Skip to contents

----

 Previous 

Next 
Main Menu 

      -  Implementation of Statutes Designed to Inform and Protect Consumers 
      -  Supervision for Compliance with Consumer Protection and          Community Reinvestment Laws  
      -  Consumer Complaints 
      -  Advice from the Consumer Advisory Council 
      -  Consumer Education and Research 
      -  Promotion of Community Economic Development and Access to Financial Services          in Historically Underserved Markets 

# Consumer and Community Affairs 

Among the Federal Reserve's responsibilities in the      areas of consumer and community affairs are
      - writing and interpreting regulations to implement        federal laws that protect and inform consumers;
      - supervising state member banks to ensure compliance with        the regulations;
      - investigating complaints from the public about state        member banks' compliance with regulations; and
      - promoting community development in historically        underserved markets.

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

##       Implementation of Statutes Designed to Inform and Protect Consumers 

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

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

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

### Amendments to Regulation E (Electronic Fund Transfers) 

#### Payroll Cards 

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

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

#### Returned-Item Fees 

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

### Joint Guidance on the Community Reinvestment Act Regulations 

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

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

### Interagency Guidance on the Risks of Nontraditional Mortgage      Products 

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

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

## Nontraditional Mortgages--        Balancing Innovation, Regulation, and Education 

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

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

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

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

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

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

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

----

        1.         www.federalreserve.gov          /pubs/arms/arms_english.htmReturn to text        2.        www.federalreserve.gov          /pubs/mortgage_interestonly/default.htm Return to text        3.        www.federalreserve.gov          /boarddocs          /press/bcreg/2006/20060929/default.htmReturn to text

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

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

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

### Other Regulatory Actions 

The Board also took the following regulatory actions during 2006:
      - In August, the Board amended the official staff        commentary to Regulation Z to raise from $528 to $547 the total dollar        amount of points and fees that triggers additional requirements for        certain mortgage loans under the Home Ownership and Equity Protection        Act. As prescribed by that statute, the increased threshold (effective        January 1, 2007) reflects changes in the consumer price index. 
      - In December, the Board amended the official staff        commentary to Regulation C to raise from $35 million to $36 million the        asset-size exemption threshold for depository institutions required to        collect data under the Home Mortgage Disclosure Act. As prescribed by        that statute, the increased threshold reflects changes in the consumer        price index. As a result, depository institutions that have assets of        $36 million or less as of December 31, 2006, are exempt from data        collection, effective January 1, 2007.

Return to menu

##       Supervision for Compliance with Consumer Protection and      Community Reinvestment Laws 

### Activities Related to the Community Reinvestment Act 

The Community Reinvestment Act (CRA) requires that the Federal      Reserve and other banking agencies encourage financial institutions to      help meet the credit needs of the local communities in which they do      business, consistent with safe and sound operations. To carry out this      mandate, the Federal Reserve
      - examines state member banks to assess their compliance        with the CRA;
      - analyzes applications for mergers and acquisitions by        state member banks and bank holding companies in relation to CRA        performance; and 
      - disseminates information on community development        techniques to bankers and the public through community affairs offices        at the Reserve Banks.

#### Examinations for Compliance with the CRA 

The Federal Reserve assesses and rates the CRA performance of      state member banks in the course of examinations conducted by staff at      the twelve Reserve Banks. During the 2006 reporting period, the Reserve      Banks conducted CRA examinations of 276 banks: 27 were rated      Outstanding, 248 were rated Satisfactory, none was rated Needs to      Improve, and one was rated Substantial Noncompliance.      2

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

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

Several other significant applications are listed below.
      - An application by Trustmark Corporation, Jackson,        Mississippi, to acquire Republic Bancshares of Texas, Inc., Houston,        Texas, was approved in August. 
      - An application by Wachovia Corporation,        Charlotte, North Carolina, to acquire Golden West Financial        Corporation, Oakland, California, was approved in September. 
      - An application by Regions Financial        Corporation, Birmingham, Alabama, to acquire AmSouth Bancorporation,        also of Birmingham, was approved in October.

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

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

### Other Consumer Compliance Activities 

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

Examinations are the Federal Reserve's primary means of enforcing      compliance with consumer protection laws. During the 2006 reporting      period, the Reserve Banks conducted 321 consumer compliance      examinations--303 of state member banks and 18 of foreign banking      organizations.      5

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

####     Fair Lending 

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

The Federal Reserve enforces the ECOA and the provisions of      the Fair Housing Act that apply to lending institutions. The ECOA      prohibits creditors from discriminating against any applicant, in any      aspect of a credit transaction, on the basis of race, color, religion,      national origin, sex, marital status, or age. In addition, creditors      may not discriminate against an applicant because the applicant      receives income from a public assistance program or has exercised, in      good faith, any right under the Consumer Credit Protection Act. The      Fair Housing Act prohibits discrimination in residential real      estate-related transactions, including the making and purchasing      of mortgage loans, on the basis of race, color, religion, national      origin, handicap, familial status, or sex.

Pursuant to the ECOA, if the Board has reason to believe that a      creditor has engaged in a pattern or practice of discrimination in      violation of the ECOA, the matter will be referred to the Department of      Justice. If a violation of the ECOA also constitutes a violation      of the Fair Housing Act and a referral is not made to the Department of      Justice, the matter will be referred to the Department of Housing and      Urban Development.

During 2006, the Board referred the following matters to the      Department of Justice, on the basis of these findings: 
      - The Board determined that a mortgage        company owned by a state member bank had engaged in        redlining--that is, discrimination against potential borrowers on        the basis of the racial composition of their neighborhoods--in        violation of the ECOA and the Fair Housing Act. The mortgage company        had adopted a marketing strategy that was based on negative racial        stereotypes and, as a result, excluded a cluster of minority        neighborhoods from its lending activity. 
      - The Board found that a state member bank had        violated the ECOA and the Fair Housing Act by discriminating against        several mortgage applicants on the basis of race and national        origin.         7         The bank rejected several minority applicants on        the basis of "insufficient collateral" without ordering an        appraisal, even though, in contrast, the bank did not deny any white        applicants for insufficient collateral without ordering an appraisal. 
      - Two state member banks were found to have        engaged in discrimination on the basis of marital status in their        pricing of auto loans, in violation of the ECOA. The banks used rate        sheets that expressly provided that nonspousal co-applicants        (applicants who were not married to each other) should be charged        higher interest rates. 
      - The Board determined that a state member bank        discriminated on the basis of age, in violation of the ECOA, by        offering customers over 50 years of age a special account with        preferential credit features. The "over 50" account provided for an        interest rate reduction on consumer loans if payment was made through        automatic debit. This interest rate reduction was not offered to        borrowers who did not have an "over 50" account. The ECOA generally        prohibits creditors from considering age when evaluating        creditworthiness, except that a creditor may consider the age of an        applicant 62 years or older in the applicant's favor. 

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

#### Flood Insurance 

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

During 2006, the Board imposed civil money penalties against four      state member banks. The penalties, which were assessed via consent      orders, totaled $32,050.

#### Coordination with Other Federal Banking Agencies 

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

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

Finally, the Board, the OCC, and the FDIC updated the host-state      loan-to-deposit ratios used to determine compliance with section 109 of      the Riegle-Neal Interstate Banking and Branching Efficiency Act of      1994.      10

### Response to 2005 Hurricanes 

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

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

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

### Training for Bank Examiners 

Ensuring that financial institutions comply with laws that      protect consumers and encourage community reinvestment is an important      part of the bank examination and supervision process. As the number and      complexity of consumer financial transactions grow, training for      examiners of the organizations under the Federal Reserve's supervisory      responsibility becomes even more important. The consumer compliance      examiner training curriculum consists of six courses focused on various      consumer protection laws, regulations, and examining concepts. In 2006,      these courses were offered in ten sessions to more than 195 consumer      compliance examiners and System staff members.

Board and Reserve Bank staff regularly review the core curriculum      for examiner training, updating subject matter and adding new elements      as appropriate. During 2006, staff conducted curriculum reviews of the      following two courses in order to incorporate technical changes in      policy and laws, along with changes in instructional delivery      techniques:
      - Community Reinvestment Act Examination Techniques        Course.  Equips assistant examiners to participate in all aspects        of a CRA examination, including the evaluation of a bank's CRA program        and the determination of its CRA rating. 
      - Fair Lending Examination Techniques Course.  Provides assistant examiners with the skills and knowledge to plan        and conduct the risk-focused fair lending portion of a consumer        compliance examination.

 When appropriate, courses are delivered via alternative      methods, such as the Internet or other distance-learning technologies.      The CRA course discussed above uses a combination of instructional      methods: (1) classroom instruction focused on case studies and      (2) specially developed computer-based instruction that      includes interactive self-check exercises. The computer-based      instruction is reinforced through daily conference calls and      discussions on electronic bulletin boards. The Fair Lending course      discussed above also uses computer-based training.

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

### Reporting on Home Mortgage Disclosure Act Data 

The Home Mortgage Disclosure Act (HMDA), enacted by Congress in      1975, requires most mortgage lenders located in metropolitan areas to      collect data about their housing-related lending activity, report the      data annually to the government, and make the data publicly available.      In 1989, Congress expanded the data required by HMDA to include      information about loan applications that did not result in a loan      origination, as well as information about the race, sex, and income of      applicants and borrowers.

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

A September 2006 article published by Federal Reserve staff in      the *Federal Reserve Bulletin* uses the 2005 data to describe      the market for higher-priced loans and patterns of lending across loan      products, geographic markets, and borrowers and neighborhoods of      different races and incomes.      12

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

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

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

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

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

### Agency Reports on Compliance with Consumer Protection Laws 

The Board reports annually on compliance with consumer protection      laws by entities supervised by federal agencies. This section      summarizes data collected from the twelve Federal Reserve Banks, the      FFIEC member agencies, and other federal enforcement      agencies.      13

#### Regulation B (Equal Credit Opportunity) 

The FFIEC agencies reported that 87 percent of the      institutions examined during the 2006 reporting period were in      compliance with Regulation B, compared with 85 percent for the 2005      reporting period. The most frequently cited violations involved the      failure to take one or more of the following actions:
      - abstain from inquiring about the race, color, religion,        national origin, or sex of an applicant in connection with a credit        transaction unless permitted by regulation 
      - collect information for monitoring purposes about the        race, ethnicity, sex, marital status, and age of applicants seeking        credit primarily for the purchase or refinancing of a principal        residence 
      - note on the application form monitoring information        regarding ethnicity, race, and sex when an applicant chooses not to        provide the information 
      - provide a written notice of denial or other adverse        action to a credit applicant that contains the specific reason for the        adverse action, along with other required information

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

The other agencies that enforce the ECOA--the Farm Credit      Administration (FCA), the Department of Transportation, the Securities      and Exchange Commission (SEC), the Small Business Administration,      and the Grain Inspection, Packers and Stockyards Administration of the      Department of Agriculture--reported substantial compliance among      the entities they supervise. The FCA's examination activities revealed      that most Regulation B violations involved either creditors' providing      inadequate statements of specific reasons for denial or creditors'      failure to request or provide information for government monitoring      purposes. As reported by the SEC, an examination conducted by the      National Association of Securities Dealers, Inc., found one violation      of Regulation B at a member firm. The firm's written supervisory      procedures did not contain information regarding the denial of credit      to customers. However, none of these other agencies initiated any      formal enforcement actions relating to Regulation B during 2006.

#### Regulation E (Electronic Fund Transfers) 

The FFIEC agencies reported that approximately 95 percent of the      institutions examined during the 2006 reporting period were in      compliance with Regulation E, which is comparable to the level of      compliance for the 2005 reporting period. The most frequently cited      violations involved the failure to take one or more of the following      actions:
      - determine whether an error occurred, within ten business        days of receiving a notice of error from a consumer 
      - give the consumer provisional credit for the amount of        an alleged error when an investigation into the alleged error cannot be        completed within ten business days 
      - provide initial disclosures that contain required        information, including limitations on the types of transfers permitted        and error-resolution procedures, at the time a consumer contracts for        an electronic fund transfer service 
      - when a determination is made that no error has occurred,        provide a written explanation and note the consumer's right to request        documentation supporting the institution's findings

The Federal Trade Commission (FTC) filed two complaints in      federal district court for alleged violations of Regulation E and      federal statutes. Among other allegations, one complaint alleged that      the defendants charged consumers' credit cards or debited their bank      accounts, both on a recurring basis, to pay for a discount health plan,      without obtaining the consumers' authorization for preauthorized      electronic fund transfers. The other complaint alleged that defendants      enrolled consumers in a mail-order program for dietary supplements and      then automatically billed consumers on a recurring basis, without      obtaining their authorizations for the recurring debits. The FFIEC      agencies and the SEC did not issue any formal enforcement actions      relating to Regulation E during the period.

#### Regulation M (Consumer Leasing) 

The FFIEC agencies reported that more than 99 percent of the      institutions examined during the 2006 reporting period were in      compliance with Regulation M, which is comparable to the level of      compliance for the 2005 reporting period. The FFIEC agencies did not      issue any formal enforcement actions relating to Regulation M during      the period.

#### Regulation P (Privacy of Consumer Financial Information) 

The FFIEC agencies reported that 98 percent of the      institutions examined during the 2006 reporting period were in      compliance with Regulation P, compared with 97 percent for the 2005      reporting period. The most frequently cited violations involved the      failure to take one or more of the following actions:
      - provide a clear and conspicuous annual privacy notice to        customers
      - disclose the institution's information-sharing practices        in initial, annual, and revised privacy notices 
      - provide customers with a clear and conspicuous initial        privacy notice that accurately reflects the institution's privacy        policies and practices, not later than when the customer relationship        is established

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

#### Regulation Z (Truth in Lending) 

The FFIEC agencies reported that 85 percent of the      institutions examined during the 2006 reporting period were in      compliance with Regulation Z, compared with 80 percent for the 2005      reporting period. The most frequently cited violations involved the      failure to take one or more of the following actions:
      - in closed-end credit transactions, accurately disclose        the finance charge and the security interest that the creditor has or        will acquire in the property identified 
      - ensure that disclosures reflect the terms of the legal        obligation between the parties and, when any information necessary for        an accurate disclosure is unknown, ensure that the creditor states that        the disclosure is an estimate 
      - on certain residential mortgage transactions, provide a        good faith estimate of the required disclosures before consummation, or        not later than three business days after receipt of the loan        application 

In addition, 106 banks supervised by the Federal Reserve      and the FDIC were required, under the Interagency Enforcement      Policy on Regulation Z, to reimburse a total of approximately      $1.5 million to consumers for understating the annual percentage      rate or the finance charge in their consumer loan disclosures.

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

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

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

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

#### Regulation AA (Unfair or Deceptive Acts or Practices) 

The FFIEC agencies reported that more than 99 percent of the      institutions examined during the 2006 reporting period were in      compliance with Regulation AA, which is comparable to the level of      compliance for the 2005 reporting period. No formal enforcement actions      relating to Regulation AA were issued during the reporting period.

#### Regulation CC (Availability of Funds and Collection of Checks) 

The FFIEC agencies reported that 92 percent of institutions      examined during the 2006 reporting period were in compliance with      Regulation CC, compared with 93 percent for the 2005 reporting period.      The most frequently cited violations involved the failure to take one      or more of the following actions:
      - make available on the next business day the lesser of        $100 or the aggregate amount of checks deposited that are not subject        to next-day availability 
      - follow procedures when invoking the exception for        large-dollar deposits
      - provide required information when placing an exception        hold on an account
      - make funds from local and certain other checks        available for withdrawal within the times prescribed by regulation

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

#### Regulation DD (Truth in Savings) 

The FFIEC agencies reported that 91 percent of institutions      examined during the 2006 reporting period were in compliance with      Regulation DD, which is comparable to the level of compliance for the      2005 reporting period. The most frequently cited violations involved      the failure to take one or more of the following actions:
      - use the phrase "annual percentage yield" in an        advertisement disclosing required additional terms and conditions for        customer accounts 
      - provide account disclosures containing all required        information
      - provide account disclosures clearly and conspicuously,        in writing, and in a form that the consumer may keep

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

Return to menu

##       Consumer Complaints 

| Classification | Number |
|----------------|--------|
| 53             |
| 0              |
| 73             |
| 1              |
| 3              |
| 1              |
| 17             |
| 0              |
| 243            |
| 1              |
| 39             |
| 60             |
| 117            |
| 20             |
| 3              |
| 0              |
| 10             |
|           |
| 641            |

The Federal Reserve investigates complaints against state member      banks and forwards to the appropriate enforcement agency any complaints      that it receives that involved other creditors and businesses. Each      Reserve Bank investigates complaints against state member banks in its      District. In 2006, the Federal Reserve received 641 consumer complaints      about regulated practices by state member banks--complaints were      received by mail, by telephone, in person, and electronically via the      Internet.

### Complaints against State Member Banks 

Of the 641 complaints about regulated practices, 70 percent      involved consumer loans: 2 percent alleged discrimination on a basis      prohibited by law (race, color, religion, national origin, sex, marital      status, handicap, age, the fact that the applicant's income comes from      a public assistance program, or the fact that the applicant has      exercised a right under the Consumer Credit Protection Act), and the      remainder concerned other credit-related practices, such as fair credit      reporting; billing-error resolution; and credit card rates, terms, and      fees. Twenty-eight percent of the complaints involved disputes about      insufficient-funds charges and procedures, amounts withdrawn from a      consumer's account, funds availability, and other deposit account      practices, including electronic fund transfers; the remaining 2 percent      concerned disputes about trust services or other practices. (See      tables.)

In 97.5 percent of the 641 complaints against state member banks      regarding regulated practices that were investigated in 2006, the banks      had correctly handled the customer's account. The remaining 2.5 percent      of the complaints against state member banks resulted in a finding that      the bank had violated a consumer protection regulation. The most common      violations involved real estate loans, deposit accounts, and electronic      fund transfers.

| Subject of complaint | All complaints | Complaints involving            violations |
|----------------------|----------------|--------------------------------------------|
||
| 641                  | 100            | 16                                         | 2.50 |
|                 |
|                 |
|                 |
| 3                    | 0.47           | 0                                          | 0 |
| 4                    | 0.62           | 0                                          | 0 |
| 3                    | 0.47           | 0                                          | 0 |
|                 |
|                 |
| 57                   | 8.89           | 4                                          | 7.02 |
| 342                  | 53.35          | 3                                          | 0.88 |
| 41                   | 6.40           | 3                                          | 2.44 |
|                 |
| 108                  | 16.85          | 3                                          | 2.78 |
| 73                   | 11.39          | 5                                          | 6.85 |
| 1                    | 0.16           | 0                                          | 0 |
| 9                    | 1.40           | 0                                          | 0 |

#### Unregulated Practices 

As required by section 18(f) of the Federal Trade Commission Act,      the Board continued to monitor complaints about banking practices that      are not subject to existing regulations and to focus on those that      concern possible unfair or deceptive practices. In 2006, the      Federal Reserve received more than 1,300 complaints against state      member banks that involved unregulated practices. The most common      complaints involved checking accounts and credit cards. Consumers      most frequently complained about problems with either opening or      closing an account (113 complaints), issues involving fraud (104),      insufficient-funds charges and procedures (77), and concerns over      specific interest rates, terms, and fees on credit cards (70). The      remainder of the complaints concerned a wide range of unregulated      practices involving credit cards, including errors or delays in      processing consumers' payments, the amounts banks charged for late      payments, and overlimit fees and procedures.

#### Complaint Referrals to HUD 

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

Return to menu

##       Advice from the Consumer Advisory Council 

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

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

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

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

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

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

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

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

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

Return to menu

##       Consumer Education and Research 

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

The Federal Reserve maintains a consumer information web site      (      www.federalreserve.gov/consumer.htm      ) that contains publications      and educational materials related to the Board's consumer regulations.      In 2006, staff produced or updated the following publications on      nontraditional mortgages:
      - "Interest-Only Mortgage Payments and Payment-Option        ARMs--Are They for You?" (a new publication, issued jointly with the        FFIEC agencies, that includes a glossary of lending terms, a        mortgage-shopping worksheet, and a list of additional information        sources) 
      - "Consumer Handbook on Adjustable-Rate Mortgages"        (substantially revised and updated in conjunction with the OTS to        incorporate descriptions and illustrations of how changes in interest        rates affect a consumer's loan payments, including an example        of how an increase in interest rates may actually        increase the total loan amount) 

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

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

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

### Research on Financial Information and Disclosures 

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

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

Return to menu

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

In 2006, the community affairs function within the Federal      Reserve System supported several initiatives to promote community      economic development and fair access to credit for low- and      moderate-income communities and populations. The function continued to      focus on improving the sustainability and financial capacity of      community development organizations, creating asset-building      opportunities for low-income individuals, and promoting initiatives to      help homeowners preserve this important asset and avoid foreclosure.      Activities included publishing newsletters and articles, sponsoring      conferences and seminars, conducting research, and supporting the      dissemination of information to both general and targeted audiences.

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

### Collaborative Efforts 

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

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

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

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

### Access to Financial Services 

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

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

### Resources, Advisory Services, and Outreach 

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

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

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

Return to menu

----

      1. See      www.federalreserve.gov/boarddocs/press/bcreg/2006/20060929/default.htm      .      Return to text      2. The 2006 reporting period for examination data was July 1,      2005, through June 30, 2006.      Return to text      3. HMDA requires lenders to collect price information on loans      they originated in the higher-priced segment of the home-loan market.      "Higher-priced mortgages" refers to mortgage loans whose annual      percentage rates are 3 percentage points or more over the yield on      comparable Treasury securities on first-lien loans, and 5 percentage      points or more over that yield on junior-lien loans.      Return to text      4. In addition, four applications involving consumer compliance      issues were withdrawn.      Return to text      5. The foreign banking organizations examined by the Federal      Reserve are organizations operating under section 25 or 25A of the      Federal Reserve Act (Edge Act and agreement corporations) and      state-chartered commercial lending companies owned or controlled by      foreign banks. These institutions are not subject to the Community      Reinvestment Act and typically engage in relatively few activities that      are covered by consumer protection laws.      Return to text      6. The guidance was released in a letter (CA 06-5) to the Reserve      Banks on February 24, 2006      (      www.federalreserve.gov/boarddocs/caletters      ).      Return to text      7. The Board referred this case to the Department of Justice in      December 2005. It was not included in the 2005 *Annual Report* because the referral occurred outside the reporting period for the 2005      report (July 1, 2004, through June 30, 2005). It is included in the      2006 *Annual Report,* which otherwise reports referrals      occurring during the 2006 calendar year.      Return to text      8. See the Interagency Fair Lending Examination Procedures for a      full discussion of fair lending risk factors      (      www.ffiec.gov/PDF/fairlend.pdf (200kb pdf)      ).      Return to text      9. The FFIEC member agencies are the Board of Governors of the      Federal Reserve System, the Federal Deposit Insurance Corporation      (FDIC), the Office of the Comptroller of the Currency (OCC),      the Office of Thrift Supervision (OTS), and the National Credit Union      Administration (NCUA).      Return to text      10. See the June 13, 2006, press release      (      www.federalreserve.gov/boarddocs/press/bcreg/2006/      ).      Return to text      11. The booklet is available on the FFIEC's web site      (      www.ffiec.gov/Katrina_lessons.htm      ).      Return to text      12. The complete article is available at       www.federalreserve.gov/pubs/bulletin/2006/hmda/bull06hmda.pdf (580 kb pdf).      Return to text      13. Because the agencies use different methods to compile the      data, the information presented here supports only general conclusions.      The 2006 reporting period was July 1, 2005, through June 30, 2006.      Return to text      14. See      www.federalreserve.gov/boarddocs/testimony/2006/20060523/default.htm      .      Return to text      15. See      www.federalreserve.gov/boarddocs/press/bcreg/2006/20060331/default.htm      .      Return to text      16. Summaries of the forum sessions are available on the CFED web      site (      www.cfed.org/focus.m      ).      Return to text      17. The research papers presented at this conference are      available at      www.frbsf.org/community/research/assets.html      .      Return to text

Return to menu

----

HomeReports to the CongressAccessibilityContact usLast update: December 21, 2007