Supervision and Consumer Protection
Supervision and consumer protection are cornerstones of the FDIC's efforts to ensure the stability of and public confidence in the nation's financial system. The FDIC's supervision program promotes the safety and soundness of FDIC-supervised insured depository institutions, protects consumers' rights, and promotes community investment initiatives.
Examination Program The FDIC's strong bank examination program is the core of its supervisory program. As of December 31, 2009, the Corporation was the primary federal regulator for 4,943 FDIC-insured, state-chartered institutions that were not members of the Federal Reserve System (generally referred to as "state non-member" institutions). Through safety and soundness, consumer compliance and Community Reinvestment Act (CRA), and other specialty examinations, the FDIC assesses an institution's operating condition, management practices and policies, and compliance with applicable laws and regulations. The FDIC also educates bankers and consumers on matters of interest and addresses consumer questions and concerns.
FDIC Examinations 2007–2009
Risk Management (Safety and Soundness):
State Non-member Banks
State Member Banks
Subtotal—Safety and Soundness Examinations
Compliance/Community Reinvestment Act
Data Processing Facilities
As of December 31, 2009, the Corporation conducted 2,604 statutorily required risk management (safety and soundness) examinations, including a review of Bank Secrecy Act compliance, and all required follow-up examinations for FDIC-supervised problem institutions within prescribed time frames. The FDIC also conducted 1,981 CRA/compliance examinations (1,435 joint CRA/compliance examinations, 539 compliance-only examinations,2 and 7 CRA-only examinations) and 3,273 specialty examinations. All CRA/compliance examinations were also conducted within the time frames established by FDIC policy, including required follow-up examinations of problem institutions.3 The accompanying table on page 25 compares the number of examinations, by type, conducted from 2007 through 2009.
Risk Management As of December 31, 2009, there were 702 insured institutions with total assets of $402.8 billion designated as problem institutions for safety and soundness purposes (defined as those institutions having a composite CAMELS4 rating of "4" or "5"), compared to the 252 problem institutions with total assets of $159.4 billion on December 31, 2008. This constituted a 179 percent increase in the number of problem institutions and a 153 percent increase in problem institution assets. In 2009, 179 institutions with aggregate assets of $1.3 trillion were removed from the list of problem financial institutions, while 629 institutions with aggregate assets of $1.6 trillion were added to the list. Eighty-three institutions are in process of being downgraded to problem status, reporting total assets of $32.2 billion. Colonial Bank, Montgomery, Alabama, was the largest failure in 2009, with $25.0 billion in assets (and was added to the list and resolved in 2009). The FDIC is the primary federal regulator for 473 of the 702 problem institutions, with total assets of $242.2 billion and $402.8 billion respectively.
During 2009, the Corporation issued the following formal and informal corrective actions to address safety and soundness concerns: 282 Cease and Desist Orders, 3 Temporary Cease and Desist Orders, and 425 Memoranda of Understanding. Of these actions, 9 Cease and Desist Orders and 22 Memoranda of Understanding were issued based, in part, on apparent violations of the Bank Secrecy Act.
As of December 31, 2009, 327 FDIC-supervised institutions were assigned a "4" rating for safety and soundness, and 146 institutions were assigned a "5" rating. Of the "4-rated" institutions, 297 were examined or had examinations in process as of December 31, 2009, and formal or informal enforcement actions are in process or had been finalized to address the FDIC's examination findings. Further, 131 "5-rated" institutions were examined or had examinations in process as of December 31, 2009.
Compliance As of December 31, 2009, 34 FDIC-supervised institutions were assigned or in process of being assigned a "4" rating and one institution was assigned a "5" rating for compliance. In total, 18 of the "4-rated" and the one "5-rated" institutions were examined in 2009; the remaining 16 were examined prior to 2009 and involved either appeals or referrals to other agencies. Of these 35 institutions, 1 is under informal enforcement action, 21 are under Cease and Desist Orders and 13 are in process of enforcement actions.
During 2009, the Corporation issued the following formal and informal corrective actions to address Compliance concerns: 18 Cease and Desist Orders and 50 Memoranda of Understanding.
Restoring and Maintaining Public Confidence and Stability in the
Financial System The FDIC is participating with other regulators, Congress, banks, and other stakeholders in multiple new and changing initiatives, each with its unique challenges and risks, to address the current crises. The initiatives are very large in scale, and the FDIC's corresponding governance and supervisory controls, in many cases, are still under development at year-end. Among the initiatives are the following:
Processing applications for those FDIC-supervised institutions applying to the Department of the Treasury's Troubled Asset Relief Program (TARP) Capital Purchase Program (CPP). This program authorizes the Treasury to purchase up to $250 billion of senior preferred shares from qualifying insured depository institutions. As of September 30, 2009, the FDIC had received over 1,700 applications requesting nearly $35 billion in TARP funding.
As of December 31, 2009, the FDIC's processing of CPP requests was 100 percent completed. The Department of Treasury completed the final disbursements under the CPP program on December 31, 2009.
Issuing a memorandum on February 10, 2009, to provide examiners with guidance on reviewing compliance with CPP program requirements. Examiners have incorporated these procedures into their on-site reviews of institutions participating in the CPP. Examination procedures for institutions participating in the TLGP were issued on September 24, 2009.
Joint Examination Teams The FDIC used joint compliance/risk management examination teams (JETs) to assess risks associated with new, nontraditional, and/or high-risk products being offered by FDIC-supervised institutions. The JET approach recognizes that to fully understand the potential risks inherent in certain products and services, the expertise of both compliance and risk management examiners is required. The JET approach has three primary objectives:
To enhance the effectiveness of the FDIC's supervisory examinations in unique situations;
To leverage the skills of examiners who have experience with emerging and alternative loan and deposit products; and
To ensure that similar supervisory issues identified in different areas of the country are addressed consistently.
In 2009, the FDIC used JETs within institutions involved in significant subprime or nontraditional mortgage activities; institutions affiliated with or utilizing third parties to conduct significant consumer lending activities, especially in the credit card area; and institutions for which the FDIC has received a high volume of consumer complaints or complaints with serious allegations of improper conduct by banks.
Bank Secrecy Act/Anti-Money Laundering The FDIC pursued a number of Bank Secrecy Act (BSA), Counter-Financing of Terrorism (CFT) and Anti-Money Laundering (AML) initiatives in 2009.
The FDIC conducted three training sessions in 2009 for 57 central bank representatives from Bangladesh, Egypt, Ghana, Indonesia, Jordan, Kuwait, Mali, Nigeria, Pakistan, Saudi Arabia, Thailand, United Arab Emirates, and Yemen. The training focused on AML/CFT controls, the AML examination process, customer due diligence, suspicious activity monitoring, and foreign correspondent banking. The sessions also included presentations from the Federal Bureau of Investigation on combating terrorist financing, and the Financial Crimes Enforcement Network on the role of financial intelligence units in detecting and investigating illegal activities.
Additionally, the FDIC hosted 29 representatives from the Central Bank of Russia, sponsored by the Financial Services Volunteer Corps. Sessions included discussion of AML topics, as well as supervisory examination processes and interaction with the financial intelligence unit. Separately, the FDIC met with five Russian and three Kazakhstani foreign officials as a part of the U.S. Department of State's International Visitor Leadership Program to discuss the FDIC's AML Supervisory Program.
Minority Depository Institution Activities The preservation of Minority Depository Institutions (MDIs) remains a high priority for the FDIC. In 2009, the FDIC continued to seek ways for improving communication and interaction with MDIs, and responding to their concerns. Technical assistance was provided to 51 MDIs in a variety of different areas including, but not limited to, the following:
Deposit insurance assessments
Proper use of interest reserves
Filing branch and merger applications
Complying with Part 365—Real Estate Lending Standards
Preparing Call Reports
Performing due diligence for loan participations
Monitoring CRE concentrations
Reducing adversely classified assets
Identifying and monitoring reputation risk
Maintaining adequate liquidity
Risks related to the use of brokered deposits
Community Reinvestment Act
Procedures for filing regulatory appeals
Criteria for assigning CAMELS ratings
The FDIC also continued to offer the benefit of having examiners return to FDIC-supervised MDIs from 90 to 120 days after examinations, to assist management in understanding and implementing examination recommendations and to discuss other issues of interest. Seven MDIs took advantage of this initiative in 2009. Also, the FDIC held six regional outreach training efforts and educational programs to MDIs, three of which are discussed below.
In February 2009, the FDIC held a conference call to discuss various facets of the proposed changes to the insurance assessment criteria, including (a) the removal of statutory constraints on the FDIC's ability to charge institutions for deposit insurance under the Federal Deposit Insurance Reform Act of 2005, (b) the temporary increase in basic deposit insurance coverage from $100,000 to $250,000 per depositor under the Emergency Economic Stabilization Act of 2008, and (c) the insurance assessments for financial institutions based on their risk category. There was also a discussion about the criteria for participating in the Troubled Asset Relief Program (TARP). Seventy-eight bankers participated on the conference call.
The FDIC hosted the fourth annual MDI National Conference in Chicago, Illinois, from July 8–10, 2009. The conference theme was "A Bridge to Community Stabilization," and over 220 bankers from MDIs attended. The breakout sessions focused on topics of interest to bank management, including commercial real estate lending, liquidity and funding, mortgage foreclosure prevention programs, and accounting issues.
The FDIC held banker roundtables and/or conference calls with MDIs in their geographic regions. Topics of discussion at roundtables included the economy, overall banking conditions, agricultural conditions, deposit insurance assessments, accounting, and other bank examination issues. Also, from December 2–3, 2009, the FDIC, in cooperation with the Puerto Rico Bankers Association, hosted a compliance school in Guayabo, PR. The event was attended by approximately 150 bankers from nine banks.
In addition, the National MDI Coordinator held conference calls with representatives from several trade groups, including the Puerto Rico Bankers Association, the National Bankers Association, the Korean-American Bankers Association, the Asian-American Bankers Association, the National Association of Chinese-American Bankers, and the Hispanic Bankers Association, to discuss the MDI program and FDIC outreach activities.
Capital Standards The FDIC continued to be actively involved in domestic and international discussions intended to address the deficiencies in regulatory capital rules that were brought to light as a result of the recent financial turmoil and to ensure capital standards adequately support the safe and sound operation of banks. This included participation in a number of supervisory working group meetings with foreign regulatory authorities.
Internationally, the FDIC is participating in the Basel Capital Monitoring Group that tracks the impact on risk-based capital with the implementation of Basel II. The FDIC will continue to compile and analyze the information on the international impact of Basel II on regulatory capital as it becomes available through public and supervisory sources.
The FDIC continues to participate in international efforts to improve the quality of capital, minimize the procyclicality of risk-based capital requirements, and ensure the amount of capital banks hold for risky exposures is commensurate with risk (notably securitization, re-securitization, and trading book exposures). The FDIC actively participates in the work of the Basel Committee on Banking Supervision's Policy Development Group and a number of working groups: AIG Trading Book, Fundamental Review of the Trading Book, Definition of Capital, Non-Risk Based Supplementary Measure (leverage ratio), Liquidity, External Ratings and Securitizations, Counterparty Credit Risk, Asset Encumbrance, Procyclicality, and Macroprudential Supervision. The substantive work of these groups culminated in the publication in June 2009 of Revisions to the Basel II market risk framework, Guidelines for computing capital for incremental risk in the trading book, and Enhancements to the Basel II framework—and two consultative papers in December of 2009-Strengthening the resilience of the banking sector and International framework for liquidity risk measurement, standards and monitoring. The FDIC also participated in drafting the request for data for the impact studies that the Basel Committee will undertake in early 2010 to calibrate the proposals in the consultative papers. A number of these groups, including the Fundamental Review of the Trading Book, Asset Incumbrance, External Ratings and Securitization, and Macroprudential Supervision, will continue their work into 2010.
Domestically, the FDIC issued a number of interagency rulemakings to align regulatory capital more closely with risk. On November 12, 2009, the FDIC made final the interim final rule regarding the risk weights for Residential Mortgage Loans Modified Pursuant to the Making Home Affordable Program (MHAP) of the U.S. Department of the Treasury.5 This rule was jointly issued with the other federal banking agencies' support to prevent residential real estate foreclosures and keep Americans in their homes. The rule allows an institution to continue to risk weight a prudently-underwritten mortgage loan at the preferential risk weight even though it has been restructured under the Treasury's program. The final rule clarified that a banking organization may retain the risk weight assigned to a mortgage loan before the loan was modified under the MHAP.
On August 27, 2009, in response to the financial turmoil and the Financial Accounting Standards Board's revisions to accounting rules for consolidation of variable interest entities—Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (FAS 166—now codified as ASC 860), and Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167—now codified as ASC 810)—the federal banking regulators issued a proposed rule for comment titled Impact of Modifications to Generally Accepted Accounting Principles, Consolidation of Asset-Backed Commercial Paper Programs, and Other Related Issues. The final rule was approved by the FDIC Board on December 15, 2009. The rule discussed the impact of the accounting changes on the agencies' regulatory capital rules. The rule modified the general risk-based and advanced risk-based capital adequacy frameworks to eliminate the exclusion of certain consolidated asset-backed commercial paper programs from risk-weighted assets. The rule provided a reservation of authority in the general risk-based and advanced risk-based capital adequacy frameworks to permit the agencies to require banking organizations to treat entities that are not consolidated under accounting standards as if they were consolidated for risk-based capital purposes. The rule included an optional four-quarter transition period to ease the impact of the accounting change on a bank's risk-based capital requirements but did not delay the impact of the accounting change on a bank's leverage ratio.
The FDIC, with the other federal bank regulators, commenced a number of rulemakings in late 2009, including a revised Standardized Framework notice of proposed rulemaking (NPR) that proposes to implement the Basel II Accord standardized risk-based capital framework, an NPR to revise the Market Risk Amendment that proposes higher regulatory capital requirements for significant trading book activities, and an NPR that proposes implementation of the Basel changes to risk-based capital requirements that doubles the capital charge for re-securitizations and requires additional disclosures for securitizations and re-securitizations.
Guidance Issued During 2009, the FDIC issued and participated in the issuance of guidance in several areas as described below:
Structured Credit Products FDIC-supervised institutions continued to invest in structured credit products, including private label mortgage-backed securities and collateralized debt obligations. By early 2009, a growing number of these institutions experienced deterioration in financial performance as a result of these investments. To reinforce the federal banking agencies' existing guidance—Supervisory Policy Statement on Investment Securities and End-User Derivatives Activities and Uniform Agreement on the Classification of Assets and Appraisal of Securities—the agencies issued new guidance on April 30, 2009, titled Risk Management of Investments in Structured Credit Products. The guidance reiterates and clarifies existing supervisory guidance on the purchase and holding of complex structured credit products. It focuses on the various supervisory concerns related to these securities: pre-purchase analysis, suitability determination, risk limits, credit ratings, valuation, ongoing due diligence, adverse classification, and capital treatment.
Qualifications for Failed Bank Acquisitions The FDIC developed guidance for private investors interested in acquiring the deposit liabilities, or the deposit liabilities and assets, of failed insured depository institutions. The FDIC published for comment on July 9, 2009, a Proposed Statement of Policy on Qualifications for Failed Bank Acquisitions (Proposed Policy Statement). On August 26, 2009, the FDIC's Board of Directors voted to adopt the Final Statement of Policy on Qualifications for Failed Bank Acquisitions (Final Policy Statement), which was published in the Federal Register on September 2, 2009. The Final Policy Statement takes into account comments received from companies, law firms, legislators, and other interested parties, and changed the minimum capital commitment from 15 percent Tier 1 leverage to 10 percent Tier 1 common equity. Other key elements of the Final Policy Statement include cross support requirements, a prohibition on affiliated lending, a limitation on the sale of acquired shares in the first three years, a prohibition on bidding by excessively opaque and complex business structures, and minimum disclosure requirements. The Final Policy Statement specifies that it does not apply to investors who hold 5 percent or less of the total voting power as long as there is no evidence of concerted action by these investors. In adopting the Final Policy Statement, the FDIC sought to strike a balance between the interests of private investors and the need to provide adequate safeguards for the insured depository institutions involved.
Commercial Real Estate Guidance In response to deteriorating trends in commercial real estate (CRE) and other commercial loans, the FDIC, along with the other financial regulators, issued the Policy Statement on Prudent Commercial Real Estate Loan Workouts (the CRE Guidance) on October 30, 2009. The CRE Guidance updates existing guidance to assist examiners in evaluating institutions' efforts to renew or restructure loans to creditworthy borrowers. It promotes supervisory consistency, enhances the transparency of workout transactions, and ensures that supervisory policies and actions do not inadvertently curtail the availability of credit to sound borrowers.
Liquidity Risk Management On July 31, 2009, the federal banking agencies and the National Credit Union Administration sought comment on a proposed Interagency Guidance on Funding and Liquidity Risk Management. The agencies developed the guidance to provide sound practices for managing funding and liquidity risk and strengthening liquidity risk management practices. The new guidance is intended to supplement existing guidance, including FIL-84-2008, Liquidity Risk Management, issued by the FDIC in 2008, which remains in effect. Where appropriate, the proposed guidance conforms to the Basel Committee's Principles for Sound Liquidity Risk Management and Supervision. The final guidance was published on April 15, 2010.
Brokered Deposits The FDIC issued a final rule on May 29, 2009, effective January 1, 2010, changing the way it administers statutory restrictions on the deposit interest rates paid by banks that are less than well-capitalized. Under Part 337.6 of the FDIC Rules and Regulations, a less than well-capitalized insured depository institution may not pay a rate of interest that significantly exceeds the prevailing rate in the institution's market area or the prevailing rate from which the deposit is accepted. The final rule is intended to simplify and strengthen the administration of this regulation.
De Novo Institutions On August 28, 2009, the FDIC advised the banking industry of supervisory changes for state non-member institutions insured seven years or less (de novo period). Under previous policy, newly insured institutions were subject to higher capital requirements and more frequent examination activities during the first three years of operation. Based on supervisory experience, the FDIC extended the de novo period from a three-year period to seven years for examinations, capital, and other requirements. In addition, material changes in business plans for newly insured institutions will require prior FDIC approval during the first seven years of operation.
Regulatory Relief During 2009, the FDIC issued six Financial Institution Letters that provided guidance to help financial institutions and facilitate recovery in areas damaged by severe storms, tornadoes, flooding, and other natural disasters. Areas within American Samoa, Arkansas, Georgia, Kentucky, Minnesota, and North Dakota were affected.
Other Guidance Issued On July 8, 2009, in response to the severe payment situation that the state of California was experiencing, the federal banking agencies issued supervisory guidance for institutions regarding the regulatory capital treatment for registered warrants issued by the state of California as payment for certain obligations. The agencies' risk-based capital standards permit a banking organization to risk weight general obligation claims on a state at 20 percent. These warrants, which are general obligations of the state, would, therefore, be eligible for the 20 percent risk weight for risk-based capital purposes. The agencies reminded institutions, however, that they should exercise the same prudent judgment and sound risk management practices with respect to the registered warrants as they would with any other obligation of a state.
The FDIC also initiated an interagency interest rate risk advisory to highlight concerns about banks taking on excessive interest rate risk in current low interest rate environment. This advisory, which was published in January 2010, clarifies existing guidance and reminds banks not to lose focus on their management of interest rate risk. Banks are expected to manage interest rate risk exposures using policies and procedures commensurate with their complexity, business model, risk profile, and scope of operations.
Consumer Protection and Compliance Guidance In January 2009, the FDIC approved, and issued, along with the other federal bank regulators, updated Final Interagency Questions and Answers on the Community Reinvestment Act (CRA) and requested comment on new proposed guidance. In June, the FDIC joined the other regulators in requesting comment on CRA regulatory changes to implement statutory requirements relating to student loans and activities in cooperation with minority- and women-owned financial institutions and low-income credit unions. The FDIC contributed to the development and June release of guidance and examination procedures on the 2009 Identity Theft Red Flags regulations. In July, the FDIC joined other regulators in issuing Revised Interagency Questions and Answers Regarding Flood Insurance, updating guidance first issued in 1987, and requested comment on additional proposed guidance. In September, the FDIC alerted banks to new statutory requirements to protect tenants occupying foreclosed properties.
In November, the FDIC joined seven other federal agencies in releasing a model privacy notice form designed to make it easier for consumers to understand how financial institutions collect and share their personal information. The model form resulted from a multi-year consumer testing effort. In December, the FDIC joined the other Federal Financial Institutions Examination Council (FFIEC) member agencies in issuing for public comment, supervisory guidance on reverse mortgages, building on FDIC analysis performed in 2008. In June, August, and December, the FDIC issued guidance to the institutions it supervises alerting them to significant changes in the Truth in Lending Act and the Federal Reserve Board's Regulation Z (which implements that Act). In December, the FDIC reminded institutions of the dramatically revised Real Estate Settlement Procedures Act regulation issued by the Department of Housing and Urban Development.
Monitoring Potential Risks from New Consumer Products The FDIC relies heavily on on-site supervisory activities to identify existing and emerging risks. In addition to on-site supervisory activities, the FDIC uses several established off-site processes, including Statistical CAMELS Off-site Rating (SCOR) and Growth Monitoring System (GMS), as well as more recent comprehensive reviews (such as the Quarterly Supervisory Risk Profile) to assess how identified risks are likely to affect insured institutions' risk profiles and ratings. These ongoing analyses have been augmented with numerous ad hoc reviews (such as reviews of commercial real estate lending trends, interest rate risk exposure, allowance-for-loan and lease losses trends, and dividend payments). Furthermore, the FDIC replaced its former Underwriting Survey Questionnaire with a Credit and Consumer Products/Services Survey in October 2009. The new survey extends beyond underwriting practices and addresses new or evolving products/strategies and consumer compliance issues and is now completed by examiners at the conclusion of each risk management and consumer compliance examination. Supervisory staff monitors and analyzes this real-time examiner input and uses the information to help determine the need for changes in policy guidance or supervisory strategies as appropriate.
The FDIC continues to work with the FFIEC to issue supervisory guidance on reverse mortgage products. The FDIC began this effort as the result of an internal review that highlighted consumer risks associated with this product. A 2009 GAO report highlighted similar issues. In addition, the FDIC continues to work with other agencies to enhance the Truth in Lending examination procedures to assist examiners when reviewing compliance with reverse mortgage disclosure requirements.
Regulatory Reporting Revisions The FDIC, jointly with the Office of the Comptroller of the Currency and the Federal Reserve Board, implemented revisions to the Consolidated Reports of Condition and Income (Call Reports) on a phased-in basis in March, June, and December 2009. The revisions focused on areas in which the banking industry was experiencing heightened risk as a result of market turmoil and illiquidity and weakening economic and credit conditions. The reporting changes included new data on real estate construction loans with interest reserves, structured financial products such as collateralized debt obligations, commercial mortgage-backed securities, pledged loans, and fiduciary assets and income. Selected institutions must report additional data on recurring fair value measurements, credit derivatives, and over-the-counter derivative exposures.
In September 2009, the agencies updated the reporting of data on the amount and number of deposit accounts and estimated uninsured deposits in the Call Report schedule to reflect the extension of the temporary increase in the standard maximum deposit insurance amount from $100,000 to $250,000 per depositor enacted in the Helping Families Save Their Homes Act.
In December 2009, the agencies approved revisions to the Call Report that were implemented in early 2010. The revisions incorporate modifications made in response to comments received on the agencies' August 2009 proposal and are subject to approval by the U.S. Office of Management and Budget. The revisions respond to such recent developments as a temporary increase in the deposit insurance limit, changes in accounting standards, and credit availability concerns. The reporting changes that were effective March 31, 2010, include new data on other-than-temporary impairments of debt securities, loans to non-depository financial institutions, and brokered time deposits; additional data on certain time deposits and unused commitments; and a change from annual to quarterly reporting for small business and small farm lending data. The agencies will collect new data pertaining to reverse mortgages annually beginning December 31, 2010.
Promoting Economic Inclusion The FDIC pursued a number of initiatives in 2009 to facilitate underserved populations using mainstream banking services rather than higher cost, non-bank alternatives and to ensure protection of consumers in the provision of these services.
Alliance for Economic Inclusion The goal of the FDIC's Alliance for Economic Inclusion (AEI) initiative is to collaborate with financial institutions; community organizations; local, state, and federal agencies; and other partners in select markets to launch broad-based coalitions to bring unbanked and underserved consumers into the financial mainstream.
The FDIC expanded its AEI efforts during 2009 to increase measurable results in the areas of new bank accounts, small-dollar loan products, remittance products, and delivery of financial education to more underserved consumers. During 2009, over 60 banks and organizations joined AEI nationwide, bringing the total number of AEI members to 967. More than 72,614 new bank accounts were opened during 2009, bringing the total number of bank accounts opened through the AEI to 162,692. During 2009, approximately 68,491 consumers received financial education through the AEI, bringing the total number of consumers educated to 142,796. Also, 35 banks were in the process of offering or developing small-dollar loans as part of the AEI, and 26 banks were offering remittance products at the end of 2009.
The FDIC expanded the AEI initiative to two additional markets during 2009—Detroit/South, Michigan and Little Rock, Arkansas—bringing the total number of active AEI markets to 14. Additionally, the FDIC worked closely during 2009 to provide technical assistance and support to communities in Milwaukee, Wisconsin and northwestern Indiana interested in forming AEI coalitions. The statewide Wisconsin Saves program agreed to lead an initiative in Milwaukee patterned after the AEI.
The FDIC also worked closely during 2009 with the National League of Cities to provide technical assistance to facilitate the launch of Bank On campaigns in Seattle, WA; Savannah, GA; Houston and San Antonio, TX; and Indianapolis, IN. The FDIC was also invited to serve as a working committee member and advisor to facilitate the launch of a Bank On Washington, DC, campaign launched in April 2010.
FDIC Advisory Committee on
Economic Inclusion The FDIC's Advisory Committee on Economic Inclusion was established in 2006 and provides the FDIC with advice and recommendations on initiatives focused on expanding access to banking services by underserved populations. This may include reviewing basic retail financial services such as check cashing, money orders, remittances, stored value cards, shortterm loans, savings accounts, and other services that promote asset accumulation and financial stability. Committee members represent a cross-section of interests from the banking industry, state regulatory authorities, government, academia, consumer or public advocacy organizations, and community-based groups.
The Advisory Committee met three times during 2009. In February 2009, the meeting topic was Strategies to Increase Access to the Financial Mainstream. The meeting featured an overview of the FDIC Survey of Banks' Efforts to Serve the Unbanked and Underbanked and focused on effective and innovative products and services, policy approaches, and supervisory and regulatory strategies to improve appropriate engagement with the mainstream financial system, particularly for low- and moderate-income (LMI) and underserved households.
The Advisory Committee also met in July 2009 to continue its discussion about issues and challenges related to improving access to the financial mainstream and to discuss innovative ways that banks and others are encouraging savings through "game-based" strategies that make savings fun or exciting, such as sweepstakes, milestones, or rewards. After this meeting, a report of the Committee's views regarding the issues and challenges of serving LMI and underserved consumers was posted on the FDIC web site to spark discussion of how best to serve consumers who may be struggling, particularly in the current economy.
On December 2, 2009, the Committee met to discuss results of the FDIC National Unbanked and Underbanked Household Survey, overdraft issues, and the strategic focus for the Committee. As a next step, the Committee will formulate a strategic plan that will provide a framework for the Committee's agenda over the next two years. Among other things, the Strategic Plan will include recommendations related to:
Determining a desirable "base" level of household savings, and how much households actually have.
Addressing desirable features of safe, affordable savings and transaction account products.
Determining how the FDIC can enhance efforts to promote youth financial education programs.
Reviewing CRA to ensure that programs targeted to LMI communities are receiving appropriate consideration.
Considering ways to scale small-dollar loans, including standardizing an affordable small-dollar loan product, providing information about existing programs, seeking philanthropic or government guarantee funds, and potentially using government workforces as a test for employer-based small-dollar loans.
Affordable Small-Dollar Loan Guidelines and Pilot Program Many consumers, even those who have bank accounts, turn to high-cost payday or other non-bank lenders to quickly obtain small loans to cover unforeseen circumstances. To help insured institutions better serve an underserved and potentially profitable market while enabling consumers to transition away from reliance on high-cost debt, the FDIC launched a two-year small-dollar loan pilot project in February 2008. The pilot is designed to review affordable and responsible small-dollar loan programs offered by insured financial institutions and assist the banking industry by identifying and disseminating information on replicable business models and best practices for small-dollar loans, including ways to offer small-dollar loan customers other mainstream banking services.
There are currently 30 banks of varied sizes and diverse locations and settings participating in the pilot. Banks submitted data on a quarterly basis, which the FDIC analyzed to determine trends and best practices. The FDIC encourages innovation in program design, but most programs generally adhere to the FDIC's Small-Dollar Loan Guidelines, issued in June 2007, and all feature payment periods beyond a single paycheck, annual percentage rates below 36 percent, and streamlined underwriting and prompt loan application processing. During seven quarters of the pilot, banks cumulatively originated about 29,000 loans with a principal balance of more than $34 million. Bankers involved in the pilot cite a number of common factors that contributed to the success of their loan programs, including strong senior management and board support; an engaged and empowered "champion" in charge of the program; proximity to large populations of consumers with demand for small-dollar loans; and, in some rural markets, limited competition. The delinquency ratio for loans in the pilot tends to be almost three times higher than for general unsecured loans to individuals. However, charge-off rates for loans originated under the program are the same as general unsecured loans to individuals. These statistics show that while small-dollar loan borrowers are more likely to have trouble paying on time, they are no more likely to default than those in the general population.
Only a few bankers participating in the pilot have reported that short-term profitability is the primary goal for their program. Rather, most pilot banks are using the small-dollar loan product as a cornerstone for profitable relationships, which also creates good-will in their community. A few banks' business models focus exclusively on the goodwill aspect and generating an opportunity for positive Community Reinvestment Act consideration. Regardless of the business model, all of the bankers involved in the pilot have indicated that small-dollar lending is something they believe they should be doing to serve their communities.
Through the Advisory Committee on Economic Inclusion, the FDIC is considering pursuing several initiatives to broaden the availability of small-dollar loans at mainstream financial institutions, including, but not limited to, the following:
Conduct a Close-Out Symposium, Article, and "Branding Effort" for the Small-Dollar Loan Pilot. The close-out symposium will highlight final pilot findings, summarize technology and other innovations in small-dollar loans, and address progress on incentives to scale small-dollar loans across the financial mainstream. The features identified in the pilot could also be "branded" as the ideal for affordable, feasible small-dollar loan programs.
Consider Creating Pools of Non-Profit Funds or Government Operating Funds to Serve as "Guarantees" for Acceptable Small-Dollar Loan Programs. Several existing small-dollar loan programs feature "guarantees" in the form of loan loss reserves or linked, low-cost deposits provided by government bodies or philanthropic groups. These guarantees provide important assurances to banks interested in providing loan funds and other support to the programs. To encourage more institutions to offer small-dollar loan programs, larger pools could be created.
Consider Conducting a Pilot Using Federal Workforces to Test Innovative Small-Dollar Loan Business Models. The dominant model in the small-dollar loan pilot is the "high-touch" relationship building model. Peer-to-peer technology and employer-based lending are promising technologies to reduce handling costs, and, with employer-based models, potentially credit losses. To the extent legally permissible, the FDIC or other federal workforces could explore serving as pilots for testing innovative small-dollar loan business models.
Members of the Advisory Committee on Community Banking with Chairman Sheila C. Bair.
On May 29, 2009, the FDIC Board of Directors approved establishing the FDIC Advisory Committee on Community Banking. This committee was formed to provide the FDIC with advice and guidance on a broad range of important policy issues impacting small community banks throughout the country, as well as the local communities they serve, with a focus on rural areas.
The 14-member committee represents a cross-section of community bankers from around the nation, as well as a member from academia. The first meeting, held on October 15, 2009, covered the impact of the financial crisis on community banks. Other issues addressed were regulatory reform proposals under consideration by Congress and their effect on community banks, the impact of FDIC supervisory proposals on these banks, and community banks' perspectives on funding the FDIC's Deposit Insurance Fund.
Survey Results of the Unbanked and Underbanked In February 2009, the FDIC transmitted to Congress the results of the first national survey of banks' efforts to serve unbanked and underbanked individuals and families in their market areas. The survey, conducted pursuant to a mandate in Section 7 of the Federal Deposit Insurance Reform Conforming Amendments Act of 2005, found that improvement may be possible in the areas of institution focus, outreach, and commitment to unbanked and underbanked populations. The survey found that a majority of banks—63 percent—offers basic financial education materials, but fewer participate in the types of outreach efforts that are viewed by the industry as most effective to attract and maintain unbanked and underbanked individuals as long-term customers.
On December 2, 2009, the FDIC released the findings of its FDIC National Survey of Unbanked and Underbanked Households, breaking new ground in gaining understanding of which Americans remain outside the banking system. The survey, conducted on behalf of the FDIC by the U.S. Bureau of the Census, was a supplement to the Census Bureau's Current Population Survey during January 2009. The study, which is the most comprehensive survey to date of the unbanked and underbanked, reveals that more than one quarter (25.6 percent) of all households in the United States are unbanked or underbanked and that those households are disproportionately low-income and/or minority. In addition to collecting accurate estimates of the number of unbanked and underbanked households in the U.S., the survey was designed to provide insights into their demographic characteristics and reasons why the households are unbanked or underbanked. The survey represents the first time that this data has been collected to produce estimates at the national, regional, state, and large metropolitan statistical area (MSA) levels. This effort is being undertaken in response to the Reform Act, which calls for the FDIC to provide an estimate of the size of the U.S. unbanked market and to identify issues that cause individuals and families to be unbanked.
Information Technology, Cyber Fraud, and Financial Crimes The FDIC issued Special Alerts in August and October 2009 notifying financial institutions of an alarming increase in reports of fraudulent electronic funds transfer transactions resulting from compromised login credentials. During 2009, the FDIC detected an increase in both the number of such incidents and the losses resulting from them. Other major accomplishments during 2009 in combating identity theft included the following:
Assisted financial institutions in identifying and shutting down approximately 651 "phishing" web sites. The term "phishing"—as in fishing for confidential information—refers to a scam that encompasses fraudulently obtaining and using an individual's personal or financial information.
Issued 219 Special Alerts to FDIC-supervised institutions on reported cases of counterfeit or fraudulent bank checks.
Issued, in conjunction with the other FFIEC agencies, frequently asked questions (FAQs) concerning "Identity Theft Red Flags, Address Discrepancies, and Change of Address Regulations." These FAQs are designed to assist financial institutions in complying with the new regulations and examiners in assessing institutions' compliance.
The FDIC conducts information technology (IT) examinations at each safety and soundness examination to ensure that institutions have implemented adequate risk management practices for the confidentiality, integrity, and availability of the institution's sensitive, material, and critical information assets using the FFIEC Uniform Rating System for Information Technology (URSIT). The FDIC also participates in interagency examinations of significant technology service providers. In 2009, the FDIC conducted 2,780 IT examinations at financial institutions and technology service providers. The FDIC also monitors significant events, such as data breaches and natural disasters that may impact financial institution operations or customers.
As an additional element of its leadership role in promoting effective bank supervision practices, the FDIC provides technical assistance, training, and consultations to international governmental banking regulators in the area of IT examinations. In 2009, through our secondment program with the Financial Services Volunteer Corps, the FDIC provided assistance in developing IT examination programs to the Central Bank of Iraq, the Central Bank of Libya, Banque d'Algerie, and Bank of Albania. The FDIC also hosted a visit by the China Banking Regulatory Commission to learn about our IT examination programs, and the FDIC hosted an international conference of bank regulators to discuss emerging technology risks and to compare supervisory approaches.
Consumer Complaints and Inquiries The FDIC investigates consumer complaints concerning FDIC-supervised institutions and answers inquiries from the public about consumer protection laws and banking practices. As of December 31, 2009, the FDIC had received 17,245 written complaints, of which 8,280 involved complaints against state non-member institutions. The FDIC responded to over 96 percent of these complaints within the two-week standard established by Corporate policy. The FDIC also responded to 2,797 written inquiries, of which 503 involved state non-member institutions. In addition, the FDIC responded to 6,491 telephone calls from the public and members of the banking community, 3,878 of which concerned state non-member institutions.
Deposit Insurance Education An important part of the FDIC's deposit insurance mission is ensuring that bankers and consumers have access to accurate information about the FDIC's rules for deposit insurance coverage. The FDIC has an extensive deposit insurance education program consisting of seminars for bankers, electronic tools for estimating deposit insurance coverage, and written and electronic information targeted for both bankers and consumers. The FDIC also responds to thousands of telephone and written inquiries each year from consumers and bankers regarding FDIC deposit insurance coverage.
Economic conditions in 2008 helped to spur a significant interest by bank customers in learning more about FDIC deposit insurance coverage. To meet the increased public demand for deposit insurance information, the FDIC implemented two major initiatives to help raise public awareness of the benefits and limitations of FDIC deposit insurance coverage.
In 2009, the FDIC continued with its 2008 initiatives aimed at raising the public's awareness of the benefits and limitations of federal deposit insurance. The FDIC continued its campaign of public service announcements for television, radio, and print media; these public service announcements encouraged bank customers to visit myFDICinsurance.gov to learn about FDIC insurance coverage. In addition to our efforts to raise public awareness, the FDIC expanded its efforts to educate bankers about the rules and requirements for FDIC insurance coverage. In the fall of 2009, after all legislative and regulatory changes were implemented, the FDIC conducted a series of six nationwide telephone seminars for bankers on deposit insurance coverage. These seminars reached an estimated 35,000 bankers participating at approximately 10,000 bank locations throughout the country. The FDIC also continued to work with industry trade groups to provide training for bank employees.
Deposit Insurance Coverage Inquiries During 2009, the FDIC received 4,782 written deposit insurance inquiries from consumers and bankers. Of these inquiries, 99 percent received responses from the FDIC within two weeks, as required by Corporate policy. In addition to written deposit insurance inquiries, the FDIC received and answered 41,259 telephone inquiries from consumers and bankers during 2009.
The 46,041 total deposit insurance inquiries received in 2009 is significantly less than the 100,933 total deposit insurance inquiries received in 2008, when there was an unprecedented surge in deposit insurance questions following the failure of IndyMac Bank. However, the 2009 deposit insurance inquiries represent a 130 percent increase compared to 2007, when the FDIC received a total of 20,024 inquiries about deposit insurance coverage.
Foreclosure Prevention In 2009, the FDIC launched an initiative to help consumers and the banking industry avoid unnecessary foreclosures and stop foreclosure "rescue" scams that promise false hope to consumers at risk of losing their homes.
The FDIC focused its foreclosure mitigation efforts in three areas during 2009:
Direct outreach to consumers with information, education, counseling, and referrals. During 2009, the FDIC hosted or co-hosted over 82 consumer outreach events that reached over 17,000 consumers. The FDIC also released an informational toolkit and launched a phone referral service to help homeowners avoid scams and reach their servicer.
Industry outreach and education targeted to lenders, loan servicers, local governmental agencies, housing counselors, and first responders (faith-based organizations, advocacy organizations, social service organizations, etc.). The FDIC worked collaboratively throughout 2009 with local foreclosure coalitions, AEI partners, and others to co-host industry-wide events. Approximately 20 such events were conducted during 2009.
Support for capacity building initiatives to help expand the quantity and quality of foreclosure counseling assistance that is available within the industry. Working closely with NeighborWorks® America and other national and local counselor training and intermediaries, the FDIC worked to support industry efforts to build the capacity of housing counseling agencies.
As part of the FDIC's foreclosure prevention efforts, the FDIC released two new educational brochures during 2009 (in both English and Spanish) to help consumers avoid scams and turn to legitimate sources of assistance. The Is Foreclosure Knocking at Your Door? brochure encourages consumers to seek a loan modification. The Beware of Foreclosure Rescue Scams brochure alerts homeowners to common scams and directs them to legitimate sources of assistance. The demand for both brochures was strong—over 150,000 copies were requested and distributed.
The FDIC also worked collaboratively with other key partners, both inside and outside federal government, on post-foreclosure neighborhood stabilization efforts. These efforts will continue in 2010.
Financial Education and Community Development In 2001, the FDIC—recognizing the need for enhanced financial education across the
country—inaugurated its award-winning Money Smart curriculum, which was, until 2009, available in six languages, large print and Braille versions for individuals with visual impairments, and a computer-based instruction version. Since its inception, over 2.4 million individuals have
participated in Money Smart classes and self-paced computer-based instruction. Approximately 300,000 of these participants subsequently established new banking relationships.
The FDIC significantly expanded its financial education efforts during 2009 through a multi-part strategy that included making available timely, high-quality financial education products, expanded delivery channels, and the sharing of best practices.
Two new Money Smart products were released in 2009. First, as part of efforts to reach underserved communities, the FDIC released a Hmong (an Asian dialect found in Vietnam, Laos, Thailand, and Myanmar) language version of Money Smart, making it the seventh language in which the curriculum is offered. Second, the FDIC released the Money Smart Podcast Network, a portable audio version of Money Smart suitable for use with virtually all MP3 players. It was created as a tool for consumers to use to learn on their own or for educators seeking an innovative way to supplement traditional classroom instruction. The new MP3 version received more than 328,716 hits from 11,015 individual visitors between its release on May 27, 2009, and year-end 2009. Showing its appeal, visitors to the web site spent an average of 38 minutes on the site. Additionally, to enhance the quality of existing products, information on foreclosure prevention scams and legitimate sources of foreclosure assistance was added to the adult instructor-led and self-paced versions of Money Smart.
The FDIC also expanded its delivery channels for financial education. For example, 237 new organizations joined the FDIC's Money Smart Alliance. Finally, best practices were shared through four editions published of Money Smart News, which reached over 40,000 subscribers.
During 2009, the FDIC undertook over 200 community development, technical assistance, financial education, and outreach activities and events. These activities were designed to promote awareness of investment opportunities to financial institutions, access to capital within communities, knowledge-sharing among the public and private sector, and wealth-building opportunities for families. Representatives throughout the financial industry and their stakeholders collaborated with the FDIC on a broad range of initiatives structured to meet local and regional needs for financial products and services, credit, asset-building, affordable housing, small business and micro-enterprise development and financial education.
For example, the FDIC participated in 15 local savings campaigns during the 2009 America Saves week to encourage consumers to build wealth. The FDIC's leadership of one such local campaign helped facilitate nearly $10 million in new savings deposits in financial institutions. Also, recognizing the importance of small business growth and job creation as an essential component in America's economic recovery, the FDIC expanded its emphasis on facilitating small business development, expansion and recovery during 2009. This included hosting well-received events to help small businesses identify supportive programs, including mainstream lending options. The FDIC also helped facilitate the establishment of two new small business loan pools during 2009 to originate loans to eligible entrepreneurs and small businesses unable to obtain traditional loans because of an elevated risk profile (e.g., start-up businesses with insufficient cash flow or collateral). These new loan pools were launched in Alexandria, Virginia, and Baton Rouge, Louisiana.
Footnotes: 2 Compliance-only examinations are conducted for most institutions at or near the mid-point between joint compliance/CRA examinations under the Community Reinvestment Act of 1977, as amended by the Gramm-Leach-Bliley Act of 1999. CRA examinations of financial institutions with aggregate assets of $250 million or less are subject to a CRA examination no more than once every five years if they receive a CRA rating of “Outstanding” and no more than once every four years if they receive a CRA rating of “Satisfactory” on their most recent examination. back
3 The 2009 annual performance goal for compliance examinations on “3-, 4-, and 5-rated” institutions was not fully met. This annual performance goal and the indicator have been revised for 2010 to be consistent with the goal established in years prior to 2009. The 2009 performance target was not achieved because of the inadvertent inclusion of “3-rated” institutions. The FDIC does not typically issue formal enforcement actions for “3-rated" institutions. The 2009 performance target was fully met with respect to “4- and 5-rated” institutions. back
4 The CAMELS composite rating represents the adequacy of Capital, the quality of Assets, the capability of Management, the quality and level of Earnings, the adequacy of Liquidity, and the Sensitivity to market risk, and ranges from “1” (strongest) to “5” (weakest). back
5 On March 4, 2009, the Treasury announced guidelines under the Making Home Affordable Program (MHAP) to promote sustainable loan
modifications for homeowners at risk of losing their homes due to foreclosure. back