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Consumer and Community Affairs

In 1997 the Board’s activities in theconsumer protection area centered onmaking disclosures about transactionsmore helpful to consumers and focusedparticularly on automobile leases andreal estate mortgages. The Board devel-oped a major consumer education cam-paign related to the disclosures thatconsumers receive under its consumerleasing regulations. The initiative hadparticipation from more than thirtyagencies and organizations, resulting inthe publication of an educational bro-chure on how to make informed leasingchoices and the creation of a public Website.

In the area of mortgage transactions,the Board joined with the U.S. Depart-ment of Housing and Urban Develop-ment (HUD) to review the disclosurescurrently given to consumers under theTruth in Lending Act and the RealEstate Settlement Procedures Act, seek-ing ways to make the disclosures moreuseful. The agencies determined thatregulatory change alone would notachieve the desired improvements calledfor by the Congress and turned theirattention to legislative changes to reformthe current disclosure scheme.

The Board acted on bank and bankholding company applications thatinvolved Community Reinvestment Act(CRA) protests, adverse CRA ratings,and issues of fair lending and noncom-pliance with consumer protection reg-ulations. Several applications involvingmajor bank mergers elicited both strongsupport and strong opposition frommembers of the public; all were pro-tested on CRA grounds. After extensiveanalysis, the Board approved all theseapplications, finding in each case that

convenience and needs factors wereconsistent with approval.

For CRA examinations of state mem-ber banks, the Board in 1997 focused onworking with the other financial regu-latory agencies to foster consistency inthe application of examination proce-dures and on analyzing the data col-lected by large banks on small businessand small farm loans and communitydevelopment lending. For large institu-tions, revised CRA regulations becamefully effective on July 1, 1997, so thatall such institutions are now examinedunder the revised regulation and nolonger have the option to be examinedunder the previous regulation.

In the fair lending area, in addition topursuing corrective measures on itsown, the Board referred several dis-crimination cases involving state mem-ber banks to the Department of Justice,including a case of alleged redliningin brokered loans. The Board referredother cases raising claims of allegedmortgage discrimination to HUD forinvestigation. The Board also publishedfinal rules governing ‘‘self tests’’ thatallow lenders to keep findings fromany self-tests they conduct confidentialunder a legal privilege; the rules areparallel to rules issued by HUD underthe Fair Housing Act. The Board contin-ued to improve the System’s processfor fair lending examinations, usingenhanced statistical techniques to testlarge institutions for compliance.

Acting on behalf of the FederalFinancial Institutions ExaminationCouncil (FFIEC) and HUD, the Boardprepared Home Mortgage DisclosureAct statements for individual lendersand aggregate reports for metropolitan

177

areas, meeting the statutory target fordelivery. From the data, the Board notedthat denial rates continued to show dis-parities among racial and ethnic groupsand that although the number of loans toblack applicants increased in 1996 as ithad in previous years, the rate of growthdecreased.

These matters are discussed below,along with other actions by the Boardin the areas of consumer protection andcommunity affairs.

Leasing Education andRegulatory Changes

Regulation M, which implements theConsumer Leasing Act, requires lessorsto give consumers uniform disclosuresof the costs and terms of a lease beforethe lease becomes legally binding. InSeptember 1996, the Board adopted arevised Regulation M following a multi-year review under its Regulatory Plan-ning and Review program. Through thereview the Board identified ways to sim-plify the regulation to carry out moreeffectively the congressional intent ofconsumer protection. The review alsoled to the modernization of the rules, toaddress changes that have taken place inconsumer leasing since 1976, the yearthe Consumer Leasing Act was enacted.The revisions included new disclosures,primarily for motor vehicle leasing, toimprove consumers’ understanding oflease transactions. The Board deter-mined that these revisions were espe-cially necessary given that about one-third of all passenger cars now deliveredto consumers are leased rather than pur-chased and financed.

Throughout 1997, the Board workedto develop an educational program toensure that consumers could take maxi-mum advantage of the new disclosuresabout lease transactions. It organized abroad-based coalition of more than

thirty agencies and organizations fromthe private and public sectors, includingautomobile manufacturers and dealers,leasing trade associations, consumeradvocacy groups, Reserve Banks, theFederal Trade Commission, and stateattorneys general.

This leasing education team devel-oped ‘‘core messages’’ about leasing—key information that consumers need tomake informed choices:

• Leasing is different from buying• Consumers need to consider the costs

at the beginning of, during, and at theend of the lease

• Consumers need to compare leaseoffers and negotiate some terms

• Consumers need to know theirrights and responsibilities in leasetransactions.

These core messages were incorpo-rated into a new brochure,Keys to Vehi-cle Leasing—A Consumer Guide, whichwas released at a press conference inDecember. One million copies of thebrochure were printed and are being dis-tributed by the Federal Reserve and theother organizations that participated inits preparation.

The information in the brochure isalso available on the Board’s publicWeb site, and copies can be printed fromthere (http://www.bog.frb.fed.us/pubs/leasing). The Web site includes a glos-sary of leasing terms and provides linksto the sites of some members of theleasing education team. In Decemberalone, the Web site recorded almost20,000 visits.1

1. The Board’s Web site provides a wide arrayof other information, including educational bro-chures on home mortgages, guidance for filingcomplaints, the consumer compliance handbook,and credit card information. It also provides linksto the Web sites of the FFIEC and the otherfinancial regulatory agencies. For CRA, theagency sites provide data on CRA ratings, reports,

178 84th Annual Report, 1997

In March the Board amended Regula-tion M to implement changes to theConsumer Leasing Act enacted in 1996.The changes primarily streamline theadvertising disclosures as specified inthe act; they also revise the rules fordisclosure of up-front costs in leaseagreements to parallel the advertisingrules and include several other technicalchanges.

The revised leasing rules adopted in1996 made it necessary for leasingcompanies and automobile dealershipsto develop new leasing forms and toreprogram the computer software usedto produce the lease disclosures. Thenew rules (and the commentary inter-preting them) were to become manda-tory on October 1, 1997. In September1997, the Board delayed the mandatoryeffective date for compliance to January1, 1998, to give the nation’s more than22,500 new-car dealerships more timeto install and test the computer softwareused to produce the disclosures.

TILA and RESPA Rules

During 1997 the Board and HUD stud-ied ways to improve the disclosuresabout home mortgage transactions givento consumers under the Truth in Lend-ing Act (TILA) and the Real EstateSettlement Procedures Act (RESPA). In1996 the Congress required the twoagencies to simplify and improve thedisclosures if possible and to create asingle format for use in complying withboth laws. In December 1996, theagencies jointly published an advancenotice of proposed rulemaking, seekingcomment on regulatory and legislativechanges that might achieve those goals.

Following a review of the commentsand an analysis conducted by the Boardand HUD, the Board in March 1997published a finding that, to achieve thegoals set forth in the amendments, legis-lative rather than regulatory changeswould be necessary. The Board invitedpublic comment on possible statutorychanges to TILA and received numer-ous letters from individual consumers.Consumers’ primary concern was thatdisclosures about mortgage costs begiven earlier in the process than they arenow, so that they can use the disclosuresto comparison shop before applying fora loan from a particular lender. Consum-ers also want the cost disclosures to beas accurate as possible, so that they willnot face unexpected charges at loanclosing, when they no longer have theflexibility to seek other financing.

In July, the Board and HUD testifiedbefore the Senate Banking Committeeon ways to improve the disclosures andoutlined their plans to develop legisla-tive recommendations. Also in July, theBoard and HUD held a public forum tohear views on major issues raised byreform efforts. The participants, whoincluded consumer advocates, officialsof state agencies, and trade associationsrepresenting lenders, mortgage brokers,and providers of settlement services,discussed the goals of TILA and RESPAand considered whether significantimprovement can be made to the exist-ing statutes or whether more compre-hensive reform is needed. They talkedabout whether lenders should guaranteerates and other costs at the time of appli-cation. They also discussed preliminaryfindings from survey data on consumercredit shopping presented by the Boardindicating that although many consum-ers rely on the annual percentage rate—the APR—when selecting a loan, fewunderstandthe measure’s mathematicalsignificance.

and examination schedules; at year-end, work wasunder way to create a centralized interagency data-base of CRA ratings.

Consumer and Community Affairs179

At year-end, the Board and HUDwere preparing a report and recommen-dations on disclosures about home mort-gage transactions, targeted for deliveryto the Congress in 1998.

Other Regulatory Matters

Regulation B(Equal Credit Opportunity)

During 1997 the Board and HUD devel-oped rules to govern ‘‘self tests’’ underthe Equal Credit Opportunity Act(ECOA) and the Fair Housing Act. (Thetwo agencies were directed by amend-ments to the statutes to issue ‘‘substan-tially similar’’ rules.) In December 1996the Board published a proposal to allowa creditor that voluntarily conducts aself-test of its operations to keep theresults confidential under a legal ‘‘privi-lege.’’ The privilege serves as an incen-tive to do self-testing by ensuring thatany evidence of discrimination producedby a self-test conducted voluntarily willnot be used against the creditor, pro-vided the creditor takes appropriate cor-rective measures for any discriminationthat is found.

The primary issue addressed in therulemaking process was whether todefine ‘‘self test’’ narrowly or broadly;the Board used a narrow definition inthe proposal but solicited public com-ment on a broader definition.

The Board’s final rule, published inDecember 1997, adopted the narrowdefinition. It defines a self-test as anyprogram, practice, or study designed andused specifically to determine the extentor effectiveness of a creditor’s compli-ance with the ECOA by creating dataor other factual information that is notavailable and cannot be derived fromloan or application files or other recordsrelated to credit transactions. It applies

to the practice of using fictitious appli-cants for credit (‘‘testers’’) but does notapply to creditor reviews and evalua-tions of loan and application files. (HUDpublished a similar rule to revise regula-tions implementing the Fair HousingAct.)

Regulation C(Home Mortgage Disclosure)

The Congress in 1996 raised the assetthreshold for coverage of depositoryinstitutions under the Home MortgageDisclosure Act (HMDA) from $10 mil-lion, setting a standard based on theconsumer price index for urban wageearners and clerical workers (theCPIW); it left unchanged the asset mea-sure for nondepository institutions. Toimplement this amendment, the Boardin January 1997 published an interimrule making an initial adjustment to theasset threshold—to $28 million—on thebasis of the change in the CPIWbetween 1975 and year-end 1996. TheBoard made the rule final in May. It willmake future changes using the annualaverage of the CPIW for the twelve-month period ending in November, aschedule that will allow publication byDecember of any change in the thresh-old for the coming year.

The rule made final in May also es-tablishes, pursuant to statutory changes,an alternative way for institutions tomake HMDA disclosure statementsavailable for public inspection. An insti-tution must make a complete copy ofits disclosure statement available to thepublic at its home office. For branchoffices located in other metropolitanareas, it previously had to make disclo-sures available at one office in each areawithin ten calendar days; now it has theoption of posting a notice informing thepublic that disclosures will be provided


on request (and indicating the address towhich requests should be sent).

In December, the Board adjusted theasset threshold to $29 million for datacollection in 1998.

Regulation E(Electronic Fund Transfers)

In January 1997, the Board publisheda proposal to revise Regulation E toimplement amendments to the Elec-tronic Fund Transfer Act (EFTA)included in the Personal Responsibilityand Work Opportunity ReconciliationAct of 1996. The amendments exemptfrom coverage ‘‘needs tested’’ electronicbenefit transfer (EBT) programs estab-lished by or administered by state orlocal governments, including those forthe disbursement of food stamps andcash assistance to needy families.

Federally administered programs—aswell as pension and other employment-related EBT programs established bystate or local governments—remain sub-ject to Regulation E’s special rules forgovernment programs. Compliance withthese special rules, which the Boardadopted in 1994, became mandatory onMarch 1, 1997.

In March the Board submitted to theCongress, as required by the EconomicGrowth and Regulatory PaperworkReduction Act of 1996, a report on thepossible costs and consumer benefitsresulting from application of the EFTAto electronic stored-value products. Thereport considered several alternativeapproaches, including allowing competi-tion in the market to determine whichconsumer protections are provided for agiven electronic stored-value product.Among the sources of information usedfor the analysis were comments submit-ted to the Board in response to its 1996proposal to extend the disclosure provi-

sions of Regulation E to some electronicstored-value products.

The report noted that even minimalregulation (such as requiring only initialdisclosures) could affect the develop-ment of electronic stored-value productsif the incremental costs of complyingwith the regulation were large or ifthey differed from one product to thenext. Because experience with electronicstored-value products to date is limited,the report concluded that it would bedifficult to predict whether the benefitsto consumers from any particular regu-latory provision would outweigh thecorresponding costs of compliance. Thereport did not endorse or recommendany specific course of action at this time.

Regulation Z(Truth in Lending)

In January the Board published pro-posed revisions to Regulation Z to carryout changes to the Truth in Lending Actenacted by the Congress in 1996. Theamendments apply to variable-rate loanshaving a term of more than one year thatare secured by the consumer’s principaldwelling. Previously, creditors had togive a fifteen-year historical example ofindex values related to the interest rate.Now they have the option of providing astatement that the periodic paymentmay increase or decrease substantially,together with the disclosure of a maxi-mum interest rate and a correspondingpayment based on a $10,000 loanamount. The Board adopted a final rulein November.

In June the Board held public hear-ings in Los Angeles, Atlanta, and Wash-ington, D.C., to determine how well theHome Ownership Equity Protection Act(HOEPA) is working. The HOEPA pro-visions of Truth in Lending apply toloans secured by the homeowner’s prin-


cipal dwelling if the interest rate or clos-ing costs exceed certain levels. The lawseeks to protect against abusive mort-gage lending practices that target theelderly and the unsophisticated. The actrequires credit disclosures, beyond thosenormally given, three days before ahomeowner becomes obligated on aloan.

The Board heard a wide range ofviews. Lenders criticized the complexityof HOEPA’s coverage tests and sug-gested simplifying the rules about whichfees count toward the closing coststhreshold (and raising the rate and feethresholds to keep the same level ofcoverage). They also expressed concernabout having to give new disclosures tocorrect even a small error, because doingso triggers a new three-day waitingperiod before funds can be disbursed.Consumer advocates asked for a moreeffective enforcement tool to addresscontinuing abuses and also favored aprohibition on practices that they sayplace homes at risk of foreclosure, suchas loans to borrowers who have highdebt-to-income ratios and repeated refi-nancings (loan flipping) that add fees ontop of fees.

Although the June hearings weredevoted primarily to home equity lend-ing, the Board also used them to exploreother issues that it must consider in thefuture, including issues related to howTruth in Lending’s finance charge dis-closure could more accurately reflect thecost of consumer credit.

Actions under the Fair CreditReporting Act

In March the Board submitted to theCongress a report concerning the avail-ability and use of sensitive identifyinginformation about consumers, such astheir social security numbers. Thereport, required by amendments to the

Fair Credit Reporting Act adopted in1996, addresses the potential use of suchinformation to commit financial fraudand the corresponding risk of loss toinsured depository institutions.

The Board found that informationabout consumers is widely availablefrom both government and commercialsources and that few legal constraintslimit its collection, use, or dissemina-tion. Some of the information is sensi-tive and can be used to facilitate unlaw-ful activities, such as ‘‘identity theft’’involving the illegal use of personal datato commit financial fraud. Losses fromidentify theft do not seem to presenta significant risk to insured depositoryinstitutions at this time. Nonetheless, thereport notes, this type of fraud is a grow-ing risk to consumers and financial insti-tutions, and relatively easy access topersonal information may increase therisk. The report suggests steps that con-sumers and financial institutions couldtake to reduce the likelihood of fraud,but it makes no recommendations forlegislative or administrative action.

In July the Board published for com-ment proposed amendments to themodel forms in Regulation B related toconsumer rights under the Fair CreditReporting Act. The proposal relates tothe disclosures that consumers must begiven when they are denied credit on thebasis of information obtained from aconsumer reporting agency or from anaffiliate of the creditor. Final action waspending at year-end.

Interpretations

In February the Board revised the offi-cial staff commentary to Regulation Z(Truth in Lending). The update givesguidance about new tolerances forthe disclosure of finance charges andother matters in connection with home-secured installment loans.


In March the Board revised the offi-cial staff commentary to Regulation M(Consumer Leasing). The update offersguidance for compliance with Regula-tion M as revised by the Board in Sep-tember 1996.

HMDA Data andLending Patterns

The Home Mortgage Disclosure Actrequires that mortgage lenders coveredby the act collect and make public cer-tain data about their home purchase,home improvement, and refinancingloan transactions. Depository institu-tions generally are covered if they werelocated in metropolitan areas and hadassets above a certain threshold at thepreceding year-end; mortgage compa-nies are covered if they were located inor made loans in metropolitan areas andhad assets of more than $10 million atthe preceding year-end (when combinedwith the assets of any parent company),and are also covered, regardless of assetsize, if they originated 100 or morehome purchase loans in the precedingyear.2 In 1997, 8,367 depository institu-tions and affiliated mortgage companiesand 961 independent mortgage compa-nies reported HMDA data for calendaryear 1996.

Lenders covered by HMDA submitinformation about the geographic loca-tion of the properties related to theirloans and applications, the dispositionof loan applications, and, in most cases,the race or national origin, income, andsex of applicants and borrowers. TheFederal Reserve Board processes thedata and produces disclosure statements

on behalf of HUD and the memberagencies of the Federal Financial Institu-tions Examination Council.3

The FFIEC prepares individual dis-closure statements for lenders thatreported data—one statement for eachmetropolitan area in which a lender hadoffices and reported loan activity. The42,936 statements produced from the1996 data cover 14.8 million loans andapplications; the 32 percent increasein loans and applications over 1995 islargely attributable to a sharp increase inrefinancing activity.4 In July, each insti-tution made its disclosure statementspublic; and in August, reports contain-ing aggregate data for all lenders in agiven metropolitan area were madeavailable at central depositories in thenation’s 332 metropolitan areas.

Lending institutions tend to specializein different types of home loans. In1996, depository institutions continuedto be the predominant source of homeimprovement loans and loans for multi-family residences. Mortgage companiesaccounted for about 52 percent ofthe conventional home purchase loansreported under HMDA and about80 percent of the government-backedhome purchase loans.

Mortgage originators and institutionsin the secondary market for mortgages,such as Fannie Mae (the FederalNational Mortgage Association) andFreddie Mac (the Federal Home LoanMortgage Corporation), offer a varietyof conventional home loan programs,often in concert with private mortgage

2. Through 1996, the asset threshold for deposi-tory institutions was $10 million. In September1996, the Congress amended HMDA to raise theasset threshold according to changes in the CPIW.See ‘‘Other Regulatory Matters’’ above.

3. The member agencies of the FFIEC are theBoard, the Federal Deposit Insurance Corporation(FDIC), the National Credit Union Administration(NCUA), the Office of the Comptroller of theCurrency (OCC), and the Office of Thrift Super-vision (OTS).

4. A summary of the 1996 HMDA data appearsin a series of special tables in theFederal ReserveBulletin, vol. 83, no. 9 (September 1997),pp. A68–A75.


insurers, to benefit low-income andminority households and neighborhoods.In recent years, these institutions haveexpanded their program offerings, whichmay account for the continuing increasein loans to these homebuyers. From1993 to 1996 the number of conven-tional home purchase loans to low-income borrowers increased 37 percent,compared with 23 percent for high-income borrowers.

The Federal Housing Administration(FHA) also has adopted measures toenhance borrowing opportunities forlow-income households; at the sametime, it has worked to make FHA loansmore competitive. The agency has low-ered its insurance premiums, increasedflexibility in its underwriting standards,and raised the maximum size of theloans that it will back. Between 1993and 1996 the number of government-backed home purchase loans (pre-dominantly FHA-insured) increased19 percent for low-income borrowers,compared with 5 percent for high-income borrowers.

Lending Patterns

Home purchase lending to minorityhomebuyers has increased markedly inrecent years: From 1993 to 1996 thenumber of home purchase loansextended to black applicants increased53 percent, to Hispanic applicants56 percent, and to Asian applicants15 percent—compared with 14 percentfor white applicants. However, thegrowth of lending to blacks slowed in1996 and was less than the nationalaverage. The slower growth may havebeen due in part to the relatively weakerhousing markets in that year in statesthat have relatively large black popula-tions, principally some states in the mid-Atlantic region and a number of south-ern states.

The 1996 HMDA data continue toshow higher rates of credit denial forconventional home purchase loans forblack and Hispanic applicants than forAsian and white applicants, even withinthe same income brackets. Overalldenial rates for conventional home pur-chase loans were 49 percent for blackapplicants, 34 percent for Hispanicapplicants, 14 percent for Asian appli-cants, and 24 percent for white appli-cants. All these rates were higher than in1993, 1994, and 1995.5

The increase in denial rates over timestems in part from changes in the homelending market. First, the number ofapplications submitted to ‘‘subprime’’lenders and to institutions that extendloans for the purchase of manufacturedhomes has increased substantially. Theselenders’ denial rates are quite high(about 55 percent on average, comparedwith about 13 percent for other lenders),and their increasing share of all applica-tions for conventional home purchaseloans (25 percent in 1996 compared with11 percent in 1993) results in higheroverall denial rates. Second, applica-tions by low-income households consti-tute an increasing share of all applica-tions. Because low-income householdstend to have relatively high denial rates,overall denial rates also tend to rise.Finally, the incidence of multiple appli-cations has increased over time. Appli-cants who submit applications to morethan one prospective lender have highdenial rates, and their growth in the poolof all applicants also tends to raise over-all denial rates.

The data collected under HMDAdo not include the wide range of finan-cial and property-related factors thatlenders consider in evaluating loan

5. For details, see the Special Tables section inthe September issue of theFederal Reserve Bulle-tin for 1995 and subsequent years.


applicants. Thus, the HMDA data alonedo not provide an adequate basisfor determining whether a particularlender is discriminating unlawfully. Butbecause they can be supplemented byother information available to lenders’supervisory agencies, the data are animportant tool in the enforcement of fairlending laws.

Use of Data by Other Agencies

Lenders who sell their loans in the sec-ondary market are required underHMDA to identify the category of pur-chaser (for example, Fannie Mae orFreddie Mac). The information helpsmake it possible to assess the relativeperformance of institutions in servingthe credit needs of lower-income andminority homebuyers.6

In its oversight of the housing activi-ties of government-sponsored entities,HUD uses the HMDA data to helpassess the efforts of Fannie Mae andFreddie Mac to support mortgages forlow- and moderate-income families andmortgages on properties in targeted com-munities. The data also serve as onecomponent of the fair lending reviewsconducted by HUD and the Departmentof Justice. In addition, the data assistHUD, the Department of Justice, andstate and local agencies in respondingto allegations of lending discrimina-tion filed by loan applicants and borrow-ers and assist in the agencies’ target-ing of lenders for further inquiry.

Private Mortgage Insurance

The FFIEC, on behalf of the nation’seight active private mortgage insurance(PMI) companies, compiles informationon applications for private mortgageinsurance similar to the information onhome mortgage lending collected underHMDA. Lenders typically require pri-vate mortgage insurance for conven-tional mortgages that involve smalldown payments.

Working through their national tradeassociation, the Mortgage InsuranceCompanies of America, the PMI compa-nies submit their data to the FFIEC on avoluntary basis. The FFIEC preparesdisclosure statements for each companyand aggregate reports for metropolitanareas. These reports are available forpublic review at the central depositoriesat which the HMDA data are available.7

Fair Lending

Under the Equal Credit OpportunityAct, the Board is required to refer to theDepartment of Justice any violationsthat it has reason to believe constitute a‘‘pattern or practice’’ of unlawful dis-crimination. The Board made four suchreferrals during 1997. Two of the casesinvolved discrimination on the basis ofmarital status, and a third, discrimina-tion on the basis of age. The three mat-ters were returned to the Board forenforcement.

The fourth case, which was still underconsideration by the Department of Jus-tice at the close of 1997, involved adetermination that a lender had appar-ently engaged in discriminatory ‘‘redlin-ing’’ in residential loans, in violation of

6. See, for example, the discussion of whichinstitutions bear the credit risk of mortgagesextended to lower-income and minority home-buyers in Glenn B. Canner, Wayne Passmore,and Brian J. Surette, ‘‘Distribution of CreditRisk among Providers of Mortgages to Lower-Income and Minority Homebuyers,’’FederalReserve Bulletin,vol. 82 (December 1996),pp. 1077–1102.

7. A summary of the 1996 PMI data appearsin a series of special tables in theFederalReserve Bulletin,vol. 83, no. 9 (September 1997),pp. A76–A79.


both the ECOA and the Fair HousingAct. The alleged redlining occurredwhen the lender, which brokered loansfor another institution, honored the prac-tice of that institution to refrain fromtaking applications from persons resid-ing in designated urban areas. TheBoard’s examination had demonstratedthat those urban areas had significantlyhigher percentages of minority residentsthan the remainder of the institution’smarket area and that the lender appearedto have no nondiscriminatory expla-nation for adhering to the institution’sredlining policy.

Community Development

The Federal Reserve System, throughits Community Affairs programs at theBoard and the Reserve Banks, engagesin ongoing outreach, informational, andeducational activities to help financialinstitutions and the public understandand address financial services issuesaffecting low- and moderate-incomepersons.

In 1997, six Reserve Banks—Boston,New York, Cleveland, St. Louis, Chi-cago, and San Francisco—reached thefinal stages of their Residential Mort-gage projects following a two-year ini-tiative in selected cities to help identifyand address barriers to equal access tocredit in the homebuying process. Inearlier stages, the Reserve Banks hadbrought together community represen-tatives and key industry participantsin the homebuying process to discussproblems that affect minority and lower-income homebuyers and to forge solu-tions. Task groups reported their find-ings during 1997. Implementation oftheir recommendations by communityand industry groups, separately and injoint efforts, is expected to improveequal access to credit over the long termin the cities studied.

Although community development,reinvestment, and fair lending continuedto be central to Community Affairseducational and technical assistanceactivities, 1997 was marked by abroader approach to the economic issuesconfronting low- and moderate-incomecommunities. The New York ReserveBank, for example, sponsored a confer-ence on welfare reform and its implica-tions for lower-income communities.The Minneapolis Reserve Bank helpedorganize focus groups to discuss thepossible effects of increased use of elec-tronic banking services on low- andmoderate-income residents.

The development and sponsorship ofeducational activities remained a majorundertaking of the Federal Reserve’sCommunity Affairs programs in 1997.Overall, the Reserve Banks sponsoredor cosponsored 233 conferences, semi-nars, and informational meetings oncommunity development, reinvestment,and fair lending topics. The programswere attended by more than 11,600bankers, bank examiners, and represen-tatives of small businesses and commu-nity and consumer groups. Additionally,staff members from the Board and theReserve Banks made more than 275 pre-sentations at conferences, seminars, andmeetings sponsored by banking, gov-ernmental, business, and communityorganizations.

Programs in 1997 reflected a growingconcern with issues related to smallbusiness finance and economic develop-ment. The Cleveland Reserve Bank,working with the U.S. Small BusinessAdministration and the National Coun-cil for Smaller Enterprises, spearheadedan ‘‘Access to Capital’’ initiative for theCleveland area. The initiative will bringtogether business leaders to review thecredit process, identify possible barriersfaced by small firms, and make recom-mendations for improving these firms’


access to financing. The Boston andSan Francisco Reserve Banks spon-sored conferences and workshops onthe financing and technical assistanceneeds of women-owned businesses. TheDallas Reserve Bank sponsored a sym-posium on financing for very smallfirms—‘‘microenterprises’’—and theBoston Reserve Bank helped create atraining curriculum on microenterprisedevelopment.

Economic development in rural areasand on Indian reservations was the focusof educational forums at several ReserveBanks. The Chicago Reserve Banksponsored a conference on rural com-munity economic development, and theMinneapolis Reserve Bank sponsored aworkshop on women’s access to creditand capital in rural areas and on Indianreservations. The Kansas City and Min-neapolis Reserve Banks worked withthe Montana–Wyoming Tribal LeadersCouncil and the University of MontanaLaw School to cosponsor a conferenceon building tribal infrastructure to sup-port economic prosperity.

In 1997 the Community Affairs pro-grams developed or expanded a varietyof publications and other informationalresources directed at bankers, smallbusinesses, and community organiza-tions. The Minneapolis Reserve Bankpublished a revised and expanded sec-ond edition ofPrinciples and Practicesfor Community Development Lending,and the Richmond Reserve Bank pub-lished a specialMarketwise Reporton ‘‘Community-Based Development.’’The Reserve Banks published a com-bined total of thirteen different com-munity affairs newsletters dealing withvarious aspects of community andeconomic development, reinvestment,and fair lending. The combined circula-tion of these newsletters in 1997 grewto more than 73,000, including bankers,small-business owners, representatives

of community-based development andconsumer groups, and housing, com-munity, and economic developmentofficials.

Outreach and technical assistance tobanks—and to community representa-tives interested in bank involvement inreinvestment and community develop-ment initiatives—continued to play amajor role in Community Affairs pro-grams in 1997. Members of the Commu-nity Affairs staffs at the Board and theReserve Banks conducted more than1,600 outreach meetings with represen-tatives of financial institutions and localcommunities to explore communitycredit needs and issues related to theprovision of financial services.

In conjunction with their outreachefforts, several Reserve Banks develop,for selected communities, profiles thatidentify key community and economicdevelopment needs and describe someorganizations that can serve asresources. These profiles are made avail-able to banks and to community andbusiness organizations, and they oftenhelp stimulate collaborative approachesto community reinvestment. During1997, the New York Reserve Bank pub-lished profiles for Westchester Countyin New York and for Bergen and PassaicCounties in New Jersey, and the Chi-cago Reserve Bank published a profilefor the metropolitan area of Saginaw–Bay City–Midland in Michigan.

The St. Louis Reserve Bank devel-oped a profile for the Springfield,Missouri, metropolitan area and workedwith the Dallas Reserve Bank on a pro-file of the Texarkana metropolitan area.The Richmond Reserve Bank developeda profile of the tricounty area surround-ing Petersburg, Virginia.

The San Francisco Reserve Bankdeveloped profiles for the states of Utah,Idaho, and Washington and the citiesof Portland, San Diego, Los Angeles,


Sacramento, San Francisco, San Jose,Las Vegas, and Phoenix. Each profile,about sixty pages long, gives an over-view of the economic and demographiccharacteristics of the area and includesa directory of community and govern-ment organizations, programs of interestto bankers, and lending, service, andinvestment opportunities for financialinstitutions.

The Atlanta Reserve Bank completedwork on a community contacts databasedesigned to facilitate accessibility andgreater use of outreach information. Thedatabase has been adopted for use byseveral other Reserve Banks, and thedatabase design has been adopted bythe FFIEC to facilitate interagency shar-ing of community contact informa-tion for use in assessments of CRAperformance.

In 1997, the Board helped organizethe first formal interagency meeting ofCommunity Affairs representatives ofthe federal supervisory agencies. Partici-pants exchanged information on theiragencies’ community affairs programs,discussed community development andreinvestment issues, and explored waysin which the agencies might coordinatetheir activities.

Community Affairs programs contin-ued in 1997 to provide support as theFederal Reserve carried out its supervi-sory responsibilities. Board and ReserveBank staff members helped to reviewproposals regarding community devel-opment investment by banks and bankholding companies and to analyzeHMDA and CRA data on small-businesslending for use in community affairsresearch and publications; and in con-ducting CRA examinations, ReserveBank examiners increasingly made useof community contacts and other infor-mation provided by Community Affairsstaff members.

Finally, Board and Reserve Bank staffmembers provided considerable supportto members of the Board of Governorsand to Reserve Bank presidents, who in1997 gave increased attention to com-munity development, reinvestment, fairlending, and consumer credit issues.Members of the Board made speeches atconferences and meetings of commu-nity, consumer, and civil rights groupsand toured lower-income neighborhoodsand community development projects inReserve Bank cities. A member of theBoard continued to serve on the boardof directors of the Neighborhood Rein-vestment Corporation. Activity by theSubcommittee on Community Affairs ofthe System’s Conference of Presidentsalso increased.

Economic Effects of theElectronic Fund Transfer Act

In keeping with statutory requirements,the Board monitors the effects of theElectronic Fund Transfer Act on thecompliance costs and consumer benefitsrelated to electronic fund transfer ser-vices. In 1997 the economic effects ofthe act generally increased because ofcontinued growth in the use of EFTservices, although an exemption forcertain electronic benefit transfer pro-grams reduced costs for state and localgovernments.

As revised in 1997, Regulation Eexempts ‘‘needs tested’’ EBT programsestablished or administered by stateor local governments. The exemptionreduces the cost of providing benefitselectronically and eliminates uncertaintyabout potential losses associated withRegulation E’s liability rules. Thus, itwill likely encourage the states todevelop EBT programs. Without Regu-lation E, the protections previouslyafforded benefit recipients, especially


protections against unauthorized use,may be diminished somewhat. How-ever, electronic delivery will likely pro-vide benefit recipients greater securitythan the paper-based delivery systemspreviously used.

During the 1990s, the proportion ofU.S. households using EFT services hasgrown at an annual rate of about 2 per-cent. About 85 percent of householdsnow have one or more EFT features ontheir accounts at financial institutions.

Automated teller machines remain themost widely used EFT service. Nearlytwo-thirds of all U.S. households cur-rently have ATM cards, and most of thenation’s depository institutions offerconsumers access to ATMs. Access toATMs has been enhanced by theoperation of shared networks; almost allATM terminals are part of one or moreshared networks. Over the past year, thenumber of ATM transactions increasedabout 3 percent, from 890.3 million permonth in 1996 to 915.0 million permonth in 1997. Over the same period,the number of installed ATMs rose19 percent, to 165,000.

Direct deposit is another widely usedEFT service. More than half of allhouseholds in the United States receivedirect deposit of funds into theiraccounts. Direct deposit is particularlywidespread in the public sector, account-ing for more than half of social securitypayments and two-thirds of federal sal-ary and retirement payments. It is lesscommon in the private sector but hasgrown substantially in recent years. Tak-ing into account both public and privatepayments, the proportion of householdsreceiving direct deposits has grownabout 5 percent a year during the 1990s.

Nearly a third of households nowhave debit cards, which consumers useat the point of sale to debit their transac-tion accounts. Point-of-sale systems still

account for a small share of electronictransactions, but their use continuedto grow rapidly in 1997. Over the pastyear, the number of point-of-sale trans-actions rose 26 percent, to 120.2 millionper month from 95.5 million per monthin 1996, and the number of point-of-saleterminals rose 49 percent, to 1.3 million.

The incremental costs associated withthe EFTA are difficult to quantifybecause no one knows how industrypractices would have evolved in theabsence of statutory requirements. Thebenefits of the law are also difficult tomeasure because they cannot be isolatedfrom consumer protections that wouldhave been provided in the absence ofregulation.

The available evidence suggests noserious consumer problems with elec-tronic transactions at this time. In 1997,about 94 percent of depository insti-tutions examined by federal bankingagencies were in full compliance withRegulation E. Violations primarilyinvolved failure to provide all therequired consumer disclosures. Con-sumer complaints and inquiries filedwith the System are another sourceof information about potential prob-lems. In 1997, 114 of the complaintsprocessed involved electronic trans-actions; of the 52 that involved statemember banks, none involved a viola-tion of the EFTA or Regulation E. The62 complaints that did not involve statemember banks were forwarded to otheragencies for resolution.

Compliance Examinations

Since 1977 the Federal Reserve Systemhas maintained a consumer complianceexamination program to ensure that statemember banks and foreign bankingorganizations subject to Federal Reserveexamination comply with federal laws


governing consumer protections infinancial services.

The Oversight Section of the Board’sDivision of Consumer and Commu-nity Affairs coordinates complianceexaminations, which are conducted bythe consumer affairs examination unitsof the twelve Reserve Banks. The sec-tion reviews a sample of the examina-tions for effectiveness, adherence toSystem policy, and uniformity ofapproach.

During the 1997 reporting period(July 1, 1996, through June 30, 1997),the Federal Reserve conducted 839examinations for compliance withconsumer protection laws: 599 of statemember banks and 240 of foreign bank-ing organizations.8

Examiner training in the areas of con-sumer compliance, fair lending, andthe Community Reinvestment Act isan important aspect of the FederalReserve’s compliance program. NewReserve Bank examiners attend a two-week basic consumer complianceschool, and examiners with six to twelvemonths of field experience attend atwo-week advanced consumer compli-ance school, a two-week fair lendingschool, and a one-week course in CRAexamination techniques. During the1997 reporting period, the System con-ducted three basic consumer complianceschools for a total of fifty-nine partici-pants, two advanced consumer compli-ance schools for thirty-two participants,three fair lending schools for fifty-three

participants, and three courses in CRAexamination techniques for sixty-sixparticipants.

The Reserve Banks supplementexaminer training through departmentalmeetings and special training sessions.In addition, examiners from the ReserveBanks routinely participate in specialprojects that give them an opportunity towiden their perspective through work-ing with other System examiners andBoard staff.

During 1997, the Board and the FDICentered into a memorandum of under-standing to jointly develop an examiner-workstation module to provide auto-mated assistance in three areas ofcompliance examinations: loans, depositoperations, and home mortgage disclo-sures. The goals of this joint effort are toincrease consistency in examinations, toreduce the time examiners spend on site,and to provide tools that decrease thetime examiners spend entering dataneeded for examinations.

The FFIEC is the interagency coordi-nating body charged with developinguniform examination principles, stan-dards, and report forms. In 1997, themember agencies of the FFIEC jointlyrevised examination procedures toreflect changes in consumer protectionlaws and regulations, including theFlood Disaster Protection Act, the Truthin Lending Act, the Fair Debt CollectionPractices Act, the Real Estate Settle-ment Procedures Act, and the ElectronicFund Transfer Act.

In addition, the FFIEC worked topromote consistency in examinationsamong the agencies responsible forimplementing the CRA. Examiners fromthe Board, the FDIC, the OCC, and theOTS reviewed the examination processfor small institutions, and the agenciesimplemented some of their recommen-dations for revising examination proce-dures and the public evaluation format.

8. The foreign banking organizations examinedby the Federal Reserve are organizations operatingunder section 25 or 25(a) of the Federal ReserveAct (Edge Act and agreement corporations) andstate-chartered commercial lending companiesowned or controlled by foreign banks. These insti-tutions are not subject to the Community Reinvest-ment Act, and, typically, in comparison with statemember banks, engage in relatively few activitiesthat are covered by consumer protection laws.


To foster consistency in the applicationof the examination procedures for largeinstitutions, the agencies held threeinteragency training sessions under theauspices of the FFIEC. The agencies arealso reviewing the implementation ofthe procedures for examining institu-tions under the lending, investment, andservice tests by reviewing the writtenperformance evaluations and conductinginteragency examinations of eight largeinstitutions. They expect to provideexaminer training on the basis of theirfindings and to provide interpretiveguidance on issues identified throughthe project.

The FFIEC expanded its CRA Website to make information on CRA morereadily available to the public. The sitenow includes the CRA regulation; aninteragency question-and-answer docu-ment; examination procedures; interpre-tive letters; CRA data collected fromlarge institutions; and links to eachmember agency’s CRA Web site for in-formation on CRA ratings, examinationschedules, and performance evaluations.

Community Reinvestment Act

The Federal Reserve assesses the CRAperformance of state member banksduring regular compliance examina-tions and takes the CRA record (aswell as other factors) into account whenacting on applications from state mem-ber banks and from bank holdingcompanies.

The Federal Reserve System has athree-faceted program for fostering andenforcing better bank performanceunder the CRA:

• Examining institutions to assesscompliance

• Disseminating information on com-munity development techniques to

bankers and the public through com-munity affairs offices at the ReserveBanks

• Performing CRA analyses in connec-tion with applications from banks andbank holding companies.

During the 1997 reporting period(July 1, 1996–June 30, 1997), theFederal Reserve conducted 586 CRAexaminations. Of the banks exam-ined, 152 were rated ‘‘outstanding’’in meeting community credit needs,423 were rated ‘‘satisfactory,’’ 10were rated ‘‘needs to improve,’’ and1 was rated as being in ‘‘substantialnoncompliance.’’

Regulation BB, as revised in 1995,provides for different evaluation meth-ods depending on an institution’s size,structure, and operations. The perfor-mance standards for small banks becameeffective on January 1, 1996. Also as ofthat date, institutions could choosewhether (1) to submit a strategic planto serve as a basis for their evaluations,(2) to be evaluated under the lending,investment, and service tests if theywere large institutions, or (3) to requestto be designated wholesale or limitedpurpose institutions and be examinedunder the regulation’s community devel-opment test. Using the lending, service,and investment tests for large retailinstitutions was mandatory after July 1,1997, meaning that they could no longerbe evaluated under the earlier regula-tion. Of the 586 CRA examinations con-ducted by the Federal Reserve duringthe reporting period, 460 used the newassessment method for small banks; 86used the assessment-factor method ofthe earlier regulation; 39 used the lend-ing, investment, and service tests; and 1used the community development test.During the 1997 reporting period, theBoard also approved one bank’s stra-tegic plan and approved four banks’


requests to be designated wholesaleinstitutions.

Agency Reports on Compliancewith Consumer Regulations

The Board is required to report annuallyon compliance with the regulations thatimplement the Equal Credit OpportunityAct, the Electronic Fund Transfer Act,the Consumer Leasing Act, the Truth inLending Act, and the Expedited FundsAvailability Act and with the prohibitionin Regulation AA against unfair anddeceptive practices. For purposes of thisreport, the Board assembles data fromthe Reserve Banks and collects datafrom the four other financial regulatoryagencies (the FDIC, the OCC, the OTS,and the NCUA) and from other federalsupervisory agencies.9 The extent ofcompliance with these regulations var-ied widely in 1997, but, overall, compli-ance was better than in 1996. The fol-lowing sections summarize compliancedata for July 1, 1996, through June 30,1997 (referred to here as the 1997reporting period, or simply 1997).

Equal Credit Opportunity Act(Regulation B)

The five financial regulatory agenciesreported that 80 percent of the institu-tions examined during the 1997 report-ing period were in full compliance withRegulation B, compared with 78 percentfor the 1996 reporting period. Of theinstitutions not in full compliance,71 percent had one to five violations(the lowest frequency category). Themost frequent violations involved the

failure to take one or more of the follow-ing actions:

• Provide a written notice of adverseaction containing a statement of theaction taken, the name and addressof the creditor, an ECOA notice, andthe name and address of the federalagency that enforces compliance

• For monitoring purposes, collectinformation about the race or nationalorigin, sex, marital status, and age ofapplicants seeking credit primarily forthe purchase or refinancing of a prin-cipal residence

• Notify an applicant of the action takenwithin the time frames specified in theregulation

• Give a statement of reasons foradverse action that is specific andindicates the principal reasons for thecredit denial or other adverse action

• Take a written credit application forthe purchase or refinancing of a prin-cipal residence

• Retain proper records of credittransactions.

The OTS issued three formal enforce-ment actions addressing violations ofRegulation B, and the FDIC issued twoformal enforcement actions addressingviolations of consumer protection regu-lations, including Regulation B.

In 1997, the Federal Trade Commis-sion (FTC) obtained consent decreesagainst two consumer finance compa-nies for violations of the ECOA. In onecase, the decree addressed allegationsthat the finance company discriminatedagainst applicants on the basis of ageand the fact that their income derivedfrom public assistance. In the other case,the finance company failed to provideapplicants who were denied credit awritten notice of adverse action. TheFTC is continuing its work with othergovernment agencies and with creditor

9. The financial regulatory agencies use differ-ent methods to compile data on compliance, whichare presented here in terms of percentages offinancial institutions supervised or examined.Consequently, the data support only generalconclusions.


and consumer organizations to increaseawareness of, and compliance with, theECOA.

The other agencies that enforce theECOA—the Farm Credit Administra-tion (FCA), the Department of Trans-portation, the Securities and ExchangeCommission (SEC), the Small Busi-ness Administration, and the GrainInspection, Packers and StockyardsAdministration of the Department ofAgriculture—reported substantial com-pliance among the entities they super-vise. The FCA’s examination andenforcement activities revealed certainviolations of the ECOA, most of themdue to creditors’ failure to collect moni-toring information and to comply withrules regarding adverse action notices;however, no formal actions were initi-ated. The SEC reported that no viola-tions of Regulation B were detected dur-ing examinations of registered broker–dealers conducted by self-regulatoryorganizations, the agency’s principalmethod of reviewing for compliance.

Electronic Fund Transfer Act(Regulation E)

The five financial regulatory agenciesreported that approximately 94 percentof the institutions examined during the1997 reporting period were in compli-ance with Regulation E, the same per-centage as in 1996. Financial institu-tions most frequently failed to complywith the following provisions:

• Provide, at least once each calendaryear, a notice of the procedures forresolving alleged errors

• After receiving notice of an error,investigate the alleged error promptly,determine whether an error was actu-ally made, and transmit the results ofthe investigation and determination tothe consumer within ten business days

• Provide an adequate initial disclosureat the time a consumer contracts foran EFT service or before the firsttransfer is made

• Provide customers with a periodicstatement of all required informationat least quarterly, or monthly if EFTactivity occurred.

The OTS issued one formal enforce-ment action addressing violations ofRegulation E during the 1997 reportingperiod. The FTC issued a final decisionand order that was incorporated into aconsent decree, settling charges againsta telemarketing company for failing toobtain written authorization from con-sumers for preauthorized transfers. Inaddition, the FTC accepted for publiccomment consent agreements in threecases alleging violations of the EFTA;the cases involved free trial offers thatresulted in unexpected charges for manyconsumers. The FDIC issued two formalenforcement actions addressing viola-tions of consumer protection regula-tions, including Regulation E.

The SEC reported that no violationsof Regulation E were detected duringexaminations of registered broker–dealers conducted by self-regulatoryorganizations.

Consumer Leasing Act(Regulation M)

The five financial regulatory agenciesreported substantial compliance withRegulation M for the 1997 reportingperiod. As in 1996, more than 99 per-cent of the institutions examined were infull compliance with the regulation. Thefew violations involved failure to adhereto specific disclosure requirements.

In 1997 the FTC issued five finaldecisions and orders against major auto-mobile manufacturers to address vio-lations of the Consumer Leasing Act


(CLA) and the Truth in Lending Act(TILA). The orders settled charges thatthe five companies had violated the CLAin lease promotions that featured lowmonthly payments or low amounts downin large, bold print but hid additionalcosts and sometimes contradictory infor-mation in ‘‘mouse print’’ that was diffi-cult or impossible to read. The com-plaints in these cases also charged thecompanies with violating the CLA byfailing to clearly and conspicuously dis-close various lease costs and terms asrequired.

In two other cases, the FTC issuedfinal decisions and orders against auto-mobile dealerships for deceptive creditand lease agreements in violation of theCLA and TILA. The FTC also issuedfor public comment consent agreementswith two major automobile manufactur-ers, and with five dealerships and theirchief executive officers in the St. Louisarea, for violations of the CLA andTILA involving misrepresentation andhiding or failing to disclose adequatelythe terms of advertised automobile leasedeals.

In 1997 the FTC continued its educa-tion efforts among consumers and busi-nesses and published a new brochure forbusinesses giving information about theadvertising requirements of revisedRegulation M.

Truth in Lending Act(Regulation Z)

The five financial regulatory agenciesreported that 75 percent of the institu-tions examined during the 1997 report-ing period were in full compliance withRegulation Z, compared with 70 percentin 1996. The Board reported a decreasein compliance, the FDIC and the OTSreported an increase, and the OCC andthe NCUA reported an unchanged levelof compliance. The five agencies indi-

cated that of the institutions not incompliance, 62 percent were in thelowest-frequency category (one to fiveviolations), compared with 63 percent in1996.

The violations of Regulation Z mostoften observed were failure to accu-rately disclose the finance charge, pay-ment schedule, annual percentage rate,and amount financed and failure to pro-vide a disclosure reflecting the terms ofthe legal obligation between the parties.

The OTS issued five formal enforce-ment actions addressing violations ofRegulation Z, and the FDIC issued twoformal enforcement actions addressingviolations of consumer protection regu-lations, including Regulation Z.

A total of 261 institutions supervisedby the Board, the FDIC, or the OTSwere required, under the InteragencyEnforcement Policy on Regulation Z, torefund $2.6 million to consumers in1997 because of improper disclosures.

The Department of Transportationcontinued during 1997 to prosecute acease-and-desist consent order issued in1993 against a travel agency and a char-ter operator. The complaint alleged thatthe two organizations had violatedRegulation Z by routinely failing to sendcredit statements for refund requeststo credit card issuers within seven daysof receiving fully documented creditrefund requests from customers. Amotion for a summary judgment ispending before an administrative lawjudge.

The FTC during the year issued twofinal decisions and orders in cases alleg-ing deceptive disclosures and under-stated credit terms, including the annualpercentage rate, in violation of Regula-tion Z and TILA. Another final decisionand order included civil penalties andconsumer redress for alleged violationsof a prior FTC order relating to failureto include mandatory credit insurance


and other costs in credit disclosures toconsumers. The agency also issuedseven final decisions and orders andaccepted for public comment consentagreements in seven other cases involv-ing lease and credit advertising. Thesecases alleged deceptive lease and creditadvertising, in violation of the CLA orTILA—specifically, failure to clearlyand conspicuously or accurately providerequired lease or credit advertisingdisclosures.

During the year the FTC also contin-ued its consumer and business educationefforts through training seminars in sev-eral regions of the country.

Expedited Funds Availability Act(Regulation CC)

The five financial regulatory agenciesreported that 87 percent of institutionsexamined during the 1997 reportingperiod were in full compliance withRegulation CC, the same percentage asin 1996. Of the institutions not in fullcompliance, 66 percent had one to fiveviolations (the lowest-frequency cate-gory). Institutions most frequently failedto comply with the following provisions:

• Follow special procedures for largedeposits

• Adequately train employees and pro-vide procedures to ensure compliance

• For deposits not subject to next-dayavailability, provide immediate avail-ability to $100

• Make funds from certain checks, bothlocal and nonlocal, available for with-drawal within the times prescribed bythe regulation

• Provide disclosures of the institution’savailability policy.

The OTS issued two formal enforce-ment actions addressing violations ofRegulation CC, and the FDIC issued

two formal enforcement actions address-ing violations of consumer protectionregulations, including Regulation CC.

Unfair and DeceptiveActs or Practices(Regulation AA)

The three financial regulatory agencieswith responsibility for enforcing Regu-lation AA’s Credit Practices Rulereported that 97 percent of the institu-tions examined during the 1997 report-ing period were in full compliance withthe regulation. The most frequent viola-tion was failure to provide a clear, con-spicuous disclosure regarding a cosign-er’s liability. No formal enforcementactions for violations of Regulation AAwere issued during the period.

Applications

In February, the Board adopted amend-ments to Regulation Y (Bank HoldingCompanies and Change in Bank Con-trol) that streamlined the applicationsprocess for mergers and acquisitions.Bank acquisition proposals from well-capitalized and well-managed bankholding companies having ‘‘satisfac-tory’’ or better CRA examinationrecords are now eligible for consider-ation using an expedited review process.Also, comments submitted after theclose of the public comment period areno longer routinely considered by theSystem.

In 1997 the Federal Reserve Systemacted on twenty-four bank and bankholding company applications thatinvolved CRA protests and six thatinvolved adverse CRA ratings. The Sys-tem reviewed another twenty applica-tions involving fair lending and otherissues related to compliance with con-


sumer protection laws.10 Among theapplications processed were severalrelated to major bank acquisitions thatwere protested on CRA grounds. TheBoard approved these applications, find-ing in each case that convenience andneeds considerations, including CRAperformance records, were consistentwith approval, as described below.

In February, the Board approved theapplication by Marine Midland Bank(Buffalo) to merge with First FederalSavings and Loan of Rochester (Roches-ter). Commenters expressed concernthat the closing of certain branchesoperated by the two companies wouldadversely affect low- and moderate-income neighborhoods. In its orderapproving the application, the Boarddirected Marine Midland to submit itsplan for branch closures, consolidations,and relocations to the New YorkReserve Bank. For each branch beingclosed in a low- or moderate-incomeor predominantly minority census tract,Marine Midland will indicate how itplans to help meet the convenienceand needs of the affected community.Marine Midland will also notify theReserve Bank of any changes to the planfor a period of two years or until theReserve Bank conducts its next CRAperformance examination.

In April, the Board approved theapplication of Banc One Corporation(Columbus), at that time the nation’stenth largest banking organization, toacquire Liberty Bancorp, Inc. (Okla-homa City). The order noted that eachof Banc One’s thirty subsidiary bankshad received ‘‘outstanding’’ or ‘‘satis-

factory’’ ratings at their most recentCRA examinations. The Board also con-sidered certain preliminary informationdeveloped in the course of its super-vision of Banc One that raised questionsabout fair lending oversight, proce-dures, and practices at Banc One Mort-gage Corporation, a nonbank subsidiaryof the bank holding company. In itsorder, the Board noted that the FederalReserve was conducting an examinationof Banc One Mortgage Corporation toresolve these issues and to ensure com-pliance with the law. If the examina-tion were to reveal a problem, theBoard has the supervisory authority torequire the bank holding company andthe nonbank subsidiary to address thedeficiencies.

In October, the Board approved theapplication by First Union Corporation(Charlotte), the nation’s sixth largestbanking organization, to acquire SignetBanking Corporation (Richmond). Thetwo organizations competed directlyin Virginia, Maryland, and the Districtof Columbia, and some commentersexpressed concern that branch closingsresulting from the merger would dispro-portionately disadvantage communitieswith predominantly low- and moderate-income and minority residents. In lightof these concerns, the Board reviewedpreliminary, confidential informationfrom First Union on branches slated forclosure as well as the company’s branchclosure policy. The Board also reviewedthe OCC’s most recent publicly avail-able CRA performance evaluations forFirst Union’s subsidiary banks; thesereports indicated that the banks havesatisfactory records of opening andclosing branches and that they providereasonable access to services for allsegments of their communities. In addi-tion, the Board reviewed data on FirstUnion’s lending record in its communi-ties and in low- and moderate-income

10. Two applications were withdrawn in1997—one involving an adverse CRA rating andthe other, a fair lending issue. The System alsoreviewed comments submitted in three other cases(not reflected in the above figures) that weredeemed to be more in the nature of individualconsumer complaints than protests.


areas. The Board concluded that conve-nience and needs considerations, includ-ing CRA performance records, wereconsistent with approval.

In December, the Board approved theapplication by NationsBank Corporation(Charlotte), the nation’s fifth largestbanking organization, to acquire BarnettBanks, Inc. (Jacksonville). The twoorganizations competed directly in alarge number of banking markets inFlorida, as well as in a few markets inGeorgia. Several commenters expressedconcern that branch closures resultingfrom the merger would adversely affectsenior citizens and low- and moderate-income neighborhoods and would resultin a reduction in community develop-ment and home mortgage lending. Inits order approving the application,the Board noted that it had consideredNationsBank’s record of opening andclosing branches in other acquisitions,in particular, its acquisition of Boat-men’s Bancshares, Inc. (St. Louis), inDecember 1996. In that case the Boardfound that, to date, NationsBank hadfollowed its branch closure policy byassessing the effect of closings in low-and moderate-income areas. Given the

extensive overlap of the two organiza-tions’ branches in Florida markets, theBoard directed NationsBank, as part ofany subsequent application to acquire adepository institution, to report to theFederal Reserve its branch closures inFlorida and Georgia during the two-year period following its acquisition ofBarnett.

Consumer Complaints

The Federal Reserve investigates com-plaints against state member banks andforwards to the appropriate enforcementagencies complaints involving othercreditors and businesses (see accompa-nying table). The Federal Reserve alsomonitors and analyzes complaints aboutunregulated practices.

Complaints about StateMember Banks

The Federal Reserve received 3,318complaints about financial institutionsin 1997: 2,673 by mail, 634 by tele-phone, and 11 in person. Fewer thanhalf of the complaints (1,524) wereagainst state member banks; of these,

Consumer Complaints to the Federal Reserve System Regarding State Member Banksand Other Institutions, by Subject, 1997

Subject State memberbanks

Otherinstitutions Total

Regulation B (Equal Credit Opportunity). . . . . . . . . . . . . . . . . . . . . . . . 69 39 108Regulation E (Electronic Fund Transfers). . . . . . . . . . . . . . . . . . . . . . . . 62 52 114Regulation Z (Truth in Lending). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 299 493Regulation BB (Community Reinvestment). . . . . . . . . . . . . . . . . . . . . . 1 3 4Regulation CC (Expedited Funds Availability). . . . . . . . . . . . . . . . . . . 30 31 61Regulation DD (Truth in Savings). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 44 94Fair Credit Reporting Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 113 169Fair Debt Collection Practices Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 18 31Flood insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 3Regulations G, T, U and X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 1 1Real Estate Settlement Procedures Act. . . . . . . . . . . . . . . . . . . . . . . . . . . 0 13 13Unregulated practices1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,047 1,180 2,227

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,524 1,794 3,318

1. Complaints against these institutions were referredto the appropriate enforcement agencies.


almost two-thirds involved unregulatedpractices. Of the complaints againststate member banks, about 61 percentconcerned lending: 5 percent allegeddiscrimination on a prohibited basis; and56 percent raised a variety of issues,most of them involving lending prac-tices, including credit denial on a basisnot prohibited by law (such as credithistory or length of residence) andmiscellaneous other practices (such asrelease or use of credit information).Another 25 percent of the complaintsagainst state member banks involveddisputes about interest on deposits andgeneral deposit account practices; theremaining 14 percent concerned dis-putes about electronic fund transfers,trust services, and other miscellaneousbank practices (see accompanying table).

The System also received 2,209inquiries about consumer credit andbanking policies and practices. Inresponding to these inquiries, the Boardand the Reserve Banks give specific

explanations of laws, regulations, andbanking practices and provide relevantprinted materials on consumer issues.

Unregulated Practices

Under section 18(f) of the Federal TradeCommission Act, the Board monitorscomplaints about banking practices notsubject to existing regulations andfocuses on complaints involving prac-tices that may be unfair or deceptive. Ofthe 2,227 complaints about unregulatedpractices, the top five categories relatedto credit cards: miscelleneous problemsinvolving credit cards (135), interestrates and terms (127), customer serviceproblems (93), pre-approved solicita-tions (78), and penalty charges onaccounts (69). The specific complaintsabout credit cards represented by thesecategories concerned such matters asfailure to close accounts as requested,increased interest rates on accounts,changed credit terms on pre-approved

Consumer Complaints Received by the Federal Reserve System, by Type and Function, 1997

Complaint

Complaints against state member banks

Total Not investigated Investigated

Number Percent

Unableto obtainsufficient

information

Explanationof law

providedto consumer

Bank legally correct

No reim-bursementor other

accommo-dation

Goodwillreimburse-

ment orother

accommo-dation

LoansDiscrimination alleged

Real estate loans. . . . . . . . . . 11 1 0 0 1 1Credit cards. . . . . . . . . . . . . . . 26 2 1 5 12 1Other loans. . . . . . . . . . . . . . . 32 2 1 2 13 1

Discrimination not allegedReal estate loans. . . . . . . . . . 70 5 2 4 28 14Credit cards. . . . . . . . . . . . . . . 617 40 11 57 184 168Other loans. . . . . . . . . . . . . . . 172 11 6 27 64 30

Deposits. . . . . . . . . . . . . . . . . . . . . . . 379 25 14 31 162 52Electronic fund transfers. . . . . . . . 52 3 2 2 18 14Trust services. . . . . . . . . . . . . . . . . . 12 1 1 1 3 2Other . . . . . . . . . . . . . . . . . . . . . . . . . 153 10 13 27 43 23

Total . . . . . . . . . . . . . . . . . . . . . . . . . . 1,524 100 51 156 528 306


accounts, and penalty charges such asover-limit fees.

Each of these five complaint catego-ries accounts for a small portion (4 per-cent or less) of all consumer complaintsreceived by the System. All other com-plaint categories involving unregulatedpractices registered fewer than fiftycomplaints in 1997.

Complaint Referrals to HUD

In 1997, in accordance with a memoran-dum of understanding between HUDand the federal bank regulatory agen-cies, the Federal Reserve referred toHUD five complaints about state mem-ber banks alleging violations of the FairHousing Act. Investigations completedfor two of the five complaints (and fiveothers that were pending at year-end1996) revealed no evidence of unlawfuldiscrimination; the other three werepending at year-end.

During 1997 HUD referred four com-plaints involving state member banks tothe Federal Reserve. By year-end theFederal Reserve had completed investi-gations into two of the four complaints;the investigations revealed no evidenceof unlawful discrimination.

Complaint Program Activities

In 1997 the Consumer Complaints Sec-tion at the Board continued work onimplementing a comprehensive systemdesigned to replace and consolidate thecomplaint program’s analysis tools.Along with other management tools, theBoard’s new system for collecting com-plaint data—Complaint Analysis Evalu-ation System and Reports (CAESAR)—provides the capability to automaticallygenerate response letters to individualcomplaints; analyze the type of discrimi-nation complaints received by the Fed-eral Reserve; and analyze data to deter-

Consumer Complaints Received—Continued

Complaints against state member banks

Referred toother

agencies

Totalcomplaints

Investigated

Pending,December 31Customer

errorBankerror

Factual orcontractualdispute—resolvable

onlyby courts

Possiblebank

violation—bank tookcorrective

action

Matter inlitigation

0 0 0 0 0 9 10 210 2 0 0 0 5 6 320 1 1 0 0 13 23 55

0 13 3 0 2 4 245 31518 79 18 6 0 76 488 1,1054 13 4 1 4 19 274 4466 50 12 1 4 47 427 8060 10 0 0 0 6 62 1140 1 2 0 0 2 15 271 26 2 0 2 16 244 397

29 195 42 8 12 197 1,794 3,318


mine patterns and trends. As part of thisinitiative, the Board is converting themainframe-based Consumer Complaintand Inquiry Tracking System and query-ing systems to the PC-based CAESAR;implementation throughout the FederalReserve is expected by early 1999.

In 1997, individual staff membersfrom the Reserve Banks’ consumercomplaint sections continued to work atthe Board for several weeks at a timeto gain familiarity with operations inWashington. Nine Reserve Banks par-ticipated in the program.

Consumer Policies

The Consumer Policies program ex-plores alternatives to regulation for pro-tecting consumers in retail financial ser-vices and brings research information tobear more directly on policymaking.During 1997, Consumer Policies staffmembers provided research analysis forreports on finance charges, home equitylines of credit, characteristics of house-holds without bank accounts, and theTILA–RESPA streamlining initiative.The Consumer Policies Section andthe Consumer Complaints Sectionworked to improve the analysis ofdata from the Consumer SatisfactionQuestionnaire, which is distributedto consumers who lodge complaintsabout state member banks. This analysisassesses the level of consumers’ satis-faction with the handling of their com-plaints, as a measure of the complaintprogram’s performance, and is used toidentify possible improvements.

The Consumer Policies program alsoconducted a major educational initiativethat targeted automobile leasing disclo-sures and complemented the implemen-tation of the revised Regulation M. Theeducational program, discussed earlierin the section ‘‘Leasing Education andRegulatory Changes,’’ included prepara-

tion of a new brochure and creation of apublic Web site.

Consumer Advisory Council

The Consumer Advisory Council con-vened in April, July, and October toadvise the Board on matters concerninglaws that the Board administers andother issues related to consumer finan-cial services. The council’s thirty mem-bers come from consumer and com-munity organizations, financial andacademic institutions, and state govern-ments. Council meetings are open to thepublic.

The streamlining of the Truth inLending Act and the Real Estate Settle-ment Procedures Act was a major topicduring 1997. In April, the council’s con-sumer credit committee reported broadagreement for providing meaningful dis-closures as early as possible and forcombining disclosures and eliminatingduplication. Several possibilities werediscussed: a ‘‘lender pay all’’ approachfor disclosing the amount the borrowerneeds at loan closing, with the lenderassuming the risk for any higher costs; aconsolidated disclosure approach cover-ing both TILA and RESPA, with thedisclosure delivered before formal appli-cation so that consumers can compari-son shop; and rolling all loan costs intoa finance charge that is disclosed as anannual percentage rate. Council mem-bers also talked about enforcement strat-egies, education for homebuyers, andthe need to reduce paperwork notrequired by either TILA or RESPA.

In October, the council consideredconcepts related to rate disclosures:improving the current annual percentagerate (APR) disclosure (which is the per-centage equivalent of the financecharge) by incorporating some costs thatare currently not included in the financecharge; replacing the APR with a disclo-


sure of the note rate and total of allclosing costs; and consolidating all costspaid at closing into a single dollar figureand converting that figure into a ‘‘pre-mium rate’’ to facilitate comparisonshopping. Council members had differ-ing views on the APR. Some believedthat it is not useful, pointing to findingsof a Michigan Research Center surveythat consumers do not really understandthe APR. An APR that does not workwell now, they said, will not beimproved by adding other cost items.Others disagreed. They noted that con-sumers in the Michigan survey fre-quently mentioned the APR as a shop-ping tool. They also observed that theAPR was initially developed because noother rate proved to be an effective oraccurate way of describing the cost ofcredit to consumers.

The council also discussed issuesrelated to the HOEPA provisions ofTruth in Lending, which seek to protecthomeowners against abusive mortgagelending practices. Some members con-tinued to believe that it may be too earlyto measure the success of a law that hasbeen in place for only two years. Butthey also noted that it was evident fromthe testimony presented at the Board’shearings in June 1997 that HOEPA hasnot stopped all fraudulent activity in thehigh-cost mortgage area. Some sug-gested that if HOEPA could be changedto prevent fraudulent activity, it shouldbe changed now, but they expresseddoubt about finding effective means toeliminate abusive practices such as theentry of inflated income on applicationscompleted by the lender for the bor-rower. Some members suggested sub-stantive restrictions—such as requiringrefunds on ‘‘points’’ charged on the ear-lier loan or prohibiting new closingcosts—for HOEPA loans refinanced bythe lender within, say, one year. Mem-bers also posed the idea of extending the

ban on balloon payments, which cur-rently applies only to loans for terms ofless than five years.

Community development and rein-vestment was a topic at all three councilmeetings in 1997. In April, membersdiscussed the effects of bank mergersand acquisitions on local communities.Some members see mergers as givingthe resulting institution greater flexibil-ity, increased capacity to take risks, anda more focused ability to work with andprovide technical assistance to groups inlocal communities. Others believe thatlarger institutions sometimes lack theflexibility to meet local needs becausetheir programs focus on the statewidepotential, and they worry that consoli-dation reduces access to loan officersand key decisionmakers, who may belocated out of state.

At the April meeting the council dis-cussed proposed interagency regulationsthat would prohibit a bank from estab-lishing branches outside its home stateprimarily for deposit production andfocused on how the loan-to-deposit ratiofor the host state should be determined.Council members suggested using astatewide test, in light of the difficulty ofdetermining which branch deposits arelocal. The council also discussed theservice and investment tests under therevised CRA rules and the need forinstitutions to publish specific goals(such as goals for small business loansor low-income housing) when they issuestrategic plans for public comment.

At the July and October meetings, thecouncil’s discussion of the CRA rulesaddressed such matters as whetherfinancial institutions should receiveCRA credit under the service test forproviding free or low-cost checkingaccounts to facilitate the government’selectronic delivery of federal pay-ments; the application of the service andinvestment tests in regard to the perfor-


mance of large banks, as reflected inCRA public evaluations by the FederalReserve; and the clarification of terms—such asinnovation, complexity, size,andimpact on the community—used todefine the weight given to ‘‘qualifiedinvestments’’ and to successful, long-term investments made previously andstill outstanding.

In October, the council discussedfindings from newly released data onsmall business, small farm, and commu-nity development lending collected andreported under the revised CRA regula-tions by large commercial banks andsavings associations. In light of certainlimitations of these data, the councilurged that the Board continue to exploremethodologies for further analysis andfor measuring loan demand in localcommunities, to provide a context forthe lending reported. The council alsosuggested that the Board consider part-nership projects that focus on improvingsmall business lending, modeled on theFederal Reserve’s mortgage partnershipprojects, which have identified obstaclesin mortgage lending and strategies forremoving them. In addition, councilmembers suggested that banks disclose,on a voluntary basis, information abouttheir community development loans,such as the kinds and locations ofprojects, as the single number currentlydisclosed is not helpful.

During 1997 a working group ofthe council considered the effects ofappraisals on community developmentlending. In July, members discussedsome of the negative consequenceswhen a property is undervalued by anappraiser unfamiliar with the commu-nity or a particular community develop-ment initiative: The insurer may notwant to insure the loan, or the lendermay decide not to close the deal. If thelow valuation becomes a ‘‘comparablevalue’’ for other properties, property

values in a community are very quicklydriven down. Discriminatory practices,such as an appraisal that bases the valu-ation on a foreclosure sale miles fromthe property instead of market valuesaround the block, can add to problems.In rural areas, the variability of propertytypes, uses, and size further complicatesappraisals. In the case of a property’s‘‘over-improvement,’’ the difficulty offinding valuations on comparable prop-erties in the local market adds to thedifficulty for a developer and a bankseeking to finance a community devel-opment project; either the developerinvests more in equity or the bankunderwrites a loan with a higher loan-to-value ratio (causing concern for thebank’s regulator).

In October, the council heard recom-mendations from the working group onsuch matters as training and licensingof appraisers; providing incentives forbanks to direct resources to the appraisalprocess; educating consumers andappraisers about the importance of accu-rate, unbiased appraisals; and the needfor further research into the appraisalprocess.

The council considered a wide arrayof other topics during the year, including

• Options for delivering disclosureselectronically under a variety of fed-eral regulations

• The federal mandate to convert mostfederal payments to electronic deposit,and whether special rules are neededunder the Board’s Regulation E fornew accounts offered to about 10 mil-lion recipients who have no bankingrelationship

• The circumstances under which finan-cial institutions ought to receive creditin the assessment of their performanceunder the CRA rule’s service test

• The Board’s reports to the Congresson stored-value products and on the


public availability of identifying infor-mation about consumers, such associal security numbers

• A Board-initiated study, headed by theBoard’s Vice Chair, of the FederalReserve’s role in the paymentssystem.

Testimony and LegislativeRecommendations

In July, the Board testified before theSenate Banking Committee on ways toimprove the disclosures required forhome mortgage loans under TILA andto unify them with the disclosuresrequired under RESPA. The Board’s tes-timony discussed how the two statutesregulate home mortgage lending,described the Board’s and HUD’s effortsto simplify and streamline the informa-tion given to consumers, and outlinedthe agencies’ plans to develop legisla-tive recommendations.

In September, the Board testifiedbefore the Subcommittee on FinancialInstitutions and Consumer Credit of theHouse Banking Committee on debitcards that can be used without securitycodes, requiring only a signature. (Thesecards are often referred to as check cardsor off-line debit cards.) Some observershave expressed concern that consumersmay not be aware of the risk of unautho-rized use associated with these products.

The Board noted its inclination, giventhat the industry has voluntarily actedto limit consumer liability in manyinstances to $50 or less, to see how wellthese voluntary efforts work before rec-ommending that the Congress amendthe Electronic Fund Transfer Act. It isalso in everyone’s interest, the Boardsaid, to ensure that consumers under-stand the risks associated with thesecards and are able to make an informedchoice about whether to assume the risk.

The subcommittee hearing alsoaddressed a legislative proposal to barcreditors from mailing unsolicited loanchecks to consumers. The Board sug-gested a better course would be to let themarket work without the interference ofnew laws. The Truth in Lending Actrequires that full disclosure of creditterms be included in any mailing so thatconsumers can make informed decisionsabout whether to accept the loans; theprimary concern with unsolicited loanchecks is not disclosure, but the poten-tial for theft and fraud by persons otherthan the intended recipient.

Recommendations ofOther Agencies

Each year the Board asks for recommen-dations from the other federal super-visory agencies for amending the finan-cial services laws or the implementingregulations.

The FDIC suggested addressingsolicitation and marketing practicesrelated to credit cards, through legis-lative or regulatory change, to per-mit enforcement agencies to moreadequately supervise trade practices. Itnoted some practices that may techni-cally comply with the law but that in theopinion of many consumers constitutedeceptive marketing. It also endorsedefforts by the Board and HUD to stream-line TILA–RESPA requirements tofacilitate comparison shopping for con-sumers before they submit an applica-tion for credit.

The OCC recommended that the Con-gress review current consumer disclo-sures, which may unnecessarily burdenbanks and insufficiently benefit consum-ers, and that it consider disclosures thatare less burdensome to depository insti-tutions and more useful to consumers.The FTC expressed its support forupdating and clarifying the requirements


of Regulation B and Regulation Z,scheduled for review soon under theBoard’s Regulatory Planning andReview program.


consumer and community affairs - federal reservepreting them) were to become manda-tory on october...

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