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Board of Governors of the Federal Reserve System
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Annual Report 2014

Consumer and Community Affairs

The Division of Consumer and Community Affairs (DCCA) has primary responsibility for carrying out the Board of Governor's role in consumer financial protection and community development. DCCA conducts consumer-focused supervision, research, and policy analysis, as well as implements relevant statutory requirements and facilitates community development. Through these efforts, the division works to ensure that consumer and community perspectives inform Federal Reserve policy, actions, and research in advancing DCCA's mission to promote a fair and transparent consumer financial services marketplace and effective community development.

Throughout 2014, the division engaged in numerous consumer and community-related functions and policy activities in the following areas:

  • Formulating consumer-focused supervision and examination policy to ensure that financial institutions for which the Federal Reserve has authority comply with consumer protection and meet requirements of community reinvestment laws and regulations. The division provided oversight for the Reserve Bank consumer compliance supervision and examination programs in state member banks and bank holding companies (BHCs) through its policy development, examiner training, and supervision oversight programs, which include enforcement of fair lending, unfair or deceptive acts or practices (UDAP), and flood insurance rules; analysis of bank and BHC applications in regard to consumer protection; and processing of consumer complaints.
  • Conducting rigorous research, analysis, and data collection to inform Federal Reserve and other policymakers about consumer protection and community economic development issues and opportunities. The division analyzed emerging issues in consumer financial services research, policies, and practices in order to understand their implications for the economic and supervisory policies that are core to the central bank's functions, as well as to gain insight into consumer decisionmaking related to financial services, implications of the financial crisis on young workers, and access to credit for small businesses.
  • Engaging, convening, and informing key stakeholders to identify emerging issues and advance what works in community reinvestment and consumer protection. The division continued to promote fair and informed access to financial markets for all consumers, particularly the needs of underserved populations, by engaging lenders, government officials, and community leaders. Throughout the year, DCCA convened programs to share information and research on effective community development policies and strategies.
  • Writing and reviewing regulations that effectively implement consumer protection and community reinvestment laws. The division manages the Board's regulatory responsibilities with respect to certain entities and specific statutory provisions of the consumer financial services and fair lending laws. DCCA drafted regulations and issued interpretations and compliance guidance for the industry and the Reserve Banks.

Supervision and Examinations

DCCA develops and supports supervisory policy and examination procedures for consumer protection laws and regulations, as well as the Community Reinvestment Act (CRA), as part of its supervision of the organizations for which the Board has authority, including holding companies, state member banks, and foreign banking organizations. The division also administers the Federal Reserve System's risk-focused program for assessing consumer compliance risk at the largest bank and financial holding companies in the System, with division staff ensuring that consumer compliance risk is effectively integrated into the consolidated supervision oversight of the holding company. The division oversees the efforts of the 12 Reserve Banks to ensure that consumer protection laws and regulations are rigorously and consistently enforced for the 850 state member banks that the Federal Reserve supervises for compliance with consumer protection and community reinvestment laws and regulations. Division staff provide guidance and expertise to the Reserve Banks on consumer protection laws and regulations, bank and BHC application analysis and processing, examination and enforcement techniques and policy matters, examiner training, and emerging issues. Finally, staff members participate in interagency activities that promote consistency in examination principles, standards, and processes.

Examinations are one of the Federal Reserve's methods of ensuring compliance with consumer protection laws and assessing the adequacy of consumer compliance risk-management systems within regulated entities. During 2014, the Reserve Banks completed 225 consumer compliance examinations of state member banks and 31 examinations of foreign banking organizations, 1 examination of an Edge Act corporation, and 1 examination of an agreement corporation.1

Bank Holding Company Consolidated Supervision

During 2014, staff reviewed more than 115 bank and financial holding companies to ensure consumer compliance risk was appropriately incorporated into the consolidated risk-management program for the organization. Division staff participated with staff from the Board's Division of Banking Supervision and Regulation on numerous projects related to ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), including standards for assessing corporate governance and continued integration of savings and loan holding companies (SLHCs) under Federal Reserve supervision.

In November 2014, the Federal Reserve issued a detailed listing of Federal Reserve supervisory guidance documents that are applicable to SLHCs.2 The listing is supplemental to previously issued guidance that informed SLHCs to comply with Federal Reserve guidance and not Office of Thrift Supervision (OTS) guidance issued prior to July 21, 2011--the date that supervision and regulation of SLHCs transferred from the OTS to the Federal Reserve.

Mortgage Servicing and Foreclosure

Payment Agreement Status

Throughout 2014, Board staff continued to work to oversee and implement the enforcement actions against 16 mortgage loan servicers that were issued by the Federal Reserve and the Office of the Comptroller of the Currency (OCC) between April 2011 and April 2012. At that time, along with other requirements, the two regulators directed servicers to retain independent consultants to conduct comprehensive reviews of foreclosure activity to determine whether eligible3 borrowers suffered financial injury because of servicer errors, misrepresentations, or other deficiencies. The file review initiated by the independent consultants, combined with a significant borrower outreach process, was referred to as the Independent Foreclosure Review (IFR).

In 2013, the regulators entered into agreements with 15 of the mortgage loan servicers to replace the IFR with direct cash payments to all eligible borrowers and other assistance (the Payment Agreement).4 The participating servicers agreed to pay an estimated $3.9 billion to 4.4 million borrowers whose primary residence was in a foreclosure process in 2009 or 2010. The Payment Agreement also required the servicers to contribute an additional $5.8 billion dollars in other foreclosure prevention assistance, such as loan modifications and forgiveness of deficiency judgments. For the participating servicers, fulfillment of the agreement will satisfy the foreclosure review requirements of the enforcement actions issued by the regulators in 2011 and 2012. The Payment Agreement did not affect the servicers' continuing obligations under the enforcement actions to address deficiencies in their mortgage servicing and foreclosure policies and procedures.

A paying agent, Rust Consulting, Inc., (Rust) was retained to administer payments to borrowers on behalf of the participating servicers. Beginning in April 2013, a letter with an enclosed check was sent to borrowers who had a foreclosure action initiated, pending, or completed in 2009 or 2010 with any of the participating servicers. Letters with checks were mailed to eligible borrowers throughout 2013 and 2014, including checks that were reissued upon the borrower's request due to expiration, a request for a change in payee, or a request by borrowers to split the check amongst the borrowers on the loan. For checks that have not been cashed or were returned undeliverable, the agencies directed Rust to expand its efforts to locate more-current address information for the unpaid borrowers. This resulted in additional consumers receiving payments under the agreements, with replacement checks scheduled to be sent to any updated address or the last known address on record for those borrowers who have not yet cashed their checks.

As of December 31, 2014, $3.4 billion has been distributed through 3.7 million checks, representing 87 percent of the total value of the funds. Receiving a payment under the agreement will not prevent borrowers from taking any action they may wish to pursue related to their foreclosure. Servicers are not permitted to ask borrowers to sign a waiver of any legal claims they may have against their servicer in connection with receiving payment.5

Foreclosure Prevention Actions

The Payment Agreement also required servicers to undertake well-structured loss-mitigation efforts focused on foreclosure prevention, with preference given to activities designed to keep borrowers in their homes through affordable, sustainable, and meaningful home preservation actions within two years from the date the agreement in principle was reached. The foreclosure prevention actions are expected to provide significant and meaningful relief or assistance to qualified borrowers and, as stated in the agreement, "should not disfavor a specific geography within or among states, nor disfavor low and/or moderate income borrowers, and not discriminate against any protected class."

Servicers may fulfill their obligations through three specific consumer-relief activities set forth in the National Mortgage Settlement, including first-lien loan modifications, second-lien loan modifications, and short sales or deeds-in-lieu of foreclosure. Servicers were given the option, subject to non-objection from their regulator, to meet their foreclosure prevention assistance requirements by paying additional cash into the qualified settlement funds to be used for direct payments to consumers or by providing cash or other resource commitments to borrower counseling or education. Several of the participating servicers chose this option and have met their foreclosure prevention obligations.

As of December 31, 2014, all servicers have submitted reports detailing the consumer-relief actions they have taken to satisfy these requirements. The foreclosure prevention assistance actions reported include loan modifications, short sales, deeds-in-lieu of foreclosure, debt cancellation, and lien extinguishment. In order to receive credit toward the servicer's total foreclosure prevention obligation, the actions submitted must be validated by the regulators. A process has been established for a third party to conduct this validation and ensure that the foreclosure prevention assistance amounts meet the requirements of the amendments to the enforcement actions.

Servicer Efforts to Address Deficiencies

In addition to the foreclosure review requirements, the enforcement actions required mortgage servicers to submit acceptable written plans to address various mortgage loan servicing and foreclosure processing deficiencies. In the time since the enforcement actions were issued, the banking organizations have been implementing the action plans, including enhanced controls, and improving systems and processes. To date, the supervisory review of the mortgage servicers' action plans has shown that the banking organizations under the enforcement actions have implemented significant corrective actions with regard to their mortgage servicing and foreclosure processes, but that some additional actions need to be taken. Federal Reserve supervisory teams will continue to monitor and evaluate the servicers' progress on implementing the action plans to address unsafe and unsound mortgage servicing and foreclosure practices as required by the enforcement actions.

In July 2014, the Federal Reserve Board published a report regarding the IFR and the Payment Agreement that replaced the IFR. The report, which focused primarily on servicers regulated by the Federal Reserve, provides information on the process for the review of the foreclosure files during the IFR and file-review results--including servicer error rates during the IFR--up to the time the IFR was replaced.6 In addition, the report contains information on direct borrower payments and other assistance from the Payment Agreement and discusses the Federal Reserve's ongoing supervision of corrective actions the mortgage servicers are required to implement. After the Payment Agreement has been fully implemented, the Federal Reserve expects to publish data on the final status of the cash payments and the foreclosure prevention assistance as well as the status of corrective actions implemented by the mortgage servicers.

Supervisory Matters

Risk-Focused Supervision

On January 1, 2014, the Board implemented a new Community Bank Risk-Focused Consumer Compliance Supervision Program for state member banks with consolidated assets of $10 billion or less and their subsidiaries. The new program is designed to promote strong compliance risk-management practices and consumer protection at state member community banks. Under the updated program, consumer compliance examiners base the examination intensity more explicitly on the individual financial institution's risk profile, including its consumer compliance culture and how effectively it identifies and manages consumer compliance risk. The new program is intended to enhance the efficacy of the Board's supervision program and reduce regulatory burden on many community banking organizations.7

To ensure effective implementation of the Community Bank Risk-Focused Consumer Compliance Supervision Program, the Board undertook several examiner training and banker outreach initiatives. Consumer compliance examiner training was delivered through two Rapid Response webinars (discussed further in this section under "Ongoing Training Opportunities") and a daylong case study exercise conducted at each Reserve Bank. Banker outreach was provided in a public Outlook Live8 webinar in March 2014 and a Consumer Compliance Outlook newsletter9 article in the second-quarter 2014 edition.

In addition, the Board issued an enhanced examination frequency policy to complement the new Community Bank Risk-Focused Supervision Program. The frequency policy promotes effective supervision through deployment of examiner resources commensurate with an institution's size, compliance rating, and CRA rating while reducing burden on many community banks. This new policy expands the number of financial institutions subject to a longer consumer compliance and CRA examination frequency cycle, as follows:

  • 48 or 60 months for banks with assets less than $350 million and satisfactory or better compliance and CRA ratings (formerly the threshold was $250 million)
  • 36 months for financial institutions with assets between $350 million and $1 billion and satisfactory or better compliance and CRA ratings (formerly 24 months)

The new examination policy does not affect financial institutions with assets less than $250 million and those with assets more than or equal to $1 billion. The exam frequency schedule remains the same for these financial institutions and institutions with less than satisfactory compliance and/or CRA ratings, as follows:

  • 48 or 60 months for institutions with assets less than $250 million and satisfactory or better compliance and CRA ratings (48 months if the CRA rating is satisfactory; 60 months if the rating is outstanding)
  • 24 months for institutions with assets greater than or equal to $1 billion and satisfactory or better compliance and CRA ratings
  • 12 months for any institution with less than satisfactory ratings for either compliance or CRA
Enforcement Activities

Fair Lending and UDAP Enforcement

With respect to fair lending, pursuant to provisions of the Dodd-Frank Act that took effect July 21, 2011, the Consumer Financial Protection Bureau (CFPB) supervises state member banks with assets of more than $10 billion for compliance with the Equal Credit Opportunity Act (ECOA). The Board also has supervisory authority for compliance with the Fair Housing Act. For the 829 state member banks with assets of $10 billion or less, the Board retains the authority to enforce both the ECOA and the Fair Housing Act. With respect to the Federal Trade Commission Act, which prohibits UDAP, the Board has supervisory authority over state member banks, regardless of asset size.

Fair lending and UDAP reviews are conducted regularly within the supervisory cycle. Additionally, examiners may conduct fair lending and UDAP reviews outside of the usual supervisory cycle, if warranted by fair lending and UDAP risk. When examiners find evidence of potential discrimination or potential UDAP violations, they work closely with DCCA's Fair Lending Enforcement Section, which provides additional legal and statistical expertise and ensures that fair lending and UDAP laws are enforced consistently and rigorously throughout the Federal Reserve System.

With respect to fair lending, 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 determines whether further investigation is warranted. A DOJ investigation may result in a public civil enforcement action or settlement. Alternatively, the DOJ may decide to return the matter to the Board for administrative enforcement. When a matter is returned to the Board, staff ensure that the institution takes all appropriate corrective action. There were no referrals to the DOJ in 2014.

If there is a UDAP or fair lending violation that does not constitute a pattern or practice under ECOA, the Federal Reserve acts on its own to ensure that the violation is remedied by the bank. Most lenders readily agree to correct fair lending and UDAP violations. In fact, lenders often take corrective action as soon as they become aware of a problem. Thus, the Federal Reserve generally uses informal supervisory tools (such as memoranda of understanding between banks' boards of directors and the Reserve Banks, or board resolutions) to ensure that violations are corrected. When necessary, the Board can bring public enforcement actions.

Given the complexity of this area of supervision, the Federal Reserve seeks to provide clarity on its perspectives and processes to the industry and the public. DCCA staff participates in numerous meetings, conferences, and trainings sponsored by consumer advocates, industry representatives, and interagency groups. Fair Lending Enforcement staff meet regularly with consumer advocates, supervised institutions, and industry representatives to discuss fair lending matters and receive feedback. Through this outreach, the Board is able to address emerging fair lending issues and promote sound fair lending compliance. For example, in 2014, the Board sponsored a free interagency webinar on fair lending supervision through Compliance Outlook Live, which was attended by more than 5,000 registrants, most of which were community banks.10

In 2014, the Board issued a consent order to cease and desist and a civil money penalty assessment of $3.5 million against an institution and its non-bank agent for deceptive practices associated with an account that was in violation of the Federal Trade Commission Act.

The actions addressed in this order involved several practices that, at various points in the financial aid refund selection process, misled students about various aspects of the account, including terms and fees.11

Flood Insurance

The National Flood Insurance Act imposes certain requirements on loans secured by buildings or mobile homes located in, or to be located in, areas determined to have special flood hazards. Under the Federal Reserve's Regulation H, which implements the act, state member banks are generally prohibited from making, extending, increasing, or renewing any such loan unless the building or mobile home, as well as any personal property securing the loan, are covered by flood insurance for the term of the loan. The law requires the Board and other federal financial institution regulatory agencies to impose civil money penalties when they find a pattern or practice of violations of the regulation. The civil money penalties are payable to the Federal Emergency Management Agency (FEMA) for deposit into the National Flood Mitigation Fund.

The enactment of two statutes, the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) and the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA), requires the federal financial institution supervisory agencies to update certain provisions of the federal flood insurance regulations. To that end, the Board and four other federal agencies have issued two joint notices of proposed rulemaking, one in October 2013 and a second in October 2014, to implement portions of the Biggert-Waters Act and HFIAA with respect to private flood insurance, the escrow of flood insurance payments, and the forced placement of flood insurance. The agencies continue work to finalize regulations to implement these statutes.

The Biggert-Waters Act also increased the maximum limits of building coverage available for non-condominium residential buildings designed for use for five or more families, classified as "Other Residential" buildings. FEMA announced the availability of insurance under the Standard Flood Insurance Policy, or SFIP, reflecting these increased maximum limits effective June 1, 2014. In response to the availability of SFIPs with the increased limits, the federal financial institution supervisory agencies issued the "Interagency Statement on Increased Maximum Flood Insurance Coverage for Other Residential Buildings" on May 30, 2014.12 This statement conveys the agencies' expectations of supervised institutions with regard to any loans secured by other residential buildings located in a special flood hazard area that may be affected by the availability of increased maximum insurance for these types of properties.

In 2014, the Federal Reserve issued 14 formal consent orders and assessed $143,925 in civil money penalties against state member banks to address violations of the flood regulations. These statutorily mandated penalties were forwarded to the National Flood Mitigation Fund held by the Department of the Treasury for the benefit of FEMA.

Community Reinvestment Act

The CRA requires that the Federal Reserve and other federal banking and thrift regulatory agencies encourage financial institutions to help meet the credit needs of the local communities in which they do business, consistent with safe and sound operations. To carry out this mandate, the Federal Reserve

  • examines state member banks to assess their compliance with the CRA;
  • considers state member banks' and bank holding companies' CRA performance in context with other supervisory information when analyzing applications for mergers and acquisitions; and
  • disseminates information about community development techniques to bankers and the public through Community Development offices at the Reserve Banks.

The Federal Reserve assesses and rates the CRA performance of state member banks in the course of examinations conducted by staff at the 12 Reserve Banks. During the 2014 reporting period, the Reserve Banks completed 189 CRA examinations of state member banks. Of those banks examined, 18 were rated "Outstanding," 169 were rated "Satisfactory," two were rated "Needs to Improve," and none were rated "Substantial Non-Compliance."

In April, the Board, the OCC, and the Federal Deposit Insurance Corporation (FDIC) published revised large-institution CRA examination procedures, which explain how community development activities that benefit a broader statewide or regional area that includes an institution's assessment area(s) and investments in nationwide funds will be considered when evaluating an institution's CRA performance, assigning ratings, and developing public performance evaluations. The revised examination procedures reflect, and are consistent with, revisions to the Interagency Questions and Answers Regarding Community Reinvestment that were published in November 2013.13

In September, the Board, the OCC, and the FDIC proposed additional revisions to the Interagency Questions and Answers.14 The proposed guidance addresses additional questions raised by bankers, community organizations, and others regarding the agencies' CRA regulations. In particular, the proposed revisions to the questions and answers would

  • address alternative systems for delivering retail banking services;
  • add examples of innovative or flexible lending practices;
  • address community development-related issues by (1) clarifying guidance on economic development, (2) providing examples of community development loans and activities that are considered to revitalize or stabilize an underserved nonmetropolitan middle-income geography, and (3) clarifying how community development services are evaluated; and
  • offer guidance on how examiners evaluate the responsiveness and innovativeness of an institution's loans, qualified investments, and community development services.

The agencies are currently reviewing comments received in response to the proposed revisions to the Interagency Questions and Answers.

Mergers and Acquisitions

The Federal Reserve analyzes expansionary applications by banks or BHCs, taking into account the likely effects of the acquisition on competition, the convenience and needs of the communities to be served, the financial and managerial resources and future prospects of the companies and banks involved, and the effectiveness of the company's policies to combat money laundering. As part of this process, DCCA evaluates whether the institutions are currently meeting the convenience and needs of their communities and existing managerial resources, as well as the institutions' ability to meet the convenience and needs of their communities and their managerial resources after the proposed transaction.

The CRA requires the Federal Reserve to consider a depository institution's record of helping to meet the credit needs of its local communities in evaluating applications for mergers, acquisitions, and branches. An institution's most recent CRA performance evaluation is a particularly important, and often controlling, consideration in the applications process because it represents a detailed on-site evaluation of the institution's performance under the CRA by its federal supervisor.

As part of the analysis of managerial resources, the Federal Reserve reviews the institution's record of compliance with consumer protection laws and regulations. The institution's most recent consumer compliance rating is central to this review because, like the CRA performance evaluation, it represents the detailed findings of the institution's supervisory agency.

Less than satisfactory CRA or consumer compliance ratings can pose an impediment to the processing and approval of the application. Federal Reserve staff gather additional information about CRA and consumer compliance performance when the financial institution(s) involved in an application have less than satisfactory CRA or compliance ratings or when the Federal Reserve receives comments from interested parties that raise CRA or consumer compliance issues. To further enhance transparency on this process, the Board issued guidance to the public in February 2014 describing the Federal Reserve's approach to applications and notices, indicating those that may not satisfy statutory requirements for approval of a proposal or otherwise raise supervisory or regulatory concerns.15

The Board provides information on its actions associated with these merger and acquisition transactions, issuing press releases and the Board Orders for each.16 As part of the February 2014 guidance, the Federal Reserve also informed the industry and public that the Federal Reserve would start publishing a semiannual report that provides pertinent information on applications and notices filed with the Federal Reserve. The first of these reports was issued in November 2014, covering the first six months of 2014.17 The report included statistics on the number of proposals that had been approved, denied, and withdrawn, as well as general information about the length of time taken to process proposals. Additionally, the report discussed common reasons that proposals had been withdrawn from consideration. Board staff also conducted educational webinars to discuss this guidance and report with banking institutions and members of the public.18 Because these applications are of interest to the public, they often generate comments that raise various issues for Board staff to consider in their analyses of the supervisory and lending records of the applicants. With respect to consumer compliance and community reinvestment, commenters often allege that various institutions fail to make credit available to certain minority groups and to low- and moderate-income (LMI) individuals, or when they do extend credit to those borrowers, it is at a higher cost. Commenters also often express their view that the institutions fail to meet the needs of small businesses in LMI geographies and/or to adequately fulfill their CRA obligation to meet the credit needs of all of the communities in their assessment area, particularly LMI areas.

In evaluating the applications and the merits of public comments, the Board considers information provided by applicants and analyzes supervisory information, including examination reports with evaluations of compliance with fair lending and other consumer protection laws and regulations, and confers with other regulators for their supervisory views. The Board conducts analyses to understand the lending activities of the applicant and target institutions.

During 2014, the Board considered over 100 applications--with a range of topics from change in control notices, to branching requests, to mergers and acquisitions--with outstanding issues involving compliance with consumer protection statutes and regulations, including fair lending laws and the CRA. DCCA staff analyzed the following 14 unrelated notices and applications for transactions involving bank mergers and branching that involved adverse public comments on CRA issues or consumer compliance issues, such as fair lending, which the Board considered and approved:19

  • Community & Southern Holdings, Inc., Atlanta, Georgia, to acquire Verity Capital Group, Inc. and thereby indirectly acquire its subsidiary bank, Verity Bank, both of Winder, Georgia, was approved in March.
  • PacWest Bancorp, Los Angeles, California, and its controlling shareholders, CapGen Capital Group II LP and CapGen Capital Group II LLC, both of New York, New York, to acquire CapitalSource Inc. and thereby indirectly acquire its subsidiary industrial bank, CapitalSource Bank, both of Los Angeles, was approved in April.
  • Umpqua Holdings Corporation, Portland, Oregon, to merge with Sterling Financial Corporation and thereby acquire its subsidiary bank, Sterling Savings Bank, both of Spokane, Washington, was approved in April.
  • Old National Bancorp, Evansville, Indiana, to merge with Tower Financial Corporation and thereby indirectly acquire its subsidiary bank, Tower Bank and Trust Company, both of Fort Wayne, Indiana, was approved in April.
  • Mercantile Bank Corporation, Grand Rapids, to merge with Firstbank Corporation, Alma, and thereby indirectly acquire its subsidiary banks, Firstbank, Mount Pleasant, and Keystone Community Bank, Kalamazoo, all of Michigan, and an election by Mercantile Bank Corporation to become a financial holding company were approved in May.
  • Cullen/Frost Bankers, Inc., San Antonio, Texas, (1) to merge with WNB Bancshares, Inc., and thereby acquire its subsidiary bank, Western National Bank, both of Odessa, Texas; (2) to have Cullen/Frost's subsidiary state member bank, Frost Bank, San Antonio, merge with Western National Bank, with Frost Bank as the surviving entity; and (3) to have Frost Bank establish and operate branches at the main office and the branches of Western National Bank were approved in May.
  • MB Financial, Inc., Chicago, to merge with Taylor Capital Group, Inc., Rosemont, and thereby indirectly acquire its subsidiary bank, Cole Taylor Bank, Chicago, all of Illinois, was approved in July.
  • Old National Bancorp, Evansville, Indiana, to merge with United Bancorp, Inc., and thereby indirectly acquire its subsidiary bank, United Bank & Trust, both of Ann Arbor, Michigan, was approved in July.
  • Regions Bank, Birmingham, Alabama, to establish a branch in Kingwood, Texas, was approved in September.
  • First American Bank Corporation, Elk Grove Village, Illinois, to acquire Bank of Coral Gables, Coral Gables, Florida, was approved in November.
  • Veritex Community Bank, a state member bank subsidiary of Veritex Holdings, Inc., both of Dallas, Texas, to establish a branch at 2700 Oak Lawn Avenue, Dallas, Texas, was approved in December.
  • ViewPoint Financial Group, Inc. to merge with LegacyTexas Group, Inc., and thereby acquire its subsidiary state member bank, LegacyTexas Bank, all of Plano, Texas; LegacyTexas Bank to merge with ViewPoint's subsidiary bank, ViewPoint Bank, N.A., Plano, Texas, with LegacyTexas Bank as the surviving entity; and LegacyTexas Bank to establish and operate branches at the locations of the main office and the branches of ViewPoint Bank were approved in December.
  • Midland States Bancorp, Effingham, Illinois, to acquire by merger Love Savings Holding Company and its wholly owned subsidiary, Heartland Bank, FSB, both of St. Louis, Missouri; Midland States Bank, Midland's subsidiary state member bank, also of Effingham, Illinois, to merge with Heartland Bank, with Midland Bank as the surviving entity; and Midland States Bank to establish and operate branches at the locations of Heartland Bank's main office and branches were approved in December.20
  • A notice by Southside Bancshares, Inc., Tyler, Texas, to acquire OmniAmerican Bancorp, Inc., and thereby indirectly acquire its subsidiary savings association, OmniAmerican Bank, both of Fort Worth, Texas, was approved in December.
Coordination with the Consumer Financial Protection Bureau

During 2014, staff continued to work through the implementation of the Interagency Memorandum of Understanding on Supervision Coordination with the CFPB. The agreement is intended to establish arrangements for coordination and cooperation among the CFPB and the OCC, the FDIC, the National Credit Union Association (NCUA), and the Board of Governors. The agreement strives to minimize unnecessary regulatory burden and to avoid unnecessary duplication of effort and conflicting supervisory directives amongst the prudential regulators. The regulators work cooperatively to share exam schedules for covered institutions and covered activities to plan simultaneous exams, provide final drafts of examination reports for comment, and share supervisory information.

Coordination with Other Federal Banking Agencies

The member agencies of the Federal Financial Institutions Examination Council (FFIEC) develop consistent examination principles, standards, procedures, and report formats.21 In 2014, the FFIEC member organizations continued to work together on various initiatives, including developing examination procedures that incorporate amendments to Regulations X (Real Estate Settlement Procedures Act [RESPA]) and Z (Truth in Lending Act [TILA]) issued by the CFPB in 2013 that integrate certain mortgage loan disclosures currently required under TILA and RESPA. Those amendments will be effective on August 1, 2015.

Interagency Guidance on Home Equity Lines of Credit Nearing Their End-of-Draw Periods

In July, the Board--along with the Conference of State Bank Supervisors, the FDIC, the NCUA, and the OCC--issued guidance to reiterate principles of sound risk management for home equity lines of credit (HELOCs) that have reached or will be reaching their end-of-draw periods.22 The guidance articulates the agencies' expectation that supervised financial institutions will have adequate risk-management practices to monitor, manage, and control the risks in their HELOC portfolios as lines near their end-of-draw periods as well as to promote compliance with applicable laws and regulations. In particular, this HELOC guidance describes risk-management practices that promote a clear understanding of potential exposures and help guide consistent, effective responses to HELOC borrowers who may be unable to meet contractual obligations at their end-of-draw periods. The guidance also highlights concepts related to financial reporting for HELOCs. Additionally, it reminds financial institutions that applicable consumer protection laws include, but are not limited to, the Equal Credit Opportunity Act, the Fair Housing Act, federal and state prohibitions against UDAP (such as section 5 of the Federal Trade Commission Act), RESPA, the Servicemembers Civil Relief Act, and TILA.

Interagency Guidance Regarding Unfair or Deceptive Credit Practices

In August, the Board--in conjunction with the CFPB, the FDIC, the NCUA, and the OCC--issued guidance regarding certain consumer credit practices.23 The guidance notes that prior to the Dodd-Frank Act, several rules prohibited banks, savings associations, and federal credit unions from engaging in certain credit practices. The Dodd-Frank Act repealed the rulemaking authority for these credit practices rules and, consequently, the Board, the OCC, and the NCUA are repealing those former rules. This guidance states the agencies' view that the unfair or deceptive acts or practices described in these former credit practices rules, including those in the Board's former Regulation AA, could violate the prohibition against unfair or deceptive acts or practices in section 5 of the Federal Trade Commission Act and title X of the Dodd-Frank Act, even in the absence of a specific regulation governing the conduct.

Examiner Training

Ensuring that financial institutions comply with laws that protect consumers and encourage community reinvestment is a fundamental aspect of the bank examination and supervision process. As the complexity of both consumer financial transactions and the regulatory landscape has increased, training for consumer compliance examiners has become more important than ever before. The division's examiner training function is responsible for the ongoing development of the professional consumer compliance supervisory staff, from an initial introduction to the Federal Reserve System through the development of proficiency in consumer compliance topics sufficient to earn an examiner's commission. DCCA's role is to ensure that examiners have the skills necessary to meet their supervisory responsibilities now and in the future.

Consumer Compliance Examiner Training Curriculum

The consumer compliance examiner training curriculum consists of five courses focused on consumer protection laws, regulations, and examining concepts. In 2014, these courses were offered in 10 sessions, and training was delivered to a total of 175 System consumer compliance examiners and staff members and 12 state banking agency examiners.

When appropriate, courses are delivered via alternative methods, such as online or other distance-learning technologies. For instance, several courses use a combination of instructional methods, including both classroom instruction focused on case studies and specially developed computer-based instruction that includes interactive self-check exercises. Board and Reserve Bank staff regularly review the core curriculum for examiner training, updating subject matter and adding new elements as appropriate. During 2014, staff began migrating introductory content from a classroom-based training model to more online delivery, dedicating classroom time for examiners to apply their learning using case studies and reviewing loan files.

Outreach and Training: Dodd-Frank Act

During 2014, the CFPB continued to promulgate new rules pursuant to the Dodd-Frank Act. Board and CFPB staff collaborated on examiner training and outreach to bankers. For instance, four Outlook Live webinars dedicated to the CFPB's TILA/RESPA Integrated Disclosures Rule, were broadcast beginning in June 2014 and continuing through November 2014. Other Outlook Live webinars covered issues ranging from general compliance management to specific fair lending and community reinvestment matters, for a total of nine compliance-related broadcasts in 2014.24

Ongoing Training Opportunities

In addition to providing core examiner training, the examiner staff development function emphasizes the importance of continuing lifelong learning. Opportunities for continuing learning include special projects and assignments, self-study programs, rotational assignments, the opportunity to instruct at System schools, mentoring programs, and an annual consumer compliance examiner forum where senior consumer compliance examiners receive information on emerging compliance issues and are able to share best practices from across the System.

In 2014, the System continued to offer Rapid Response sessions. Introduced in 2008, this platform offers examiners one-hour teleconferences that explore emerging issues; provide urgent training to address the implementation of new laws, regulations, or supervisory guidance; and highlight case studies. Seven consumer compliance Rapid Response sessions were designed, developed, and presented to System staff during 2014. The sessions covered a broad range of topics including social media, flood insurance violations, and vendor management considerations.

Responding to Consumer Complaints and Inquiries

The Federal Reserve investigates complaints against state member banks and selected nonbank subsidiaries of BHCs (Federal Reserve regulated entities), and forwards complaints against other creditors and businesses to the appropriate enforcement agency. Each Reserve Bank investigates complaints against Federal Reserve regulated entities in its District. The Federal Reserve also responds to consumer inquiries on a broad range of banking topics, including consumer protection questions.

In late 2007, the Federal Reserve established Federal Reserve Consumer Help (FRCH) to centralize the intake of consumer complaints and inquiries. In 2014, FRCH processed 32,339 cases. Of these cases, more than half (19,179) were inquiries and the remainder (13,160) were complaints, with most cases received directly from consumers. Of the 13,160 complaints, FRCH referred 76 percent to other federal and state banking agencies in 2014. Approximately 5 percent of cases were referred to the Federal Reserve from other agencies.

While consumers can contact FRCH by telephone, fax, mail, e-mail, or online, most FRCH consumer contacts occurred by telephone (59 percent). Thirty-seven percent (12,118) of complaint and inquiry submissions were made electronically (via e-mail, online submissions, and fax), and the online form page received approximately 59,174 visits during the year.

Complaint Referrals

In 2014, the Federal Reserve forwarded 9,992 complaints against other banks and creditors to the appropriate regulatory agencies and government offices for investigation. To minimize the time required to re-route complaints to these agencies, referrals were transmitted electronically.

The Federal Reserve forwarded 11 complaints to the Department of Housing and Urban Development (HUD) that alleged violations of the Fair Housing Act.25 The Federal Reserve's investigation of these complaints revealed one instance of illegal credit discrimination.

Consumer Inquiries

The Federal Reserve received over 19,000 consumer inquiries in 2014, covering a wide range of topics. Consumers were typically directed to other resources, including other federal agencies or written materials, to address their inquiries.

Consumer Complaints

Complaints against Federal Reserve regulated entities totaled 3,159 in 2014. Approximately 42 percent (1,334) of these complaints were received by telephone, with 94 percent (1,254) of those requiring additional information from consumers to be provided in writing to enable investigation. Approximately six percent of the total complaints received in 2014 were still under investigation as of December 2014. Of the remaining complaints (1,412), 67 percent (1,215) involved unregulated practices and 33 percent (610) involved regulated practices. (Table 1 shows the breakdown of complaints about regulated practices by regulation or act; table 2 shows complaints by product type.)

Table 1. Complaints against state member banks and selected nonbank subsidiaries of bank holding companies about regulated practices, by regulation/act, 2014
Regulation/act Number
Regulation AA (Unfair or Deceptive Acts or Practices) 5
Regulation B (Equal Credit Opportunity) 25
Regulation BB (Community Reinvestment) 2
Regulation CC (Expedited Funds Availability) 71
Regulation D (Reserve Requirements) 4
Regulation DD (Truth in Savings) 50
Regulation E (Electronic Funds Transfers) 51
Regulation H (National Flood Insurance Act/Insurance Sales) 9
Regulation M (Consumer Leasing Act) 1
Regulation P (Privacy of Consumer Financial Information) 18
Regulation V (Fair and Accurate Credit Transactions) 18
Regulation Z (Truth in Lending) 86
Garnishment Rule 1
Fair Credit Reporting Act 158
Fair Debt Collection Practices Act 54
Fair Housing Act 18
Homeowners Protection Act 5
Real Estate Settlement Procedures Act 28
Servicemembers Civil Relief Act 6
Total 610
Table 2. Complaints against state member banks and selected nonbank subsidiaries of bank holding companies about regulated practices, by product type, 2014
Subject of complaint/product type All complaints Complaints involving violations
Number Percent Number Percent
Total 610 100 22 4
Discrimination alleged
Real estate loans 22 3.6 0 0
Credit cards 2 0.4 0 0
Other loans 2 0.4 0 0
Nondiscrimination complaints
Checking accounts 128 20.9 7 1.3
Real estate loans 83 13.6 8 1.4
Credit cards 216 35.4 0 0
Other 157 25.7 7 1.3
Complaints about Regulated Practices

The majority of regulated practices complaints concerned checking accounts (21 percent), real estate (17 percent), and credit cards (36 percent).26 The most common checking account complaints related to funds availability not as expected (34 percent), insufficient funds/overdraft charges and procedures (19 percent), and alleged forgery/fraud/embezzlement/theft (9 percent). The most common real estate complaints related to debt collection/foreclosure concerns (14 percent); escrow problems (12 percent); and disputed rates, terms, and fees (8 percent). The most common credit card complaints related to inaccurate credit reporting (38 percent), bank debt-collection tactics (18 percent), billing error resolutions (8 percent), and payment errors/delays (7 percent).

Twenty-six regulated practices complaints alleging discrimination on the basis of prohibited borrower traits or rights were received in 2014.27 Nineteen discrimination complaints were related to the race, color, national origin, or ethnicity of the applicant or borrower. Seven discrimination complaints were related to either the age, handicap, familial status, or religion of the applicant or borrower. Of the complaints alleging discrimination based on a prohibited basis received in 2014, there were no violations.

In 86 percent of complaints against Federal Reserve regulated entities received in 2014, staff analysis revealed that institutions correctly handled the situation. Of the remaining 14 percent of investigated complaints, 4 percent were deemed violations of law; 4 percent were identified errors, which were corrected by the bank; and the remainder included matters involving litigation or factual disputes, withdrawn complaints, internally referred complaints, or information was provided to the consumer.

Complaints about Unregulated Practices

The Board continued to monitor complaints about banking practices not subject to existing regulations. In 2014, the Board received 1,215 complaints against Federal Reserve regulated entities that involved these unregulated practices.28 The majority of the complaints were related to electronic transactions/prepaid products (30 percent), credit cards (20 percent), checking account activity (13 percent), real estate products (13 percent), and commercial loans/leases (6 percent).

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Consumer Laws and Regulations

Throughout 2014, DCCA continued to administer the Board's regulatory responsibilities with respect to certain entities and specific statutory provisions of the consumer financial services and fair lending laws. This includes drafting regulations and issuing interpretations and compliance guidance for the industry and the Reserve Banks.

Proposed Flood Insurance Rule

In October, the Board, along with the Farm Credit Administration, the FDIC, the NCUA, and the OCC jointly issued a proposed rule to amend regulations pertaining to loans secured by residential improved real estate or mobile homes located in special flood hazard areas.29 The proposed rule would implement provisions of the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) relating to escrowing flood insurance payments and the exemption of certain detached structures from the mandatory flood insurance purchase requirement. The HFIAA amends the escrow provisions of the Biggert-Waters Act.

In accordance with the HFIAA, the proposed rule would require regulated lending institutions to escrow flood insurance premiums and fees for loans made, increased, extended, or renewed on or after January 1, 2016, unless the regulated lending institution or a loan qualifies for a statutory exception. In addition, for outstanding residential loans made before that date, the proposed rule would require institutions to provide borrowers the option to escrow flood insurance premiums and fees. To facilitate compliance, the agencies' proposal includes new and revised sample notice forms and clauses concerning the escrow requirement and the option to escrow.

Consistent with the HFIAA, the proposed rule would eliminate the legal requirement to purchase flood insurance for a structure that is a part of a residential property located in a special flood hazard area if that structure is detached from the primary residential structure and does not also serve as a residence. Under the HFIAA, however, lenders may nevertheless require the purchase of flood insurance for such structures to protect the value of the collateral securing the loan.

In a separate rulemaking, the agencies will address other provisions of the Biggert-Waters Act for which the agencies have jurisdiction and that were not amended by the HFIAA.

Repealing Rules Pursuant to the Dodd-Frank Act

Under title X of the Dodd-Frank Act, rulemaking authority for a number of consumer financial protection laws was transferred from the Board to the CFPB, except with respect to certain motor vehicle dealers. In May 2014, the Board repealed its Regulation DD (Truth in Savings) and Regulation P (Privacy of Consumer Financial Information), which were superseded by substantially identical rules issued by the CFPB.30 At the same time, the Board issued final amendments to the Identity Theft Red Flags rule in Regulation V (Fair Credit Reporting), which require financial institutions and creditors to implement identity theft prevention programs and clarify that these provisions apply only to creditors that regularly extend credit or obtain consumer reports in the ordinary course of their business.31

In August, the Board issued a proposal to repeal its Regulation AA (Unfair or Deceptive Acts or Practices), which includes the Board's "credit practices rule" that prohibits banks from using certain remedies to enforce consumer credit obligations and from including these remedies in their consumer credit contracts.32 The Dodd-Frank Act repealed the provision in the Federal Trade Commission Act that authorized the Board to issue rules addressing unfair or deceptive acts or practices by banks. Notwithstanding the repeal of the Board's rulemaking authority, the Board continues to have enforcement authority under the Federal Trade Commission Act and the Dodd-Frank Act to prevent and remedy unfair or deceptive acts or practices by the institutions it supervises. Concurrent with the proposed repeal of Regulation AA, the Board, the CFPB, the FDIC, the NCUA, and the OCC issued interagency guidance clarifying that the unfair or deceptive practices described in the former credit practices rules, including those in Regulation AA, could violate the statutory prohibitions against unfair or deceptive practices, even in the absence of a specific regulation governing the conduct.

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Consumer Research and Emerging-Issues and Policy Analysis

Throughout 2014, DCCA analyzed emerging issues in consumer financial services policies and practices in order to understand their implications for the market risk surveillance and supervisory policies that are core to the Federal Reserve's functions, as well as to gain insight into consumer financial decisionmaking.

Researching Issues Affecting Consumers and Communities

In 2014, DCCA explored various issues related to consumers and communities through convening experts, conducting original research, and fielding new and ongoing surveys. The information gleaned from these undertakings provided insights into the factors affecting consumers and households.

Consumer Behavior Research Surveys

In order to better understand consumer decisionmaking in the rapidly evolving financial services sector, DCCA periodically conducts Internet panel surveys to gather data on consumers' experiences and perspectives on various issues of interest.

With respect to ongoing surveys, DCCA conducted its annual survey of consumers' use of, and opinions about, mobile financial services. Since 2011, the survey has polled more than 2,200 individuals each year to learn whether and how they use mobile devices for banking and payments. The survey was also among the first to integrate questions about using mobile devices for shopping and comparing products along with questions about using mobile devices for banking and payments.

The findings of these surveys, conducted in the winter, are released each spring in the report Consumers and Mobile Financial Services. Results from the survey conducted in November 2013 were published in March 2014.33 For the fourth survey, conducted in December 2014, results will be published in March 2015. Given the rapid pace of developments in the mobile financial services market, DCCA plans to conduct another survey of consumers' use of mobile financial services in the coming year and produce a corresponding report summarizing the survey results.

In addition, results from DCCA's newest survey in the financial services area--the Survey of Household Economics and Decisionmaking--were published in the Report on the Economic Well-Being of U.S. Households in 2013, released in August 2014. (See box 1 for details.) DCCA launched the survey to better understand consumer decisionmaking in the wake of the Great Recession.

Box 1. Shedding Light on Household Finances: Survey of Household Economics and Decisionmaking

DCCA has been exploring knowledge gaps about consumer financial behavior, decisionmaking, and experiences following the Great Recession. The Survey of Household Economics and Decisionmaking (SHED) focuses on issues not sufficiently understood through external data and research or not already explored through other Federal Reserve resources, such as the Survey of Consumer Finances. The SHED includes questions about housing and living arrangements, credit access and behavior, education and student debt, savings, retirement, and medical expenses.

The results of the September 2013 SHED survey are outlined in the Report on the Economic Well-Being of U.S. Households in 2013, released in July 2014.1 A second round of the survey was conducted in the fall of 2014, and a report on its findings will be published in summer 2015.

Overall, the survey found that, as of September 2013, many households were faring well but that sizable fractions of the population were displaying some signs of financial stress:

Lingering effects of the recession: Thirty-four percent of individuals reported that they were worse off financially than they had been five years earlier in 2008, and 34 percent said that they were doing about the same. While over 60 percent of respondents indicated that their families were either "doing okay" or "living comfortably" financially, one-fourth said that they were "just getting by" and another 13 percent said they were struggling to do so.

Credit availability: While 31 percent of survey respondents had applied for some type of credit in the prior 12 months, one-third of those who applied for credit were turned down or given less credit than they applied for. Moreover, 15 percent of those who did not apply reported that they put off applying because they thought they would be turned down. Overall, 23 percent of respondents were either denied credit, offered less credit than they requested, or put off applying for fear of denial.

Housing and mortgages: Many renters expressed an implied interest in homeownership, as the most common reasons for renting rather than owning a home were an inability to afford the down payment (45 percent) and an inability to qualify for a mortgage (29 percent). Overall, confidence in mortgage approval was mixed, with 53 percent of all respondents--including homeowners--indicating they were confident that they would be approved for a mortgage if they were to apply at the time of the survey. In contrast, 29 percent said they were not confident and 17 percent did not know whether they could obtain approval.

Education debt: Twenty-four percent of the population held education debt for themselves or a family member, with 16 percent holding debt from their own education. Some individuals struggle to service this debt, with 18 percent of those with education debt indicating that they were behind on payments in some way, including 9 percent with loans in collections. The rate of being behind or in collections was far greater among those who failed to complete the program for which they borrowed money, and also varied by type of institution attended.

Emergency savings: Many respondents indicated a lack of preparedness for financial emergencies. When asked how they would pay for a theoretical emergency expense of $400, less than half of respondents said that they would completely pay it using cash or a credit card that they pay in full, while 19 percent indicated they could not pay the expense and 33 percent would pay the expense by borrowing or selling something. Over two-fifths of respondents are ill-prepared for a loss of their main source of income and could not cover expenses for three months even by borrowing money, using savings, selling assets, or borrowing from friends or family.

Retirement planning: The survey results suggest that many individuals are not adequately prepared for retirement. Thirty-one percent of non-retired respondents reported having no retirement savings or pension, including 19 percent of those ages 55 to 64. Retirement plans for many individuals at or near retirement were also altered by the Great Recession. Two-fifths of those over age 45 who had not yet retired said that they pushed back the planned date of retirement because of the recession, and 15 percent of those who had retired since 2008 reported that they retired earlier than planned due to the recession.

1. For the press release and publication, see Return to text

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Survey of Experiences and Perspectives of Young Workers

In 2013, the Community Development staff at the Federal Reserve Board began exploring the experiences and expectations of young Americans entering the labor market. Staff reviewed existing research and engaged external research and policy experts to identify the potential economic implications of these labor market trends on young workers. This initial exploration raised several questions about the experiences of young workers that were not fully explained by existing data. In response, the Federal Reserve conducted the Survey of Young Workers in December 2013 to develop a deeper understanding of the forces at play. The online survey was intended to be exploratory--ultimately confirming some insights and highlighting areas worthy of additional study. The survey was administered via an Internet panel. The 2,097 survey respondents ranged in age from 18 to 30.

In the Shadow of the Great Recession: Experiences and Perspectives of Young Workers was released in November 2014, with preliminary findings highlighted at a conference co-sponsored by the Federal Reserve Banks of Atlanta and Kansas City and Rutgers University's John J. Heldrich Center for Workforce Development.34 The report summarizes insights from the Survey of Young Workers and frames policy and research issues for future consideration by the Federal Reserve Board. One of the major findings highlighted in the report is that many young adults remain optimistic about their job future and that respondents with higher levels of education and work experience are more likely to be optimistic than respondents who lack such skills and experiences. A second finding is that young workers are responding to the labor market's increasing demand for postsecondary credentials and degrees. A third finding is that intangibles still play an important role and that finding a job is still heavily based on personal connections. Lastly, the survey found that young workers value job stability, and when given the choice, respondents generally preferred steady employment (67 percent) to higher pay (30 percent).

Emerging-Issues Analysis

The Policy Analysis function of DCCA provides key insights, information, and analysis on emerging financial services issues that affect the well-being of consumers and communities. To this end, Policy Analysis staff follow, analyze, and anticipate trends; lead Division-wide issues working groups; and organize expert roundtables to identify emerging risks and inform policy recommendations.

In 2014, the Policy Analysis team contributed analyses on a broad range of policy issues--from recent trends in auto lending, to the impact on consumers of student loan debt, to the implications of mobile banking, to existing and emerging credit products for small businesses, and to challenges facing certain segments of consumers. New mortgage rules took effect at the beginning of the year and Policy staff, together with colleagues at the Board and in the Federal Reserve Banks, continued to closely monitor the availability of mortgage credit and the impact on local housing markets, neighborhoods, and potential homebuyers.

Impact of Resets on Home Equity Lines of Credit and Mortgage Interest Rates

In 2014, the first wave of interest-rate resets occurred on HELOCs, interest-only (I-O) loans, and loans in the Home Affordable Modification Program (HAMP) program. These resets could result in payment shock for millions of homeowners, depending on their FICO scores and other debts.

About one-quarter, or 2.5 million, of the more than 10 million HELOCs outstanding are expected to reach their end-of-draw periods and convert to amortizing loans by the end of 2017, with the average payment estimated to rise by $250 per month. In response, some large banks have implemented HELOC-assistance programs to borrowers in need of flexible payment arrangements.

Also, many of the I-O mortgages, which were in wide use during the height of the lending bubble in 2007 and put borrowers into homes with artificially low mortgage payments for an initial period, are beginning to reset to payments that reflect full amortization. Payment increases, in some cases, may be significant.

Meanwhile, the first loan modifications made under the government's HAMP program are reaching their five-year mark, after which interest rates will increase up to 1 percent per year until they adjust to the market rate at the time of their modification. HAMP modifications will continue to enter this multiyear reset process with completion expected by 2021.

The Policy Analysis team participated in an interagency regulatory conference on mortgage resets with researchers and examiners working on the topic. Assistance also was provided for interagency guidance on mortgage resets to ensure that, in addition to bank safety and soundness considerations, consumers will be provided with adequate notice to prepare for the increases and that concerns on the part of affected borrowers will be addressed.35

Trends in Auto Lending

The Policy team continued to monitor developments in auto lending. While Federal Reserve research shows a solid recovery of the auto market post-crisis and growth in auto loan originations, concerns have been raised that increased lending to below-prime borrowers, high-cost loans, and longer loan terms could result in financial hardship for households struggling with living expenses. In August, Policy Analysis staff held a forum for Federal Reserve System staff to discuss their research to assess current auto market conditions and loan performance data, with a particular focus on the subprime sector, and explore any potential risk areas and consumer harms. Staff also engaged with industry representatives and consumer groups who also attended to share their perspectives about certain auto lending practices and the implications for consumers. The dialogue provided an opportunity for staff and external experts to exchange views about the future state of auto financing and to identify areas where additional data and analysis would be useful to better monitor market and lending conditions affecting the availability of and access to affordable auto loan products.

The Evolving Small Business-Bank Relationship

The Federal Reserve System has typically concentrated its small business-related activities around the study of credit conditions and the impact of a strong business climate on community and economic development. Less understood is the overall impact of a changing financial landscape on the small business customer and existing banking business models.

In the past, small business banking has been considered largely "relationship banking." Recent trends, however, suggest that small businesses engage in a more complex web of relationships among competing financial service providers. A vast array of nonbank service providers has cropped up to help small businesses manage various aspects of their banking and payments processes, including deposits, debit and credit card payments, Treasury services, remote deposit, payroll, automated clearinghouse (ACH), and wire services. Likewise, online alternative lenders have developed innovative technologies to underwrite and originate loans and now offer short-term loan products aimed at filling small businesses' small-dollar needs. Among these new players are peer-to-peer lenders, direct loan providers, and payment processing firms making forays into cash-advance lending. Consequently, competition and new technologies are altering the conventional concept of small business relationship banking.

The Policy team convened a working session for staff from throughout the Federal Reserve System--including the community development, research, regional economics, consumer compliance, and operations functions--who are concerned with small business issues. Internal and external experts presented research on current trends in traditional and online small business banking. The session was aimed at exploring how small business-bank relationships are developed and maintained in an environment of technological change, the growth of nonbank service providers, and the resulting impact on traditional bank business models and small businesses.

To supplement small business research being conducted throughout the Federal Reserve System, the Policy team commissioned two research studies from outside organizations. One, a survey of 60 community bank CEOs, found that banks recognize that their small business customers are savvier today than in the past when it comes to assessing their banking needs and options. The survey also found that banks appear to have the desire and liquidity to lend, but are becoming more conservative in their underwriting for small business borrowers. The second study, an online focus group of 22 small business borrowers, examined small businesses' awareness, perceptions, and understanding of short-term, small-dollar online loan products. The study revealed that small businesses find it difficult to compare and evaluate the costs and benefits of various online small-dollar products. Potential borrowers also expressed concerns about safeguards to protect their personal and business information were they to borrow funds from these online sources.

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Community Development

The Federal Reserve System's Community Development function promotes economic growth and financial stability for LMI communities and individuals through a range of activities: convening stakeholders, conducting and sharing research, and identifying emerging issues (see box 2 for more information). As a decentralized function, the Community Affairs Officers (CAOs) at each of the 12 Reserve Banks design activities to respond to the specific needs of the communities they serve, with oversight from Board staff to promote and coordinate Systemwide priorities.

Exploring New Sources of Community Development Finance

One of the responsibilities of the Federal Reserve's Community Development function is to research the sources of community development finance for underserved communities and work with stakeholders to improve the supply and delivery of these funds. Historically, the Federal Reserve's interest in these funding sources has mainly included the more traditional sources, such as government funding, foundations, Community Development Financial Institutions, and CRA-motivated bank investments. All of these remain critical sources of funding, but many of these have also been shrinking in recent years. Therefore, the Board's Community Development team has begun to investigate how new and innovative sources of funding could be used to finance community development and small business. A key part of this expansion is technology, which is changing fundraising and investment and has the potential to streamline and scale community development transactions.

In March 2014, the Board's Community Development team hosted a small group of community development and technology thought leaders for a discussion on the challenges and opportunities presented by crowdfunding investment as a significant new source of capital for the community development industry. The event was also live-streamed on the Board's website and set the groundwork for these two otherwise divergent fields to facilitate a functional, fair, and prosperous crowdfunding market for community development.

In September 2014, the Board hosted a meeting entitled "Family Philanthropy and Impact Investing," and brought together staff and trustees from family foundations, family offices, advisors, and other thought leaders to discuss the increasing demand for family foundations to engage in impact investing.

In October 2014, the Board hosted a targeted meeting for online community development platforms. The meeting brought together practitioners that were either currently operating, or seriously investing in the development of, online platforms that facilitate community development transactions. The meeting was structured as a peer-to-peer interaction and focused on identifying the current landscape of community development online platforms, common barriers and challenges, best practices, and opportunities for collaboration.

These three meetings, in addition to dozens of other conversations and meetings, have greatly expanded the Board's knowledge of potential new sources of community development finance, and helped to connect the various stakeholders in this field.

Expanding Access to Information on System Community Development Activities

In 2012, the Federal Reserve's Community Development function conducted an environmental scan to assess community development needs around the country. One of the key findings from this process was that Community Development staff could improve their efforts to share the wide array of resources with the public and System colleagues alike in a more systematic and user-friendly way. As a result, the web portal was created to improve the awareness of, and access to, Federal Reserve community development resources by providing users with a single, web-based entry point. Resources are organized according to the System's strategic focus areas supporting people, place, the policy and practice of community development, and small business.36

Launched in June 2014, functions as a referral site, in that it aggregates information on relevant, timely community development resources from all 12 Reserve Banks and the Board of Governors in a centralized spot. Users are then redirected to specific Reserve Bank websites for access to the materials themselves, and for additional content. In its first quarter of operation, drew 12,840 page views for the approximately 350 resources it hosted from across the Federal Reserve System. The site offers four key features:

  • Resources are easy to locate and are organized by two key pieces of information: topic/community development content and type of resource (e.g., national and local data, speeches, publications, etc.).
  • A robust search feature helps users locate resources, either by specific criteria or general interest categories.
  • Users can sign up to be notified of new content according to preference criteria that they select.
  • Content is populated regularly to keep the site fresh and current.

Box 2. How Does the Fed Promote Effective Community Development?

The Federal Reserve understands that stable communities promote stable regions and a more robust economy overall. Staff in the Community Development function at the Board and all 12 Reserve Banks engage in applied research, public programs, outreach, and technical assistance in order to help promote economic growth and financial stability in communities across the country, especially low- and moderate-income areas.

The System's commitment to community development is captured in the Community Development Perspectives report, which represents its various points of engagement in this work around the country. Released in conjunction with the site launch, this report includes brief summaries of Community Development's work in its strategic focal points of people, place, the policy and practice of community development, and small business. Within each of these focus areas, the report includes background information that helps to provide context for this work; a sampling of key research, outreach programs, and other initiatives; and some ideas on future challenges, needs, and opportunities. Read the interactive report at Leaving the Board.

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1. In 2013, DCCA began reporting the number of examinations completed based on the calendar year (from January 1 to December 31); in prior years, numbers had been reported for the period from July 1 through June 30. Agency and branch offices of foreign banking organizations, Edge Act corporations, and agreement corporations fall under the Federal Reserve's purview for consumer compliance activities. An agreement corporation is a type of bank chartered by a state to engage in international banking. The bank "agrees" with the Federal Reserve Board to limit its activities to those allowed an Edge Act corporation. An Edge Act corporation is a banking institution with a special charter from the Federal Reserve to conduct international banking operations and certain other forms of business without complying with state-by-state banking laws. By setting up or investing in Edge Act corporations, U.S. banks are able to gain portfolio exposure to financial investing operations not available under standard banking laws. Return to text

2. For more information, see to text

3. Borrowers were eligible if their primary residence was in a foreclosure action with one of the 16 mortgage loan servicers at any time in 2009 or 2010. Return to text

4. One OCC-regulated servicer elected to complete the Independent Foreclosure Review, and did not, therefore, enter into the Payment Agreement. Return to text

5. For more information, see to text

6. The report is available at to text

7. For more information, see to text

8. Outlook Live is the Federal Reserve System's audio conference series on consumer compliance issues. For more information on this webinar, see Leaving the BoardReturn to text

9. Consumer Compliance Outlook is a Federal Reserve System publication dedicated to consumer compliance issues. For more information on this newsletter article, see Leaving the BoardReturn to text

10. For more information and to obtain the webcast, see Leaving the Board. Return to text

11. For more information, see to text

12. The agencies issuing this statement are the Board of Governors, the Farm Credit Administration, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC). For more information, see to text

13. For more information, see and The Interagency Questions and Answers document provides additional guidance to financial institutions and the public on the agencies' CRA regulations. Return to text

14. For more information, see to text

15. For more information, see to text

16. For access to the Board's Orders on Banking Applications, see to text

17. For the report, see to text

18. The webinars were part of the "Ask the Fed" and "Consumer Compliance Outlook Live" series. For access to "Ask the Fed," see Leaving the Board. For access to "Consumer Compliance Outlook Live," see Leaving the Board. Return to text

19. Related notices and applications for which a single Board Order was issued were counted as a single notice or application in this total. Return to text

20. An adverse comment was also received for a related notice under the Change in Bank Control Act of 1978, as amended, with respect to this transaction. The Board approved that notice in December. For access to notices under the Change in Bank Control Act, see to text

21. The FFIEC is a formal interagency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors, the FDIC, the NCUA, the OCC, and the CFPB and to make recommendations to promote uniformity in the supervision of financial institutions. In 2006, the State Liaison Committee (SLC) was added to the council as a voting member. The SLC includes representatives from the Conference of State Bank Supervisors, the American Council of State Savings Supervisors, and the National Association of State Credit Union Supervisors. Return to text

22. For more information, see to text

23. For more information, see to text

24. For more information, see Leaving the BoardReturn to text

25. A memorandum of understanding between HUD and the federal bank regulatory agencies requires that complaints alleging a violation of the Fair Housing Act be forwarded to HUD. Return to text

26. Real estate loans include adjustable-rate mortgages, residential construction loans, open-end home equity lines of credit, home improvement loans, home purchase loans, home refinance/closed-end loans, and reverse mortgages. Return to text

27. This includes alleged discrimination on the basis of race, color, religion, national origin, sex, marital status, age, applicant income derived from public assistance programs, or applicant reliance on provisions of the Consumer Credit Protection Act. Return to text

28. Examples of unregulated practices include (but are not limited to) customer service issues; allegations of forgery, embezzlement, or theft; policy or procedure concerns; issues with account opening and closing; and contractual issues that are not covered under existing federal banking regulations. Return to text

29. For more information, see to text

30. For more information, see to text

31. The amendments to the Fair Credit Reporting Act were intended to narrow the scope of the law so that it would not be applied to professionals, such as doctors or lawyers, who sometimes allow consumers to delay payment. Return to text

32. For more information, see to text

33. See Board of Governors of the Federal Reserve System (2014), Consumers and Mobile Financial Services 2014 (Washington: Board of Governors, March), to text

34. For more information on the event, see Leaving the Board and Leaving the BoardReturn to text

35. For more information, see to text

36. To access the site, see Leaving the BoardReturn to text

Last update: July 17, 2015

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