regulation Z, the Federal Trade Commission Act, and other statutes. Under the consent judgment, the individual defendant will cease making misrepresentations about home mortgage refinancing offers and cease future violations of Regulation Z. The defendant was also required to pay $128,300 in consumer restitution. In another case, the FTC settled charges, through a stipulated order, against a mortgage corporation for its alleged violations of the Truth in Lending Act and Regulation Z, the Federal Trade Commission Act, and other statutes. The stipulated order requires the defendant to pay $750,000 in consumer restitution; the order also set up a $350,000 performance fund to be used if the defendant fails to comply with the order. In addition, the order bars the defendant from making or servicing any home-secured loans and includes other injunctions.

The FTC continued litigation against a mortgage broker and its principals for their alleged violations of the Truth in Lending Act, Regulation Z, and the Federal Trade Commission Act, in connection with advertisements for extremely low mortgage rates. In 2004, the court entered a stipulated preliminary injunction against the defendants. In 2005, the court held the defendant's chief executive officer in civil contempt of that order; he was subsequently arrested under a bench warrant. The court released this individual after he paid $275,000 in sanctions and agreed to pay $400,000 in consumer restitution, among other terms. Litigation is ongoing in this case.

The FTC settled charges against a finance company, seven related companies, and their principals for their alleged violations of the Truth in Lending Act and Regulation Z, the Federal Trade Commission Act, and other statutes. The final order shut down the companies and permanently bars them and their principals from participating in any lending or direct-deposit business and from offering or selling ancillary products. The FTC will receive a $10.5 million claim in the consolidated bankruptcy case against the companies, 50 percent of the assets in receivership, and two suspended judgments totaling approximately $674,000. Finally, the FTC continues litigation against two related companies and their officers for their alleged violations of the Truth in Lending Act, Regulation Z, and the Federal Trade Commission Act. The companies are alleged to have engaged in misrepresentation about merchandise refunds and, when consumers were owed refunds, to have failed to promptly credit their credit card accounts.

The FCA's examination and enforcement activities revealed that most Regulation Z violations involved inadequate or incorrect disclosures for closed-end credit. The other agencies that enforce Regulation Z--the Department of Transportation and the Grain Inspection, Packers, and Stockyards Administration of the Department of Agriculture--reported substantial compliance among the entities they supervise.

Regulation AA (Unfair or Deceptive Acts or Practices)

The FFIEC agencies reported that more than 99 percent of the institutions examined during the 2005 reporting period were in compliance with Regulation AA, which is comparable to the level of compliance for the 2004 reporting period. No formal enforcement actions relating to Regulation AA were issued during the reporting period.

Regulation CC (Availability of Funds and Collection of Checks)

The FFIEC agencies reported that 93 percent of institutions examined during the 2005 reporting period were in compliance with Regulation CC, which is comparable to the level of compliance for the 2004 reporting period. Among the institutions not in full compliance, the most frequently cited violations involved the failure to take one or more of the following actions:

The OTS issued one cease-and-desist order for violations of a number of consumer regulations, including Regulation CC. The other FFIEC agencies did not issue any formal enforcement actions related to Regulation CC during the reporting period.

Regulation DD (Truth in Savings)

The FFIEC agencies reported that 91 percent of institutions examined during the 2005 reporting period were in compliance with Regulation DD, compared with 92 percent for the 2004 reporting period. Among the institutions not in full compliance, the most frequently cited violations involved the following actions:

The OTS issued one cease-and-desist order for violations of a number of consumer regulations, including Regulation DD. The other FFIEC agencies did not issue any formal enforcement actions related to Regulation DD during the reporting period.

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Consumer Complaints

The Federal Reserve investigates complaints against state member banks and forwards to the appropriate enforcement agency complaints that involve other creditors and businesses. Each Reserve Bank investigates complaints against state member banks in its District. In 2005, the Federal Reserve received 460 consumer complaints about regulated practices by state member banks--complaints were received by mail, by telephone, in person, and electronically via the Internet.

Complaints against State Member Banks

Of the 460 complaints about regulated practices, 78 percent involved consumer loans: 5 percent alleged discrimination on a basis prohibited by law (race, color, religion, national origin, sex, marital status, age, the fact that the applicant's income comes from a public assistance program, or the fact that the applicant has exercised a right under the Consumer Credit Protection Act), and 73 percent concerned other credit-related practices, such as credit card disclosures, preapproved solicitations, and billing error resolution. Seventeen percent of the complaints involved disputes about interest on deposits and other deposit account practices, including electronic fund transfers; the remaining 5 percent concerned disputes about trust services or other practices. (See tables.)

Consumer Complaints against State Member Banks, by Classification, 2005
Classification Number
Regulation B (Equal Credit Opportunity) 29
Regulation C (Home Mortgage Disclosure Act) 0
Regulation E (Electronic Fund Transfers) 30
Regulation H (Bank Sales of Insurance) 2
Regulation M (Consumer Leasing) 0
Regulation P (Privacy of Consumer Financial Information) 4
Regulation Q (Payment of Interest) 0
Regulation Z (Truth in Lending) 187
Regulation BB (Community Reinvestment) 2
Regulation CC (Expedited Funds Availability) 18
Regulation DD (Truth in Savings) 37
Fair Credit Reporting Act 96
Fair Debt Collection Practices Act 40
Fair Housing Act 2
Flood Insurance 3
Regulations T, U, and X 4
Real Estate Settlement Procedures Act 6
Total 460

In 95 percent of the complaints against state member banks regarding regulated practices that were investigated in 2005, the banks had correctly handled the customer's account. The remaining 5 percent of the complaints against state member banks resulted in a finding that the bank had violated a consumer protection regulation. The most common violations involved real estate loans, deposit accounts, and electronic fund transfers.

Unregulated Practices

As required by section 18(f) of the Federal Trade Commission Act, the Board continued to monitor complaints about banking practices that are not subject to existing regulations and to focus on those that concern possible unfair or deceptive practices. In 2005, the Board received more than 1,300 complaints against state member banks that involved unregulated practices. The categories that received the most complaints involved checking accounts and credit cards. Consumers most frequently complained about insufficient funds charges and procedures (95 complaints); other issues concerned interest rates and terms on credit cards (95), customer service (83), and fraud (57). The remainder of the complaints concerned a wide range of unregulated practices involving credit cards, including banks' refusals to close accounts when requested to do so by customers, the amounts banks charge for late payments, and the unsolicited offers banks send to consumers.

Complaint Referrals to HUD

In accordance with a memorandum of understanding between HUD and the federal bank regulatory agencies, in 2005 the Federal Reserve referred three complaints to HUD that alleged state member bank violations of the Fair Housing Act.

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Advice from the Consumer Advisory Council

The Board's Consumer Advisory Council--whose members represent consumer and community organizations, the financial services industry, academic institutions, and state agencies--advises the Board of Governors on matters concerning laws and regulations that the Board administers and on other issues related to consumer financial services. Council meetings are held three times a year and are open to the public. (For a list of members of the council, see the section "Federal Reserve System Organization.")

In 2005, the council met in March, June, and October. In March, council members discussed the Board's proposed amendments to Regulation E, which implements the Electronic Fund Transfer Act (EFTA). Members focused on proposed revisions to cover payroll cards as "accounts" under Regulation E; the revisions would require financial institutions to provide written periodic statements to consumers who use payroll cards. Some members asserted that providing written periodic statements to these consumers posed operational problems for lenders, because payroll card users are often not bank customers. Other members believed that payroll cards are a major monetary asset for many unbanked consumers--and consumers should receive periodic statements for these accounts, regardless of any statement-delivery or other concerns.

Complaints against State Member Banks that Involve Regulated Practices, 2005
Subject of complaint All complaints Complaints involving
Number Percent Number Percent
Total 460 100 22 5
Discrimination alleged  
Real estate loans 5 1 0 0
Credit cards 11 2 0 0
Other loans 7 1 0 0
Other type of complaints  
Real estate loans 42 9 7 17
Credit cards 257 56 3 1
Other loans 38 8 2 5
Deposits 50 11 4 8
Electronic fund transfers 26 6 4 15
Trust services 1 1 0 0
Other 23 5 2 9

In March and June, the council discussed the advance notice of proposed rulemaking (ANPR) to revise Regulation Z, which implements the Truth in Lending Act (TILA). Members commented on the current content and format of disclosures for credit card accounts and also pointed out that competition between credit card companies has led to consumers being offered complicated and confusing products that they may not understand. Members commented on the disclosure table known as the "Schumer box," which is provided with credit card applications and solicitations. Although including a Schumer box on credit card applications and solicitations has been a successful way for lenders to disclose the associated fees, the design and format of the box could still be improved. Members also discussed whether the TILA amendments included in the Bankruptcy Abuse and Prevention and Consumer Protection Act of 2005 should be implemented as part of the ongoing regulatory review of Regulation Z. All members agreed that developing the Bankruptcy Act TILA disclosures in conjunction with the review of Regulation Z would be beneficial.

The Home Mortgage Disclosure Act (HMDA) was a topic of discussion at both the March and October meetings. In March, council members discussed revisions to Regulation C (HMDA's implementing regulation) that require federally insured depository and for-profit nondepository lenders to collect, report, and publicly disclose loan-price data for certain higher-priced home mortgage loans. Many lenders and community groups expressed concerns about the release and interpretation of the new HMDA data. They emphasized that the Federal Reserve System's community affairs staff could promote a better understanding of the data by supporting education efforts and starting a dialogue between lenders and community groups. In October, members noted that the new HMDA pricing data show a higher incidence of higher-priced lending among minorities; members also believed that more research on opportunities for reaching underserved individuals, including low-income and minority borrowers, is needed.

The proposed revisions to the financial agencies' regulations implementing the Community Reinvestment Act (CRA) were discussed at the March and June meetings. Members' comments primarily focused on community development in rural areas. Prior to July 19, 2005, the CRA rules considered community development in rural areas as eligible for CRA credit if the activities targeted low- or moderate-income census tracts or populations. However, rural areas are frequently categorized as middle-income tracts because of the uneven distribution of income levels within those census tracts. Members generally agreed that, in rural areas, the definition of community development should be expanded to be more responsive to the community development needs of those areas, regardless of their overall income levels. Members also focused on the community development test for branching services; they did not agree with the proposed rule change that would eliminate CRA credit for branching by banks with assets of between $250 million and $1 billion. They believed that a branching test should be required for intermediate small banks under the revised CRA proposal.

In June, council members from financial institutions discussed the scope and variety of recent information security breaches involving customer information, and they explored the challenges of finding solutions for safeguarding customer information. Members generally agreed that federal regulation (1) is needed to address information security problems on a national basis and (2) should cover entities beyond financial institutions. Entities that are not subject to regulatory oversight should be required to meet federal guidelines for establishing security programs and providing notice to customers and law enforcement agencies when breaches occur.

In October, pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA), members provided comments on consumer protection laws and regulations that may have become outdated, unnecessary, or unduly burdensome. Members commented on the rules governing the asset-size exemption for reporting HMDA data, TILA's provisions addressing the right to rescind certain mortgage loan transactions, the Gramm-Leach-Bliley Act (GLB Act) requirements for sending annual privacy notices, and the CRA rule requiring federal regulators' prior approval for establishing branches. Members agreed that the requirements for HMDA reporting and TILA's right-of-rescission rules were important and should be retained without change. Members suggested that the rules concerning GLB Act privacy notices and the CRA notice requirements for establishing branches could be simplified.

Nontraditional mortgage loan products were also discussed at the October meeting. During the past two years, the number of consumers obtaining nontraditional mortgages, such as payment-option adjustable-rate mortgages or interest-only mortgages, has significantly increased. Council members noted that these products are complex; require extensive education on the part of consumers, as well as extensive disclosures by lenders; and are often offered without considering sound underwriting criteria for the loan. Members expressed concern that some lenders do not provide consumers with disclosures that explain the full range of risks involved in repaying the loan. Members highlighted the need for more-extensive consumer financial education, which should be balanced with clear disclosures from lenders, understandable and less complex products, and underwriting standards that assess borrowers' suitability for nontraditional loan products. Hurricane Katrina was another topic of discussion at the October meeting. Members discussed a wide range of issues connected with the impact of the hurricane, commending the performance of the Federal Reserve and the other bank regulatory agencies in addressing immediate issues. However, members noted that the Gulf Coast region now needs long-term rebuilding and revitalization strategies to supplement the shorter-term "piecemeal" responses that occurred immediately after the disaster. Members encouraged the Federal Reserve Board to take a leadership role in bringing federal policymakers together for a dialogue about long-term goals and solutions.

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Promotion of Consumer Education and Community Economic Development in Historically Underserved Markets

In 2005, the community affairs function within the Federal Reserve System supported several initiatives to promote community economic development and fair access to credit for low- and moderate-income communities and populations. The function continued to focus on financial literacy and education, the sustainability of community development organizations, policies to help low-income individuals build their assets, and community economic development. Activities included conducting research, publishing newsletters and articles, sponsoring conferences and seminars, and supporting the dissemination of information to both general and targeted audiences.

As a decentralized function, the Community Affairs Offices (CAOs) at the Board and each of the twelve Reserve Banks design activities in response to the needs of communities in the regions they serve. At the Reserve Banks, CAOs focus on providing information and promoting awareness of investment opportunities to financial institutions, government agencies, and organizations that serve low- and moderate-income communities and populations; the Board's CAO engages in activities and explores issues that have public policy implications.

Promoting well-educated and informed consumers is vital to supporting consumer protection and efficient financial market operations. Accordingly, the Board has a long-standing commitment to providing consumers with information that helps them know their rights and responsibilities in relation to financial services, including how they can use disclosures to shop and compare products and providers. The Federal Reserve maintains a consumer information web site ( ) that includes educational materials related to the Board's consumer regulations. In 2005, the consumer publication "How to File a Consumer Complaint about a Bank" was substantially revised and updated to reflect the current marketplace.

Last year, Board staff continued to be involved with an interagency working group drafting a national strategy for financial education. The working group was created to fulfill the legislative mandate of the Financial Literacy and Education Commission (the commission), established by the Fair and Accurate Credit Transactions Act (the FACT Act). The thirteen-agency working group, led by Treasury Department staff, is charged with developing a national strategy to promote basic financial literacy and education. The working group has sought the participation of government, private, nonprofit, and public institutions in this effort. In 2005, Board staff submitted comments to Treasury Department staff, who are writing the final strategy. Board staff also worked with the other agencies to update the web site; the update links the web site to the Federal Reserve's consumer education materials. The globalization of the financial services industry has made financial education an international, as well as a national, concern. In November, Board staff shared insights on financial education and consumer protection regulation at a conference hosted by the European Credit Research Institute in Belgium, and at the Third International Forum on Financial and Consumer Protection and Education in Malaysia.

Recognizing the importance of providing access to consumer and financial education to its employees, the Board offered several informational seminars in conjunction with its Workplace Financial Education Task Force, chaired by the director of the Division of Consumer and Community Affairs. Four programs were offered in 2005: identity theft, alternative and interest-only mortgage loans, credit reports, and an orientation to money and finances for Take Your Sons and Daughters to Work Day. Staff also assisted in the design and launch of a tax resources web site on the Board's intranet.

Board staff continued to be involved in national financial education initiatives throughout the year. The division's director serves as an adviser to the board of Operation HOPE, a national nonprofit organization dedicated to delivering financial education programs to low-income populations with a particular focus on communities suffering from natural disasters. Currently, a member of the Board of Governors serves on the board of directors of NeighborWorks America (the trade name of the Neighborhood Reinvestment Corporation). Community Affairs staff participate in strategic planning for the NeighborWorks Center for Homeownership Education and Counseling, with the objective of developing national standards for financial counseling and training to promote homeownership among low- and moderate-income populations. To further support consumers' informed decision making about mortgage credit, Board staff developed an information brochure describing the implications of interest-only loans, a popular product in high-cost housing markets. The brochure describes the rate and payment adjustments inherent in the terms of these loans. Board and Reserve Bank staff also continued to support the Conference of Mayors' financial education program, Dollar Wi$e. In various cities throughout the country, the program seeks to increase the awareness of the importance of personal financial management. Membership in the campaign doubled in 2005, with seventy-one cities now participating.

The CAOs at the Reserve Banks remained active in financial education initiatives during 2005. The Federal Reserve Bank of Kansas City actively promoted workplace financial education by convening employers in Kansas City and Denver to discuss the advantages of providing financial education to employees. In partnership with the Atlanta Reserve Bank, Kansas City staff also published a brochure identifying the characteristics of an effective financial education program ( (3.1 MB PDF). The Oklahoma City Branch of the Kansas City Reserve Bank collaborated with the Oklahoma Jump$tart Coalition to host a conference of local financial-education service providers and community members to identify strategies for expanding financial education throughout the state. In an effort to expand the scope of the regional financial education collaboratives it has helped establish in key cities in the Fourth District, the Cleveland Reserve Bank hosted a conference that underscored effective strategies for measuring success and conducting research on financial education.

Complementing the System's financial education efforts, various CAOs partnered with CFED, a national nonprofit organization formerly known as the Corporation for Enterprise Development, to host a series of events delving into asset-building and wealth-accumulation strategies for lower-income individuals. The San Francisco, New York, Boston, and Philadelphia Reserve Banks cohosted two conferences with CFED in San Francisco and New York that highlighted private-sector innovations as well as local and national policies that facilitate and encourage savings and investment among lower-income consumers. In addition, the Board and the Richmond Reserve Bank cohosted a forum of national research and policy experts to discuss opportunities for improving asset-building among lower-income populations.

Building on prior years' efforts to help community development financing organizations grow and survive, the Federal Reserve System and the Aspen Institute collaborated on a series of conferences. Research by the Aspen Institute, a national research and leadership development organization, was the foundation for conference discussions about the industry and how to increase its impact. One event, sponsored by the Chicago Reserve Bank, explored various business models that have led to successful community development finance programs. Another event, cohosted by the Boston Reserve Bank, explored whether socially responsible investments can be used to fund community development institutions and help them operate more effectively. Board staff also participated in an international conference, sponsored by the Social Enterprise Initiative at Harvard Business School, on effective business strategies for serving lower-income populations. Staff presented a case study of a community development financial institution, highlighting the role banking regulation and policy had in motivating private investment in these institutions, as well as the business strategies these institutions adopted to respond to the credit and financial services needs of their lower-income markets.

The System's CAOs remain committed to increasing research and data on community economic development. In 2005, the System hosted its biennial community development research conference, "Promises and Pitfalls: As Consumer Finance Options Multiply, Who Is Being Served and at What Cost?" The Research and Community Affairs staffs at the Board and the Cleveland Reserve Bank collaborated on the event. Papers presented at the conference assessed the impact that consumer behavior, alternative financial services providers, financial education, and other factors have on consumers' access to and experiences with the financial sector. In one paper, System staff studied data from focus groups with Mexican immigrants who remitted money to family members in Mexico. Those results are being used to help immigrants connect with the banking system and thereby increase market efficiencies for both financial institutions and consumers. The results are also being used in interagency efforts to educate consumers about the remittance channels available to them. A call for papers for the System's 2007 research conference has been issued. The 2007 conference will address the effectiveness of the Community Reinvestment Act (CRA) in promoting access to and encouraging community and economic development, in light of the dramatic changes that have occurred in the financial services industry in the thirty years since the CRA was enacted. 9

In addition to participating in the System research conference, several CAOs at Reserve Banks have expanded their programs to include research and data collection. The Boston Reserve Bank launched a series of community economic development papers that offer in-depth coverage of current community economic development issues. The Boston Bank also created a new series of data resources on the socioeconomic characteristics of lower-income communities in New England ( ). The New York Reserve Bank published research on whether stored-value cards are an effective electronic payment tool for unbanked consumers; the Bank also published a paper on using the earned income tax credit to encourage savings and banking system participation by unbanked consumers ( ). To bridge the gap between community economic development theory and practice, the San Francisco Reserve Bank launched a new community development journal that features articles and commentary by researchers, policymakers, and practitioners ( ). Research by Board staff on the financial education programs offered to military personnel by the Department of Defense (DoD) continued. Staff collected data from recipients of the DoD's financial education program as support for a longitudinal study to assess the impact of DOD's programs on the financial management behavior of the recipients.

Finally, Board staff undertook efforts to help the public understand and use the new Home Mortgage Disclosure Act (HMDA) data. Public interest in HMDA data increased significantly in 2005, with the release of previously uncollected data on the pricing of home mortgage loans. To address potential concerns and questions about the new HMDA data, Board staff worked collaboratively with other agencies to develop questions and answers about the insights and limitations the new data provide. (See the Board's March 31, 2005, press release at .) These questions and answers were designed to both help interested parties use the data objectively and to discourage individuals and groups from forming conclusions about mortgage lending patterns that are not supported by the data.

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Outreach Activities

The Board engages in outreach activities throughout the year to provide information to the public about the Board's responsibilities, to facilitate understanding of changes in banking regulations and their impact on banks and consumers, to promote community development and consumer education, and to foster discussion of public policy issues. Board staff periodically meet with financial institutions, community groups, and other members of the public in formal and informal settings. The Board sponsors and participates in meetings, conferences, and seminars for the general public and targeted audiences. This year, the Board again participated in the Congressional Black Caucus Foundation's 2005 annual legislative conference, which provides a national forum for examining strategies and viable solutions to public policy issues facing African Americans. Board staff distributed consumer education materials provided by the Federal Reserve System and used the opportunity to inform conference attendees about the Federal Reserve and its multifaceted responsibilities.

1. In 2004, the agencies, along with the OTS, produced a consumer publication, "Protecting Yourself from Overdraft and BouncedCheck Fees," which is available in English and Spanish. Both versions are available on the Board's consumer information web site ( ).    Return to text
2. The 2005 reporting period was July 1, 2004, through June 30, 2005.    Return to text
3. "High-cost mortgages" refers to mortgage loans whose annual percentage rates (APRs) are 3 percent or more over the yield on comparable Treasury securities on first liens, and 5 percent or more over that yield on subordinate liens. Interest rate spreads that exceed these two thresholds are required to be reported under Regulation C, which implements the Home Mortgage Disclosure Act (HMDA).    Return to text
4. In addition, four applications involving consumer compliance issues were withdrawn.    Return to text
5. The foreign banking organizations examined by the Federal Reserve are organizations operating under section 25 or 25A of the Federal Reserve Act (Edge Act and agreement corporations) and state-chartered commercial lending companies owned or controlled by foreign banks. These institutions are not subject to the Community Reinvestment Act and typically engage in relatively few activities that are covered by consumer protection laws.    Return to text
6. The FFIEC member agencies are the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration.    Return to text
7. The complete article is available at .    Return to text
8. Because the agencies use different methods to compile the data, the information presented here supports only general conclusions. The 2005 reporting period was July 1, 2004, through June 30, 2005.    Return to text
9. The web site for the 2005 conference (including conference papers), as well as the 2007 call for papers, can be accessed at .    Return to text

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