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.
The Federal Reserve System's various consumer protection and community development roles were the subject of great interest in 2007. Consumer protection concerns moved to the forefront of public dialogue as lawmakers, regulators, the media, and consumers scrutinized various practices being used in the financial services marketplace, particularly in the markets for subprime mortgages and credit cards. Intense examination of the policies and practices at issue has revealed the complexity of the current financial services marketplace. Deregulation and technological and financial innovation over the last two decades fueled the growth of this market, increasing competition and consumer choice. However, the number and types of consumer financing products and providers now available means consumers have to become more vigilant and well-informed as they shop for financial products and manage their personal finances. The Federal Reserve has strategically used its regulatory and supervisory authorities to address consumer protection issues in today's complex consumer financial services marketplace and to promote consumer education and community development.
Homeownership has long been a highly valued goal of both policymakers and consumers. In response to the demand for home loans, the mortgage industry has introduced innovative and creative loan products into the consumer financial services market. As a result, consumers' access to home mortgage credit has expanded considerably over the last decade. Market opportunities and technological advancements have contributed to the growth of the mortgage industry. As the mortgage market grew, some lenders employed nontraditional underwriting and risk-layering strategies in order to capture new market segments, particularly consumers who may not have been able to qualify for credit under more-traditional mortgage-underwriting criteria. Although innovation in the mortgage market has made access to mortgage credit possible for increasing numbers of households, loan products have become increasingly complex--and underwriting standards have loosened in recent years, particularly in the subprime market. (See related box "An Overview of the Subprime Mortgage Market.")
At $11 trillion, the depth and breadth of the U.S. home mortgage market is unique. Its sheer capacity has enabled many families to become homeowners, facilitating a long-standing goal of consumers and policymakers. Over the past two decades, the mortgage industry has expanded as a result of financial innovation, technological advancements, and deregulation. Lenders have been able to provide more consumers with access to mortgage credit. In particular, advances in credit scoring technology and risk-based pricing strategies opened up the mortgage market to consumers considered to be higher-risk because of their limited or negative credit histories, income limitations, or other financial issues. Lenders charged these borrowers, known as subprime borrowers, higher rates to reflect the higher level of risk they presented. The subprime mortgage market began to expand markedly in the mid-1990s and peaked in 2006.
The growth of the subprime mortgage market was fueled by expansive developments across the financial industry that significantly changed every aspect of the mortgage industry, from how mortgages were marketed and underwritten to how they were funded. The use of credit scoring models to price for risk enabled lenders to more efficiently evaluate a consumer's creditworthiness, reducing transaction costs for lenders. In addition, changes to and the ongoing growth of the secondary mortgage market increased the ability of lenders to sell many mortgages to "securitizers" that pooled large numbers of mortgages and sold the rights to the resulting cash flows to investors. Previously, lenders tended to hold mortgages on their books until the loans were repaid. The increasingly popular "originate-to-distribute" lending model gave lenders (and mortgage borrowers) greater access to capital markets and allowed risk to be shared more widely. Increased access to mortgage credit was further fueled by the rise of both mortgage brokers who expanded the sales and distribution channels of mortgage lending and independent mortgage originators not directly affiliated with a federally supervised depository institution.
The expanding field of nonbank mortgage lenders was particularly notable in the subprime mortgage market. Data from 2006 reported under the Home Mortgage Disclosure Act indicate that 45 percent of high-cost first mortgages were originated by independent mortgage companies, institutions that are not regulated by the federal banking agencies and that typically sell nearly all of the mortgages they originate. These nondepository institutions fund mortgage lending through the capital markets rather than customer deposits, the traditional source of loan funding for banks.
All of these mortgage market developments increased the supply of mortgage credit, which in turn likely contributed to the rise in the national homeownership rate from 64 percent in 1994 to about 68 percent in 2007. But the broadening of access to mortgage credit also had negative aspects. Given their weaker credit histories and financial conditions, subprime borrowers tend to default on their loans more frequently than prime borrowers. A higher incidence of weaker underwriting standards and risk-layering practices, such as failing to document income and lending nearly to the full value of the home, further increased a subprime borrower's vulnerability for default.
In 2007, the problems in the subprime market, deceleration of the housing market, decreased house-price appreciation, and the weakening of the overall economy contributed to a significant number of subprime mortgage defaults. As a result, the subprime mortgage market experienced significant setbacks: several independent mortgage lenders declared bankruptcy, and some large financial organizations experienced multimillion dollar losses in their portfolios. For consumers, the consequences of defaulting on a mortgage can be severe, such as the loss of accumulated home equity, reduced access to credit, and foreclosure. And the negative effects can spread beyond subprime customers. Clusters of foreclosures in one community can cause the value of nearby properties to decline and lead to an increase in vacant and abandoned properties, thereby inflicting economic harm on entire neighborhoods.
As the subprime mortgage crisis expanded throughout the last quarter of 2007, the Federal Reserve actively used its policy, supervisory, and regulatory tools to respond to the needs of markets, lenders, consumers, and communities. These activities were discussed in detail by Federal Reserve Board governors and other officials who testified before Congress throughout the year, offering lawmakers and the public an in-depth discussion about the issues and actions undertaken by the Federal Reserve in response to concerns about the subprime market.1 In addition, staff at Federal Reserve Banks across the country worked with regulators, government officials, lenders, servicers, consumer advocates, and community leaders to improve their understanding of the complex issues that contribute to, as well as the effects of, widespread mortgage delinquencies and foreclosures. (For a detailed discussion of the Federal Reserve's efforts, see the "Mortgage Credit" section of this chapter.) The Federal Reserve has a strong interest in supporting consumers and communities. Its activities during 2007 have laid the foundation for continued efforts to help stabilize the mortgage industry and assist consumers to make sound financial decisions.
Aware of the changing conditions in the mortgage market, the Federal Reserve Board has responded to the consumer protection and supervisory concerns of nontraditional and subprime mortgage loans.1 In recent years and throughout 2007, Federal Reserve staff have undertaken various initiatives to (1) scrutinize potentially risky practices within the mortgage industry and (2) address issues through regulatory, supervisory, or community engagement activities.
In June, the Board held a public hearing under the Home Ownership and Equity Protection Act (HOEPA). The purpose of the hearing was to gather information on how the Board might use its rulemaking authority to curb abusive lending practices in the home mortgage market, particularly the subprime sector.2 The meeting, moderated by Governor Randall Kroszner, was the last in a series of five hearings held under HOEPA; the other four hearings were held throughout the nation during the summer of 2006.3 Representatives from the financial services industry, consumer and community groups, and state agencies participated in the June hearing and shared their perspectives on certain lending practices, such as prepayment penalties, the underwriting of "stated income" loans, and the failure to provide escrow accounts for taxes and insurance.4 Representatives from the financial services industry acknowledged that some recent lending practices merited concern, but these participants urged the Board to address most of the concerns by issuing supervisory guidance rather than regulations under HOEPA. They suggested that recent supervisory guidance on nontraditional mortgages and subprime lending, as well as corrective measures initiated within the mortgage market, had reduced the need for new regulations. Industry participants said that if the Board issues regulations, they must be clear enough to eliminate uncertainty and avoid unduly restricting credit. To help consumers avoid abusive lending practices, industry representatives supported improving the disclosures provided to consumers during the mortgage process.
Conversely, consumer advocates and state and local officials urged the Board to adopt robust regulations under HOEPA. They acknowledged a useful role for supervisory guidance but contended that recent problems in the mortgage market indicated a need for stronger requirements that can be enforced through civil actions--actions that would only be possible under regulations, not supervisory guidance. Consumer advocates and others welcomed efforts to improve mortgage disclosures but insisted that disclosures alone would not prevent abusive loans. They argued that independent mortgage lenders are not subject to the federal regulators' guidance, and enforcement of the existing laws governing these entities is limited.
In addition to the series of hearings, the Board received information and advice from its Consumer Advisory Council (see "Advice from the Consumer Advisory Council") and from outreach meetings to gain insight into industry practices. These efforts informed the Board's release of proposed amendments to Regulation Z (Truth in Lending) at a public meeting in December.5 The goals of these proposed amendments are to
The proposed rules are comprehensive both in their reach and aim: they would apply to all mortgage lenders, not just depository institutions, and they seek to improve transparency and enhance consumer protection in mortgage lending.
The proposal directly addresses those practices raising the most significant concerns. For higher-priced loans, the proposed rule would prohibit lenders from engaging in a pattern or practice of making mortgage loans on the basis of collateral alone, without considering a borrower's ability to repay the loan; require lenders to verify the income or assets they rely upon in making the loan; and require lenders to establish escrow accounts for taxes and insurance. Prepayment penalties would be permitted on higher-cost loans only under certain conditions. For higher-cost loans and most other mortgage loans secured by a principal dwelling, the proposed rules would prohibit lenders from paying yield-spread premiums to brokers, unless a written agreement between the consumer and broker disclosed the broker's total compensation and other important information; prohibit lenders and brokers from coercing appraisers to misstate a home's value; and require that servicers credit loan payments on the date of receipt and refrain from charging consumers multiple late fees.
With respect to the marketing of home loans, the proposed rules would require lenders to disclose applicable rates or payments in advertisements as prominently as advertised teaser rates. For closed-end loans, the proposed rules would prohibit seven misleading or deceptive advertising practices, for example, using the term "fixed" to describe a rate that is not fixed. The public comment period ends in early April 2008.
Throughout 2007, concerns about the mortgage industry continued to grow. The Board undertook various supervi sory activities in collaboration with other agencies to provide guidance to lenders and support to consumers. A comprehensive overview of the Federal Reserve Board's ongoing efforts to address supervisory concerns in the subprime mortgage market was outlined in congressional testimony delivered in March by the director of the Division of Consumer and Community Affairs.6 In April, the federal financial regulatory agencies jointly issued the "Statement on Working with Mortgage Borrowers" that encouraged institutions to work constructively with residential borrowers who are, or who are reasonably expected to be, unable to make payments on their home loans.7 The statement emphasizes that loan-workout arrangements are generally in the long-term best interest of both financial institutions and borrowers, provided the arrangement is consistent with safe and sound lending practices. The statement cites examples of constructive workout arrangements; for instance, an institution might modify a borrower's loan terms or move a borrower from a variable-rate to a fixed-rate loan. In addition, bank and thrift programs that transition low- or moderate-income homeowners from higher-cost loans to lower-cost loans in a safe and sound manner may receive favorable consideration under the Community Reinvestment Act.8
In May, the federal bank, thrift, and credit union regulatory agencies issued final illustrations of the information on nontraditional mortgage products that lenders should provide to consumers. The sample illustrations are intended to help institutions implement consumer protections in the "Interagency Guidance on Nontraditional Mortgage Product Risks" that the agencies adopted in October 2006.9 The consumer protections described in the guidance aim to ensure that consumers receive clear and balanced information about nontraditional mortgages--before they choose a mortgage product or select a payment option for an existing mortgage. Accordingly, the illustrations consist of a narrative explanation of nontraditional mortgage products, a chart comparing interest-only and payment-option adjustable-rate mortgages (ARMs) with a traditional fixed-rate loan, and a table showing the impact of various payment options on the loan balance of a payment-option ARM (such a table could be included in monthly loan statements). Institutions are not required to use the sample illustrations, but the guidance sets forth information that lenders should provide to consumers to allow them to evaluate a nontraditional mortgage loan.
The federal financial regulatory agencies jointly issued additional guidance titled the "Statement on Subprime Mortgage Lending" in June.10 This guidance describes prudent safety-and-soundness and consumer protection standards that institutions should follow when originating certain ARMs that are typically offered to subprime borrowers. These ARMs offer low initial payments that are based on a short-term fixed introductory rate that is significantly discounted from the fully indexed rate (the sum of the current index and the margin). The statement emphasizes the importance of evaluating a borrower's repayment capacity and ability to make payments under the fully indexed rate, assuming a fully amortizing repayment schedule. The guidance also stresses the need for institutions to consider a borrower's total monthly housing-related payments (that is, principal, interest, taxes, and insurance) when assessing the borrower's repayment capacity, using the borrower's debt-to-income ratio. Finally, the guidance instructs lenders to provide consumers with clear and balanced information on the benefits and risks of this type of ARM.
In September, the federal financial regulatory agencies and the Conference of State Banking Supervisors issued the "Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages."11 The guidance encourages servicers of residential mortgages to pursue strategies to mitigate their losses and seek to preserve homeownership among their borrowers. The statement outlines steps that servicers may pursue to determine if a borrower is at an increased risk of mortgage default. Steps include identifying borrowers who have a heightened risk of delinquency, contacting those borrowers to assess their ability to repay, and determining whether default is reasonably foreseeable. The guidance also presents many possible loss-mitigation techniques that a servicer may initiate with a troubled borrower.
In addition to issuing industry guidance, the Board entered a multiagency partnership to conduct targeted consumer compliance reviews of selected nondepository lenders that have significant subprime mortgage operations.12 The joint effort, announced in July, is the first time multiple agencies have collaborated to plan and conduct consumer compliance reviews of independent mortgage lenders and nondepository subsidiaries of bank and thrift holding companies, as well as mortgage brokers doing business with, or working for, these entities.
The agencies involved--the Federal Reserve, the Office of Thrift Supervision (OTS), the Federal Trade Commission (FTC), state agencies represented by the Conference of State Bank Supervisors, and the American Association of Residential Mortgage Regulators--have begun developing plans for the targeted consumer compliance reviews. Federal Reserve System examiners, assisted by representatives from the FTC and the states, will lead reviews of entities supervised by the Federal Reserve System. At the same time, state regulators will conduct a coordinated review of an independent state-licensed subprime lender and associated mortgage brokers, and the OTS will conduct a review of a selected mortgage subsidiary of a thrift holding company. These reviews will evaluate the companies' underwriting standards, as well as senior management's oversight of the risk-management practices the companies used to ensure compliance with state and federal consumer protection regulations and laws, including the Home Mortgage Disclosure Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Federal Trade Commission Act, and the Home Ownership and Equity Protection Act. The agencies will share information about the reviews and investigations; take supervisory action, as appropriate; collaborate on lessons learned; and seek ways to better cooperate in ensuring effective and consistent reviews of these institutions. By jointly developing and applying a coordinated review program, the regulatory agencies will be better positioned to evaluate and more consistently assess subprime mortgage practices across a broad range of mortgage lenders and other participants within the industry. On-site reviews are scheduled to begin in February 2008.
To augment the Board's regulatory and supervisory activities, System community affairs staff engaged in numerous efforts to address the personal, economic, and social distress of homeowners and communities that have been negatively affected by the sharp increases in subprime mortgage loan delinquencies and foreclosures. Community affairs analysts and outreach specialists used their long-standing networks of industry and community relationships to convene local community and business leaders, investors, lenders, servicers, rating agency representatives, government officials, consumer and community groups, and others across the country. To complement these discussions, System research staff collected and analyzed data on real estate and subprime mortgage conditions and on the impact of homeowner counseling programs. The Federal Reserve Bank of Philadelphia began collecting data for a longitudinal study of the effectiveness of homeownership counseling. In a similar but smaller-scale study, the Dallas Reserve Bank began measuring the impact of a local mortgage assistance program. The New York Reserve Bank collected zip code -level data on the incidence of Alt-A and subprime mortgage products in its District. Several other researchers focused on loan workouts and modifications throughout the country. Other key initiatives for the research functions included providing regional foreclosure projections and in-depth analyses of the incidence of defaults within a particular region.
The Board and the Reserve Banks hosted a number of events, conferences, and meetings on foreclosure-related matters in 2007. Many events focused on encouraging lenders and servicers to develop systematic loss-mitigation techniques and to promote coordinated outreach to distressed borrowers. In the twelfth District, the San Francisco Reserve Bank and its partners conducted a series of six forums to explore foreclosure issues and identify strategies for preserving homeownership among minorities and low-income borrowers.13 The Federal Reserve Bank of Chicago sponsored symposiums in Chicago, Indianapolis, and Detroit that featured discussions on the regional impact of foreclosures. The Cleveland Reserve Bank cosponsored a conference on vacant and abandoned properties, and the Federal Reserve Bank of Minneapolis hosted several events in the Twin Cities area focused on mortgage broker licensing, the need to modernize the foreclosure system, and the differences in state foreclosure laws. The Reserve Banks also organized several public workshops and participated in outreach events to highlight innovative intervention programs. For example, the San Francisco and Dallas Reserve Banks cosponsored a series of mortgage-streamlining workshops to leverage participants' broader knowledge of community development subjects and apply this knowledge to homeownership initiatives for Native Americans.
During the past year, Board and System staff strengthened partnerships with two prominent national homeownership preservation organizations, NeighborWorks America and the Hope Now Alliance. Both groups have mobilized their national networks of affiliates and partners in order to advance efforts to streamline the mortgage-refinancing process and modify subprime mortgages. In 2007, Governor Kroszner continued to serve on the NeighborWorks America board of directors. Members of the Board's staff remain involved with that organization's Center for Homeownership Education and Counseling, which establishes education standards for counseling intermediaries. System community affairs staff collaborated with NeighborWorks America by participating in several foreclosure-prevention training workshops for homeownership counselors; staff also helped promote the 1-888-995-HOPE hotline that links borrowers in financial distress with mortgage counseling. The Atlanta Reserve Bank produced an educational DVD in partnership with NeighborWorks America that addressed the growing foreclosure challenges in its region.
Several Reserve Banks also supported the Hope Now Alliance, a collaboration of counselors, servicers, investors, and other mortgage market participants. System community affairs staff worked with local Hope Now partners and community stakeholders to identify cross-industry technology solutions that would enable servicers and counselors to contact at-risk borrowers and better serve homeowners.
Substantial consumer protection and community development concerns continue to be raised about mortgage lending practices. The Federal Reserve will continue its regulatory, supervisory, and community development efforts to seek ways to protect and support consumers' interests in mortgage credit. The Federal Reserve will also work collaboratively with a broad spectrum of partners to develop strategies and programs that will help troubled homeowners address their mortgage credit difficulties.14
The credit card market is another area of consumer finance that has grown rapidly, spurred by technological advances, new products, and other innovations. Increasingly, electronic payments are accepted for a wide range of transactions, and consumers now use credit cards to facilitate everyday purchases, such as groceries, gasoline, and even a cup of coffee. In 2007, the total level of revolving debt held by consumers increased by nearly 8 percent from 2006, to nearly $944 billion.
Competition in the credit card market has intensified over the last decade. As a result, lenders have undertaken aggressive marketing and product development campaigns and also pursued strategies to rely more on fee-based income. (Previously, lenders had relied almost solely on interest from their customers' account balances for revenue.) These industry developments have significantly elevated concerns about consumer protection; the transparency of credit card pricing; and the adequacy of consumer disclosures in credit card marketing materials, contracts, and periodic statements.15
Credit card disclosures are intended to provide consumers with the information they need to shop for the product that best meets their needs and to enable them to make well-informed decisions regarding usage of their cards. However, as credit products became more complex, the Board recognized the need to evaluate its existing regulations governing the content and presentation of information on credit card disclosures. This undertaking required an in-depth understanding of the credit card industry, consumers' information needs, and the way consumers shop for credit cards. Before engaging in rule-writing, the Board undertook extensive consumer testing. Working with a consultant, the Board developed a testing methodology that involved several stages. First, two sets of focus-group meetings were held with credit card customers. The focus groups offered insight on
The second stage of the consumer testing focused on current credit card disclosures. In one-on-one interviews, credit card customers were presented with mock disclosures. Participants were asked to evaluate the information presented, and an interviewer asked them follow-up questions in order to evaluate the usability of the disclosures and consumers' understanding of them.
Feedback from the second stage was used to develop revised sample disclosures for the third phase of testing. These sample disclosures were tested and refined during multiple interviews with consumers. This process allowed staff to learn more about what information consumers read on current credit card disclosures; to observe how easily consumers can find various pieces of information in these disclosures; and to test consumers' understanding of the terminology used in the disclosures.
The consumer testing process provided important insights into the way consumers shop for credit cards and the information they need to make informed decisions. In particular, staff found that consumers tend to notice numbers rather than narrative text. Consumers frequently reviewed the summary table of rates and terms that they receive with credit card solicitations but paid little attention to densely worded account-opening disclosures and change-in-terms notifications. Likewise, on periodic statements, consumers generally focused on numbers, such as fee and interest charge information. The Board took these findings into account as it began drafting proposed amendments to Regulation Z.
In May, the Board issued for public comment proposed Regulation Z amendments. The proposal is intended to improve the effectiveness of the disclosures consumers receive in connection with credit card accounts and other revolving credit plans; specifically, the proposal seeks to ensure that such information is provided in a timely manner and in a form that is readily understandable. The proposed amendments would require changes to the format, timing, and content requirements of the five main types of open-end credit disclosures: (1) credit and charge card application and solicitation disclosures; (2) account-opening disclosures; (3) periodic-statement disclosures; (4) change-in-terms notices; and (5) advertising provisions. The proposed amendments largely reflect the results of the consumer testing described above.
The proposal generated a great deal of interest, yielding more than 2,500 comments during the comment period that ended in October. A large number of these comments were submitted by individual consumers. Additional insights were provided by consumer advocates and industry representatives serving on the Board's Consumer Advisory Council. (See "Advice from the Consumer Advisory Council.")
The proposal contains changes to make the disclosures provided with credit and charge card applications and solicitations more meaningful and easier for consumers to use. Proposed changes include adopting new format requirements for the summary table, including rules regarding type size and the use of boldface type for certain key terms; placement of information; and use of cross-references. The proposed rules address a number of issues regarding the penalties credit and charge card companies may charge customers. For example, applications and solicitations would have to state how long penalty rates may be in effect, provide a modified disclosure about variable rates, describe the effect of creditors' payment-allocation practices, and reference consumer education materials on the Board's website.
The proposal contains revisions to make the cost disclosures provided to consumers at account opening more conspicuous and easier to read. The proposed changes would require that certain key terms be disclosed in a summary table at account opening; this table would summarize the key information consumers need to make informed decisions about how they use credit cards. The proposed changes would also adopt a different approach to disclosing fees, in order to make it easier for consumers to identify the costs associated with using the card.
The proposal contains revisions to make the disclosures on periodic statements more understandable, primarily by changing the format requirements for these disclosures--for example, by grouping fees, interest charges, and transactions together by type. Other format changes include itemizing the interest charges for different types of transactions, such as purchases and cash advances, and providing aggregate totals of fees and interest for the month and year-to-date. In addition, creditors would have to disclose to consumers the effect of making only the minimum required payments on their account balances.
The proposal expands the circumstances under which consumers will receive written notice of changes in the terms (for example, an increase in the interest rate) applicable to their accounts, and it increases the amount of time these notices must be sent before the change becomes effective. Generally, the proposed rules would increase advance notice before a changed term can be imposed from 15 to 45 days, to better allow consumers to obtain alternative financing or change their account usage. The proposed rules would also require a creditor to provide 45 days' prior notice before increasing a rate as a result of a consumer's delinquency or default.
The proposal revises the rules governing the advertising of open-end credit, to help consumers better understand the credit terms being offered. Under the proposed revisions, advertisements that state a minimum monthly payment on a plan offered to finance the purchase of goods or services would be required to disclose, in equal prominence to the minimum payment, the time period required to pay off the balance and the total of payments if only minimum payments were made. Furthermore, advertisements would be able to refer to a rate as "fixed" only if the advertisement specified the time period for which the rate was fixed and that the rate would not increase for any reason during that time. If a time period is not specified, the term "fixed" may be used only if the rate will not increase for any reason while the plan is open.
In addition to proposed rules related to mortgages and credit cards, the Board issued regulatory amendments in 2007 related to the electronic delivery of consumer disclosures, electronic fund transfers, and the privacy of financial information.
In November, the Board published amendments to five consumer financial services and fair lending regulations (Regulations B, E, M, Z, and DD). The amendments clarify the requirements for providing consumer disclosures in electronic form under the Electronic Signatures in Global and National Commerce Act (the E-Sign Act). Enacted in 2000, the E-Sign Act provides that electronic documents and electronic signatures have the same validity as paper documents and handwritten signatures. The E-Sign Act also contains special rules for the use of electronic disclosures in consumer transactions. Under the act, consumer disclosures that are required by other laws or regulations to be provided in writing may be provided in electronic form if the consumer affirmatively consents after receiving the notice specified in the statute and if certain other conditions are met.
In March 2001, the Board published interim final rules under Regulations B, E, M, Z, and DD that established uniform standards for the timing and delivery of electronic disclosures, consistent with the requirements of the E-Sign Act. The Board later lifted the mandatory compliance date for these rules. As a result, institutions could provide disclosures electronically pursuant to the E-Sign Act but were not required to comply with the 2001 interim rules.
In November, the Board withdrew certain portions of the 2001 interim rules from the Code of Federal Regulations in order to reduce confusion about their status and simplify the regulations. The Board also withdrew other provisions of the 2001 interim rules that might have imposed undue burdens on electronic banking and commerce and that were unnecessary for consumer protection. The November final rules also included guidance on the use of electronic disclosures, including provisions to clarify the circumstances under which consumers conducting transactions online may obtain electronic disclosures without regard to the consent requirements of the E-Sign Act. The mandatory compliance date for the final rules is October 1, 2008.16
The Electronic Fund Transfer Act (EFTA) provides a basic framework of rights, liabilities, and responsibilities for participants in electronic fund transfer systems. The EFTA is implemented by the Board's Regulation E (12 CFR 205). In July, the Board published a final rule that exempts transactions of $15 or less from Regulation E's requirement that receipts be made available to consumers for transactions initiated at an electronic terminal. For this purpose, electronic terminals include automated teller machines and point-of-sale terminals. This exception is intended to facilitate the ability of consumers to use debit cards in retail settings where it may not be practical or cost-effective to provide receipts. The rule was effective August 6, 2007.17
In November, the Board published two final rules under Regulation V to implement provisions of the Fair and Accurate Credit Transactions Act of 2003 (the FACT Act), which amended the Fair Credit Reporting Act (FCRA). First, the Board published final rules to implement the affiliate-marketing-notice and opt-out requirements of section 214 of the FACT Act. The final rules give consumers the ability to limit the use of certain information for marketing purposes by affiliates of companies with which consumers have done business. The final rules also incorporate certain statutory exceptions to the notice and opt-out requirement, including exceptions for when an affiliate has a pre-existing business relationship with a consumer or when the marketing is in response to a consumer-initiated communication. The mandatory compliance date for the final rule is October 1, 2008. The affiliate-marketing rules were developed on an interagency basis with the other federal banking agencies, the Federal Trade Commission (FTC), and the Securities and Exchange Commission.18
Second, the Board published final rules to implement the identity theft "red flag" provisions of section 114 of the FACT Act and the address-discrepancy provisions of section 315 of the act. The final rules require financial institutions and creditors to develop and implement an identity theft protection program that is designed to detect, prevent, and mitigate identity theft. The final rules also require users of consumer reports to (1) adopt reasonable policies and procedures for verifying the identity of a consumer upon receipt of a notice of address discrepancy from a consumer reporting agency and (2) reconcile the discrepancy when the user opens an account despite the discrepancy and regularly furnishes information to the consumer reporting agency. The mandatory compliance date for the final rule is November 1, 2008. The rules for identity theft red flags and address discrepancies were developed on an interagency basis with the other federal banking agencies and the FTC.19
In December, the Board published proposed rules to implement the provisions of section 312 of the FACT Act, which apply to those who furnish information to consumer reporting agencies (furnishers). That section requires the Board to issue guidelines to ensure the accuracy and integrity of information being furnished to consumer reporting agencies. Section 312 also requires the Board to issue rules identifying the circumstances under which furnishers must investigate disputes about the accuracy of information contained in consumer reports based on a direct request from a consumer. The comment period for the proposal will close in February 2008. The furnisher accuracy-and-integrity guidelines and the direct-dispute rules were developed on an interagency basis with the other federal banking agencies and the FTC.20
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. (See "Mortgage Credit" earlier in this chapter for a description of the division's supervisory activities related to mortgage lending.) Division staff members provide guidance and expertise to the Reserve Banks on consumer protection regulations, examination and enforcement techniques, examiner training, and emerging issues. Routinely, staff members develop and update examination policies, procedures, and guidelines; review Reserve Bank supervisory reports and work products; and participate in interagency activities that promote uniformity in examination principles and standards.
Examinations are the System's primary means of enforcing compliance with consumer protection laws. During the 2007 reporting period,21 the Reserve Banks conducted 324 consumer compliance examinations--312 of state member banks and 12 of foreign banking organizations.22
The Federal Reserve is committed to ensuring that the institutions it supervises comply fully with the federal fair lending laws--the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. Fair lending reviews are conducted regularly within the supervisory cycle. Additionally, examiners may conduct fair lending reviews outside of the usual supervisory cycle, if warranted. When examiners find evidence of potential discrimination, they work closely with the division's Fair Lending Enforcement Section, which brings additional legal and statistical expertise to the examination and ensures that fair lending laws are enforced consistently and rigorously throughout the Federal Reserve System.23
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 (DOJ) The DOJ reviews the referral and decides if further investigation is warranted. A DOJ investigation may result in a public civil enforcement action or settlement. The DOJ may decide instead to return the matter to the Federal Reserve for administrative enforcement. When a matter is returned to the Federal Reserve, staff ensures that the institution corrects the problems and makes amends to the victims.
During 2007, the Board referred the following eight matters to the DOJ:
If a fair lending violation does not constitute a pattern or practice that is referred to the DOJ, the Federal Reserve acts on its own to ensure that the bank remedies it. Most lenders readily agree to correct fair lending violations. In fact, lenders often take corrective steps as soon as they become aware of a problem. Thus, the Federal Reserve generally uses informal supervisory tools (such as memoranda of understanding between the bank's board of directors and the Reserve Bank) or board resolutions to ensure that violations are corrected. If necessary to protect consumers, however, the Board can and does bring public enforcement actions.
The two previously mentioned referrals involving mortgage-pricing discrimination resulted from a process of targeted pricing reviews that the Federal Reserve initiated when Home Mortgage Disclosure Act (HMDA) pricing data first became available in 2005. (See "Reporting on Home Mortgage Disclosure Act Data.") Board staff developed, and continue to refine, HMDA screens that identify institutions that may warrant further review on the basis of an analysis of HMDA pricing data. Because HMDA data lack many factors that lenders routinely use to make credit decisions and set loan prices, such as information about a borrower's creditworthiness and loan-to-value ratios, HMDA data alone cannot be used to determine whether a lender discriminates. Thus, the Federal Reserve staff analyzes HMDA data in conjunction with other supervisory information to evaluate a lender's risk for engaging in discrimination.
For the 2006 HMDA pricing data--the most recent year for which the data are publicly available--Federal Reserve examiners performed a pricing-discrimination risk assessment for each institution that was identified through the HMDA screening process. These risk assessments incorporated not just the institution's HMDA data but also the strength of the institution's fair lending compliance program; past supervisory experience with the institution; consumer complaints against the institution; and the presence of fair lending risk factors, such as discretionary pricing. On the basis of these comprehensive assessments, Federal Reserve staff determined which institutions would receive a targeted pricing review. Depending on the examination schedule, the targeted pricing review could occur as part of the institution's next examination or outside the usual supervisory cycle.
Even if an institution is not identified through HMDA screening, examiners may still conclude that the institution is at risk for engaging in pricing discrimination and may perform a pricing review. The Federal Reserve supervises many institutions that are not required to report data under HMDA. Also, many of the HMDA-reporting institutions supervised by the Federal Reserve originate few higher-priced loans and, therefore, report very little pricing data. For these institutions, examiners analyze other available information to assess pricing-discrimination risk and, when appropriate, perform a pricing review.
During a targeted pricing review, staff analyze additional information, including potential pricing factors that are not available in the HMDA data, to determine whether any pricing disparity by race or ethnicity is fully attributable to legitimate factors, or whether any portion of the pricing disparity may be attributable to illegal discrimination. To perform these reviews, staff use analytical techniques that account for the increasing complexity of the mortgage market. Two industry changes in particular--the proliferation of product offerings and the increased use of risk-based pricing--have increased the complexity of fair lending reviews. It is not uncommon for a lender to offer many different products, each with its own pricing based on the borrower's credit risk.
To effectively detect discrimination in the expanding range of products and credit-risk categories, the Federal Reserve increasingly uses statistical techniques. When performing a pricing review, staff typically obtain extensive proprietary loan-level data on all mortgage loans originated by the lender, including prime loans (that is, not just the higher-priced loans reported under HMDA). To determine how to analyze these data, the Federal Reserve studies the lender's specific business model, pricing policies, and product offerings. On the basis of the review of the lender's policies, staff determine which factors from the lender's data should be considered. A statistical model is then developed that takes those factors into account and is then tailored to that specific lender. Typically, a test for discrimination in particular geographic markets, such as metropolitan statistical areas (MSAs), is performed. Looking at specific markets is important, as relatively small unexplained pricing disparities at the national level can mask much larger disparities in individual markets.
On the basis of the results of pricing reviews conducted, Federal Reserve staff had reason to believe that two nationwide lenders had engaged in a pattern or practice of discrimination and referred these cases to the DOJ. After accounting for legitimate factors reflected in the lenders' specific pricing policies, staff found that minorities still paid more for their mortgages than non-Hispanic white borrowers in multiple MSAs. The first referral involved two of the fair lending risk factors that the agencies have identified and used for some time: (1) broad discretion in pricing by loan officers or brokers and (2) financial incentives for loan officers or brokers to charge borrowers higher prices. The lending institution gave its loan officers discretion to charge overages and underages, that is, to set loan prices higher or lower than its standard rates. The institution also paid loan officers more if they charged overages. The Federal Reserve found evidence that, in multiple MSAs, African American and Hispanic borrowers paid higher overages than comparable non-Hispanic whites.
The second referral involved loans originated through mortgage brokers at which the institution also permitted pricing discretion. In multiple MSAs, African Americans and Hispanics paid higher annual percentage rates than comparable non-Hispanic whites. Pricing discretion and financial incentives to charge borrowers more do not always result in fair lending violations; however, these referrals underscore that it is critical for lenders that permit these practices to have clear policies about their use and to monitor their use effectively.
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 (HMDA's implementing regulation) 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 2006 HMDA data to the public in September 2007.
A December 2007 article published by Federal Reserve staff in the Federal Reserve Bulletin uses the 2006 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.24 The article also analyzed several of the items included in the HMDA data in order to determine their usefulness in predicting mortgage-loan delinquency across metropolitan-area counties. The analysis resulted in several findings, including that the incidence of higher-priced lending and the share of non-owner-occupied loans in a county were both related to higher levels of default in the future.
As in 2004 and 2005, most reporting institutions reported extending few if any higher-priced loans in 2006; 61 percent of the lenders originated less than 10 higher-priced loans that year. The data also indicate that relatively few lenders accounted for most of the higher-priced loan originations in 2006. Of the nearly 8,900 home lenders reporting HMDA data, 928 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 38 percent of all such loans in 2006. Also as in 2004 and 2005, the majority of all loan originations were not higher priced in 2006; however, the incidence of higher-priced lending did increase from 26.2 percent in 2005 to 28.7 percent in 2006. Some of the increase in the incidence of higher-priced lending is attributed to changes in the interest rate environment from 2005 to 2006, 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 (more than half of these loans are higher priced), 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: 25.3 percent of first-lien conventional home purchase loans were reported as higher-priced in 2006, compared with 45.7 percent of comparable junior-lien loans.
Second, higher-priced lending varies widely by geography. As in 2004 and 2005, 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 2006. In many metropolitan areas in the South, Southwest, and West, 30 percent to 40 percent of the homebuyers who obtained conventional loans in 2006 received higher-priced loans.
Third, the incidence of higher-priced lending varies greatly among borrowers of different races and ethnicities. In 2006, as in 2004 and 2005, African Americans and Hispanics were much more likely than non-Hispanic whites and Asians to receive higher-priced loans. For example, in 2006, 54 percent of African American borrowers, and 47 percent of Hispanic borrowers, received higher-priced conventional home purchase loans, compared with 18 percent of non-Hispanic white and 17 percent of Asian borrowers. 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.")
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
The Federal Reserve assesses and rates the performance of state member banks under the CRA in the course of examinations conducted by staff at the twelve Reserve Banks. During the 2007 reporting period, the Reserve Banks conducted 271 CRA examinations of banks: 33 were rated Outstanding, 237 were rated Satisfactory, none was rated Needs to Improve, and one was rated Substantial Noncompliance.27
In February, the Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision jointly released a consumer alert about CRA-related solicitations from lenders.28 This alert cautioned the public about loan solicitations or other offers from lenders or mortgage brokers that offer consumers cash as part of a "Community Reinvestment Act (CRA) Program." The agencies had received numerous consumer complaints and inquiries about this type of solicitation, and the alert warned that the solicitation appears to be a deceptive effort to encourage consumers to apply for a mortgage loan secured by their home. A statement that the agencies do not sponsor or endorse such programs and that the CRA does not require such programs was also included in the alert, along with a warning for consumers to be suspicious about conducting business with lenders who make deceptive claims.
In July, the federal bank and thrift regulatory agencies released for comment a series of new and revised interagency questions and answers on CRA. The agencies are proposing new questions and answers, as well as making substantive and technical revisions to the existing material. Some of the proposed revisions are intended to encourage institutions to work with homeowners who are unable to make their mortgage payments; the questions and answers emphasize that institutions can receive CRA consideration for foreclosure-prevention programs for low- and moderate-income homeowners, consistent with the April 2007 interagency "Statement on Working with Mortgage Borrowers."29 In addition, several technical changes are being proposed to clarify, update, and improve the readability of existing guidance. A few of the more substantive changes include
During 2007, the Board considered applications for several significant banking mergers. The Board approved two applications by Bank of America Corporation, Charlotte, North Carolina, the second largest depository institution in the United States. The company's acquisition of U.S. Trust Corporation, New York, New York, was approved by the Board in March and its application to acquire ABN AMRO North America Holding Company, Chicago, Illinois, was approved in September. The merger of two historic bank holding companies, The Bank of New York, New York, New York, and Mellon Financial Corporation, Pittsburgh, Pennsylvania, was approved by the Board in June. Several other significant applications are listed below.
The public submitted comments on nine applications, including those mentioned above. Many of the commenters referenced pricing information on residential mortgage loans and concerns that minority applicants were more likely than nonminority applicants to receive higher-priced mortgages. These concerns were largely based on observations of lenders' 2005 and 2006 HMDA pricing data. Other issues raised by commenters involved minority applicants being denied mortgage loans more frequently than nonminority applicants; potentially predatory lending practices by subprime and payday lenders; the potential adverse effects of branch closings; and lenders' failure to address the convenience and needs of low- and moderate-income communities. In addition, the Board also received comments about the adverse effects of increased foreclosures, especially in low- and moderate-income communities.
The Board considered forty-two applications with outstanding issues involving compliance with consumer protection statutes and regulations, including fair lending laws, and the CRA.30 Thirty-seven of those applications were approved and five were withdrawn, including one with an adverse CRA rating.
The Federal Reserve is committed to ensuring the provision of financial services to all consumers and communities. One of the many ways the Board achieves this goal is by promoting the safety and soundness of all the institutions subject to System supervision, including those that are minority owned. Through its regulatory, supervisory, and community development functions, the Board consistently addresses the unique challenges and needs of minority-owned banks. At the same time, the Board holds these institutions to the supervisory standards that are applied to all state member banks. The Board views this strategy as integral to its efforts to promote a safe, sound, and competitive banking system that also protects consumer interests.
To enhance its support of minority-owned institutions, the Federal Reserve has been developing an innovative and comprehensive training and technical assistance program for minority-owned depository institutions. Designed to address issues that might inhibit or limit the financial and operating performance of minority-owned institutions, the program includes outreach and technical assistance for institution directors. It also fosters relationship-building between institutions and supervisory staff, and raises supervisory awareness of the unique challenges faced by minority-owned institutions. The program is scheduled to be fully operational in 2008.31
Periodically, the Board issues guidance on consumer protection laws and regulations to Reserve Bank examiners. Some guidance is developed and updated in concert with the other federal financial institution regulatory agencies, and some is issued solely by the Board. In 2007, the Board issued examination procedures designed to help examiners determine whether specific acts or practices conducted by state-chartered banks are unfair or deceptive. These procedures incorporate general guidance provided in the March 11, 2004, "Statement on Unfair or Deceptive Acts or Practices (UDAP) by State-Chartered Banks" issued jointly by the Board and the Federal Deposit Insurance Corporation. The Board's guidance helps examiners analyze potential UDAP issues during a consumer compliance examination or a complaint investigation.
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 staff that review and examine 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 examination concepts. In 2007, these courses were offered in eleven sessions to more than 193 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 2007, staff conducted a curriculum review of the Introduction to Consumer Compliance Examinations I (CA I) course to incorporate technical changes in policy and laws, along with changes in instructional delivery techniques. This course, designed for assistant examiners, focuses on the (1) consumer laws and regulations that govern operations and non-real estate lending and (2) regulations affecting deposit and non-real estate lending operations. The course emphasizes examination techniques and procedures that demonstrate the practical application of these laws and regulations.
When appropriate, courses are delivered via alternative methods, such as the Internet or other distance-learning technologies. The CA I course 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.
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.
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. Moreover, 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 2007, the Board imposed civil money penalties against eight state member banks. The penalties, which were assessed via consent orders, totaled $246,050.
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 and the FFIEC member agencies (collectively, the FFIEC agencies), as well as other federal enforcement agencies.32
The FFIEC agencies reported that 85 percent of the institutions examined during the 2007 reporting period were in compliance with Regulation B, compared with 87 percent for the 2006 reporting period. The most frequently cited violations involved
During this reporting period, the OTS issued two supervisory agreements and one cease-and-desist order to a savings association for 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 specific 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 Regulation B violations involving the improper collection of government monitoring information.
The FFIEC agencies reported that approximately 94 percent of the institutions examined during the 2007 reporting period were in compliance with Regulation E, compared with 95 percent in the 2006 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 E during the period.
The Federal Trade Commission (FTC) settled charges against one corporation that falsely marketed products and debited consumer accounts without obtaining consumers' authorization for preauthorized electronic fund transfers, in violation of Regulation E. The FTC also continued litigation against a group of defendants for allegedly enrolling consumers in a program and automatically billing them for charges without obtaining authorization for the recurring debits.
The FFIEC agencies reported that more than 99 percent of the institutions examined during the 2007 reporting period were in compliance with Regulation M, which equals the level of compliance for the 2006 reporting period. The FFIEC agencies did not issue any formal enforcement actions relating to Regulation M during the period.
The FFIEC agencies reported that 97 percent of the institutions examined during the 2007 reporting period were in compliance with Regulation P, compared with 98 percent for the 2006 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.
The FFIEC agencies reported that 82 percent of the institutions examined during the 2007 reporting period were in compliance with Regulation Z, compared with 85 percent for the 2006 reporting period. The most frequently cited violations involved the failure to take one or more of the following actions:
In addition, 185 banks supervised by the Federal Reserve, FDIC, OCC, and OTS were required, under the Interagency Enforcement Policy on Regulation Z, to reimburse a total of approximately $2.75 million to consumers for understating the annual percentage rate or the finance charge in their consumer loan disclosures.
The OTS issued two supervisory agreements and two cease-and-desist orders 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 specific to Regulation Z during the reporting period.
The Department of Transportation continued to prosecute one air carrier for its improper handling of credit card refund requests and other Federal Aviation Act violations.
The FCA identified creditors that were using incorrect templates, resulting in violations of Regulation Z. While all required disclosures were made, the format of the disclosures was not consistent with regulatory requirements.
The FTC continued litigation in federal district court against a mortgage broker for alleged violations of Regulation Z; the alleged violations involved the broker's advertisements and finance-charge disclosures.
The FFIEC agencies reported that more than 99 percent of the institutions examined during the 2007 reporting period were in compliance with Regulation AA, which equals the level of compliance for the 2006 reporting period. No formal enforcement actions relating to Regulation AA were issued during the reporting period.
The FFIEC agencies reported that 90 percent of institutions examined during the 2007 reporting period were in compliance with Regulation CC, compared with 92 percent for the 2006 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, which included Regulation CC. The other FFIEC agencies did not issue any formal enforcement actions specific to Regulation CC during the reporting period.
The FFIEC agencies reported that 88 percent of institutions examined during the 2007 reporting period were in compliance with Regulation DD, compared with 91 percent for the 2006 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 and 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 specific to Regulation DD during the reporting period.
The Federal Reserve investigates complaints against state member banks and forwards those that involve other creditors and businesses to the appropriate enforcement agency. Each Reserve Bank investigates complaints against state member banks in its District. In 2007, the Federal Reserve received 1,540 consumer complaints concerning regulated practices by state member banks.
In November, the Federal Reserve System launched Federal Reserve Consumer Help (FRCH), an initiative that consolidates and streamlines the Federal Reserve's process for handling consumer complaints and inquiries. FRCH improves consumers' access to the Federal Reserve by providing a convenient, one-stop website and a toll-free number where consumers can get assistance with their banking problems or questions. (See related box "The Federal Reserve Consumer Help Center.")
Credit cards, mortgages, and electronic funds transfers are just a few of the services and products consumers use to conduct their financial business. The use of these products and services has become widespread, and it can be easy to lose sight of their complexity--until a consumer has a question or something goes wrong. Consumers often need help navigating the maze of terminology, regulations, and policies that governs financial products, services, and institutions. For more than 30 years, the Federal Reserve System has provided professional help to consumers who have complaints against a financial institution. In 2007, the Federal Reserve launched the Federal Reserve Consumer Help (FRCH) center, a centralized consumer complaint center that improves consumers' access to information and services. The FRCH website provides comprehensive information on consumer financial issues, as well as contact information. Consumers can use the site to research their issue, or they may contact the Federal Reserve to ask a question or file a complaint via e-mail, a toll-free number, fax, or mail.
Consumer complaints are an important source of information for the Federal Reserve Board. Regardless of their outcome, complaints often identify areas of concern that the Board considers when writing regulations or guidance for bank examiners. Complaints can also reveal emerging consumer-protection issues and trends in banking practices. The Federal Reserve established its program for receiving consumer complaints and inquiries in 1976. Drawing on the resources of the Federal Reserve System's twelve Reserve Bank Districts, the program answers consumers' questions, investigates complaints against state member banks (those institutions under the Federal Reserve's supervisory authority), or refers consumers to the appropriate agency for a response. In addition, the Board responds to issues raised by congressional representatives on behalf of their constituents. Over the last decade, the consumer financial services marketplace has dramatically changed. Technological developments and increased access to technology have also changed both the way institutions operate and how consumers want to communicate with financial institutions and others. In 2007, the Federal Reserve responded to these forces by launching FRCH, while continuing to tap staff expertise and knowledge of regional banking markets.
The Federal Reserve is committed to providing superior service to consumers. The call center is staffed by highly trained professionals; 80 percent of incoming calls or e-mail inquiries are answered by a representative within 60 seconds or less. Complaints against banking institutions supervised by the Federal Reserve continue to be investigated by the Reserve Bank responsible for examining the institution in question. This approach ensures that complaints are investigated by examiners who are knowledgeable about an institution and its regional banking market--and who can leverage the bank-supervisor relationship to resolve an issue. If a consumer has a complaint against an institution not supervised by the Federal Reserve, FRCH can seamlessly connect him or her with the appropriate agency.
FRCH tracks all incoming questions and requests for assistance, by issue and volume. Data will be shared with the other federal banking regulatory agencies. The Federal Reserve and other agencies analyze the data so that they can identify shared issues, develop best practices for customer service and complaint investigation, and develop consumer education materials. Such collaboration is critical to addressing consumer protection issues in the broader financial services marketplace and developing consumer information materials to educate consumers about trends in banking products and their rights. In addition, FRCH is establishing a mechanism for tracking customer satisfaction, that is, whether consumers feel the center helped them with their financial services issues.
Early reviews of available data on FRCH call volume and website visits indicate that consumers are contacting the the Federal Reserve in record numbers. The Federal Reserve is dedicated to providing superior access to consumers who need assistance and will continue to monitor the performance of FRCH, with the goal of identifying further opportunities to help consumers exercise their rights and work through their financial services challenges. The Federal Reserve plans to launch a Spanish-language version of the website in the first quarter of 2008.
Under the direction of the Federal Financial Institutions Examination Council (FFIEC), an interagency working group was formed in late 2007 to explore ways to improve consumers' experiences with contacting a banking agency and with submitting a complaint or inquiry to the appropriate regulator. A third-party contractor may be used to examine best practices and recommend improvements to the process consumers use to file a complaint or inquiry with one of the FFIEC agencies.33
The majority (61 percent) of complaints about regulated practices involved credit cards. The most common credit card problem fell into the complaint category called "other rates/terms/fees" (35 percent), followed by problems with billing-error resolution (19 percent) and banks' providing inaccurate account information (8 percent).34
Complaints about checking accounts were the next largest category (19 percent) of complaints about regulated practices. The most common checking account concerns were insufficient-funds or overdraft charges and procedures (30 percent), funds availability (14 percent), and disputed withdrawals of funds by banks (13 percent).
Real estate-related complaints made up 5 percent of complaints involving regulated practices.35 Of those, only 4 percent (or three complaints) concerned adjustable-rate mortgages. The most common real estate-related loan problems concerned escrow accounts (15 percent); other rates, terms, or fees (11 percent); and errors or delays in crediting loan payments (10 percent). Of all complaints involving regulated practices, 13 (0.8 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).
Complaint investigations determined that banks had handled customers' accounts in accordance with Federal Reserve regulations in the majority (96 percent) of the complaints reviewed. Investigations for the remaining 4 percent determined that the bank had violated a consumer protection regulation. The most common violations involved credit cards and checking accounts. (See tables.)
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 2007, the Board received more than 2,000 complaints against state member banks that involved unregulated practices. The product categories that contained the most complaints were credit cards and checking accounts. In those categories, consumers most frequently complained about fraud, forgery, or theft (216 complaints); problems with opening or closing an account (196 complaints); issues involving insufficient-funds or overdraft charges and procedures (190 complaints); and certain credit card interest rates, terms, and fees (129 complaints).
|Regulation AA (Unfair or Deceptive Acts or Practices)||85|
|Regulation B (Equal Credit Opportunity)||62|
|Regulation C (Home Mortgage Disclosure)||1|
|Regulation E (Electronic Funds Transfers)||98|
|Regulation H (Bank Sales of Insurance)||2|
|Regulation M (Consumer Leasing)||3|
|Regulation P (Privacy of Consumer Financial Information)||35|
|Regulation Q (Payment of Interest)||3|
|Regulation Z (Truth in Lending)||761|
|Regulation BB (Community Reinvestment)||6|
|Regulation CC (Expedited Funds Availability)||123|
|Regulation DD (Truth in Savings)||124|
|Regulations T, U, and X||0|
|Regulation V (Fair and Accurate Credit Transactions)||13|
|Fair Credit Reporting Act||138|
|Fair Debt Collection Practices Act||64|
|Fair Housing Act||1|
|HOPA (Homeowners Protection Act)||1|
|Real Estate Settlement Procedures Act||15|
|Right to Financial Privacy Act||2|
|Subject of complaint||All complaints||Complaints involving violations|
|Real estate loans||1||.1||0||0|
|Real estate loans||80||5||0||0|
1. Only the top three product categories of nondiscrimination complaints are listed here Return to table
In 2007, the Federal Reserve received one housing-related discrimination complaint and forwarded it to HUD in accordance with a memorandum of understanding between HUD and the federal bank regulatory agencies regarding complaints alleging a violation of the Fair Housing Act. The Federal Reserve's investigation of this complaint revealed no evidence of illegal credit discrimination.
The mission of the community affairs function within the Federal Reserve System is to promote community economic development and fair access to credit for low- and moderate-income communities and populations. 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, with oversight from Board staff. 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 high-priority efforts; in particular, Board community affairs staff focus on issues that have public policy implications.36
In 2007, disruptions in the housing market made collaboration among the financial services community, the Board, and the Reserve Banks imperative. The CAOs worked diligently to identify solutions that would help mitigate the adverse consequences of the increasing numbers of mortgage defaults and foreclosures in many Districts. (See "Mortgage Credit") System staff also continued work on a number of important topics: improving the sustainability and financial capacity of community development organizations, creating asset-building opportunities for low- and moderate-income populations, and developing programs to promote community development and consumer education. Activities included conducting research, sponsoring conferences and seminars, publishing newsletters and articles, and supporting the dissemination of information to both general and targeted audiences.
The Reserve Banks and the Board continued their work on two substantial collaborative efforts over the past year. The first effort, an initiative undertaken by System Community Affairs staff and the Brookings Institution, analyzes and compares communities that have high concentrations of poverty. Using sixteen case studies from selected communities, the project employs both quantitative and qualitative analyses to explore the dynamics of the communities, their residents, their economies, and programs that are helping or hindering a community's integration into the economic mainstream. The data generated by this ongoing initiative help Reserve Banks, local financial institutions, business leaders, service providers, and philanthropic organizations better understand their regional economies and the capital and credit needs of the communities they serve.
The second major collaborative effort in 2007 was the Community Affairs System Research Conference, "Financing Community Development: Learning from the Past, Looking to the Future," cosponsored by the Board and the Federal Reserve Bank of Philadelphia. The conference brought together a diverse audience from academia, financial institutions, community organizations, foundations, and the government. Approximately 400 participants learned about and discussed original studies on the opportunities and obstacles to helping low- and moderate-income communities and people build wealth by using home loans, small business loans, or other financial services. System community affairs staff were actively involved in the planning and execution of the conference: staff reviewed papers, developed the agenda, presented research, and served as moderators and participants in formal discussion groups. The Board's Community Affairs officer delivered a keynote address during the conference, and Chairman Ben Bernanke provided remarks on the history, evolution, and new challenges of the Community Reinvestment Act.37
In 2007, Community Affairs staff from around the System continued working on several initiatives to not only enhance access to affordable credit in currently underserved markets but also to provide information and promote awareness of investment opportunities to financial institutions, government agencies, and organizations. The St. Louis Reserve Bank hosted "Exploring Innovation: A Conference on Community Development Finance" to explore how organizational creativity, learning, and innovation can improve community development projects, increase their access to capital, and help projects achieve scale and sustainability. The San Francisco Reserve Bank's Center for Community Investments hosted two conferences focused on community development investment. One conference, which was cosponsored with the Board, focused on the availability of rural venture capital; the other, cosponsored with the New York Reserve Bank, discussed issues related to the creation of a secondary market for community development loans. Other Reserve Banks hosted symposiums on this topic as well, such as the Federal Reserve Bank of Richmond's Community Development Financial Institution (CDFI) workshops that gathered community development lenders, local bankers, and representatives from the CDFI Fund to discuss capitalizing and certifying potential CDFIs. The Federal Reserve Bank of Boston and the Aspen Institute, a national research and leadership development organization, cohosted a conference on socially responsible investment and the role of subsidy dollars in public investment. In a related initiative, the Boston Reserve Bank collaborated with the Massachusetts Small Business Assistance Advisory Council on the launch of a loan program for small businesses.
Asset-building and financial education remained major areas of focus for the Community Affairs Offices in 2007. System staff continued to collaborate with constituent organizations on efforts to provide advisory services and conduct outreach to low- and moderate-income communities. The Federal Reserve Bank of Atlanta worked with the Federal Deposit Insurance Corporation to create MoneySmart curriculum modules on low-income investment. The Kansas City Reserve Bank cosponsored a major conference on entrepreneurship with the Association for Enterprise Opportunity. Together with the San Francisco and Minneapolis Reserve Banks, the Kansas City Reserve Bank also continued work on several Indian country initiatives focused on improving the financial literacy and housing options of Native Americans. The three Banks continued to promote the adoption of uniform commercial codes to facilitate tribes' efforts to borrow from off-reservation partners or other tribes. The Federal Reserve Bank of Dallas engaged in efforts to promote financial education in the workplace, including sponsorship of a highly successful seminar for human resource professionals attended by approximately 80 employers, who in turn represented 380,000 employees. The Richmond Reserve Bank released two issues of its journal MarketWise (731 KB PDF), one which featured an article on the earned-income tax credit (EITC). The New York Reserve Bank cosponsored a conference with the New York City Office of Financial Empowerment that promoted the EITC. As a result of the conference, a statewide coalition of EITC practitioners was created, and several statewide asset-building strategies for low- and moderate-income communities were adopted.
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.") Among other issues, council discussions in 2007 focused on two significant topics:
In its June and October meetings, the council addressed several issues related to the Board's rulemaking authority under HOEPA: whether the Board should issue rules or guidance, the possibility of prohibiting or restricting certain loan terms or practices in subprime loans, the definition of "subprime," and the role and timing of the disclosures provided to consumers during the loan-making process.
Several consumer representatives strongly supported issuing rules under HOEPA rather than guidance. Consumer representatives expressed the view that guidance puts supervised institutions at a competitive disadvantage to other mortgage lenders that do not have to comply with guidance. Rules, however, would apply to all mortgage lenders, not just federally supervised institutions. Consumer representatives noted that rules would also provide consumers with a private right of action. Several members stated that rulemaking may be appropriate for areas in which the Board can establish clear, bright lines for regulatory supervision but that guidance is the best way to ensure that institutions have appropriate flexibility to meet consumers' needs.
In considering whether proposed rules on mortgage lending should apply to the subprime mortgage market, council members generally urged the Board to define "subprime" not by borrower characteristics but according to the type of loan or its terms, such as a loan's annual percentage rate. An industry member endorsed the definition of "subprime" that the Board used in earlier guidance and cautioned against using Home Mortgage Disclosure Act (HMDA) standards as a pricing criterion for subprime loans, because the HMDA standards may not capture all subprime loans.
Several members urged the Board to ban prepayment penalties, particularly for subprime loans. They expressed concerns that, for subprime borrowers, prepayment penalties are not balanced by lower interest rates and often prevent borrowers from graduating into prime loans. Other members acknowledged problems with using prepayment penalties in the subprime market but said the penalties can be a useful tool and yield lower interest rates for consumers. These members urged the Board to regulate prepayment penalties to ensure that borrowers receive a choice about whether to have a prepayment penalty, which may result in a lower interest rate for them. A consumer representative suggested that prepayment penalties for adjustable-rate mortgages should expire 60 days before the first interest-rate reset on such a loan.
Council members generally agreed that it is a sound underwriting practice to require borrowers to make monthly payments to escrow accounts for taxes and insurance, as loans that include escrow payments generally perform better. There was also consensus on the importance of clearly disclosing whether an advertised payment amount includes a borrower's taxes and insurance. Recognizing the financial vulnerability of subprime borrowers, members generally agreed that the Board should mandate that escrow accounts be established for subprime loans. Some members suggested that escrow accounts should not be required for borrowers who take out prime loans. Members had a variety of views about initially mandated escrow accounts that borrowers could later opt out of. Both consumer and industry representatives generally agreed that any opt-out decision should not be made at loan closing and that clear disclosure of any escrow requirement and opt-out provision is paramount.
Several council members commented on the need for stated-income loans, especially in immigrant communities and for borrowers who engage in cash transactions or are otherwise not connected with mainstream financial institutions. The members emphasized the importance of sound, responsible underwriting for stated-income loans and urged that lenders be given flexibility to use nontraditional, third-party forms of income documentation. Some members highlighted the importance of providing borrowers with clear disclosures for stated-income loans to ensure that these borrowers are aware they may not be receiving the lowest rate for which they qualify.
Council members generally agreed that the Board should require lenders to ensure borrowers' ability to repay a loan for a reasonable term by underwriting the loan to the fully indexed rate. Some members commented that such a standard would also benefit investors by giving them greater assurance about the quality of the loans they are purchasing. Members disagreed about the length of time for which ability to repay should be considered. Some industry representatives cautioned that setting too strict a standard could inappropriately restrict access to credit.
Members agreed on the importance of providing consumers with simplified, plain-language disclosures for mortgage products. Several members identified key terms that should be clearly and concisely disclosed. Some members expressed concern, however, that simplified disclosures may not sufficiently inform borrowers about the more complex or exotic mortgage products being offered; they suggested such products may require a different type of disclosure. Some members supported a requirement that Truth in Lending Act (TILA) disclosures be provided earlier in the loan-making process for nonpurchase mortgage loans. They also emphasized that TILA disclosures should accurately reflect the terms of the transaction.
In a discussion of yield-spread premiums (YSPs), several members stated that many consumers do not know about YSPs or understand how they work. Members agreed on the importance of providing borrowers with transparent YSP disclosures. Several consumer representatives expressed concern about abusive practices related to YSPs; for example, a consumer may receive a higher interest rate because his or her mortgage broker has an agreement to receive a YSP from a certain lender, or some lenders may combine YSPs and discount points, resulting in higher fees for borrowers. An industry member expressed the view that banning YSPs would hurt small broker businesses by eliminating a key source of their compensation and would put small loan originators at a competitive disadvantage to large lenders, thereby leaving consumers with fewer choices in the marketplace.
At its March meeting, the council discussed the recent increase in home foreclosures in a number of markets across the country. Several members described the impact of defaults and foreclosures on their communities: large concentrations of abandoned and vacant properties and the associated need to enhance policing efforts and other city services, a rise in homelessness, decreasing property values, and declining tax revenues for local governments. Some members noted a disproportionate concentration of foreclosures in communities that are predominately Latino or African American; members also shared concerns about foreclosure "rescue" scams and the "flipping" of previously foreclosed homes, and they stressed the importance of having community-based organizations coordinate and manage rescue funds for homeowners facing foreclosure. Members discussed possible ways to assist households facing default or foreclosure. Several consumer representatives described the difficulty credit counselors face when they try to contact servicers on behalf of borrowers. Members also noted the challenges associated with restructuring mortgages that have been securitized.
Members commented on the proposed statement on subprime mortgage lending issued by the federal financial regulatory agencies in March. The proposal addressed concerns that (1) subprime borrowers may not fully understand the risks and consequences of products like adjustable-rate mortgage loans and (2) these products may pose an elevated risk to financial institutions. Most members supported the guidance. Several members voiced approval for the provision recommending that lenders underwrite a loan at its fully indexed rate. They were also supportive of the recommendation that a loan's underwriting include an escrow component for taxes and insurance. Some members supported extending the principles of the guidance to prime mortgage lending, but others noted possible difficulties to segmenting the mortgage market in this way. Several members shared concerns that applying the guidance to prime loans might reduce the variety of loan products available to consumers. Members representing the financial services industry questioned whether the guidance might lead to the creation of a loan-suitability standard, that is, a requirement that lenders gauge the suitability of a loan product for certain borrowers. Industry members generally thought such a standard could limit the array of loan products available to consumers. Several members emphasized the need for a new Federal Housing Administration loan product that could meet the needs of subprime borrowers.
In May, the Board issued proposed amendments to Regulation Z, which implements the Truth in Lending Act, that would affect the content, format, and timing of credit card disclosures. The council's discussions in June and October focused on several dimensions of the proposal: the summary table, or "Schumer box," for application and solicitation disclosures; account-opening disclosures; periodic statements; and change-in-terms notices.
Several members commended the Board for proposed revisions to the Schumer box. By highlighting key information on credit card terms, the revisions would facilitate consumers' ability to compare different credit cards, members said. Several consumer representatives urged the Board to include a "typical APR" in the Schumer box. This APR would include the fees that consumers typically pay during a billing cycle and could alert them to the potential costs of using the credit card. A typical APR would also allow consumers to compare the fees different cards charge. Several industry members objected to the idea of a typical APR, however, expressing concerns that such a rate would be misleading and unhelpful, as many fees are not necessarily incurred by every consumer. Industry representatives supported the disclosure of fees in dollar amounts rather than as a percentage of the balance, noting that the Board's consumer testing found that consumers more readily understand dollar amounts than percentages. Several consumer representatives commended the Board for proposing a disclosure to inform consumers about the amount of available credit if the account-opening fees are 25 percent or more of the credit limit, as is sometimes the case with subprime credit cards.
For account-opening disclosures, members generally supported the Board's proposal to require a summary table similar to the Schumer box. They noted that a summary would make it easy for consumers to compare the actual account terms with those they were originally offered. Some industry and consumer representatives disagreed about the proposal to allow the verbal disclosure of some fees at the time a consumer incurs a charge, instead of relying on account-opening disclosures to disclose all fees.
Members generally approved of the new format for periodic statements, particularly the clear grouping of fees and the year-to-date totals for interest charges and fees. They noted the importance of highlighting the late-payment notice by requiring its placement on the front of the statement and emphasized the importance of clearly disclosing day and time deadlines for payments (that is, the cutoff before late-payment charges apply). Several consumer representatives stated that the effective APR disclosure should be retained because it more accurately accounts for the total cost of credit. Industry representatives, however, expressed their preference for eliminating the effective APR disclosure on the basis that, even with the change in labeling, the figure is confusing to consumers. The industry members stated that the proposed year-to-date totals for interest and fees represent the most meaningful disclosure to consumers of the total cost. Several members commended the Board on its use of consumer testing to develop the credit card disclosures and urged the Board to continue using both qualitative and quantitative testing as it determines how best to communicate complicated financial terms to consumers.
For change-in-terms notices, several consumer representatives expressed support for requiring 45 days' advance notice for rate increases triggered by a consumer's default or delinquency. They emphasized that advance notice will give consumers the opportunity to pursue other credit options. Industry representatives disagreed with providing a 45-day advance notice of increased rates when the increase is prompted by consumer default. They noted that default pricing is properly disclosed to consumers at account opening and that the triggering of a default rate by a consumer's action does not constitute a change in terms. Industry representatives expressed support for 45 days' advance notice of charges or changes in terms that have not been previously disclosed. Several industry representatives opposed having an opt-out when a rate increase is prompted by default or delinquency, but they supported a consumer's right to opt out in other cases.
The council also discussed credit card issuers' practice of offering a 0 percent APR for consumers' balance transfers from other credit cards and a higher APR for purchases. Typically, issuers then typically allocate consumers' payments to balances that have the lowest APR--allowing high-APR balances to remain high. Several consumer representatives urged the Board to prohibit policies that apply all payments to the lowest-rate balance first, noting that many consumers do not understand how such low-APR products work. Several industry representatives expressed the view that such payment-allocation methods are appropriate business practices and that consumers benefit from low-APR cards because they receive an interest-free loan for a certain period of time. Industry representatives did acknowledge the need for better disclosures.
There was consensus among council members on what they consider to be best practices for due dates on credit card payments: if creditors do not receive mail or post payments on weekends or holidays, then payments that arrive on those days should be posted on the next business day and should be credited as on time if the due date fell on that weekend or holiday. Similarly, a payment that has a weekend or holiday due date should be credited as on time if it is received on the next business day.
At their March meeting, council members discussed additional topics, including model privacy notices, proposed amendments to Regulation E, and several aspects of Regulation CC.
To comply with their disclosure obligations on the sharing of consumer information under the Gramm-Leach-Bliley Act, financial institutions may use the model privacy form developed jointly by the federal financial regulatory agencies and the Federal Trade Commission. Members generally commended the agencies for the proposed form, noting that the prototype was a marked improvement over current privacy notices because it is clearer and easier to navigate--and thus makes it easier for consumers to compare different privacy policies. Some industry representatives expressed concerns that the form did not sufficiently address additional notice and opt-out requirements that may exist under state laws; they urged the agencies to preempt state privacy law requirements. Institutions may not use the form if they lack confidence that doing so would satisfy their obligations under state laws, industry representatives said.
The council provided feedback on proposed amendments to Regulation E, which implements the Electronic Fund Transfer Act, that would eliminate the receipt requirement at point-of-sale and other electronic terminals for debit card transactions of $15 or less. Members acknowledged that consumers increasingly use credit and debit cards for small-dollar transactions but disagreed about whether receiving a receipt helps consumers manage their finances. Industry members generally expressed the view that consumers receive minimal benefit from receipts for small-dollar transactions. They noted that consumers would continue to receive information about each of their transactions on periodic statements. Several consumer representatives opposed the Board's proposal, stating that receipts are an important tool to help consumers accurately track their transactions, obtain reimbursements, and provide documentation in a dispute. Several industry representatives expressed concern that the costs associated with providing terminal receipts for debit card transactions are burdensome and impede industry efforts to create cashless payment options in certain retail settings. Consumer representatives generally regarded the proposed $15 threshold as too high. Industry representatives, however, suggested that the threshold should be increased to $25, consistent with current credit card rules that waive requirements for authorization by signature or personal identification number for transactions less than this amount.
Members discussed several aspects of Regulation CC, which governs the availability of funds deposited in checking accounts and the collection and return of checks. They focused particularly on scams involving fraudulent checks and on the exception-hold practices that financial institutions can use to protect themselves and their customers from these scams. Members expressed concern that the brief hold periods permitted under Regulation CC for certain checks may impede financial institutions' ability to conduct appropriate due diligence. Several industry representatives emphasized the importance of cooperation and information-sharing among financial institutions when an institution has concerns that a check may be fraudulent. Some members suggested that enhanced enforcement to require a paying institution to return a check item promptly could be helpful in this process. Others recommended that the federal financial regulatory agencies standardize and coordinate fraudulent-check alerts rather than issue separate alerts. Members highlighted the importance of education to increase awareness of fraudulent-check issues among both financial institution employees and consumers.
1. See the (testimony of Chairman Ben S. Bernanke, September 20, 2007.Return to text
2. In 1994, HOEPA was enacted in response to reports of predatory home equity lending pract2, ices in underserved markets. HOEPA amended the Truth in Lending Act by imposing additional disclosure requirements and other limits on certain high-cost, home-secured loans. Under HOEPA, the Board is authorized to issue rules that prohibit certain acts or practices in connection with home mortgage loans. HOEPA also directs the Board to periodically hold public hearings to examine the home equity lending market and the adequacy of existing regulatory and legislative provisions for protecting the interests of consumers, particularly low-income consumers.Return to text
3. For Governor Kroszner's opening comments, see www.federalreserve.gov/newsevents/speech/kroszner20070614a.htm.Return to text
4. For a list of panelists and the agenda, see www.federalreserve.gov/newsevents/press/bcreg/20070612a.htm.Return to text
5. See www.federalreserve.gov/newsevents/press/bcreg/20071218a.htm.Return to text
6. See the testimony of Sandra F. Braunstein, March 27, 2007.Return to text
7. See www.federalreserve.gov/newsevents/press/bcreg/20070417a.htm (press release) and www.federalreserve.gov/boarddocs/srletters/2007/sr0706.htm (Consumer Affairs letter).Return to text
8. For more information, see Q&A §__.22(a)-1 (Interagency Questions and Answers Regarding Community Reinvestment, July 11, 2001).Return to text
9. See www.federalreserve.gov/newsevents/press/bcreg/20070531b.htm.Return to text
10. See www.federalreserve.gov/newsevents/press/bcreg/20070629a.htm (press release) and www.federalreserve.gov/boarddocs/srletters/2007/sr0712.htm (Consumer Affairs letter).Return to text
11. See www.federalreserve.gov/newsevents/press/bcreg/20070904a.htm (press release) and www.federalreserve.gov/boarddocs/srletters/2007/sr0716.htm (Consumer Affairs letter).Return to text
12. See www.federalreserve.gov/newsevents/press/bcreg/20070717a.htm.Return to text
13. See www.sf.frb.org/community/issues/assets/preservation/index.html.Return to text
14. See the testimony of Governor Randall S. Kroszner, December 6, 2007 (www.federalreserve.gov/newsevents/testimony/kroszner20071206a.htm), and October 24, 2007 (www.federalreserve.gov/newsevents/testimony/kroszner20071024a.htm).Return to text
15. See the testimony of Governor Frederic S. Mishkin, June 7, 2007.Return to text
16. See www.federalreserve.gov/newsevents/press/bcreg/20071101a.htm.Return to text
17. See www.federalreserve.gov/newsevents/press/bcreg/20070628a.htm.Return to text
18. See www.federalreserve.gov/newsevents/press/bcreg/20071025a.htm.Return to text
19. See www.federalreserve.gov/newsevents/press/bcreg/20071031a.htm.Return to text
20. See www.federalreserve.gov/newsevents/press/bcreg/20071129a.htm.Return to text
21. The 2007 reporting period for examination data was July 1, 2006, through June 30, 2007.Return to text
22. 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
23. See the testimony of Sandra F. Braunstein, director, Division of Consumer and Community Affairs, July 25, 2007.Return to text
24. Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner, "The 2006 HMDA Data," Federal Reserve Bulletin, December 2007.Return to text
25. See the testimony of Sandra F. Braunstein, director, Division of Consumer and Community Affairs, October 24, 2007.Return to text
26. See the testimony of Sandra F. Braunstein, director, Division of Consumer and Community Affairs, May 21, 2007.Return to text
27. The 2007 reporting period for examination data was July 1, 2006, through June 30, 2007.Return to text
28. See www.federalreserve.gov/newsevents/press/other/20070216a.htm.Return to text
29. See www.federalreserve.gov/newsevents/press/bcreg/20070417a.htm.Return to text
30. The forty-two applications do not include the nine protested applications.Return to text
31. See the speech by Governor Randall S. Kroszner, August 1, 2007. See also the testimony of Sandra F. Braunstein, director, Division of Consumer and Community Affairs, October 30, 2007.Return to text
32. Because the agencies use different methods to compile the data, the information presented here supports only general conclusions. The 2007 reporting period was July 1, 2006, through June 30, 2007.Return to text
33. FFIEC agencies represented on the working group are the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration. Representatives from the Conference of State Bank Supervisors are also participating.Return to text
34. Includes complaints about interest rates, terms, or fees other than late fees, overlimit fees, prepayment fees, fees related to credit insurance, or the calculation of the finance charge.Return to text
35. Includes adjustable-rate mortgages; residential construction loans, open-end home equity lines of credit, home improvement loans, home purchase loans, home refinance or closed-end loans; and reverse mortgages.Return to text
36. See www.federalreserve.gov/communitydev/default.htm.Return to text
37. See www.federalreserve.gov/newsevents/speech/bernanke20070330a.htm.Return to text