District Circular Letters
October 9, 1997
REGULATION M:
AUTOMOBILE LEASING:
BASLE COMMITTEE:
INTEREST RATE RISK
RISK FOCUSED CONSUMER
To Member Banks, Bank Holding Companies,
U.S. Branches and Agencies of Foreign Banks,
Edge Act Corporations, and Others Concerned
in the Twelfth Federal Reserve District
Delay of Mandatory Compliance Date for Revisions to Regulation M (Docket
R-0892)
The Federal Reserve Board has delayed from October 1, 1997,
to January 1, 1998, the date for mandatory compliance
with revisions to Regulation M that apply to automobile leasing.
The Board's revisions make a significant number of substantive changes
to the regulation, establishing new disclosures to improve consumers'
understanding of automobile and other lease transactions. The changes
require the preparation of new leasing forms and the reprogramming of
the computer software used to produce the consumer lease disclosures at
automobile dealerships.
Representatives of leasing companies, automobile dealerships, and vendor
support services requested a delay in the date set by the Board for mandatory
compliance to these revisions. Installation of new leasing software is
still under way at many of the 22,500 new-car dealerships that arrange
leases through approximately 9,000 leasing companies. As a result, many
of the dealerships have been unable to produce the required computer-generated
disclosures by October 1.
The Board approved the delay to ensure that consumers receive accurate
and meaningful disclosures through computer generated programs when they
enter into lease transactions.
Principles for the Management of Interest Rate Risk
The Basle Committee on Banking Supervision has released a paper containing
a set of principles for the management of interest rate risk.
The document is a revised version of a consultative paper issued in
January 1997. It re-emphasizes the need for banks to maintain adequate
risk management practices in all their activities and identifies specific
agreed upon principles that supervisory authorities will consider in evaluating
banks' management of interest rate risk.
Risk-Focused Consumer Compliance Supervision Program
The Federal Reserve Board has approved a risk-focused consumer compliance
supervision program and extended the consumer examination frequency schedule
for state member banks and foreign banking organizations.
Implementation of the new program will be phased in during 1998.
These actions will enhance the effectiveness of the Federal Reserve
System's consumer compliance examination program, reduce the burden of
examinations for supervised institutions, and more effectively deploy
Federal Reserve System examination resources.
The new frequency guidelines extend the examination cycle from between
eighteen to twenty-four months to thirty-six months for state member banks
having an exemplary compliance history and assets of less than $250 million.
An exemplary compliance history is defined as two satisfactory or better
ratings for both consumer compliance and the Community Reinvestment Act
(CRA). A copy of the new Examination Frequesncy Schedule is attached.
Banks with assets greater than $250 million will be examined every twenty-four
months, while banks with performance problems will be examined once every
twelve months.
The consumer examinations performed under the new progam will be conducted
concurrently with examinations for fair lending laws and the CRA, both
of which are covered under separate but complimentary programs that reflect
the new frequency schedule.
An essential component of the new examination approach is the correlation
of two risk elements:
- regulation risk, which involves an evaluation of
the potential consequences to the consumer or the bank of noncompliance
with consumer protection laws and regulations; and
- product risk, where 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 a bank's compliance
posture. The primary advantage of this examination approach is that it
targets examination resources to higher risk areas without compromising
the integrity of the examination process.
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.
Copies
Copies of the Board's notice, Docket
R-0892 (both the origional rule and the notice of delay of compliance
date), and the Basle Committee report, "Principles for the Management
of Interest Rate Risk," are available from our Corporate Services
Department. To request copies to be sent via mail, please call (415) 974-2748.
The Basle Committee's report is also available on the committee's website,
<http://www.bis.org>.
Additional Information
For additional information regarding these matters, please contact our
Banking Supervision and Regulation Department, at (415) 974-2967
[for Regulation M], (415) 974-3177 [for the Basle Committee
report], and (415) 974-2951 [for the Risk-Focused Consumer
Compliance Supervision Program].
FEDERAL RESERVE BANK OF SAN FRANCISCOS
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