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Notice

Uniform Interagency Consumer Compliance Rating System

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Information about this document as published in the Federal Register.

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AGENCY:

Federal Financial Institutions Examination Council (FFIEC).

ACTION:

Notice; final guidance.

SUMMARY:

The Federal Financial Institutions Examination Council (FFIEC), on behalf of its members, is revising the Uniform Interagency Consumer Compliance Rating System, more commonly known as the CC Rating System. The agencies comprising the FFIEC are the Board of Governors of the Federal Reserve System (FRB), the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the State Liaison Committee (SLC) (Agencies). The FFIEC promotes compliance with federal consumer protection laws and regulations through each agency's supervisory and outreach programs.

The CC Rating System revisions reflect the regulatory, examination (supervisory), technological, and market changes that have occurred in the years since the original rating system was established in 1980. The revisions are designed to better reflect current consumer compliance supervisory approaches and to more fully align the CC Rating System with the Agencies' current risk-based, tailored examination processes. The CC Rating System is being published after consideration of comments received from the public.

DATES:

Effective March 31, 2017.

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FOR FURTHER INFORMATION CONTACT:

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Board: Lanette Meister, Senior Supervisory Consumer Financial Services Analyst, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551, (202) 452-2705.

CFPB: Cassandra Huggins, Attorney-Advisor, Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC 20552, (202) 435-9177.

FDIC: Ardie Hollifield, Senior Policy Analyst, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429-0002, (202) 898-6638; John Jackwood, Senior Policy Analyst, (202) 898-3991; or Faye Murphy, Chief, Consumer Compliance and UDAP Examination Section, (202) 898-6613.

NCUA: Matthew J. Biliouris, Deputy Director, Office of Consumer Financial Protection and Access, National Credit Union Administration, 1775 Duke Street, Alexandria, VA 22314-3428, (703) 518-1161.

OCC: Kimberly Hebb, Director of Compliance Policy, Office of the Comptroller of the Currency, 400 7th Street SW., Washington, DC 20219, (202) 649-5470; or Michael S. Robertson, Compliance Specialist, (202) 649-5470.

SLC: Matthew Lambert, Policy Counsel, Conference of State Bank Supervisors, 1129 20th Street NW., 9th Floor, Washington, DC 20036, (202) 407-7130.

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SUPPLEMENTARY INFORMATION:

Background

Pursuant to 12 U.S.C. 3301 et seq., the FFIEC, established in 1979, is a formal interagency body empowered to prescribe principles and standards for the federal examination of financial institutions and to make recommendations to promote consistency and coordination in the supervision of institutions.

The FFIEC promotes compliance with federal consumer protection laws and regulations through each agency's supervisory and outreach programs. Through compliance supervision, the Agencies determine whether an institution is meeting its responsibility to comply with applicable requirements.

On May 3, 2016, the FFIEC published a notice and request for comment in the Federal Register (May Proposal), 81 FR 26553, requesting comment on proposed revisions to the CC Rating System. The CC Rating System is a supervisory policy for evaluating financial institutions' [1] adherence to consumer compliance requirements. It provides a general framework for evaluating compliance assessment factors in order to assign a consumer compliance rating to each federally regulated financial institution.[2] The primary purpose of the CC Rating System is to ensure that regulated financial institutions are evaluated in a comprehensive and consistent manner and that supervisory resources are appropriately focused on areas exhibiting risk of consumer harm and on institutions that warrant elevated supervisory attention. The revised CC Rating System emphasizes the importance of institutions' compliance management systems (CMS), with emphasis on compliance risk management practices designed to manage consumer compliance risk, support compliance, and prevent consumer harm.

The CC Rating System is based upon a scale of 1 through 5, in increasing order of supervisory concern. Thus, 1 represents the highest rating and consequently the lowest level of supervisory concern, while 5 represents the lowest rating and consequently the most critically deficient level of performance and the highest degree of supervisory concern. When using the CC Rating System to assess an institution, the Agencies do not consider an institution's record of performance under the Community Reinvestment Act (CRA) because institutions are evaluated separately for CRA.

Purpose of the Revisions

The CC Rating System revisions are designed to better reflect current consumer compliance supervisory approaches and to more fully align the rating system with the Agencies' current risk-based, tailored examination processes. The revisions to the CC Rating System were not developed to set new or higher supervisory expectations for financial institutions and their adoption will represent no additional regulatory burden.

When the original CC Rating System was adopted in 1980, examinations focused more on transaction testing for regulatory compliance rather than evaluating the sufficiency of an institution's CMS to ensure compliance with regulatory requirements and to prevent consumer harm. In the intervening years, each of the Agencies has adopted a risk-based consumer compliance examination approach to promote strong compliance risk management practices and consumer protection within supervised financial institutions. Risk-based consumer compliance supervision evaluates whether an institution's CMS effectively manages the compliance risk in the products and services offered to its customers. Under risk-based supervision, examiners tailor supervisory activities to the size, complexity, and risk profile of each institution and adjust these activities over time. While compliance management programs vary based on the size, complexity, and risk profile of supervised institutions, all institutions should maintain an effective CMS. The sophistication and formality of the CMS typically will increase commensurate with the size, complexity, and risk profile of the entity.

As the Agencies drafted the new rating system definitions, one objective was to develop a rating system appropriate for evaluating institutions of all sizes. Therefore, the revised CC Rating System conveys that the system is risk-based to recognize and communicate clearly that compliance management programs vary based on the size, complexity, and risk profile of supervised institutions. This concept is reinforced in the Consumer Compliance Rating Definitions by conveying to examiners that assessment factors associated with an institution's CMS should be evaluated commensurate with the institution's size, complexity, and risk profile.

In developing the revised CC Rating System, the Agencies believed it was also important for the new rating system to establish incentives for institutions to promote consumer protection by preventing, self-identifying, and addressing compliance issues in a proactive manner. Therefore, the revised rating system recognizes institutions that consistently adopt these compliance strategies.

Another benefit of the new CC Rating System is to promote coordination, communication, and consistency among the Agencies, consistent with the Agencies' respective supervisory authorities. Each of the Agencies will use the CC Rating System to assign a consumer compliance rating to supervised institutions, including banks and nonbanks, as appropriate, consistent with the agency's supervisory authority. Further, revising the rating system definitions responds to requests Start Printed Page 79475from industry representatives who have asked that the CC Rating System be updated.

Summary of Comments Received

The FFIEC received 17 comments regarding the proposed revisions to the CC Rating System. Eight of the comments were from financial institution trade associations, three from consumer and community advocacy organizations, two from trade consultants, one from a financial holding company, one from an individual, and two from anonymous sources.

Commenters generally favored the changes to the CC Rating System, commending the Agencies':

1. Recognition of the need for the CC Rating System to be risk-based and focus more on the sufficiency of the CMS;

2. inclusion of incentives to support institutions' establishment of effective consumer compliance programs;

3. consideration of violations of consumer laws based on root cause, severity, duration, and pervasiveness;

4. inclusion of third-party relationships; and

5. application of the same rating system across providers of consumer financial services under the Agencies' jurisdictions.

Some commenters recommended clarifying changes to various aspects of the revised rating system, as described below. After consideration of all comments, the FFIEC is issuing this final CC Rating System substantially as proposed, but with some changes for clarification purposes. The following discussion describes the comments received and changes made to the CC Rating System in response. The final updated CC Rating System is included at the end of this Notice.

Principles of the Interagency CC Rating System

The Agencies developed four principles to serve as a foundation for the CC Rating System. Under those principles, the rating system must be risk-based, transparent, actionable, and should incent compliance.

The Agencies received comments concerning the first principle, which states that the CC Rating System must be risk-based. One commenter encouraged the Agencies to adopt standards that are risk-based to ensure that small institutions are not overwhelmed by unwieldy regulatory burden. The Agencies agree. As explained above, the revisions to the CC Rating System were not developed to set new or higher supervisory expectations for financial institutions and their adoption will not increase regulatory burden. Additionally, the CC Rating System directs examiners to assess an institution's CMS commensurate with the institution's size, complexity, and risk profile.

Five-Level Rating Scale

Commenters recommended that descriptive language be added to each of the five levels of the CC Rating System and to certain assessment factors, and that specific examples be provided to clarify what is required under the new rating system. One commenter stated that the distinction between the assessment factor levels is subjective. Another commenter suggested that the CC Rating System use descriptive adjectives instead of numbers to portray examination ratings. The Agencies believe that the adjectives used in each of the assessment factors under the numerical ratings contained in the Consumer Compliance Rating Definitions, as well as the description of the numerical ratings contained in the Guidance, provide useful terms and clear distinctions between the rating levels. The rating levels and categories will allow examiners to distinguish between varying degrees of supervisory concern when rating institutions. Therefore, the Agencies concluded that the addition of descriptive terms to the numerical rating in the CC Rating System would not be necessary.

A commenter suggested that each of the three categories of assessment factors should be assigned a numerical average or weight of importance. The consumer compliance rating reflects a comprehensive evaluation of a financial institution's performance by considering the categories and assessment factors in the context of the size, complexity, and risk profile of the institution. Thus, the rating is not based on a numeric average or any other quantitative calculation. The relative importance of each category or assessment factor may differ based on the size, complexity, and risk profile of an individual institution. Accordingly, one or more category or assessment factor may be more or less relevant at one financial institution as compared to another institution. An examiner must balance conclusions about the effectiveness of the financial institution's CMS over the individual products, services, and activities of the organization when arriving at a consumer compliance rating. Therefore, the Agencies do not believe it would be appropriate to implement a numerical average or weighting within the final CC Rating System.

Board and Management Oversight

Commenters recommended that the Agencies incorporate discussion of the Culture of Compliance into the Board and Management Oversight category. Commenters provided components of a compliance culture such as the Board and Management's commitment to the existence and effectiveness of policies, procedures, risk assessments, due diligence, training, accountability, and an environment in which staff can report compliance issues and receive a positive response from management. The Agencies believe that the details defined in the Consumer Compliance Rating Definitions under Board and Management Oversight address the concerns stated by the commenters by making clear that management teams that achieve satisfactory or better performance exhibit a commitment to each of those areas.

Corrective Action and Self-Identification

A commenter observed that the CC Rating System appropriately encourages a financial institution to proactively correct violations and to provide remediation to affected consumers. However, that commenter suggested the Agencies provide more guidance to make clear that an entity's subsequent corrective action would not compensate for a consistent pattern of non-compliance and weak management. The Agencies agree and believe that this point is reflected in the guidance. The Violations and Consumer Harm category ensures that examiners consider noncompliance and resulting consumer harm when assigning a rating. The other categories require examiners to evaluate the effectiveness of the institution's management and compliance program to identify and manage compliance risk in the institution's products and services and to prevent violations of law and consumer harm.

One commenter expressed concern that the concept of self-identification was presented inconsistently in the May Proposal. The commenter noted that the Corrective Action and Self-Identification assessment factor was described only as, any corrective action undertaken as consumer compliance issues are identified within the proposed CC Rating System guidance. The commenter noted that elsewhere in the proposal, discussion of this assessment factor appropriately incorporates the concept of self-identification. The Agencies have updated language in the Guidance to clarify discussion of this assessment factor by adding reference to self-identification of consumer compliance Start Printed Page 79476issues to the description of the Corrective Action and Self-Identification assessment factor.

Training

One commenter recommended that the CC Rating System require training programs to adequately train employees on compliance with fair lending and consumer protection laws. The Agencies believe that the definitions included in the Training assessment factor appropriately describe the Agencies' expectations that compliance training programs encompass consumer protection laws and regulations and do not believe that more specificity would be helpful.

Third-Party Relationships

One commenter supported the assessment of third-party relationship management within the CC Rating System. The commenter stated that regulatory oversight of third-party relationships is critical to ensure that financial institutions do not use those relationships to avoid compliance with consumer protection and fair lending laws.

Another commenter suggested the CC Rating System should clarify that the evaluation of an institution's third-party relationships will be limited to relationships between the financial institutions and vendors that impact consumer financial products and services. Specifically, the commenter suggested the Agencies should clarify that the CC Rating System does not extend to the financial institutions' broad third-party relationship management program. The Agencies note that the CC Rating System requires examiners to review a financial institution's management of third-party relationships and servicers as part of its overall consumer compliance program. The CC Rating System does not impose specific expectations for management of third-party relationships. Such expectations are provided in separate guidance issued by each of the Agencies.[3]

Violations of Law and Consumer Harm

Commenters expressed conflicting concerns over the Violations of Law and Consumer Harm category. Some noted that the category is defined too narrowly in that it does not appropriately consider practices that present a risk of harm to consumers that are not clear violations of law. The Agencies believe that management of compliance risk is appropriately considered in the other two categories. Specifically, the first two categories, “Board and Management Oversight and Compliance Program include, for example, consideration of how effectively institutions identify and manage compliance risks, including emerging risks; assessment of whether institutions evaluate product changes before and after implementing the changes; and evaluation of the sufficiency of the institution's procedures, training, and monitoring practices to manage compliance risk in the products, services, and activities of the institution. Others commented that the CC Rating System should be narrowed to address only violations of law that result in consumer harm. These commenters believe that a CMS deficiency exists only when a legal violation occurs that results in sufficient consumer harm. The Agencies disagree that a CMS can only be judged to be deficient when violations of law occur. The CC Rating System incents institutions to implement a CMS that effectively prevents, identifies, and addresses CMS deficiencies and any violations of laws or regulations.

One commenter noted that the Rating Categories should be weighted, with Violations of Law and Consumer Harm carrying the most weight because the commenter believes that prevention of violations and consumer harm is the entire purpose of the CC Rating System. While preventing consumer harm is critically important and integral to the CC Rating System, the Agencies disagree that the best way to achieve this purpose would be by requiring that this category always be weighted more than the others. The Agencies believe that CMS plays a critical role in prevention of violations and consumer harm. Thus, while the Violations of Law and Consumer Harm category evaluates violations and harm that have occurred, the other two categories evaluate the effectiveness of the CMS to prevent consumer violations and harm.

Severity

One commenter stated that the severity of a violation should not be based solely on the dollar amount of consumer harm. The revised CC Rating System does not base severity solely on a dollar amount of harm. The CC Rating system acknowledges that while many instances of consumer harm can be quantified as a dollar amount associated with financial loss, such as charging higher fees for a product than was initially disclosed, consumer harm may also result from a denial of an opportunity.

Assignment of Ratings by Supervisors

Several commenters encouraged the Agencies to implement a rating system with a single consumer compliance rating for all institutions, including those with assets greater than $10 billion. Commenters noted concerns with reconciling different ratings issued by two agencies and questioned whether two consumer compliance ratings could provide actionable feedback and effective incentives to supervised institutions. The Agencies believe that the detail that examiners provide regarding the scope of the compliance areas and products reviewed in arriving at a consumer compliance rating furnishes sufficient context to support effective financial institution response to rating conclusions. The CFPB will continue to issue consumer compliance ratings to providers of consumer financial products and services under its supervisory jurisdiction.

Comments Out of Scope of the CC Rating System

Commenters also submitted comments that, while broadly related to consumer compliance ratings, fall outside the scope of the CC Rating System. For example, some commenters identified specific consumer protection issues, such as overdraft practices and bank partnerships with non-bank lenders, that they believe should merit heightened consideration within the examination process. While these issues may be important, the CC Rating System does not provide guidance to examiners regarding specific consumer compliance issues. The Agencies provide such issue-oriented guidance and guidance on risk-focused supervision in separate official letters and bulletins.

Three commenters suggested that the CC Rating System require examiners to provide a summary of the institution's Start Printed Page 79477performance within each category. Historically, examiners at each agency have articulated factors contributing to the consumer compliance rating within the Report of Examination. Financial institutions will continue to receive this information through that report.

One commenter suggested mandatory penalties for less-than-satisfactory performance. The CC Rating System does not address the Agencies' supervisory response to consumer compliance ratings.

Two commenters also suggested that the FFIEC should conduct an assessment of examination results across the Agencies to evaluate the success of the CC Rating System implementation. Each agency maintains formal training and comprehensive quality assurance processes to ensure consistent application of policy changes and uses these tools on an ongoing basis.

Another commenter emphasized that the Agencies should promote transparency through public release of ratings. Ratings are confidential supervisory information that are prohibited from disclosure except as authorized by federal laws and regulations.

Two commenters supported the NCUA's approach to integrate the principles and standards of the CC Rating System into the existing CAMEL rating structure, in place of a separate or stand-alone CC rating. Using the principles and standards contained in the revised CC Rating System, NCUA examiners will incorporate their assessment of a credit union's ability to effectively manage its compliance risk into the Management component rating and the overall CAMEL rating used by NCUA.

Implementation Date

The FFIEC recommends that the Agencies implement the updated CC Rating System for consumer compliance examinations that begin on or after March 31, 2017.[4]

FFIEC Guidance on the Uniform Interagency Consumer Compliance Rating System

Uniform Interagency Consumer Compliance Rating System

The Federal Financial Institutions Examination Council (FFIEC) member agencies (Agencies) promote compliance with federal consumer protection laws and regulations through supervisory and outreach programs.[5] The Agencies engage in consumer compliance supervision to assess whether a financial institution is meeting its responsibility to comply with these requirements.

This Uniform Interagency Consumer Compliance Rating System (CC Rating System) provides a general framework for assessing risks during the supervisory process using certain compliance factors and assigning an overall consumer compliance rating to each federally regulated financial institution.[6] The primary purpose of the CC Rating System is to ensure that regulated financial institutions are evaluated in a comprehensive and consistent manner, and that supervisory resources are appropriately focused on areas exhibiting risk of consumer harm and on institutions that warrant elevated supervisory attention.

The CC Rating System is composed of guidance and definitions. The guidance provides examiners with direction on how to use the definitions when assigning a consumer compliance rating to an institution. The definitions consist of qualitative descriptions for each rating category and include compliance management system (CMS) elements reflecting risk control processes designed to manage consumer compliance risk and considerations regarding violations of laws, consumer harm, and the size, complexity, and risk profile of an institution. The consumer compliance rating reflects the effectiveness of an institution's CMS to ensure compliance with consumer protection laws and regulations and reduce the risk of harm to consumers.

Principles of the Interagency CC Rating System

The Agencies developed the following principles to serve as a foundation for the CC Rating System.

Risk-based. Recognize and communicate clearly that CMS vary based on the size, complexity, and risk profile of supervised institutions.

Transparent. Provide clear distinctions between rating categories to support consistent application by the Agencies across supervised institutions. Reflect the scope of the review that formed the basis of the overall rating.

Actionable. Identify areas of strength and direct appropriate attention to specific areas of weakness, reflecting a risk-based supervisory approach. Convey examiners' assessment of the effectiveness of an institution's CMS, including its ability to prevent consumer harm and ensure compliance with consumer protection laws and regulations.

Incent Compliance. Incent the institution to establish an effective consumer compliance system across the institution and to identify and address issues promptly, including self-identification and correction of consumer compliance weaknesses. Reflect the potential impact of any consumer harm identified in examination findings.

Five-Level Rating Scale

The CC Rating System is based upon a numeric scale of 1 through 5 in increasing order of supervisory concern. Thus, 1 represents the highest rating and consequently the lowest degree of supervisory concern, while 5 represents the lowest rating and the most critically deficient level of performance, and therefore, the highest degree of supervisory concern.[7] Ratings of 1 or 2 represent satisfactory or better performance. Ratings of 3, 4, or 5 indicate performance that is less than satisfactory. Consistent with the previously described Principles, the rating system incents a financial institution to establish an effective CMS across the institution, to self-identify risks, and to take the necessary actions to reduce the risk of non-compliance and consumer harm.

  • The highest rating of 1 is assigned to a financial institution that maintains a strong CMS and takes action to prevent violations of law and consumer harm.
  • A rating of 2 is assigned to a financial institution that maintains a CMS that is satisfactory at managing consumer compliance risk in the institution's products and services and at substantially limiting violations of law and consumer harm.
  • A rating of 3 reflects a CMS deficient at managing consumer Start Printed Page 79478compliance risk in the institution's products and services and at limiting violations of law and consumer harm.
  • A rating of 4 reflects a CMS seriously deficient at managing consumer compliance risk in the institution's products and services and/or at preventing violations of law and consumer harm. Seriously deficient indicates fundamental and persistent weaknesses in crucial CMS elements and severe inadequacies in core compliance areas necessary to operate within the scope of statutory and regulatory consumer protection requirements and to prevent consumer harm.
  • A rating of 5 reflects a CMS critically deficient at managing consumer compliance risk in the institution's products and services and/or at preventing violations of law and consumer harm. Critically deficient indicates an absence of crucial CMS elements and a demonstrated lack of willingness or capability to take the appropriate steps necessary to operate within the scope of statutory and regulatory consumer protection requirements and to prevent consumer harm.

CC Rating System Categories and Assessment Factors

CC Rating System—Categories

The CC Rating System is organized under three broad categories:

1. Board and Management Oversight,

2. Compliance Program, and

3. Violations of Law and Consumer Harm.

The Consumer Compliance Rating Definitions below list the assessment factors considered within each category, along with narrative descriptions of performance.

The first two categories, Board and Management Oversight and Compliance Program, are used to assess a financial institution's CMS. As such, examiners should evaluate the assessment factors within these two categories commensurate with the institution's size, complexity, and risk profile. All institutions, regardless of size, should maintain an effective CMS. The sophistication and formality of the CMS typically will increase commensurate with the size, complexity, and risk profile of the entity.

Additionally, compliance expectations contained within the narrative descriptions of these two categories extend to third-party relationships into which the financial institution has entered. There can be certain benefits to financial institutions engaging in relationships with third parties, including gaining operational efficiencies or an ability to deliver additional products and services, but such arrangements also may expose financial institutions to risks if not managed effectively. The prudential agencies, the CFPB, and some states have issued guidance describing expectations regarding oversight of third-party relationships. While an institution's management may make the business decision to outsource some or all of the operational aspects of a product or service, the institution cannot outsource the responsibility for complying with laws and regulations or managing the risks associated with third-party relationships.

As noted in the Consumer Compliance Rating Definitions, examiners should evaluate activities conducted through third-party relationships as though the activities were performed by the institution itself. Examiners should review a financial institution's management of third-party relationships and servicers as part of its overall compliance program.

The third category, Violations of Law and Consumer Harm, includes assessment factors that evaluate the dimensions of any identified violation or consumer harm. Examiners should weigh each of these four factors—root cause, severity, duration, and pervasiveness—in evaluating relevant violations of law and any resulting consumer harm.

Board and Management Oversight—Assessment Factors

Under Board and Management Oversight, the examiner should assess the financial institution's board of directors and management, as appropriate for their respective roles and responsibilities, based on the following assessment factors:

  • Oversight of and commitment to the institution's CMS;
  • effectiveness of the institution's change management processes, including responding timely and satisfactorily to any variety of change, internal or external, to the institution;
  • comprehension, identification, and management of risks arising from the institution's products, services, or activities; and
  • self-identification of consumer compliance issues and corrective action undertaken as such issues are identified.

Compliance Program—Assessment Factors

Under Compliance Program, the examiner should assess other elements of an effective CMS, based on the following assessment factors:

  • Whether the institution's policies and procedures are appropriate to the risk in the products, services, and activities of the institution;
  • the degree to which compliance training is current and tailored to risk and staff responsibilities;
  • the sufficiency of the monitoring and, if applicable, audit to encompass compliance risks throughout the institution; and
  • the responsiveness and effectiveness of the consumer complaint resolution process.

Violations of Law and Consumer Harm—Assessment Factors

Under Violations of Law and Consumer Harm, the examiner should analyze the following assessment factors:

  • the root cause, or causes, of any violations of law identified during the examination;
  • the severity of any consumer harm resulting from violations;
  • the duration of time over which the violations occurred; and
  • the pervasiveness of the violations.

As a result of a violation of law, consumer harm may occur. While many instances of consumer harm can be quantified as a dollar amount associated with financial loss, such as charging higher fees for a product than was initially disclosed, consumer harm may also result from a denial of an opportunity. For example, a consumer could be harmed when a financial institution denies the consumer credit or discourages an application in violation of the Equal Credit Opportunity Act,[8] whether or not there is resulting financial harm.

This category of the Consumer Compliance Rating Definitions defines four factors by which examiners can assess violations of law and consumer harm.

Root Cause. The Root Cause assessment factor analyzes the degree to which weaknesses in the CMS gave rise to the violations. In many instances, the root cause of a violation is tied to a weakness in one or more elements of the CMS. Violations that result from critical deficiencies in the CMS evidence a critical absence of management oversight and are of the highest supervisory concern.

Severity. The Severity assessment factor of the Consumer Compliance Rating Definitions weighs the type of consumer harm, if any, that resulted from violations of law. More severe harm results in a higher level of supervisory concern under this factor. Start Printed Page 79479For example, some consumer protection violations may cause significant financial harm to a consumer, while other violations may cause negligible harm, based on the specific facts involved.

Duration. The Duration assessment factor considers the length of time over which the violations occurred. Violations that persist over an extended period of time will raise greater supervisory concerns than violations that occur for only a brief period of time. When violations are brought to the attention of an institution's management and management allows those violations to remain unaddressed, such violations are of the highest supervisory concern.

Pervasiveness. The Pervasiveness assessment factor evaluates the extent of the violation(s) and resulting consumer harm, if any. Violations that affect a large number of consumers will raise greater supervisory concern than violations that impact a limited number of consumers. If violations become so pervasive that they are considered to be widespread or present in multiple products or services, the institution's performance under this factor is of the highest supervisory concern.

Self-Identification of Violations of Law and Consumer Harm

Strong compliance programs are proactive. They promote consumer protection by preventing, self-identifying, and addressing compliance issues in a proactive manner. Accordingly, the CC Rating System provides incentives for such practices through the definitions associated with a 1 rating.

The Agencies believe that self-identification and prompt correction of violations of law reflect strengths in an institution's CMS. A robust CMS appropriate for the size, complexity and risk profile of an institution's business often will prevent violations or will facilitate early detection of potential violations. This early detection can limit the size and scope of consumer harm. Moreover, self-identification and prompt correction of serious violations represents concrete evidence of an institution's commitment to responsibly address underlying risks. In addition, appropriate corrective action, including both correction of programmatic weaknesses and full redress for injured parties, limits consumer harm and prevents violations from recurring in the future. Thus, the CC Rating System recognizes institutions that consistently adopt these strategies as reflected in the Consumer Compliance Rating Definitions.

Evaluating Performance Using the CC Rating Definitions

The consumer compliance rating is derived through an evaluation of the financial institution's performance under each of the assessment factors described above. The consumer compliance rating reflects the effectiveness of an institution's CMS to identify and manage compliance risk in the institution's products and services and to prevent violations of law and consumer harm, as evidenced by the financial institution's performance under each of the assessment factors.

The consumer compliance rating reflects a comprehensive evaluation of the financial institution's performance under the CC Rating System by considering the categories and assessment factors in the context of the size, complexity, and risk profile of an institution. It is not based on a numeric average or any other quantitative calculation. Specific numeric ratings will not be assigned to any of the 12 assessment factors. Thus, an institution need not achieve a satisfactory assessment in all categories in order to be assigned an overall satisfactory rating. Conversely, an institution may be assigned a less than satisfactory rating even if some of its assessments were satisfactory.

The relative importance of each category or assessment factor may differ based on the size, complexity, and risk profile of an individual institution. Accordingly, one or more category or assessment factor may be more or less relevant at one financial institution as compared to another institution. While the expectations for compliance with consumer protection laws and regulations are the same across institutions of varying sizes, the methods for accomplishing an effective CMS may differ across institutions.

The evaluation of an institution's performance within the Violations of Law and Consumer Harm category of the CC Rating Definitions considers each of the four assessment factors: Root Cause, Severity, Duration, and Pervasiveness. At the levels of 4 and 5 in this category, the distinctions in the definitions are focused on the root cause assessment factor rather than Severity, Duration, and Pervasiveness. This approach is consistent with the other categories where the difference between a 4 and a 5 is driven by the institution's capacity and willingness to maintain a sound consumer compliance system.

In arriving at the final rating, the examiner must balance potentially differing conclusions about the effectiveness of the financial institution's CMS over the individual products, services, and activities of the organization. Depending on the relative materiality of a product line to the institution, an observed weakness in the management of that product line may or may not impact the conclusion about the institution's overall performance in the associated assessment factor(s). For example, serious weaknesses in the policies and procedures or audit program of the mortgage department at a mortgage lender would be of greater supervisory concern than those same gaps at an institution that makes very few mortgage loans and strictly as an accommodation. Greater weight should apply to the financial institution's management of material products with significant potential consumer compliance risk.

An institution may receive a less than satisfactory rating even when no violations were identified, based on deficiencies or weaknesses identified in the institution's CMS. For example, examiners may identify weaknesses in elements of the CMS in a new loan product. Because the presence of those weaknesses left unaddressed could result in future violations of law and consumer harm, the CMS deficiencies could impact the overall consumer compliance rating, even if no violations were identified.

Similarly, an institution may receive a 1 or 2 rating even when violations were present, if the CMS is commensurate with the risk profile and complexity of the institution. For example, when violations involve limited impact on consumers, were self-identified, and resolved promptly, the evaluation may result in a 1 or 2 rating. After evaluating the institution's performance in the two CMS categories, Board and Management Oversight and Compliance Program, and the dimensions of the violations in the third category, the examiner may conclude that the overall strength of the CMS and the nature of observed violations viewed together do not present significant supervisory concerns.

Assignment of Ratings by Supervisor(s)

The prudential regulators will continue to assign and update, as appropriate, consumer compliance ratings for institutions they supervise, including those with total assets of more than $10 billion.[9] As a member of the Start Printed Page 79480FFIEC, the CFPB will also use the CC Rating System to assign a consumer compliance rating, as appropriate, for institutions with total assets of more than $10 billion, as well as for nonbanks for which it has jurisdiction regarding the enforcement of Federal consumer financial laws as defined under the Dodd-Frank Act.[10] The prudential regulators will take into consideration any material supervisory information provided by the CFPB, as that information relates to covered supervisory activities or covered examinations.[11] Similarly, the CFPB will take into consideration any material supervisory information provided by prudential regulators in appropriate supervisory situations.

State regulators maintain supervisory authority to conduct examinations of state-chartered depository institutions and licensed entities. As such, states may assign consumer compliance ratings to evaluate compliance with both state and federal laws and regulations. States will collaborate and consider material supervisory information from other state and federal regulatory agencies during the course of examinations.

Consumer Compliance Rating Definitions

Assessment factors to be considered12345
Board and Management Oversight
Board and management oversight factors should be evaluated commensurate with the institution's size, complexity, and risk profile. Compliance expectations below extend to third-party relationships.
Oversight and CommitmentBoard and management demonstrate strong commitment and oversight to the financial institution's compliance management systemBoard and management provide satisfactory oversight of the financial institution's compliance management systemBoard and management oversight of the financial institution's compliance management system is deficientBoard and management oversight, resources, and attention to the compliance management system are seriously deficientBoard and management oversight, resources, and attention to the compliance management system are critically deficient.
Substantial compliance resources are provided, including systems, capital, and human resources commensurate with the financial institution's size, complexity, and risk profile. Staff is knowledgeable, empowered and held accountable for compliance with consumer laws and regulationsCompliance resources are adequate and staff is generally able to ensure the financial institution is in compliance with consumer laws and regulationsCompliance resources and staff are inadequate to ensure the financial institution is in compliance with consumer laws and regulationsCompliance resources and staff are seriously deficient and are ineffective at ensuring the financial institution's compliance with consumer laws and regulationsCompliance resources are critically deficient in supporting the financial institution's compliance with consumer laws and regulations, and management and staff are unwilling or incapable of operating within the scope of consumer protection laws and regulations.
Management conducts comprehensive and ongoing due diligence and oversight of third parties consistent with agency expectations to ensure that the financial institution complies with consumer protection laws, and exercises strong oversight of third parties' policies, procedures, internal controls, and training to ensure consistent oversight of compliance responsibilitiesManagement conducts adequate and ongoing due diligence and oversight of third parties to ensure that the financial institution complies with consumer protection laws, and adequately oversees third parties' policies, procedures, internal controls, and training to ensure appropriate oversight of compliance responsibilitiesManagement does note adequately conduct due diligence and oversite of third parties to ensure that the financial institution complies with consumer protection laws, nor does it adequately oversees third parties' policies, procedures, internal controls, and training to ensure appropriate oversight of compliance responsibilitiesManagement oversight and due diligence over third-party performance, as well as management's ability to adequately identify, measure, monitor, or manage compliance risks, is seriously deficientManagement oversight and due diligence of third-party performance is critically deficient.
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Change ManagementManagement anticipates and responds promptly to changes in applicable laws and regulations, market conditions and products and services offered by evaluating the change and implementing responses across impacted lines of businessManagement responds timely and adequately to changes in applicable laws and regulations, market conditions, products and services offered by evaluating the change and implementing responses across impacted lines of businessManagement does not respond adequately and/or timely in adjusting to changes in applicable laws and regulations, market conditions, and products and services offeredManagement's response to changes in applicable laws and regulations, market conditions, or products and services offered is seriously deficientManagement fails to monitor and respond to changes in applicable laws and regulations, market conditions, or products and services offered.
Management conducts due diligence in advance of product changes, considers the entire life cycle of a product or service in implementing change, and reviews the change after implementation to determine that actions taken have achieved planned resultsManagement evaluates product changes before and after implementing the change.
Comprehension, Identification and Management of RiskManagement has a solid comprehension of and effectively identifies compliance risks, including emerging risks, in the financial institution's products, services, and other activitiesManagement comprehends and adequately identifies compliance risks, including emerging risks, in the financial institution's products, services, and other activitiesManagement has an inadequate comprehension of and ability to identify compliance risks, including emerging risks, in the financial institution's products, services, and other activitiesManagement exhibits a seriously deficient comprehension of and ability to identify compliance risks, including emerging risks, in the financial institutionManagement does not comprehend nor identify compliance risks, including emerging risks, in the financial institution.
Management actively engages in managing those risks, including through comprehensive self-assessmentsManagement adequately manages those risks, including through self-assessments.
Corrective Action and Self-IdentificationManagement proactively identifies issues and promptly responds to compliance risk management deficiencies and any violations of laws or regulations, including remediationManagement adequately responds to and corrects deficiencies and/or violations, including adequate remediation, in the normal course of businessManagement does not adequately respond to compliance deficiencies and violations including those related to remediationManagement response to deficiencies, violations and examination findings is seriously deficientManagement is incapable, unwilling and/or fails to respond to deficiencies, violations or examination findings.
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Compliance Program
Compliance Program factors should be evaluated commensurate with the institution's size, complexity, and risk profile. Compliance expectations below extend to third-party relationships.
Policies and ProceduresCompliance policies and procedures and third-party relationship management programs are strong, comprehensive and provide standards to effectively manage compliance risk in the products, services and activities of the financial institutionCompliance policies and procedures and third-party relationship management programs are adequate to manage the compliance risk in the products, services and activities of the financial institutionCompliance policies and procedures and third-party relationship management programs are inadequate at managing the compliance risk in the products, services and activities of the financial institutionCompliance policies and procedures and third-party relationship management programs are seriously deficient at managing compliance risk in the products, services and activities of the financial institutionCompliance policies and procedures and third-party relationship management programs are critically absent.
TrainingCompliance training is comprehensive, timely, and specifically tailored to the particular responsibilities of the staff receiving it, including those responsible for product development, marketing and customer serviceCompliance training outlining staff responsibilities is adequate and provided timely to appropriate staffCompliance training is not adequately comprehensive, timely, updated, or appropriately tailored to the particular responsibilities of the staffCompliance training is seriously deficient in its comprehensiveness, timeliness, or relevance to staff with compliance responsibilities, or has numerous major inaccuraciesCompliance training is critically absent.
The compliance training program is updated proactively in advance of the introduction of new products or new consumer protection laws and regulations to ensure that all staff are aware of compliance responsibilities before rolled outThe compliance training program is updated to encompass new products and to comply with changes to consumer protection laws and regulations.
Monitoring and/or AuditCompliance monitoring practices, management information systems, reporting, compliance audit, and internal control systems are comprehensive, timely, and successful at identifying and measuring material compliance risk management throughout the financial institutionCompliance monitoring practices, management information systems, reporting, compliance audit, and internal control systems adequately address compliance risks throughout the financial institutionCompliance monitoring practices, management information systems, reporting, compliance audit, and internal control systems do not adequately address risks involving products, services or other activities including, timing and scopeCompliance monitoring practices, management information systems, reporting, compliance audit, and internal controls are seriously deficient in addressing risks involving products, services or other activitiesCompliance monitoring practices, management information systems, reporting, compliance audit, or internal controls are critically absent.
Programs are monitored proactively to identify procedural or training weaknesses to preclude regulatory violations. Program modifications are made expeditiously to minimize compliance risk.
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Consumer Complaint ResponseProcesses and procedures for addressing consumer complaints are strong. Consumer complaint investigations and responses are prompt and thoroughProcesses and procedures for addressing consumer complaints are adequate. Consumer complaint investigations and responses are generally prompt and thoroughProcesses and procedures for addressing consumer complaints are inadequate. Consumer complaint investigations and responses are not thorough or timelyProcesses and procedures for addressing consumer complaints and consumer complaint investigations are seriously deficientProcesses and procedures for addressing consumer complaints are critically absent. Meaningful investigations and responses are absent.
Management monitors consumer complaints to identify risks of potential consumer harm, program deficiencies, and customer service issues and takes appropriate actionManagement adequately monitors consumer complaints and responds to issues identifiedManagement does not adequately monitor consumer complaintsManagement monitoring of consumer complaints is seriously deficientManagement exhibits a disregard for complaints or preventing consumer harm.
Violations of Law and Consumer Harm
Root CauseThe violations are the result of minor weaknesses, if any, in the compliance risk management systemViolations are the result of modest weaknesses in the compliance risk management systemViolations are the result of material weaknesses in the compliance risk management systemViolations are the result of serious deficiencies in the compliance risk management systemViolations are the result of critical deficiencies in the compliance risk management system.
SeverityThe type of consumer harm, if any, resulting from the violations would have a minimal impact on consumersThe type of consumer harm resulting from the violations would have a limited impact on consumersThe type of consumer harm resulting from the violations would have a considerable impact on consumersThe type of consumer harm resulting from the violations would have a serious impact on consumers.
DurationThe violations and resulting consumer harm, if any, occurred over a brief period of timeThe violations and resulting consumer harm, if any, occurred over a limited period of timeThe violations and resulting consumer harm, if any, occurred over an extended period of timeThe violations and resulting consumer harm, if any, have been long-standing or repeated.
PervasivenessThe violations and resulting consumer harm, if any, are isolated in numberThe violations and resulting consumer harm, if any, are limited in numberThe violations and resulting consumer harm, if any, are numerousThe violations and resulting consumer harm, if any, are widespread or in multiple products or services.

[End of proposed text.]

Start Signature

Dated: November 7, 2016.

Federal Financial Institutions Examination Council.

Judith E. Dupre,

FFIEC Executive Secretary.

End Signature End Supplemental Information

Footnotes

1.  The term financial institutions is defined in 12 U.S.C. 3302(3).

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2.  NCUA integrates the principles and standards of the current CC Rating System into the existing CAMEL rating structure, in place of a separate rating. When finalized, the revised CC Rating System will be incorporated into NCUA's risk-focused examination program. Using the principles and standards contained in the revised CC Rating System, NCUA examiners will assess a credit union's ability to effectively manage its compliance risk and reflect that ability in the Management component rating and the overall CAMEL rating used by NCUA.

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3.  Guidance from the Agencies addressing third-party relationships is generally available on their respective Web sites. See, e.g., CFPB Bulletin 2012-03, “Service Providers” (April. 13, 2012), available at http://files.consumerfinance.gov/​f/​201204_​cfpb_​bulletin_​service-providers.pdf;​ FDIC FIL 44-2208, “Managing Third-Party Risk” (June 6, 2008), available at http://www.fdic.gov/​news/​news/​financial/​2008/​fil08044a.html;​ NCUA Letter to Credit Unions 07-CU-13, “Evaluating Third Party Relationships” (December 2007), available at http://www.ncua.gov/​Resources/​Documents/​LCU2007-13.pdf;​ OCC Bulletin OCC 2013-29, “Third-Party Relationship: Risk Management Guidances” (October 30, 2013), available at http://www.occ.gov/​news-issuances/​bulletins/​2013/​bulletin-2013-29.html;​ Interagency Guidance, “Weblinking: Identifying Risks and Risk Management Techniques” (2003), available at http://www.occ.treas.gov/​news-issuances/​bulletins/​2003/​bulletin-2003-15a.pdf.;​ NCUA Letter to Credit Unions 03-CU-08, “Weblinking: Identifying Risks & Risk Management Techniques” (April 2003), available at http://ithandbook.ffiec.gov/​media/​resources/​3315/​ncu-03-cu-08_​weblinking_​tech.pdf. See SR 13-19/CA 13-21, “Guidance on Managing Outsourcing Risk” (December 5, 2013) available at http://www.federalreserve.gov/​bankinforeg/​srletters/​sr1319.htm.

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4.  For institutions with continuous target supervisory activities during a 12-month supervisory cycle, the Consumer Compliance Rating System Guidance will be used when the supervisory cycle for that institution ends on or after March 31, 2017.

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5.  The FFIEC members are the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the State Liaison Committee.

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6.  The Federal Financial Institutions Examination Council Act of 1978 (12 U.S.C. 3302(3)) defines financial institution. Additionally, as a member of the FFIEC, the CFPB will also use the CC Rating System to assign a consumer compliance rating, as appropriate for nonbanks, for which it has jurisdiction regarding the enforcement of Federal consumer financial laws as defined under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (12 U.S.C. 5481 et seq.).

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7.  The Agencies do not consider an institution's record of performance under the Community Reinvestment Act (CRA) in conjunction with assessing an institution under the CC Rating System since institutions are evaluated separately under the CRA.

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9.  Section 1025 of the Dodd-Frank Act (12 U.S.C. 5515) applies to federally insured institutions with more than $10 billion in total assets. This section granted the CFPB exclusive authority to examine insured depository institutions and their affiliates for compliance with Federal consumer financial laws. The prudential regulators retained authority for examining insured depository institutions with more than $10 billion in total assets for compliance with certain other laws related to consumer financial protection, including the Fair Housing Act, the Servicemembers Civil Relief Act, and section 5 of the Federal Trade Commission Act.

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10.  12 U.S.C. 5481 et seq. A financial institution with assets over $10 billion may receive a consumer compliance rating by both its primary prudential regulator and the CFPB. The rating is based on each agency's review of the institution's CMS and compliance with the federal consumer protection laws falling under each agency's jurisdiction.

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11.  The prudential regulators and the CFPB signed a Memorandum of Understanding on Supervisory Coordination dated May 16, 2012 (MOU) intended to facilitate the coordination of supervisory activities involving financial institutions with more than $10 billion in assets as required under the Dodd-Frank Act.

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[FR Doc. 2016-27226 Filed 11-10-16; 8:45 am]

BILLING CODE 7535-01-P; 6714-01-P; 6210-01-P; 4810-33-P; 4810-AM-P