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Informational Memorandum
Subject:Report on Violations of Consumer, Borrower Rights and Flood Insurance Regulations
Date of Memorandum:04/22/2002
Expiration Date:
Office:OE
Signed By:Smith, Roland
FCA Contact Person:Holland, Tom
Contact Phone:703-883-4484
List of Attachments:Violations Summary Report FY2001

INFORMATIONAL MEMORANDUM



April 22, 2002


To: Chairman, Board of Directors
Chief Executive Officer
Each Farm Credit System Institution

From: Roland E. Smith, Director
Office of Examination

Subject: Report on Violations of Consumer, Borrower Rights and Flood Insurance Regulations


Attached is a summary report on violations of consumer, borrower rights, and flood insurance regulations identified in Farm Credit Administration (FCA) examinations. The report, based on the examinations conducted, provides trends on the number and types of violations occurring over the past 5 fiscal years (FY) (1997 to 2001) in the Farm Credit System (FCS on System). In summary, the FCS experienced a 2 percent increase in the total number of violations of consumer, borrower rights, and flood insurance regulations. The number of violations also increased between FY 2000 and FY 2001. During the same 5-year period, there was a 24 percent decline in the number of institutions with violations. However, between FY 2000 and FY 2001, there was a slight increase in the number of institutions with violations. We have required institutions to take corrective actions to ensure compliance with the regulations. Based on our follow-up activities, we have concluded that corrective actions have been taken or are in process by all affected institutions.

If you have any questions, please feel free to contact the Director of your respective FCA Field Office, or Thomas J. Holland, Director, Special Examination and Supervision Division, Office of Examination, at (703) 883-4483, or correspond on the Internet at e-mail address hollandt@fca.gov.

Attachment


Violations of Consumer, Borrower Rights,
and Flood Insurance Regulations
Identified in FY 2001 Examinations


Summary
This report summarizes FCS institutions’ violations of Regulation Z (Truth-in-Lending Act), Regulation B (Equal Credit Opportunity Act), Regulation M (Consumer Leasing Act), Regulation U (Securities Exchange Act), FCA’s Borrower Rights regulations, and Flood Insurance regulations identified in examinations conducted by FCA during FY 2001 and for the 5-year period FY 1997 through FY 2001. Information regarding compliance with Regulations Z, B, and M is reported by FCA to the Board of Governors of the Federal Reserve System for its annual Report to Congress.

Over the 5-year period FY 1997 to FY 2001, we detected a 2 percent increase in the number of violations of consumer, borrower rights, and flood insurance regulations. During the same period, there was a 24 percent decline in the number of institutions with violations. Although the numbers have improved somewhat over the 5-year period, the types of violations (i.e., sections violated) consistently fell into the same categories (outlined under the individual regulations later in this report). Corrective actions have been required by FCA to ensure compliance. Those actions have been adequately resolved by the FCS institutions or are in the process of resolution. The number of corrective actions has also shown a declining trend over the 5-year period.








Regulation Z (Truth in Lending Act)
During FY 2001, FCA examined 104 institutions for consumer, borrower rights, and flood insurance regulations compliance. In the majority of institutions examined, examiners found no Regulation Z violations. However, examiners did identify 44 Regulation Z violations in 16 institutions. This is an increase in both the number of violations and institutions with violations since the preceding year. However, this represents a 45 percent reduction in the number of violations and a 41 percent reduction in the number of institutions over the 5-year period from 1997 through 2001. The following chart shows the 5-year trend.













The following provides detail on where the majority of the violations were concentrated.

Content of Disclosures (226.18): 39 percent (17 of 44) of violations involved the content of the disclosure statements, including incomplete, lack of separate itemization, overstatement, or understatement of finance charges. Loan officer oversight and insufficient training were cited as the reasons for the majority of the violations.

Right of Rescission (226.23): 27 percent (12 of 44) of the violations involved inaccurate or incomplete right of rescission notices. Loan officer oversight and insufficient training were cited as the reasons for the majority of the violations.

Residential Mortgage Transactions (226.19): 23 percent (10 of 44) of the violations involved untimely or incomplete disclosures (good faith estimate and adjustable rate mortgage disclosures). Loan officer oversight and insufficient training were cited as the reasons for the majority of the violations.



Of the violations identified, 86 percent resulted in corrective actions by the affected institutions. Specifically, these included additional training for lending personnel or correction of the violation. The remaining 14 percent required no corrective action due to the nature or timing of the violation. The examiners cited 16 institutions for violating Regulation Z, with no one institution representing a significant portion of the violations.
Regulation B (Equal Credit Opportunity Act)
During FY 2001, while the majority of FCS institutions examined had no Regulation B violations, examiners did identify 48 violations in 19 institutions. This is an increase in both the number of violations and institutions with violations since the previous year. However, this represents an 8 percent reduction in the number of violations and a 17 percent reduction in the number of institutions with violations over the 5-year period from 1997 through 2001. The following chart shows the 5-year trend.



The majority of the violations were concentrated in the areas of monitoring information and notifications.

Information for Monitoring Purposes (202.13): 48 percent (23 of 48) involved failure to collect monitoring information or to make the required determination based on visual observation or surname. Loan officer oversight and insufficient training were cited as the majority of the reasons for these violations.

Notifications (202.9): 46 percent (22 of 48) involved timeliness of adverse action notices or failure to provide the required disclosures. Loan officer oversight was cited as the reason for the majority of the violations.



Of the violations identified, 96 percent resulted in corrective actions by the affected institutions. Specifically, this included additional training for lending personnel, improved procedures, or correction of the violation. The remaining 4 percent required no corrective action due to the nature or timing of the violation. The examiners cited 19 institutions for violations of Regulation B, with no one institution representing a significant portion of the violations.

Regulation M (Consumer Leasing)
As in previous years, no violations of Regulation M were found. Since this regulation applies to leases of personal property for personal, family, or household purposes, few System direct leases are subject to this regulation.

Regulation U (Margin Credit Extended by Banks)
There were no violations of Regulation U identified in examinations during FY 2001. This compares to three violations in two institutions found in FY 2000, and two violations in two institutions in FY 1999. Statistics on violations of Regulation U were not captured prior to FY 1999.


FCA Borrower Rights Regulations
During FY 2001, while the majority of System institutions examined had no violations of FCA borrower rights regulations, there were 78 violations of borrower rights regulations identified in 17 institutions. This represents a 63 percent reduction in the number of institutions and a 19 percent reduction in the number of violations over the 5-year period from 1997 through 2001. The following chart shows the 5-year trend.



The majority of the violations were concentrated in the areas of adherence to restructuring policy and procedures, and not providing required disclosures.

Restructuring Policy and Procedures (614.4516): 37 percent (29 of 78) involved restructuring policy and procedures related to the failure to provide written notice to the borrower that the loan may be suitable for restructuring. Loan officer oversight was the most frequently cited reason for the violations.

Required Disclosures (614.4367): 31 percent (24 of 78) concerned required disclosures involving failure to provide effective interest rate disclosures or providing incomplete disclosures. The most frequently cited reasons for the violations were failure to follow procedures or misinterpretation of the regulation.



Of the violations identified, 95 percent resulted in corrective actions by the affected institutions. Specifically, this included revised procedures, additional training for lending personnel, or correction of the violation. The remaining 5 percent required no corrective action due to the nature or timing of the violation. The examiners cited 17 institutions for violations of borrower rights regulations, with no one institution representing a significant portion of the violations.

Flood Insurance
During FY 2001, the majority of System institutions examined had no violations of flood insurance regulations. There were 59 violations of flood insurance regulations identified during FY 2001 in 21 institutions. This represents a 58 percent reduction in the number of institutions and a 32 percent reduction in the number of violations over the 3-year period from FY 1999 through FY 2001. Statistics on violations of flood insurance regulations have only been captured since FY 1999. The following chart shows the 3-year trend.



The majority of the violations were due to the failure to determine if flood insurance needed to be purchased and not using the standard flood hazard determination form.


Requirement to purchase flood insurance where available (614.4930): Flood hazard determinations were not made. Lender oversight was cited as the most frequent cause of the violations, followed by lack of adherence to policy and procedures.

Required use of standard flood hazard determination form (614.4940): The determination was not made thus the standard form was not used. Lender oversight was cited as the most frequent cause of the violations, followed by lack of adherence to policy and procedures.

These two sections frequently overlap and result in one count of a violation. Of the 59 violations identified in examinations, 49 (83 percent) were in these areas.


All of the violations were corrected by the affected institutions. Specifically, this included revised procedures, additional training for lending personnel, or correction of the violation. The examiners cited 21 institutions for violations of flood insurance regulations, with no one institution representing a significant portion of the violations.