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US Federal Reserve extends monitoring of non-bank subsidiaries


Sunday, September 20th, 2009

The Federal Reserve has extended its consumer protection role over the banking sector by announcing increased supervision of non-bank subsidiaries of US and foreign banks.

The new policy will tighten the bank’s regulation of the financial system by allowing it to investigate consumer complaints against subsidiary companies that, because they are non-bank companies, have not been covered before.  It is aimed at non-bank lenders in the sub-prime market.  The Federal Reserve said the new policy stems from a pilot project begun in 2007 with consumer protection compliance reviews of non-depository lenders with significant subprime mortgage operations.

In a statement, the Federal Reserve said the policy “responds to a need for more effective supervision and consumer protection. It is designed to improve the Federal Reserve's understanding of the consumer compliance risk that certain products and services may pose to the holding companies and consumers and to guide supervisory activity for these entities.”

In a letter to its officers and managers in charge of consumer affairs sections, the Bank’s director of consumer and community affairs Sandra Braunstein said the new policy would apply immediately and gave a timetable for its implementation.
The Reserve already has policies to monitor consumer compliance over large complex banking organizations, foreign banks, regional banks and community banks.  Updated or initial consumer compliance risk assessments for non-bank subsidiaries of large complex banking organizations should be done by the end of the fourth quarter of this year and for the nonbank subsidiaries of regional, community and other foreign banks by the end of the first quarter of 2010, Braunstein said.

Following the risk assessment, supervisory activities would be planned.  They would be risk-focused and would include continuous monitoring, discovery reviews, target or full-scope examinations with transaction testing, and the investigation of consumer complaints. The guidance contained in existing supervision policies and procedures would be used as a framework for non-bank subsidiaries during 2009 and 2010. Subsidiaries would be rated under the Bank’s existing consumer compliance risk management rating system  which gives rankings of strong, satisfactory, fair, marginal, or unsatisfactory.)