For immediate release

The Federal Reserve Board has approved a risk-focused consumer compliance supervision program and extended the consumer examination frequency schedule for state member banks and foreign banking organizations. Implementation of the new program will be phased in during l998. These actions will enhance the effectiveness of the Federal Reserve System's consumer compliance examination program, reduce the burden of examinations for supervised institutions, and more effectively deploy Federal Reserve System examination resources. The new frequency guidelines extend the examination cycle from l8-24 months to 36 months for state member banks having an exemplary compliance history and assets of less than $250 million. An exemplary compliance history is defined as two satisfactory or better ratings for both consumer compliance and the Community Reinvestment Act. Banks with assets greater than $250 million will be examined every 24 months, while banks with performance problems will be examined once every l2 months. The consumer exminations performed under the new progam will be conducted concurrently with examinations for fair lending laws and the CRA, both of which are covered under separate but complimentary programs that reflect the new frequency schedule. An essential component of the new examination approach is the correlation of two risk elements: regulation risk -- which involves an evaluation of the potential consequences to the consumer or the bank of noncompliance with consumer protection laws and regulations; and product risk -- where examiners will identify the potential risks associated with financial products or services relative to a bank's market position, management expertise, and business orientation. The relationships between these two risk elements will then be correlated to determine the level of review necessary to verify a bank's compliance posture. The primary advantage of this examination approach is that it targets examination resources to higher-risk areas without compromising the integrity of the examination process. The new program also places a greater emphasis on outreach and monitoring activities. The outreach components of the program will be designed to foster compliance through regular contacts with state member banks. These contacts will be conducted apart from examination and supervisory activities, and will include such items as training seminars and advisory visits. Monitoring efforts will be performed between examinations and will be designed to alert examiners to any potential deterioration in a bank's consumer compliance posture. The conclusions drawn from the monitoring process will be considered when establishing the scope, timing, and staffing of future examinations.

1997 Banking and consumer regulatory policy