Federal Reserve Announces Policy on Consumer Compliance Supervision for Nonbank Subsidiaries of Bank Holding Companies

The Federal Reserve Board has announced in Consumer Affairs Letter 09-8 that it will implement a consumer compliance supervision program involving nonbank subsidiaries of bank holding companies (BHCs) and foreign banking organizations (FBOs). This compliance supervision program will include activities covered by the consumer protection laws and regulations the Federal Reserve has the authority to enforce.

In 2007, the Federal Reserve launched a pilot project in cooperation with the Federal Trade Commission, Office of Thrift Supervision and certain associations of state regulators, focused on consumer protection compliance reviews of selected non-depository lenders that had significant subprime mortgage businesses. The Federal Reserve’s new policy builds on the foundation set by the pilot program.

Under the new policy, the Federal Reserve will conduct consumer compliance risk assessments for nonbank subsidiaries of BHCs and FBOs. Nonbank subsidiaries of Large Complex Banking Organizations must submit or update an institutional profile and consumer compliance risk assessment by the end of the fourth quarter of 2009, and must identify and schedule any necessary supervisory work by the end of the first quarter of 2010. All other nonbank subsidiaries of BHCs and FBOs must submit or update an institutional profile and consumer compliance risk assessment by the end of the first quarter of 2010, and must identify and schedule any necessary supervisory work by the end of the second quarter of 2010.

The Federal Reserve will plan supervisory activities based on the completed risk assessments and on complaints it receives from consumers. Supervisory activities under the Federal Reserve’s new policy may include continuous monitoring, discovery reviews, targeted and full-scope examinations with transaction testing and investigation of consumer complaints. Findings of the supervisory activities will be transmitted to the nonbank subsidiary’s senior management and to the BHC. These findings may also be used to assign a risk rating to the nonbank subsidiary and may be considered when the Federal Reserve assigns Bank Holding Company ratings or U.S. Combined Assessment ratings.

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The foregoing is only a summary of one of the many significant issues affecting bank holding companies and other financial institutions. If you have any questions about the foregoing or about other financial institution issues, please direct them to your regular contact at Troutman Sanders LLP or to any of the persons listed in the sidebar to this release.