FDIC Regulatory Update Bank Compliance Association of Connecticut April 2012

1. FDIC Regulatory Update Bank Compliance Association of ConnecticutApril 2012 Hot Topics and Best Practices: Compliance, CRA, and Fair Lending Alice Beshara Assistant Regional Director New York Region Kara Ritchie Supervisory Examiner New England South Territory

2. FDIC Regulatory Update • Compliance Hot Topics • CMS Best Practices • CRA Best Practices • Fair Lending Hot Topics

3. FDIC Regulatory UpdateHot Topics • Flood Insurance • Lack of Content Insurance • Electronic Funds Transfer • Non-compliant Error Resolution Procedures and Practices • Overdraft Protection • Required Pay Issue • Class Action Lawsuits

4. FDIC Regulatory UpdateHot Topics Flood Insurance - Contents Insurance • Flood Insurance is required for contents if: • Both the building and contents are taken as collateral and • The building securing the loan is in SFHA and the contents are located in that building.

5. FDIC Regulatory UpdateHot Topics Flood Insurance - Contents Insurance • Common Question: • How much insurance should be purchased? • Bank should use a reasonable method of valuing the contents. • Refer to FDIC Press Release dated October 14, 2011 for guidance that updates the Interagency Questions and Answers Regarding Flood Insurance dated July 21, 2009 at: http://www.fdic.gov/news/news/press/2011/pr11163.html

6. FDIC Regulatory UpdateHot Topics Flood Insurance - Contents Insurance • If the bank chooses to release contents instead of obtaining insurance: • Be aware of any safety and soundness implications before releasing. • Release of only UCC may be insufficient.

7. FDIC Regulatory UpdateHot Topics EFT – Error Resolution Procedures • Issue: EFT Disclosure complies with Regulation E requirements, but bank practice and procedures do not comply with Regulation E requirements.

8. FDIC Regulatory UpdateHot Topics EFT – Error Resolution Procedures Examples: • Before accepting the claim or investigating the claim: • Bank requires customers to complete a questionnaire or other bank document. • Bank requires customers to get claim or other bank-required documents notarized. • Bank requires customers to file a police report. • Bank rejects error claim if it is not in writing.

9. FDIC Regulatory UpdateHot Topics EFT – Error Resolution Procedures • Best Practices to avoid EFT error resolution issues: • Perform periodic monitoring of EFT error resolution logs, including review of back up documentation and conversation logs. • Request audit include full scope EFT error resolution audit to test compliance. • Interview employees in areas where error claims are received to verify if practices are consistent with Regulation E. • Review complaints.

10. FDIC Regulatory UpdateHot Topics OD –Required Pay: • What is the issue? • Bank has policy and practice of not intentionally allowing any overdrafts for any customers at POS/ATMs and • Occasionally the bank is required to pay ATM/POS transactions that result in an overdraft due to payment processing service.

11. FDIC Regulatory UpdateHot Topics OD –Required Pay: • Regulation E requires that a bank cannot charge an overdraft fee for an ATM/POS transaction unless consumer opts-in to have these 2 transaction types covered.

12. FDIC Regulatory UpdateHot Topics OD –Required Pay: • Some banks with a policy and practice of not permitting any ATM/POS transactions overdraw accounts sent Opt-in Notices to customers.

13. FDIC Regulatory UpdateHot Topics OD –Required Pay: • Some of these banks continued their practice of only paying Required Pay items into overdraft for all customers, whether or not they opted-in. • Those who opted-in were charged an overdraft fee. • Those who did not opt-in were not charged an overdraft fee.

14. FDIC Regulatory UpdateHot Topics OD –Required Pay: • In many instances, the disclosures and information provided to these customers along with the Opt-in Notices did not explain: • That the customer would only be allowed to overdraw their account in Required Pay situations. • That the bank still has to pay transactions into overdraft in Required Pay situations even if they don’t assess a fee.

15. FDIC Regulatory UpdateHot Topics OD –Required Pay: • Recommended Corrective Actions: • Stop charging opted-in consumers overdraft fees for Required Pay transactions. • Provide restitution to those customers who paid overdraft fees for Required Pay transactions to mitigate potential reputational and litigation risks.

16. FDIC Regulatory UpdateHot Topics OD –Class Action Lawsuits: • Several large, national banks subject to OD-related lawsuits. • Processing debit card transactions from highest dollar amount to lowest dollar amount. • Beginning to see these lawsuits at local or regional community banks.

17. FDIC Regulatory UpdateHot Topics • FDIC New York Region Teleconference Series • Most recent held on February 9, 2012. • Script and Q&A on FDIC’s website at: http://www.fdic.gov/news/conferences/pastevents.html • New York Regional call announcements are generally emailed to CEOs of FDIC supervised institutions. • National Bankers' Teleconference Series • Most recent held February 21, 2012 on Regulation Z's Mortgage Loan Originator Compensation Rule: Proxies and Profitability. • Additional regional and national calls to be held. • Sign up for FDIC subscription service at:https://public.govdelivery.com/accounts/USFDIC/subscriber/new?

18. FDIC Regulatory UpdateCMS and Best Practices • Compliance Management System • Board and Senior Management Oversight • Compliance Program • Policies and Procedures • Monitoring • Training • Complaint Resolution • Audit

19. FDIC Regulatory UpdateCMS and Best Practices • Board and Management Oversight Best Practices • Compliance is everyone’s responsibility. • All policies include compliance component. • Ensure adequate training, including outside training. • Ensure compliance is included in planning, development, and implementation of business propositions. • Provide for recurrent reports by the compliance officer to the Board.

20. FDIC Regulatory UpdateCMS and Best Practices • Policies and Procedures Best Practices • Ensure consistent operating guidelines. • Provide standards to review business operations. • Written, approved annually by Board. • Include goals, objectives, and procedures reflective of bank practice. • Detail varies with complexity.

21. FDIC Regulatory UpdateCMS and Best Practices • Monitoring Best Practices • Proactive approach to identify procedural or training weaknesses in an effort to preclude violations. • Regularly scheduled reviews ensures timely identification of issue. • “Spot” transaction level reviews on a regular basis ensures accountability of staff.

22. FDIC Regulatory UpdateCMS and Best Practices • Training Best Practices • Applies to Board, management, and staff. • Staff – specific, comprehensive training in laws and regulations, and internal policies and procedures. • Establish regular training schedule. • Periodically assess knowledge and comprehension. • Frequently updated.

23. FDIC Regulatory UpdateCMS and Best Practices • Complaint Resolution Best Practices • May be indicative of a weakness. • Establish written procedures: • Designate responsibility to knowledgeable individual; • Maintain a list, including oral complaints; • Report periodically to Board; • Include procedures for monitoring complaints to or about third parties. • Take even one complaint seriously – what caused the issue? May need to look beyond the stated issue.

24. FDIC Regulatory UpdateCMS and Best Practices • Audit Best Practices • Establish follow-up procedures to verify corrective action was effective. • Ensure compliance receives copy of audit reports; deficiencies may require change of procedures or additional training. • Maintain matrix of issues to track correction, responsibilities, verification, etc.

25. FDIC Regulatory UpdateCRA and Best Practices • CRA Performance Context • Changes with each CRA evaluation. • Changes if the assessment area changes. • Changes as the bank grows in complexity and size. • Changes as the bank changes its business strategies and focus. • Changes in light of demographics, economic factors, and housing market.

26. FDIC Regulatory UpdateCRA and Best Practices • CRA Performance Context • Consider: • Bank structure and branching. • Bank products and services. • Demographic data. • Economic data. • Housing data. • Competition data. • Lending, investments, and services needs and opportunities in assessment area. • Input from community development groups. • Similarly situated lenders performance.

27. FDIC Regulatory UpdateCRA and Best Practices • CRA Evaluation Preparation • Best Practices: • Awareness of CRA Evaluation procedures for type of CRA evaluation. • Established CRA committee and designated CRA Officer. • Knowledge of current economic, demographic, housing, and competitive data and factors. • Conducting community development needs and opportunities assessment of assessment area. • Obtaining input from community development groups and organizations. • Knowledge of lending data based on performance criteria.

28. FDIC Regulatory UpdateCRA and Best Practices • CRA Evaluation Preparation • Best Practices: • Educating pertinent staff about community development purpose definition. • Periodically gathering and reviewing community development loans, investments, and services information to verify if qualified. • Tracking qualified community development information by year, with number and dollar amounts, and back up information on the activity.

29. FDIC Regulatory UpdateFair Lending Hot Topics • Common Local Fair Lending Violations • Signature requirements • Credit report pricing

30. FDIC Regulatory UpdateFair Lending Hot Topics • National Fair Lending Issues • Redlining • Not just looking for a hole in the assessment or lending area. • Analysis also focuses on equal access to credit being offered. • Consider: demographics, marketing, branch structure, and lending patterns.

31. FDIC Regulatory UpdateFair Lending Hot Topics • National Fair Lending Issues • Monitoring for Redlining Risk • Understand demographics of your assessment area and/or lending area. • Document what bank considered when opening or closing a branch in Board or CRA Committee minutes. • Evaluate lending distribution in loan portfolio and identify gaps.

32. FDIC Regulatory UpdateFair Lending Hot Topics • National Fair Lending Issues • Disparate Impact • A neutral practice that is applied to all applicants but the standard disproportionately impacts a prohibited basis group. • Department of Justice (DOJ) has been bringing disparate impact cases relating to indirect auto lending, mortgage brokers, mortgage loan pricing, and underwriting.

33. FDIC Regulatory UpdateFair Lending Hot Topics • National Fair Lending Issues • Monitoring for Disparate Impact • Review all lending practices and standards. • Monitor application rates for various loan products offered by bank.

34. FDIC Regulatory UpdateFair Lending Hot Topics • Monitoring for Fair Lending Risks • Recommend periodically reviewing DOJ Enforcement website for settlements and annual report to Congress. • www.justice.gov/crt/about/hce/caselist.php

35. FDIC Regulatory Update • Answers to questions sent prior to presentation: • CRA notice question. • CFPB feedback question.   • Compensation Rule under TIL for MLOs comment.  • No Pay Bank in a Required Pay situation versus Pay Bank and OD limit reached creating a similar “required pay” situation.

36. FDIC Regulatory Update Thank you! Any questions or comments? Alice Beshara Abeshara@fdic.gov (917) 320-2730 Kara Ritchie kritchie@fdic.gov (508) 698-0361 x8035