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Risk-Focused Consumer Exams to Take Effect

Wednesday, January 1, 1997

The Federal Reserve Board will phase in its new risk-focused consumer compliance supervision program in 1998. As part of the new procedures, the Fed has extended the consumer examination frequency schedule for state member banks and foreign banking organizations.

These procedures are designed to do three things: enhance the effectiveness of the Fed's consumer compliance examination program; reduce the burden of examinations for supervised institutions; and more effectively deploy the Fed's examination resources.

For state-member banks with an exemplary compliance history and assets of less than $250 million, the examination guidelines will extend from 18-24 months to 36 months. Banks with assets greater than $250 million will be examined every 24 months, and banks with performance problems will be examined once every 12 months.

The new consumer examinations will be conducted concurrently with examinations for fair lending laws and the CRA. A critical aspect of the new approach is the correlation of two risk elements, regulation risk and product risk.

Regulation risk involves an evaluation of the potential consequences to the consumer or the bank of noncompliance with consumer protection laws and regulations. Under product risk, examiners will identify the potential risks associated with financial products or services relative to a bank's market position, management expertise and business orientation.

The relationships between these two risk elements will then be correlated to determine the level of review necessary to verify the bank's compliance posture.

The new program also places a greater emphasis on outreach and monitoring activities. The outreach components of the program will be designed to foster compliance through regular contacts with state member banks. These contacts will be conducted apart from examination and supervisory activities, and will include such items as training seminars and advisory visits.

Monitoring efforts will be performed between examinations and will be designed to alert examiners to any potential deterioration in a bank's consumer compliance posture. The conclusions drawn from the monitoring process will be considered when establishing the scope, timing and staffing of future examinations.

For more information, contact Henry Dove at (314) 444-8846.