Consumer Compliance Handbook - Federal Reserve System

[Pages:499]Consumer

Compliance

Handbook

Division of Consumer and Community Affairs

Inquiries and comments relating to the contents of this handbook should be addressed to Manager, Reserve Bank Oversight Division of Consumer and Community Affairs Board of Governors of the Federal Reserve System Washington, DC 20551

Copies of this handbook can be obtained from Publications Fulfillment Mail Stop 127 Board of Governors of the Federal Reserve System Washington, DC 20551

The price is $50 per copy. Remittance may be made by either check or money order, drawn on a U.S. bank, and should be made payable to the Board of Governors of the Federal Reserve System. Updates are available at an additional charge. For information, call 202-452-3244 or write Publications Fulfillment at publications-bog@.

About this Handbook

Since the late 1960s, Congress has enacted a number of consumer protection and civil rights laws directly related to the activities of financial institutions. Most transactions involving consumers and financial institutions are covered by these laws. The Board of Governors is responsible for administering and enforcing the laws for state-chartered banks that are members of the Federal Reserve System (state member banks)--and, with respect to some of the laws, for foreign banking organizations. Oversight of this area is assigned to the Board's Division of Consumer and Community Affairs; direct supervision of individual institutions to determine their compliance with the laws, and the implementing regulations, is largely the responsibility of the Federal Reserve Banks, operating under delegated authority. Specially trained consumer compliance examination staff help carry out the Board's consumer compliance supervision program.

Intended Use

This Consumer Compliance Handbook provides Federal Reserve examiners (and other System compliance personnel) with background on the consumer compliance regulations and statutes covered by the Board's consumer compliance supervision program and guidelines for conducting consumer compliance examinations. Others in the compliance profession may also find it useful.

The Handbook describes each regulation (or, if no regulation exists, the statute) and, for most of the regulations, provides examination objectives, examination procedures, and a detailed examination checklist. Although most of the regulations are discussed in some detail, the discussions are not intended as a substitute for the regulation (or the statute). For complete information, examiners should refer to the regulation itself, as well as the statute, official interpretations, and any related CA Letters issued by the Division of Consumer and Community Affairs.

The Handbook primarily concerns examinations of state member banks, but it also covers supervisory activities related to foreign banking offices. For simplicity, most discussions refer to ``state member banks'' (or just ``banks''), even when they may apply to foreign banking offices. In addition, the material on risk-focused consumer compliance supervision, which is currently being revised, applies in part to the supervision of LCBOs (large

complex banking organizations), including those without a state member bank.1

Contents

The first part of the Handbook covers aspects of the examination process in general; the remaining parts focus on individual regulations (or, in some cases, individual statutes):

I. Risk-focused consumer compliance supervision II. Deposit-related regulations and statutes III. Credit-related regulations and statutes IV. Other regulations, rules, policies, and statutes V. Federal fair lending regulations and statutes VI. Community Reinvestment Act

Relationship to FFIEC-Issued Material

The Handbook has been prepared specifically for Federal Reserve examiners. Some of the chapters concerning regulations or statutes for which the FFIEC has issued supervisory materials are adapted from FFIEC documents. The differences between the Handbook and FFIEC materials are not substantive and primarily involve formatting or other minor changes to increase consistency among individual Handbook chapters.

Updates

Informal updates will be provided to System staff through CA Letters, conference calls, and other means of internal communication, as circumstances dictate. Formal updates will be distributed at least annually.

Questions

Questions and comments about this Handbook should be directed to the Manager, Reserve Bank Oversight, Division of Consumer and Community Affairs.

An electronic version of this printed handbook is available on the Board's web site, at http:// boarddocs/SupManual/ default.htm.

1. The material on risk-focused consumer compliance supervision is not included in this edition of the Handbook.

Consumer Compliance Handbook

iii (11/07)

Consumer Compliance Handbook

Contents

About this Handbook I. Risk-Focused Consumer Compliance Supervision Framework II. Deposit-Related Regulations and Statutes Regulation E (Electronic Fund Transfers) Regulations Q and D (Interest on Demand Deposits/Reserve Requirements) Regulation CC (Availability of Funds and Collection of Checks) Regulation DD (Truth in Savings)

III. Credit-Related Regulations and Statutes Regulation C (Home Mortgage Disclosure) Regulation H (Flood Insurance) Fair Credit Reporting Regulation Z (Truth in Lending) Fair Debt Collection Practices Act Homeowners Protection Act Homeownership Counseling Real Estate Settlement Procedures Act

IV. Other Regulations, Rules, Policies, and Statutes Regulation G (Disclosure and Reporting of CRA-Related Agreements: CRA Sunshine Requirements) Regulation H (Section 109 of the Riegle?Neal Interstate Banking and Branching Efficiency Act) Regulation M (Consumer Leasing) Regulation P (Privacy of Consumer Financial Information) Regulation AA (Unfair or Deceptive Acts or Practices: Credit Practices Rule) Federal Trade Commission Act (Section 5) Branch Closings Children's Online Privacy Protection Act Right to Financial Privacy Act

Consumer Compliance Handbook

v (6/08)

Contents

V. Federal Fair Lending Regulations and Statutes Overview Regulation B (Equal Credit Opportunity) Fair Housing Act Examination procedures Appendix Alternative Examination Approach for Low-Risk Banks

VI. Community Reinvestment Act Regulation BB (Community Reinvestment) Small Institutions Intermediate Small Institutions Large Institutions Institutions with Strategic Plans Wholesale or Limited-Purpose Institutions Supplementary Guidance

vi (6/08)

Consumer Compliance Handbook

Risk-Focused Consumer Compliance Supervision Framework

Overview of the Program

The Board adopted a program for risk-focused consumer compliance supervision in 1997. Since then, the program has been modified several times to increase its efficiency and effectiveness in an evolving banking environment. The procedures implementing the risk-focused consumer compliance supervision program are currently being revised to, among other things, incorporate a wide range of existing supervisory guidance.1 Once the revised procedures have been tested and formally approved, they will be added to this Consumer Compliance Handbook.

The risk-focused consumer compliance supervision program is designed to reasonably ensure that all organizations supervised by the Federal Reserve comply with consumer protection laws and regulations. It is founded on the expectation that consumer compliance risk management is an integral part of the corporate-wide risk management function of each state member bank and bank holding company.

The risk-focused supervision program directs System resources to organizations, and to the activities within those organizations, commensurate with the level of risk to both the organization and consumers. This focusing of resources reduces burden on those organizations that already have appropriate risk mitigators in place. In recognition of the rapidity of change in the financial services industry, the program is designed to be adaptable to different types of organizations and risk profiles.

Particularly in a period of rapid change, the more informed organizations are about the regulatory environment in which they operate, the greater the opportunity for them to achieve compliance on their own. For that reason, the program supplements traditional supervisory activities with timely communications concerning consumer compliance regulatory and supervisory matters. Given the interrelationship among different types of risk, the program

1. The procedures are also being revised to incorporate revised guidance related in part to the supervision of LCBOs (large complex banking organizations), including those without a state member bank.

requires examination reports and other products of the supervision process to be meaningful to all stakeholders, including the supervised entities, the Federal Reserve, and state banking authorities.

Following are some highlights of the program:

? Provides for the efficient and effective deployment of System resources by allowing Reserve Banks to tailor supervisory activities to the size, structure, complexity, and risk of the bank. As a result, both the frequency and depth of review should be commensurate with a bank's risk profile. Sufficient information about the use of resources will be captured and analyzed to help direct future decision making at the System and Reserve Bank levels.

? Incorporates guidelines for evaluating compliance management programs in the context of risk to the organization as well as to consumers. These guidelines will be evaluated routinely and updated as necessary to reflect changing risk within the financial services industry. The program will provide specific guidance on evaluating the efficacy of internal controls and audit programs as well as on applying appropriate testing methodologies.

? Requires coordination with other supervisory disciplines and other regulators, as warranted, to ensure a full understanding of the organization's risk profile such that consumer compliance risks are incorporated into overall risk assessments and consumer compliance ratings influence overall management ratings and risk management ratings as appropriate. The form of specific supervisory products will be dictated by the needs of relevant stakeholders.

? Promotes communication between supervised organizations and Reserve Banks, outside of the supervisory process, for the purpose of sharing timely information about industry developments and consumer compliance risk management practices as well as changes to laws and regulations. Resulting improvement in institutions' risk management programs should allow for more-efficient use of examiner time and resources while reducing regulatory burden.

Consumer Compliance Handbook

Overview ? 1 (1/06)

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