Getting Your Board Involved with Compliance 

 

Compliance?  Why Bother? 

One of the things that we hear from our compliance officers is that the Board “does not really care about compliance”.  For so many small community Banks that consider themselves Business Banks. The idea of compliance is something along the lines of a sigh, an eye roll and an annoyance!  

“We don’t do consumer loans, so there is no need to worry about these things!”  or “if we have some consumer issues, we will hire somebody” are some of the common statements that we hear from the Board members s of our clients.  

And while it is easy to understand the sentiment, it is important to point out that even at Banks with minimal consumer activity; there are areas where compliance with consumer regulations is required.   In particular, Regulation B (Equal Credit Opportunity Act), the Community Reinvestment Act , the Unfair, Deceptive and Abusive Practices Act (UDAAP) and Fair Lending regulations.  We discussed the application of these regulations in our Blog entitled “is Fair lending an Issue at Business Banks?”   Additionally, all banks must comply with the requirements of Bank Secrecy Act and Anti-Money Laundering regulations.  The reach of these regulations goes deep into commercial lending and business transaction. 

Compliance is Required no matter how big or small or the character of the Bank

In addition to the ongoing need to comply with the above regulations, business banks must be aware of the fact that one or two loans may trigger the need to comply with various other regulations such as the Home Mortgage Disclosure Act (HMDA), The Real Estate Settlement Procedures Act (RESPA), the Safe Act and several others!   Like or not, the need to keep abreast of consumer regulation exists for all banks.   Quite often it is the “accidental” consumer transaction or two that results in tremendous headaches for our clients.  

For the compliance officer who is constantly trying to sound the alarm, that a strong compliance management program is required regardless of the character of the Bank, one of the biggest obstacles can be the reluctance of senior management to take compliance seriously.  This is where the Board comes in!

The Best Way to get Compliance to go away as a Problem is to have the Board Involved

For all banks, the Board of Directors is ultimately responsible for the success of failure of the operation.  In that regard, it is the Board which sets the tone for the priorities at the institutions they oversee.  Getting the members of the Board to actively participate in the administration of the compliance program will send a strong message to the staff at the Bank.   

A Board that is well informed asks questions and follows up on management reports will greatly enhance the overall compliance program and elevate the level of compliance to its proper level. 

The more than staff at the Bank realizes that the Board takes compliance seriously, the more that compliance issues will become a thing of the past.  Task number one then for the Compliance Officer is to get the buy in of the Board of Directors.  

The Board Should Receive Annual Compliance Training

The Bank Secrecy Act is one of the few regulations that specifically requires Boards to receive annual training.  As a result, BSA training is generally the only class that we regularly see Board members taking on a regular basis.   In our opinion, this is a grave mistake!  Board members should take regular and comprehensive classes on all areas of importance to the Bank, including compliance.   We recommend that the Compliance Officer should be a pest when it comes to this training and continue to insist that the Board receive training on at a minimum, the “big four “  (Regulation B, CRA Fair Lending and UDAAP).     The more the Board understands the requirements of these regulations, the more they will insist on being informed of the compliance effort at the Bank.    

The Board should be informed and ask questions –A Compliance Committee is a great idea! 

One of the most effective tools that we have observed is the formulation and implementation of a compliance committee, composed of senior management and reporting to the Board or a committee of the Board.   By meeting at least quarterly to discuss issues that directly impact the Bank’s compliance program and reporting these issues to the Board, management can communicate concerns and ensure that all appropriate parties are held accountable for their compliance efforts.    In addition, the compliance committee adds a level of gravitas to the compliance effort and sends the message to all staff that the Bank considers compliance as an essential part of the Bank’s overall success. 

Make the Board Understand that Lack of Compliance = Lack of Growth and Public Humiliation!

We often hear the axiom that no Bank has ever failed exclusively on compliance issues.  And while that may be true, many a bank has been severely hampered by compliance concerns.  Enforcement action as a result of compliance can include a Consent Order prohibiting the Bank from growing or expanding.  A bank may be prevented from offering new product lines until such time as a compliance concern is addressed.  Ultimately, if an institution is ordered to pay civil money penalties, a public notices is issued.  The bank’s customers, competitors and the general community can be made aware of compliance concerns the Bank is suffering.  The damage to reputation in these situations is difficult and takes a long time to repair.

So even if compliance is not a profit center, it can be a profit reducer if not properly administrated!