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Compliance Corner: Fourth Quarter 2002

Website Compliance

This article highlights some key website compliance issues and can be used as a guide to assist financial institutions in evaluating the overall effectiveness of their compliance management program for electronic banking delivery systems.

All electronic banking delivery systems, regardless of size or complexity, should be integrated into a financial institution's compliance management process. The major elements of an effective compliance management system are as critical to electronic banking as they are to banking through traditional delivery systems. An effective compliance management system contains two key components — board and management oversight and a compliance management program.

Board and Management Oversight
A financial institution's board and management should recognize the consequences associated with noncompliance and devote sufficient resources to ensure that the compliance program covers electronic banking systems. Management is also responsible for instilling a compliance culture throughout the organization, including the administration of electronic banking systems.

Compliance Management Program
A carefully devised, implemented, and monitored compliance management program will provide a solid foundation for ensuring compliance in an electronic banking system. Compliance policies and procedures should be developed to provide comprehensive guidance for all personnel who develop, maintain, and/or administer these systems. In addition, the policies should address the bank's compliance, audit, and/or internal control systems. Specifically, all banks should have some process in place for reviewing the electronic element of the products they offer. Audit, legal, and compliance, or some combination of these three divisions, should be involved in the compliance review of electronic products.

Common Compliance Issues
The compliance risk associated with an electronic banking site can be related to the degree of complexity of services provided. However, even a basic website can contain violations of consumer regulations. While reviewing websites for compliance with consumer regulations, Federal Reserve examiners have identified three areas of specific weakness in addition to general website requirements — loan advertisements, deposit advertisements, and nondeposit investment products. Not surprisingly, many weaknesses in website compliance are also weaknesses in general compliance processes.

General Website Requirements

  • All electronic advertisements must be clear, conspicuous, and not misleading.
  • The Equal Housing Lender Logo is required on a financial institution's homepage and all pages advertising housing-related loans.
  • The FDIC Membership Statement or symbol must appear on a financial institution's homepage and every page that includes deposit product advertising.
  • E-Sign Act requirements must be met before providing consumers electronic disclosures and applications (refer to the 2nd Quarter 2001 edition of SRC Insights and Compliance Corner for more details on the E-Sign Act).
  • Links to other websites should be carefully considered for potential legal and reputation risks. In particular, links to real estate brokers and kids' websites could pose compliance problems related to the Real Estate Settlement Procedures Act (RESPA) and the Children's Online Privacy Protection Act (COPPA), respectively.
  • Loan and deposit calculators provided on websites should provide accurate calculations.
  • A financial institution's online privacy policy should be consistent with the paper-based policy provided to customers in mailings and at branches.

Loan Advertisements

  • Website loan advertisements should not discourage applicants from applying for loans based on any of the "prohibited bases" listed in the Equal Credit Opportunity Act.
  • Advertisements for loans stating a rate of finance charge must state it as an "Annual Percentage Rate," using those three words. Furthermore, when a simple annual rate is shown, it must not appear more conspicuously than the APR.
  • For open and closed-end loans, certain loan terms in an advertisement trigger legal requirements to disclose certain other terms of the loan.
  • When variable rate disclosures are made available online, the annual percentage rate advertised must be the one in effect within the past 30 days.

Deposit Advertisements

  • Website deposit advertisements must reflect the terms and conditions in the financial institution's deposit agreements.
  • If an online deposit advertisement states a rate of return, it must state the rate as an "Annual Percentage Yield," using that term. The abbreviation "APY" can be used provided the term Annual Percentage Yield is stated at least once in the advertisement.
  • Whenever the Annual Percentage Yield is stated in a deposit advertisement, the advertisement should state information about (i) variable rates; (ii) the time the annual percentage yield is offered; (iii) minimum balance; (iv) minimum opening deposit; (v) effect of fees; and (vi) features of time accounts, including time requirements, early withdrawal penalties, and required interest payouts.
  • A deposit advertisement should not refer to or describe an account as "free" or "no cost" if any maintenance or activity fee may be imposed on the account.

Nondeposit Investment Products
Financial institutions advertising or selling nondeposit investment products online should ensure that consumers are informed of the risks associated with nondeposit investment products. Online advertisements should minimize the possibility of customer confusion and prevent any inaccurate or misleading impression about the nature of the nondeposit investment product or its lack of FDIC insurance. Specifically, websites advertising nondeposit investment products should comply with the following provisions.

  • Disclosure must be made to customers in a conspicuous manner that these products are not insured and may lose value.
  • The “Member FDIC” statement should not appear anywhere on the pages where non-deposit investment products are advertised.

The issues presented in this article are guidelines that can be used to determine how well financial institutions stack up in their compliance efforts with respect to electronic delivery systems. However, there are several complex compliance issues associated with website advertisements. Those delineated in this article provide a basic framework for financial institutions to evaluate the overall effectiveness of their current compliance program for electronic delivery systems.

If you have any questions regarding compliance programs for electronic banking delivery systems, please contact Connie Wallgren, Vice President and Chief Examinations Officer at (215) 574-6217.

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.

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