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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 issue commentaries and other guidance.

During 2006, the Board published final amendments to its Regulation E, which implements the Electronic Fund Transfer Act, and the associated commentary to make the regulation applicable to payroll card accounts established through an employer to provide a consumer with electronic fund transfers of salary, wages, or other employee compensation on a recurring basis. The Board also amended Regulation E to clarify that a person, such as a merchant, must obtain a consumer's authorization to collect returned-item fees electronically from the consumer's account. The Board engaged in several rulemaking and other activities with the other federal banking agencies and the Federal Trade Commission (FTC). The Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued final guidance on the most recent amendments to the agencies' Community Reinvestment Act (CRA) regulations. The Board also issued joint final guidance with the OCC, the FDIC, the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) to address the risks associated with nontraditional mortgage products. In addition, the Board and the FTC jointly issued a report to Congress on the consumer dispute provisions of the Fair Credit Reporting Act.

Furthermore, the Board raised the dollar threshold that triggers additional requirements under the Home Ownership and Equity Protection Act and raised the exemption threshold for depository institutions required to collect data under the Home Mortgage Disclosure Act.

Amendments to Regulation E (Electronic Fund Transfers)

Payroll Cards

In August, the Board published final amendments to Regulation E that address payroll card accounts established through an employer on behalf of a consumer and to which recurring electronic fund transfers of salary, wages, or other employee compensation are made. Under the final rule, payroll card accounts are subject to the same requirements that apply to traditional transaction accounts under Regulation E; these requirements include a financial institution's duty to provide payroll-card account holders with initial disclosures, periodic statements, and error-resolution and liability provisions. For periodic statements, however, the final rule allows financial institutions to provide the specified account information electronically, and in writing upon the consumer's request, rather than through paper statements.

Regulation E applies to financial institutions that (1) hold an account belonging to a consumer or (2) both issue an access device (such as a debit card) to a consumer and agree with the consumer to provide electronic fund transfer (EFT) services. The final rule clarifies that the depository institution holding the consumer's funds in a payroll card account is a financial institution under the regulation. The final rule does not generally cover employers or third-party service providers. The mandatory compliance date for the final rule is July 1, 2007.

Returned-Item Fees

In December, the Board published a final rule amending Regulation E and its official staff commentary. These amendments clarify the consumer-authorization requirements for the electronic collection of returned-item fees. The final rule states that a person seeking to collect a fee for a returned check or any other item must obtain a consumer's authorization to initiate an EFT to collect this fee. This requirement applies to the person initiating the EFT, not to the consumer's account-holding financial institution. Consumer authorization is obtained when (1) a notice stating the specific amount of the fee (or explaining how the fee is calculated, if the fee may vary) and a statement that the fee will be collected via an EFT is provided to the consumer and (2) the consumer goes forward with the transaction. For point-of-sale transactions, the notice must be posted in a prominent and conspicuous location, and a copy of the notice must be given to the consumer to retain. The required copy of the notice may be given to the consumer at the time of the transaction or mailed to the consumer's address as soon as reasonably practicable after the EFT has been initiated.

Joint Guidance on the Community Reinvestment Act Regulations

In March, the Board, along with the FDIC and the OCC, issued joint final guidance to implement changes to the agencies' CRA regulations, which were effective in September 2005. The guidance answers frequently asked questions about the new CRA rules, including a new rule that provides CRA "community development" consideration for bank activities that revitalize or stabilize designated disaster areas. The guidance states that banks will receive consideration for activities they conduct within 36 months of an area's designation as a disaster area when such activities help to attract new, or to retain existing, businesses or residents to the area and are related to disaster recovery.

The guidance also implements a new rule that provides "community development" consideration for bank activities that revitalize or stabilize underserved or distressed middle-income rural areas. The guidance describes the types of activities that will receive consideration as well as how such activities will be evaluated. In addition, the guidance discusses the new community development test for intermediate small banks (banks that have assets of between $250 million and $1 billion).

Interagency Guidance on the Risks of Nontraditional Mortgage Products

In September, the Board, along with the OCC, the FDIC, the OTS, and the NCUA, issued final guidance to address the risks associated with the growing use of so-called nontraditional mortgage products, such as interest-only mortgages and payment-option adjustable-rate mortgages. 1 These products, which allow borrowers to defer repayment of the loan's principal and sometimes interest, are being offered to a wide spectrum of borrowers. Among other issues, the interagency guidance addresses concerns that some borrowers may not fully understand the risks of these products, including their potential for negative amortization.

Specifically, the agencies provided guidance in three primary areas: loan terms and underwriting standards, portfolio and risk-management practices, and consumer protection issues. The first section of the guidance advises financial institutions to ensure that their loan terms and underwriting standards for nontraditional mortgage products are consistent with prudent lending practices, which include considering whether a borrower has the capacity to repay a loan. The second section outlines the need for financial institutions to have strong risk-management standards, capital levels commensurate with the risk of their products and activities, and an allowance for loan and lease losses that reflects the collectibility of their loan portfolio. The third section describes recommended practices to ensure that financial institutions are providing consumers with clear and balanced information that allows them to understand the terms and associated risks of a loan before they choose a specific product or payment option. (See related box " Nontraditional Mortgages--Balancing Innovation, Regulation, and Education .")

Nontraditional Mortgages-- Balancing Innovation, Regulation, and Education

Homeownership has long been viewed as a fundamental step to furthering personal and financial well-being. A home is often the largest and most important asset individuals and families acquire, and the equity earned on a home can, over time, provide homeowners with financial flexibility and security. Consumers have benefited from public policies to encourage and facilitate homeownership, as well as from innovations in the financial services industry that have increased both the number of lenders and types of home loans available. While increased competition and product choice provide consumers with new opportunities, they also present many challenges for both borrowers, who must be prepared to evaluate their options, and for regulators, who seek to ensure consumer protections without hindering market innovation through overly restrictive regulation.

In recent years, so-called nontraditional mortgages, including interest-only and payment-option adjustable-rate mortgages, have become increasingly popular. Originally designed as niche products to meet the needs of certain borrowers, such as wealthy customers or customers who have seasonal or other fluctuations in their incomes, nontraditional mortgages are now commonplace among more-typical borrowers. In 2006, nontraditional mortgages accounted for one-third of all mortgage originations, compared with only one-tenth of mortgage originations in 2003. Nontraditional mortgages can provide borrowers with greater flexibility by allowing them to repay only interest for a period of time or to choose among other repayment options, in contrast to a fully amortizing loan that requires fixed payments throughout the loan term. The interest rate and payments are adjusted later in the term of a nontraditional mortgage in order to recapture repayment of principal. Because nontraditional mortgages typically allow a borrower to make lower payments early in the loan, these loans have become increasingly popular in high-cost housing markets.

But nontraditional mortgages can also carry significant risk, including negative amortization, which occurs when the amount of the loan increases over time, and "payment shock," which occurs when interest rate adjustments result in a much higher payment later in the loan term. Further, reports of aggressive marketing practices for these loans, as well as reported incidents of consumers receiving inadequate or misleading loan disclosures, have raised concerns among consumer groups, financial institution regulatory agencies, and some lawmakers that nontraditional mortgages are inappropriately marketed to and used by some borrowers. However, the need to ensure that consumer protections are in place for nontraditional mortgages must be balanced with the desire to encourage innovation and flexibility in the mortgage industry.

In 2006, the Federal Reserve Board took a multifaceted approach to responding to consumer-related issues in today's mortgage market, including the risks presented by the growing use of nontraditional mortgage products. During the summer, the Board convened a series of public hearings to discuss home equity lending markets and practices. After conducting initial outreach to an array of interested groups, Federal Reserve regulatory and research staff structured the hearings to include discussion panels on the impact of the 2002 changes to the Home Ownership and Equity Protection Act (HOEPA) regulations, as well as panels on key issues in the mortgage market. Topics included trends and issues associated with complex products, such as nontraditional mortgages and reverse mortgages, as well as efforts to provide consumers with pre- and post-purchase counseling and intervention, lender "best practices" and the role of mortgage brokers, and the results of research on state predatory lending laws. The hearings also explored consumer behavior in shopping for mortgage loans and discussed the challenges of designing more effective and informative consumer disclosures. Both lenders and consumer advocates participated in the hearings, which enabled diverse viewpoints on both the benefits and pitfalls of nontraditional mortgages to be presented.

Lenders testified that nontraditional mortgage loans are appropriately underwritten and have historically shown strong performance. Consumer advocates and state officials, on the other hand, testified that aggressive marketing and the complexity of these products increase the risk that a borrower will obtain a mortgage he or she does not understand and might not be able to afford. They also questioned whether additional loan disclosures would only overwhelm consumers, because the products are so complex. Board staff are considering the comments from these hearings, as well as insights gained from consumer focus groups and other sources of information, as they evaluate potential revisions to the mortgage disclosure requirements in Regulation Z.

Recognizing the important role of education in understanding mortgage transactions, the Board partnered with other federal supervisory agencies to improve the resources available to both consumers and lenders on nontraditional mortgages. For consumers, the Federal Reserve, in partnership with the Office of Thrift Supervision, updated the "Consumer Handbook on Adjustable-Rate Mortgages," which includes an in-depth discussion of nontraditional mortgages and illustrations of how loan payments may result in negative amortization. 1 The Board also published a consumer information brochure, "Interest-Only Mortgage Payments and Payment-Option ARMs--Are They for You?," which includes a glossary of lending terms, a mortgage shopping worksheet, and a list of additional information sources to help consumers evaluate whether these types of loans are right for them. 2 This publication stresses the importance of understanding key mortgage loan terms, warns of the risks consumers may face, and urges borrowers to be realistic about whether they can handle future payment increases. In addition, interagency guidance on nontraditional mortgages, issued in September, highlights the increased risk for lenders and borrowers that nontraditional mortgages can present. 3 The guidance discusses the importance of (1) carefully managing the potential heightened risk levels, for the benefit of both lenders and borrowers; (2) using prudent loan-structuring and -underwriting standards; (3) considering a borrower's repayment capacity; and (4) ensuring that consumers have sufficient information to understand the terms and risks before making a loan or payment choice.

The mortgage industry has proven to be innovative in developing a wide range of mortgage credit products. Through its supervisory responsibilities, research, consumer education, and outreach to communities and lenders, the Federal Reserve will continue to strive to balance such innovation in the financial services industry with responsive oversight and consumer protection.

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Report on Compliance with Consumer Dispute Provisions of the Fair Credit Reporting Act

In August, the Board and the FTC issued a joint report to Congress pursuant to section 313(b) of the Fair and Accurate Credit Transactions Act of 2003 (the FACT Act). In addition to other changes, the FACT Act amended the Fair Credit Reporting Act (FCRA) to enhance the FCRA's consumer dispute provisions. The joint report describes the extent to which consumer reporting agencies (CRAs) and furnishers of information to CRAs comply with the consumer dispute provisions of the FCRA. Before writing the report, the Board and the FTC conducted a study that examined several sources of information: public comments from consumers, CRAs, and consumer and industry groups; consumer complaints sent to the federal financial institution regulatory agencies; bank examination data on FCRA compliance; and other studies, reports, and data conducted or maintained by the federal financial institution regulatory agencies. The report found that most CRAs appear to be processing consumer disputes within the statutory time frame; however, there was disagreement as to the adequacy of the dispute investigations conducted by CRAs and furnishers of information to CRAs.

To ensure that the FACT Act provisions enhancing the consumer dispute process are given enough time to be effective, the Board and the FTC did not recommend any additional administrative or legislative actions at this time. However, as discussed in the report, the FTC and the Board will continue to monitor the performance of the dispute process, explore possible enhancements, and recommend actions, if appropriate.

Other Regulatory Actions

The Board also took the following regulatory actions during 2006:

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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 Federal Reserve 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 operations. 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 2006 reporting period, the Reserve Banks conducted CRA examinations of 276 banks: 27 were rated Outstanding, 248 were rated Satisfactory, none was rated Needs to Improve, and one was rated Substantial Noncompliance. 2

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

During 2006, the Board considered applications for several significant banking mergers. The Board approved the application by Capital One Financial Corporation, McLean, Virginia, to acquire North Fork Bancorporation, Inc., Melville, New York, in November; this acquisition was a major expansion of Capital One Corporation's relatively new retail banking operations. In addition, three large bank holding companies, National City Corporation, in Cleveland, Ohio; BB&T Corporation, in Winston-Salem, North Carolina; and Marshall & Ilsley Corporation, in Milwaukee, Wisconsin, each acquired two large banking organizations in 2006.

Several other significant applications are listed below.

The public submitted comments on each of these applications. Commenters expressed concerns that minority applicants were being denied mortgage loans more frequently than nonminority applicants; other concerns described included potentially predatory lending practices of subprime and payday lenders; potential adverse effects of branch closings; and lenders' failure to address the convenience and needs of low- and moderate-income communities. Many of the comments referenced pricing information on residential mortgage loans that was required to be reported beginning with the 2004 Home Mortgage Disclosure Act (HMDA) data. Commenters' concerns that minority applicants were more likely than nonminority applicants to receive higher-priced mortgages were largely based on observations of the 2004 and 2005 HMDA pricing data. 3

In total, the Board acted on twenty-four 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 thirty-six 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 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, examination and enforcement techniques, examiner training, and emerging issues. The staff 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 2006 reporting period, the Reserve Banks conducted 321 consumer compliance examinations--303 of state member banks and 18 of foreign banking organizations. 5

The Board periodically issues guidance for Reserve Bank examiners on consumer protection laws and regulations. In addition to updating examination procedures and guidance in concert with the other federal financial institution regulatory agencies, the Board issued guidance on state member banks' activities in disaster areas affected by the 2005 hurricanes in the Gulf Coast region. 6 As put forth in the guidance, state member banks located outside of the hurricane disaster areas will receive CRA consideration for their activities that revitalize or stabilize the disaster areas, if the banks have otherwise adequately met the needs of their assessment areas. (See "Response to the 2005 Hurricanes" later in this chapter.")

Fair Lending

The Federal Reserve is committed to ensuring that every institution it supervises complies fully with the federal fair lending laws--the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. Fair lending reviews are conducted regularly within the supervisory cycle. Additionally, examiners may conduct fair lending reviews outside of the usual supervisory cycle, if warranted. To promote rigorous and consistent fair lending enforcement, the Division of Consumer and Community Affairs staff coordinate investigations of potential fair lending violations with Reserve Bank staff.

The Federal Reserve enforces the ECOA and the provisions of the Fair Housing Act that apply to lending institutions. The ECOA prohibits creditors from discriminating against any applicant, in any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, 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, national origin, handicap, familial status, or sex.

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 Department of Justice. If a violation of the ECOA also constitutes a violation of the Fair Housing Act and a referral is not made to the Department of Justice, the matter will be referred to the Department of Housing and Urban Development.

During 2006, the Board referred the following matters to the Department of Justice, on the basis of these findings:

Since the addition of pricing information to the data reported under HMDA, the Federal Reserve has used the pricing data to facilitate its fair lending enforcement efforts. (See "Reporting on Home Mortgage Disclosure Act Data" later in this chapter.) The Federal Reserve does not rely on HMDA data alone in its enforcement efforts, however, because HMDA data do not include many potential determinants of loan pricing, such as the borrower's credit history and the loan-to-value ratio. Instead, the Federal Reserve analyzes the HMDA pricing data in conjunction with other fair lending risk factors--such as discretionary pricing and incentives for loan officers to charge higher prices--to identify lenders that are at risk for pricing discrimination. 8 These lenders will receive a targeted pricing review. During a targeted pricing review, examiners collect additional information (including factors that are not available in the HMDA data) to determine whether a pricing disparity by race or ethnicity is fully attributable to legitimate factors, or whether any portion of the pricing disparity is attributable to discrimination.

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 and any personal property securing the loan are covered by flood insurance for the term of the loan. The act requires the Board and other federal financial institution regulatory agencies 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 2006, the Board imposed civil money penalties against four state member banks. The penalties, which were assessed via consent orders, totaled $32,050.

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. 9 In 2006, the FFIEC revised examination procedures for the Fair Credit Reporting Act (FCRA). Section 604(g) of the FCRA generally prohibits creditors from obtaining and using medical information in connection with any determination of a consumer's eligibility, or continued eligibility, for credit unless permitted by regulation. The agencies have issued regulations creating exceptions to the statute's general prohibition; therefore, the FCRA examination procedures have been revised to reflect these new regulations. In addition, the FFIEC revised the CRA examination procedures for large banks, small banks, wholesale or limited-purpose banks, and banks operating under strategic plans. The revisions incorporate the CRA regulatory changes that were approved in 2005.

In 2006, the four banking agencies (the FDIC; the Federal Reserve, the OCC; and the OTS) convened the first Interagency Consumer Affairs Conference. The conference's objectives were to (1) discuss the banking regulatory issues that affect consumers, (2) determine more-effective ways for the agencies to share information about the complaints they receive, and (3) identify best practices for communicating and interacting with the public. These agencies plan to hold regular consumer affairs conferences; the next conference is scheduled for October 2007.

Finally, the Board, the OCC, and the 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. 10

Response to 2005 Hurricanes

In 2006, the Federal Reserve and the other banking agencies continued initiatives to help financial institutions affected by the 2005 hurricanes in the Gulf Coast. The Board, the FDIC, the OCC, and the OTS sponsored an interagency forum, "The Future of Banking in the Gulf Coast: Helping Banks and Thrifts Rebuild Communities," that focused on the short-term and long-term challenges facing these financial institutions, including how they can help meet the needs of their local communities. In addition to officials from the sponsoring agencies, senior executives from both large and small financial institutions and representatives from community development corporations and a number of other federal agencies participated in the forum.

The FFIEC member agencies and the Conference of State Bank Supervisors released a booklet, "Lessons Learned from Hurricane Katrina: Preparing Your Institution for a Catastrophic Event." 11 Using financial institutions' experiences and lessons learned during Hurricane Katrina and its aftermath, the booklet is intended to help other institutions plan for an emergency or a catastrophic event.

The FFIEC member agencies, along with state financial institution regulators, also conducted a public service campaign to encourage banks, thrifts, and credit unions to continue working with borrowers affected by Hurricane Katrina or Hurricane Rita. Public service announcements (PSAs) were distributed to radio stations and print publications in geographic areas that had the highest concentrations of people affected by the hurricanes. The radio PSAs played more than 1,495 times on thirty-one stations, reaching an estimated audience of 4.13 million people in the targeted regions. The print PSAs appeared more than sixteen times in ten newspapers and other local publications, reaching approximately 565,000 people.

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 consumer compliance examiner training curriculum consists of six courses focused on various consumer protection laws, regulations, and examining concepts. In 2006, these courses were offered in ten sessions to more than 195 consumer compliance examiners and System staff members.

Board and Reserve Bank staff regularly review the core curriculum for examiner training, updating subject matter and adding new elements as appropriate. During 2006, staff conducted curriculum reviews of the following two courses in order to incorporate technical changes in policy and laws, along with changes in instructional delivery techniques:

When appropriate, courses are delivered via alternative methods, such as the Internet or other distance-learning technologies. The CRA course discussed above uses 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. The computer-based instruction is reinforced through daily conference calls and discussions on electronic bulletin boards. The Fair Lending course discussed above also uses computer-based training.

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

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.

In response to the growth of the subprime-loan market, the Federal Reserve updated Regulation C in 2002. The revisions, which became effective in 2004, require lenders to collect price information for loans they originated in the higher-priced segment of the home-loan market. When applicable, lenders report the number of percentage points by which a loan's annual percentage rate exceeds the threshold that defines "higher-priced loans." The threshold is 3 percentage points or more above the yield on comparable Treasury securities for first-lien loans, and 5 percentage points or more above that yield for junior-lien loans. The HMDA data collected in 2004 and released to the public in 2005 provided the first publicly available loan-level data about loan prices. The FFIEC released the 2005 HMDA data to the public in September 2006.

A September 2006 article published by Federal Reserve staff in the Federal Reserve Bulletin uses the 2005 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. 12

As in 2004, relatively few lenders accounted for most of the higher-priced loan originations in 2005. Of the 8,850 home lenders reporting HMDA data, 1,120 of them made 100 or more higher-priced loans. The 10 home lenders that had the largest volume of higher-priced loans accounted for about 59 percent of all such loans. Higher-priced lending is also concentrated by price: in 2005, the vast majority of higher-priced loans had annual percentage rates within 3 percentage points of the reporting thresholds. As in 2004, the majority of all loan originations were not higher priced in 2005, however, the incidence of higher-priced lending did increase substantially--26.2 percent in 2005, compared with 15.5 percent in 2004. Some of the increase in the incidence of higher-priced lending is attributed to changes in the interest rate environment from 2004 to 2005, as well as to changes in borrower profiles and lender practices.

Loan pricing is a complex process that may reflect a wide variety of factors about the level of risk a particular loan or borrower presents to the lender. As a result, the prevalence of higher-priced lending varies widely. First, the incidence of higher-priced lending varies by product type. For example, manufactured-home loans show the greatest incidence of higher-priced lending, because these loans are considered higher risk. In addition, first-lien mortgages are generally less risky than comparable junior-lien loans, and the pricing for these loans reflects their risk profiles: 25.7 percent of first-lien refinance loans were reported as higher-priced in 2005, compared with 30.2 percent of comparable junior-lien loans.

Second, higher-priced lending varies widely by geography. As in 2004, many of the metropolitan areas that reported the greatest incidence of higher-priced lending were in the southern region of the country. Several metropolitan areas on the West Coast also had an elevated incidence of higher-priced lending in 2005. For example, in many metropolitan areas in the South, Southwest, and West, 30 percent to 40 percent of the homebuyers who obtained conventional loans in 2005 received higher-priced loans.

Third, the incidence of higher-priced lending varies greatly among borrowers of different races and ethnicities. In 2005, as in 2004, blacks and Hispanics were much more likely than non-Hispanic whites and Asians to receive higher-priced loans. For example, in 2005, 55 percent of black borrowers, and 46 percent of Hispanic borrowers, received higher-priced home-purchase loans, compared with only 17 percent of non-Hispanic white or Asian borrowers. To a large extent, these differences reflect a segmentation of the home-loan market, that is, black and Hispanic borrowers were much more likely to obtain mortgage loans from institutions that specialize in higher-priced lending.

Because HMDA data lack information about credit risk and other legitimate pricing factors, it is not possible to determine from HMDA data alone whether the observed pricing disparities and market segmentation reflect discrimination. When analyzed in conjunction with other fair lending risk factors and supervisory information, however, the HMDA data can facilitate fair lending supervision and enforcement. (See " Fair Lending " earlier in this chapter.)

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. 13

Regulation B (Equal Credit Opportunity)

The FFIEC agencies reported that 87 percent of the institutions examined during the 2006 reporting period were in compliance with Regulation B, compared with 85 percent for the 2005 reporting period. The most frequently cited violations involved the failure to take one or more of the following actions:

During this reporting period, the OTS issued one supervisory agreement to a savings association for its alleged violations of the Equal Credit Opportunity Act (ECOA) and Regulation B, as well as other consumer regulations. The other FFIEC agencies did not issue any formal enforcement actions relating to Regulation B during the reporting period.

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, an examination conducted by the National Association of Securities Dealers, Inc., found one violation of Regulation B at a member firm. The firm's written supervisory procedures did not contain information regarding the denial of credit to customers. However, none of these other agencies initiated any formal enforcement actions relating to Regulation B during 2006.

Regulation E (Electronic Fund Transfers)

The FFIEC agencies reported that approximately 95 percent of the institutions examined during the 2006 reporting period were in compliance with Regulation E, which is comparable to the level of compliance for the 2005 reporting period. The most frequently cited violations involved the failure to take one or more of the following actions:

The Federal Trade Commission (FTC) filed two complaints in federal district court for alleged violations of Regulation E and federal statutes. Among other allegations, one complaint alleged that the defendants charged consumers' credit cards or debited their bank accounts, both on a recurring basis, to pay for a discount health plan, without obtaining the consumers' authorization for preauthorized electronic fund transfers. The other complaint alleged that defendants enrolled consumers in a mail-order program for dietary supplements and then automatically billed consumers on a recurring basis, without obtaining their authorizations for the recurring debits. The 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 2006 reporting period were in compliance with Regulation M, which is comparable to the level of compliance for the 2005 reporting period. 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 98 percent of the institutions examined during the 2006 reporting period were in compliance with Regulation P, compared with 97 percent for the 2005 reporting period. The most frequently cited violations involved the failure to take one or more of the following actions:

The 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 85 percent of the institutions examined during the 2006 reporting period were in compliance with Regulation Z, compared with 80 percent for the 2005 reporting period. The most frequently cited violations involved the failure to take one or more of the following actions:

In addition, 106 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 $1.5 million to consumers for understating the annual percentage rate or the finance charge in their consumer loan disclosures.

The OTS issued three supervisory agreements for violations of a number of consumer regulations, including Regulation Z, during the reporting period. The other FFIEC agencies did not issue any formal enforcement actions relating to Regulation Z during the reporting period.

The Department of Transportation investigated one air carrier for its improper handling of credit card and cash refunds for unused refundable tickets. As a result of this investigation, the air carrier made the required refunds and entered into a consent order under which it was directed to cease and desist from further violations of the credit refund requirements of Regulation Z. The air carrier was assessed a civil penalty of $50,000.

The FTC continued litigation against a mortgage broker and its principals for their alleged violations of Regulation Z and federal statutes, in connection with advertisements for extremely low mortgage rates. In 2004, the court entered a stipulated preliminary injunction against the defendants. In 2006, the defendant's chief executive filed for bankruptcy, following his 2005 agreement to--among other terms--pay the FTC $400,000 under a stipulated order releasing him from confinement for civil contempt of the 2004 stipulated preliminary injunction. The FTC filed a proof of claim for amounts it is owed in the underlying federal district court action and the contempt action. Litigation is ongoing in this case.

In 2006, the FTC settled charges in a case alleging that a defendant violated Regulation Z and federal statutes. The defendant allegedly engaged in misrepresentation about refunds for tax information products. After accepting product returns from consumers, or otherwise acknowledging that the consumers were owed refunds, the defendant failed to credit the consumers' credit card accounts in a timely fashion.

Regulation AA (Unfair or Deceptive Acts or Practices)

The FFIEC agencies reported that more than 99 percent of the institutions examined during the 2006 reporting period were in compliance with Regulation AA, which is comparable to the level of compliance for the 2005 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 92 percent of institutions examined during the 2006 reporting period were in compliance with Regulation CC, compared with 93 percent for the 2005 reporting period. The most frequently cited violations involved the failure to take one or more of the following actions:

The OTS issued one supervisory agreement 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 2006 reporting period were in compliance with Regulation DD, which is comparable to the level of compliance for the 2005 reporting period. The most frequently cited violations involved the failure to take one or more of the following actions:

The FFIEC agencies did not issue any formal enforcement actions related to Regulation DD during the reporting period.

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Consumer Complaints

Consumer Complaints against State Member Banks, by Classification, 2006
Classification Number
Regulation B (Equal Credit Opportunity) 53
Regulation C (Home Mortgage Disclosure Act) 0
Regulation E (Electronic Fund Transfers) 73
Regulation H (Bank Sales of Insurance) 1
Regulation H (Flood Insurance) 3
Regulation M (Consumer Leasing) 1
Regulation P (Privacy of Consumer Financial Information) 17
Regulation Q (Payment of Interest) 0
Regulation Z (Truth in Lending) 243
Regulation BB (Community Reinvestment) 1
Regulation CC (Expedited Funds Availability) 39
Regulation DD (Truth in Savings) 60
Fair Credit Reporting Act 117
Fair Debt Collection Practices Act 20
Fair Housing Act 3
Regulations T, U, and X 0
Real Estate Settlement Procedures Act 10
Total 641

The Federal Reserve investigates complaints against state member banks and forwards to the appropriate enforcement agency any complaints that it receives that involved other creditors and businesses. Each Reserve Bank investigates complaints against state member banks in its District. In 2006, the Federal Reserve received 641 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 641 complaints about regulated practices, 70 percent involved consumer loans: 2 percent alleged discrimination on a basis prohibited by law (race, color, religion, national origin, sex, marital status, handicap, 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 the remainder concerned other credit-related practices, such as fair credit reporting; billing-error resolution; and credit card rates, terms, and fees. Twenty-eight percent of the complaints involved disputes about insufficient-funds charges and procedures, amounts withdrawn from a consumer's account, funds availability, and other deposit account practices, including electronic fund transfers; the remaining 2 percent concerned disputes about trust services or other practices. (See tables.)

In 97.5 percent of the 641 complaints against state member banks regarding regulated practices that were investigated in 2006, the banks had correctly handled the customer's account. The remaining 2.5 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.

Complaints against State Member Banks that Involve Regulated Practices, 2006
Subject of complaint All complaints Complaints involving
Number Percent Number Percent
Total 641 100 16 2.50
Discrimination alleged  
Real estate loans 3 0.47 0 0
Credit cards 4 0.62 0 0
Other loans 3 0.47 0 0
Other type of complaints  
Real estate loans 57 8.89 4 7.02
Credit cards 342 53.35 3 0.88
Other loans 41 6.40 3 2.44
Deposits 108 16.85 3 2.78
Electronic fund transfers 73 11.39 5 6.85
Trust services 1 0.16 0 0
Other 9 1.40 0 0

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 2006, the Federal Reserve received more than 1,300 complaints against state member banks that involved unregulated practices. The most common complaints involved checking accounts and credit cards. Consumers most frequently complained about problems with either opening or closing an account (113 complaints), issues involving fraud (104), insufficient-funds charges and procedures (77), and concerns over specific interest rates, terms, and fees on credit cards (70). The remainder of the complaints concerned a wide range of unregulated practices involving credit cards, including errors or delays in processing consumers' payments, the amounts banks charged for late payments, and overlimit fees and procedures.

Complaint Referrals to HUD

In accordance with a memorandum of understanding between HUD and the federal bank regulatory agencies that requires that a complaint alleging a violation of the Fair Housing Act be forwarded to HUD, in 2006 the Federal Reserve referred three complaints to HUD that alleged state member bank violations of the Fair Housing Act. In two of the three cases, the Federal Reserve's investigations revealed no evidence of illegal discrimination. The remaining case was pending at year-end.

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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, in March, June, and October, and are open to the public. (For a list of members of the council, see the section " Federal Reserve System Organization .")

During their March meeting, council members discussed proposed changes to Regulation E, which implements the Electronic Fund Transfer Act (EFTA). The proposed changes addressed payroll card accounts, specifically the disclosure and notification requirements of financial institutions that provide payroll card account services to consumers. Under the interim final rule, financial institutions are granted relief from the requirement to provide consumers with paper periodic statements--if they provide the information in periodic statements to consumers through alternative means (such as electronically or by telephone). Both industry and consumer representatives generally supported the proposed changes and agreed that their scope and approach effectively addressed consumer protection issues. Several industry representatives noted that substituting alternative methods for the delivery of account information appropriately balances consumers' rights and their need to access their accounts, on the one hand, with financial institutions' potential compliance costs, on the other. Some consumer representatives, however, suggested that the periodic statements are an important educational tool for consumers and, therefore, consumers would benefit from receiving paper periodic statements.

Council members also discussed proposed changes to Regulation Z, which implements the Truth in Lending Act (TILA), at their March meeting. Members shared their views on whether the Board should establish a standard cutoff time for the crediting of payments on open-end credit accounts. The council did not reach a consensus on a specific cutoff time; however, members noted that such a cutoff would have important consequences, including high fees and increased interest rates, for consumers who make late payments. Several members suggested that the need to provide consumers with more transparency about the costs and fees imposed as a result of late payments may be greater than the need to establish cutoff times for the crediting of payments. Council members also discussed a TILA amendment that requires creditors that offer open-end credit accounts to provide consumers with disclosures, on each periodic statement, about the effects of making only minimum payments on their accounts. Members expressed a wide range of views on whether such disclosures would be meaningful and useful to consumers; members also shared concerns about ensuring the accuracy of the disclosures.

During its March and June meetings, the council discussed issues related to the Board's public hearings on the home equity lending market, as well as the adequacy of existing consumer disclosures and protections. Members discussed the Board's 2002 revisions to the Home Ownership and Equity Protection Act (HOEPA) rules and their effect on consumer protections and the availability of credit in the high-cost and subprime-lending markets. The council also discussed several issues related to how consumers shop for credit and how that process may affect the loan terms they ultimately receive. Members discussed the increased role that mortgage brokers play in the loan-making process--and whether this role highlights a need for additional regulation of brokers, specifically regulation on the broker practice of directing potential borrowers to certain mortgage products. Members addressed the need to strengthen consumer disclosures to ensure that borrowers understand key credit terms and costs, particularly for mortgage products that feature interest-only periods, prepayment penalties, and adjustable or "teaser rates." Several members also expressed a need for additional research on consumer behavior in the home mortgage market.

In June, the council discussed several issues related to financial literacy, including goals for financial education programs, methods for educating consumers, and how to measure and evaluate the effectiveness of financial education programs. Members identified financial education as a fundamental tool for helping consumers build and preserve assets. Because financial literacy not only enhances the well-being of individuals or households but also strengthens neighborhoods and communities, council members support (1) making financial literacy a national public policy priority and (2) creating national education initiatives and more-formalized methods to train and educate consumers.

At the October meeting, members also discussed proposed regulations and guidelines to implement provisions of the Fair and Accurate Credit Transactions Act (FACT Act) that require financial institutions to identify "red flags" for detecting possible cases of identity theft. Most industry representatives expressed the need for more-flexible guidelines that would allow financial institutions to use a risk-based approach to address identity-theft risks, which change rapidly. Consumer representatives were concerned that the proposed guidelines give covered institutions and creditors too much discretion over their identity-theft prevention and detection policies. Council members also shared their views on the implementation of the proposed regulations, including the staff training requirement and requirements for covered institutions to develop and implement a written identity-theft prevention program.

At their October meeting, members discussed the importance of creating greater incentives to encourage investment in affordable housing. Homeownership is a fundamental part of a consumer's asset-building strategy; the availability of affordable housing in a neighborhood can create economic opportunities that, in turn, support future investments in entrepreneurship and education. Members noted that financial institutions play a critical role by providing mortgage credit to consumers and by financing the development of affordable housing. They highlighted the need for federal bank regulators to play a larger role by providing institutions with greater incentives for (1) meeting affordable housing needs and (2) expanding their outreach to local community organizations, as part of their community reinvestment strategies.

During each of their meetings this past year, council members discussed interagency guidance on managing the potential heightened risk of new and emerging residential mortgage products, often referred to as "nontraditional," "alternative," or "exotic" mortgage loans. Members generally supported the guidance, noting its importance in light of the recent proliferation and use of nontraditional mortgage products, especially by consumers whose household incomes are not keeping up with home-price appreciation. Members generally agreed that these products do not present problems for some borrowers. But the loans are risky for consumers whose cash flows or income projections may limit their ability to repay, who may not have the capacity or discipline to manage the loan, or who are not fully informed about the terms and conditions such loans carry.

Several members expressed concern that the guidance has given certain mortgage originators a competitive advantage, since the key principles of the guidance apply only to banking and thrift organizations and federal credit unions. Others reiterated this concern by emphasizing that the agencies are only providing guidance rather than creating requirements that could be enforced by consumers or law enforcement agencies. Members also commented on the proposed illustrations of consumer information, which were part of the guidance. The illustrations are designed to help borrowers better understand the features of nontraditional mortgages. The council was generally supportive of the illustrations. Members stated that the illustrations highlight important information, such as the costs, terms, features, and risks of a loan, for borrowers. However, members expressed a need to include additional loan information, such as information on the risk of payment shock to the consumer, the costs of reduced-documentation loans, prepayment penalties, and the potential for negative amortization of the loan.

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Consumer Education and Research

The Consumer Education and Research section produces the Board's consumer education materials and supports the Board's consumer outreach initiatives. Section staff also conduct research in support of the division's policy development and community development functions. For example, research staff analyze the annual HMDA data, which are then used in the monitoring and enforcement of the fair lending laws.

The Federal Reserve maintains a consumer information web site ( ) that contains publications and educational materials related to the Board's consumer regulations. In 2006, staff produced or updated the following publications on nontraditional mortgages:

In addition, the Board's brochure "How to File a Consumer Complaint about a Bank," was updated. (The brochure is available in both English and Spanish.) Print and web-based versions of these publications are available on the web site.

Throughout the year, Board staff participated in a number of financial education events, including events for community members, federal employees, and congressional staff. The Board continued to work with the interagency Financial Literacy and Education Commission (FLEC); last year, staff helped update and expand the FLEC's web site to incorporate links to Reserve Bank consumer education resources. In their speeches and other appearances, Board members underscored the importance of financial education to an individual's economic well-being. Former Governor Mark Olson spoke at the press conference for the announcement of FLEC's National Strategy for Financial Education in April. Chairman Ben Bernanke testified on the Federal Reserve's role in financial education before the U.S. Senate Committee on Banking, Housing, and Urban Affairs in May. 14

In cooperation with the Department of Defense, the U.S. Army, and Army Emergency Relief (a private nonprofit organization), staff are studying whether a two-day financial education program had an impact on how the participating soldiers manage their finances. At this stage, baseline data have been collected, and staff will be working to gather follow-up data.

Research on Financial Information and Disclosures

A financial institution is required to provide consumers with disclosures about its products and services, including disclosures about its privacy policy or the terms of a loan. The Federal Reserve is one of seven agencies working to develop more "consumer-friendly" disclosures, that is, disclosures written in clear, understandable language that provide information a consumer can use to compare financial services providers. In the spring, the agencies released a report that summarized their research on developing a comprehensible financial privacy notice for consumers. 15 The Financial Services Regulatory Relief Act of 2006, which was signed in October, subsequently required the federal financial regulatory agencies to develop a model privacy notice. The design, format, and language of the model notice must be easily understood and allow consumers to compare the privacy policies of different financial institutions.

As part of its overall effort to improve consumer disclosures, the Board studied how consumers use different types of information sources--both the quantity and quality of the sources--and whether this information affected their credit and investment decisions. This study, in addition to the research on privacy notices, will be used in the upcoming review of the Board's open-end credit regulations. The Board has contracted with a market research firm to conduct formative and usability testing on credit card disclosures, including the disclosures used in solicitation letters, applications, periodic statements, and change-in-terms notices. Consumer testing will continue in early 2007; the Board will consider data collected in these sessions as it develops new proposed rules under Regulation Z.

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Promotion of Community Economic Development and Access to Financial Services in Historically Underserved Markets

In 2006, 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 improving the sustainability and financial capacity of community development organizations, creating asset-building opportunities for low-income individuals, and promoting initiatives to help homeowners preserve this important asset and avoid foreclosure. Activities included publishing newsletters and articles, sponsoring conferences and seminars, conducting research, and supporting the dissemination of information to both general and targeted audiences.

As a decentralized function, the Community Affairs Offices (CAOs) at each of the twelve Reserve Banks design activities in response to the needs of communities in the Districts they serve in conjunction with staff from the Board. The 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. Similarly, the Board's CAO promotes and coordinates Systemwide efforts, in addition to engaging in activities and exploring issues that have public policy implications. In 2006, the Board and the Reserve Banks collaborated on a number of activities that focused on asset-building for individuals and strengthening community development organizations, while continuing their efforts to expand public understanding of the need to enhance access to affordable credit in underserved markets.

Collaborative Efforts

The Reserve Banks and the Board continued their work on two substantial collaborative efforts over the past year. The System resumed its asset-building and wealth-creation partnership with the CFED, a nonprofit organization dedicated to expanding access to economic opportunity by bringing together community development practitioners, public policy analysts, and private-sector representatives. In 2006, the Federal Reserve System and the CFED held the last three in a series of five forums convening leaders in economic policy, community development, philanthropy, and the financial industry. Starting with the initial forum in June 2005, the forums were convened to encourage more individuals to engage in asset-building activities, such as homeownership, entrepreneurship, savings, and investment. One session, held in Kansas City, focused on the unique challenges to developing asset-building programs in rural communities; the forum was cosponsored by the Reserve Banks of Kansas City, Dallas, Minneapolis, and St. Louis. A second meeting, hosted by the Reserve Bank of Atlanta, explored asset-building for low- and moderate-income savers, but from the perspective of financial institutions. The discussions focused on developing products to help this population begin or expand its saving efforts. The final forum, hosted by the Board of Governors, gathered a roundtable of leaders in the asset-building field. The leaders reflected on the results of the regional forums and identified next steps to help the industry progress. 16

A related initiative, led by the San Francisco Reserve Bank, was a call for papers on asset-building issues and strategies. Twenty-eight of the more than 100 papers received were presented at a research forum during CFED's 2006 Assets Learning Conference, "A Lifetime of Assets: Building Families, Communities and Economies ." More than 1,000 participants attended; staff from each Reserve Bank and the Board were actively involved in planning the conference, including developing the agenda, presenting research, and serving as moderators and participants in formal discussion groups. The Board's Community Affairs officer delivered a keynote address during the conference. Board staff presented research on the asset portfolios of low-income households and how these assets have changed over the past fifteen years (from 1989 to 2004). Staff also explored homeownership and foreclosure patterns that affect the asset-building capabilities of low-income households. 17

Beyond the CFED partnership, Reserve Banks have been active in the promotion and development of regional asset-building coalitions. Staff from the Richmond Reserve Bank chaired the planning committee for the South Carolina Asset Development Collaborative, and staff from the San Francisco Reserve Bank facilitated both the Oregon Asset Building Convergence and the Washington State Asset Building Summit. Other Reserve Banks continued to provide advisory services for more than a dozen other state and regional asset-building coalitions throughout the country, such as the Houston Asset Building Coalition, Minnesota Saves, and the Nashville Wealth Building Alliance.

Another Systemwide collaboration was a partnership with the Aspen Institute, a national research and leadership development organization. The goal of this collaboration was to identify sustainable and scalable business models that community development organizations can use to more effectively advance their goals. In 2006, the Federal Reserve System and the Aspen Institute cosponsored four conferences around the country that explored a variety of business models that have led to successful community development finance programs. A forum at the San Francisco Reserve Bank highlighted funding efforts for community development financial institutions (CDFIs), individual development account programs, charter schools, and child care facilities. A forum at the Chicago Reserve Bank focused on collaborative efforts to promote the earned-income tax credit by helping low- to moderate-income families prepare their taxes. Participants at a forum at the New York Reserve Bank examined several collaborative efforts undertaken by development organizations, including efforts to share infrastructure resources (facilities, equipment, etc.), collaborate on fundraising, and pool other resources and strategies to increase their organizational capacity. Finally, a forum at the Dallas Reserve Bank focused on the formation of potential new sources of capital for CDFIs and community development corporations. These forums generated ongoing Systemwide research on various aspects of public and private subsidies for community development. Staff from several of the Reserve Banks and the Board are currently involved in a research project to measure the magnitude of the need for public and private groups to subsidize community development, measure how effectively these subsidies are utilized, and identify emerging strategies for optimizing the leverage of subsidy dollars.

Access to Financial Services

Staff from around the System have continued working on several initiatives to enhance access to affordable credit in currently underserved markets. In 2006, the San Francisco Reserve Bank and the Board partnered to study issues related to the creation of a secondary market for community development loans. The San Francisco Reserve Bank devoted an issue of its Community Development Investment Review to an overview of the community development finance industry, which included advice on best practices from industry practitioners. The Board and the San Francisco Reserve Bank followed up by hosting a conference in Washington, D.C., for lenders, investors, and financial intermediaries, in addition to policymakers and academics. The conference sought to (1) assess the status of the industry and (2) discuss ways to innovate and collaborate to increase liquidity for community development lending. The next edition of the Review included the conference proceedings and essays by conference participants laying out a possible road map for the creation of a secondary market for community development loans, and included remarks by Governor Kroszner, who keynoted the conference.

The Minneapolis Reserve Bank has taken the lead in another initiative to expand access to financial services through its work with Native American communities. On many reservations, access to affordable credit is often limited by ambiguities and inconsistencies in the various tribal laws that govern secured transactions. In response, Minneapolis Reserve Bank staff have worked to help investors and lenders better understand the property rights of Native Americans. For the past few years, the Reserve Bank staff have worked to create an improved legal structure that tribes can use to facilitate their efforts to borrow from off-reservation partners or other tribes. In 2005, staff were part of a team that completed a draft Model Tribal Secured Transactions Act (MTA) for the National Conference of Commissioners on Uniform State Laws (NCCUSL). Throughout 2006, staff supported education and dissemination efforts for the MTA by providing technical assistance and making numerous presentations, including one to tribal judges, on the benefits of tribal adoption of the MTA. During the year, the Crow tribe adopted the MTA, three additional tribes in Montana passed resolutions to adopt it, and approximately fifteen tribes were in various stages of considering adoption of the MTA.

Resources, Advisory Services, and Outreach

In 2006, the Board released an update of the Federal Reserve Fiscal Impact Tool (FIT). First released in 2003, the FIT software helps users analyze the fiscal impacts of economic development in small- and mid-sized communities. FIT supports economic development planning by producing a cost-benefit analysis of proposed development projects; FIT estimates a project's impact on local sales and property tax revenues and on costs to local government. To supplement this analysis, FIT integrates a wide array of data, at the city, county, and state levels, on incorporated locations in the United States. The 2006 update contains more and newer data, along with a module that allows for time discounting and the calculation of a net present value. The Board distributed more than 1,000 copies of the updated software in 2006. Users include state and local economic development organizations, academics, and consultants. A recent survey of users identified two communities--El Paso, Texas, and Lincoln, Nebraska--that have employed FIT to assist in setting limits on incentives for development projects.

During the past year, the foreclosure rate has risen for certain housing markets. Low- and moderate-income families and communities may be especially at risk for foreclosure. Consequently, the Board and the Reserve Banks have enhanced their efforts to preserve homeownership among these populations. The Board continued its involvement with NeighborWorks® America (NeighborWorks), a national network of more than 240 community-based organizations providing financial support, technical assistance, and training for community rehabilitation efforts. A member of the Board of Governors serves on the NeighborWorks board of directors, and members of the Board's staff serve on the organization's Center for Homeownership Education and Counseling. Staff from the Reserve Banks have led regional collaborative efforts with NeighborWorks through their participation in foreclosure-prevention training workshops for homeownership counselors. The Banks have also provided support to and endorsement of state-level activities, for example, the Minneapolis Reserve Bank's participation in Minnesota's Emerging Market Homeownership Initiative and the Cleveland Reserve Bank's promotion (through the Pittsburgh Branch) of the foreclosure-mitigation efforts of the Pennsylvania secretary of banking.

Over the past year, the Board continued its outreach activities to provide the public with information 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 policy issues. Board staff periodically met with financial institutions, community groups, and other members of the public in formal and informal settings. For example, the Board expanded its prior work with Operation HOPE, a national nonprofit organization dedicated to developing and implementing programs focused on connecting minority communities with mainstream, private-sector resources and to empowering underserved communities. The System has collaborated with Operation HOPE in prior years, and the director of the Board's Division of Consumer and Community Affairs serves on the Operation HOPE Mid-Atlantic Advisory Board. In 2006, Chairman Bernanke delivered a keynote address at the "Anacostia Economic Summit," a conference sponsored by Operation HOPE and the District of Columbia. (Anacostia is an underdeveloped neighborhood in southeast Washington, D.C.) The summit focused on ways to encourage revitalization in this area and highlighted the importance of obtaining both targeted public and private investment to jump-start the development efforts in this and other underserved neighborhoods. In preparation for the conference, Chairman Bernanke toured the Anacostia community with lenders, community development leaders, and local property developers to gain firsthand insight into the community's redevelopment.

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1. See . Return to text
2. The 2006 reporting period for examination data was July 1, 2005, through June 30, 2006. Return to text
3. HMDA requires lenders to collect price information on loans they originated in the higher-priced segment of the home-loan market. "Higher-priced mortgages" refers to mortgage loans whose annual percentage rates are 3 percentage points or more over the yield on comparable Treasury securities on first-lien loans, and 5 percentage points or more over that yield on junior-lien loans. 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 guidance was released in a letter (CA 06-5) to the Reserve Banks on February 24, 2006 ( ). Return to text
7. The Board referred this case to the Department of Justice in December 2005. It was not included in the 2005 Annual Report because the referral occurred outside the reporting period for the 2005 report (July 1, 2004, through June 30, 2005). It is included in the 2006 Annual Report, which otherwise reports referrals occurring during the 2006 calendar year. Return to text
8. See the Interagency Fair Lending Examination Procedures for a full discussion of fair lending risk factors ( (200kb pdf) ). Return to text
9. The FFIEC member agencies are the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA). Return to text
10. See the June 13, 2006, press release ( ). Return to text
11. The booklet is available on the FFIEC's web site ( ). Return to text
12. The complete article is available at (580 kb pdf). Return to text
13. Because the agencies use different methods to compile the data, the information presented here supports only general conclusions. The 2006 reporting period was July 1, 2005, through June 30, 2006. Return to text
14. See . Return to text
15. See . Return to text
16. Summaries of the forum sessions are available on the CFED web site ( ). Return to text
17. The research papers presented at this conference are available at . Return to text

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