Sunday, April 27, 2014

 Getting to the Root of the Problem- An important Step to Strong Compliance

The compliance examiners are coming!  It is time to get everything together to prepare for the onslaught right?   Time to review every consumer loan that has been made and every account that has been opened in the last 12 months, right? Not necessarily!  The fact of the matter is that the compliance examination is really an evaluation of the  your compliance management program (“CMP”).  By approaching your examinations and audits as an evaluation of the effectiveness of your overall CMP, the response to the news of an upcoming review becomes  (almost) welcome.  

The Elements of the CMP

There is really no “one size fits all” way to set up a strong compliance program.  There are, however, basic components that all compliance management systems need.  These components are often called the pillars of the CMP.  The pillars are:

·         Policies and procedures

·         Internal Controls

·         Management Information systems

·         Training

The relative importance of each of these pillars depends on the risk kevels at individual banks.  The compliance examination is a test of how well the bank has identified these risks and deployed resources.   For example, in a bank that has highly experienced and trained staff couple with low turnover, the need for fully detailed procedures may be minimal.  On the other hand, at a bank where new products are being offered regularly, the need for training ca be critical.   The central questions, have you properly identified the risks that exist at your bank and having done so, have you taken the necessary steps to mitigate risks.  

Making the CMP  fit Your Bank 

Making sure that your CMP is right-sized starts with an evaluation of the bank is doing and the inherent risk in that activity.  For example, consumer lending comes with a level of risk.  Missed deadlines, improper disclosures or misinterpretations of the requirements of the regulations are risks that are inherent in a consumer portfolio.   In addition to the risks inherent in the portfolio are the risks associated with the manner in which the bank conducts it consumer business.   Are risk assessment conducted when a products is going to be added or terminated?  In many cases. both decisions can create risks.  For example, the decision to cease HELOC’s may create a fair lending issue; while the decision to start making HELOC’s has to be made in light of the knowledge and abilities of the staff that will be making the loans and the staff that will be reviewing for compliance.  

We suggest that compliance has to be a part of the overall business and strategic plan of a bank.  The best way to make sure that the CMP is appropriate for the bank is to include compliance in all of the business decisions.   The CMP has to be flexible enough to absorb changes at the bank while remaining effective and strong. 

 The Test of the CMP

Probably the most efficient way to determine the strengths and weakness of the CMP is by reviewing the findings of internal audit, and examinations as well as quality control checks.  When reviewing these findings what is most important is getting to the root of the problem.    Moreover, we suggest that not only the findings , but the recommendations that can be found in examination and audit reports  can be used to help “tell the story”  of the effectiveness of the CMP.  As the Bank receives its readout of findings and recommendations, it is very important to ask the examiner or auditor “In your opinion, what was the cause of this finding?”  Generally, we believe that you will find that the answer you receive will be candid and extremely helpful in addressing the problem.  Let’s face it, sometimes findings occur when people have bad days.  On those bad days, even the secondary review did not quite catch the problem.  For the most part, these are the types of findings that keep examiners up at night. 

 The findings that cause concerns are the ones that result from lack of knowledge or lack of information about the requirements of a regulation.  These findings are systemic and tend to raise the antenna of auditors and examiners.  Unfortunately, too often the tendency for banks is to respond to this kind of finding by agreeing with it and promising to take immediate steps to address it.  Without knowing the root cause of the problem, the fix becomes the banking version of sticking one’s finger in the dyke to avoid a flood.  

Addressing Findings  

We suggest a five step process to truly address findings and strengthen the CMP.

 1.       Make sure that the compliance staff truly understands the nature of the finding.  This may sound obvious, but far too many times there is a great deal loss in translation between the readout and the final report.  Many of our clients have stated that they felt like what was discussed at the exit doesn’t match the final report they receive.  We recommend fighting the urge to dismiss the auditor/examiner as a crank!  Call the agency making the report and get clarification to make sure that concern that is being express is understood by bank staff.   

 2.       Develop an understanding of the root cause of the finding.  Does this finding represent a problem with our training?  Perhaps we have not deployed our personnel in the most effective manner.  It is critical that management and the compliance team develop an understanding or why this finding occurred to most effectively address it.  

 3.       Assign a personal responsible along with an action plan and benchmark due dates.   Developing the plan of action and setting dates develops an accountability for ensuring that the matter is addressed. 

 4.       Assign an individual to monitor progress in addressing findings.  We also recommend that this person should report directly to the Audit Committee of the Board of Directors.  This builds further accountability into the system. 

 

5.       Validate the response.   Before an item can be removed from the tracking list, there should be an independent validation of the response.  For example, if training was the issue; the response should not be simply that all staff have now taken the training.  The process should include a review of the training materials to ensure that they are sufficient, feedback from staff members taking the training, and finally a quality control check of the area affected.   

 

Not only does determining the root cause of a problem make the response more effective, but in doing so, the CMP will be strengthened.  It may be easy to see that a bank has a problem with disclosing right of recession disclosures.  It may be harder to see that the problem is not the people at all, but that the training they received is confusing and ineffective.  Only by diving into the root cause of the problem can the CMP be fully effective. 

 We have attached a suggested form for following findings and addressing the root cause

   

Having the “Compliance Conversation” in the Face of Changing Expectations. 

 
One of the constants in the world of compliance is change.   This has been especially true in the last few years, as not only have new regulations been issued, there a new and different agency that regulates banks.  Right now, most are unsure just how much the CFPB will affect the banks it does not primarily regulate.   However, it is a good bet that much of what is done by the CFPR will also be implemented in one form or another by the other prudential regulators. 

One of the other constants in compliance has been skepticism about consumer laws in general and the need for compliance specifically.  It is often easy to feel the recalcitrance of the senior management at banks to the very idea of compliance.  Even many banks with a good compliance record often tend to do exactly that which is required by the regulation for the sole purpose of staying in compliance and not necessarily that they agree with the spirit of compliance.  Indeed, skepticism about the need for consumer regulations as well as the effectiveness of the regulations are conversations that can be heard at many a bank. 

The combination of changes in the consumer regulations, changes at regulatory agencies and changes in the focus of these agencies presents both a challenge and an opportunity for compliance staff everywhere.  It is time to have “the talk” with senior management.    The point of the talk?  Enhancements in compliance can help your bank receive higher compliance ratings while improving the overall relationship with your primary regulator. 

The Compliance Conversation

While there are many ways to try to frame the case for why compliance should be a primary concern at a bank, there are several points that we have found that help convince a skeptic. 

1)      Compliance regulations have been earned by the financial industry.  A quick review of the history of the most ell-known consumer regulations will show that each of these laws was enacted to address bad behaviors of financial institutions.  The Equal Credit Opportunity Act was passed to help open up credit markets to women and minorities who were being shut out of the credit market.  The Fair lending laws, HMDA and the Community Reinvestment Act were passed to assist in the task of the ECOA.  In all of these cases, the impetus for the legislation was complaints from the public about the behavior of banks.  The fact is that these regulations are there to prevent financial institutions form hurting the public. 

2)      Compliance will not go away!  Even though there have been changes to the primary regulations, there has been credible movement to do away with them.   The fact of the matter is that banking is such an important part of our economy that is will always receive a great deal of attention from the public and therefore legislative bodies.   In point of fact, the trend for all of the compliance regulations is that they continue to expand.  The need for a compliance program is as basic to baking as the need for deposit insurance.  In addition, since compliance is and will be, a fact of baking life, the prudent course is to embrace it.  

 

3)      Compliance may not be a profit center, but a good compliance program cuts way down on the opportunity costs of regulatory enforcement actions.  Many financial institutions tend to be reactive when it comes to compliance.  We understand; there is cost benefit analysis that is done and often, the decision is made to “take our chances” and get by with a minimal amount of resources spent on compliance.   However, more often than not the cost benefit analysis does not take into account the cost of “getting caught”.  Findings form compliance examinations that require “look backs” into past transactions and reimbursement to customers who were harmed by a particular practice is expensive.  The costs for such action include costs of staff time (or temporary staff), reputational costs and the costs associated with correcting the offending practice.  A strong compliance management system will prevent these costs form being incurred and protect the Bank’s reputation; which at the end of the day is its most important asset. 

 

4)      Compliance is directly impacted by the strategic plan. Far too often, compliance is not considered as banks put together their plans for growth and profitability.   Plans for new marketing campaigns or new products being offered go through the approval process without the input of the compliance team.  Unfortunately, without this consideration, banks add additional risk without being aware of how the additional risk can be mitigated.    When compliance is considered in the strategic plan, we find that the proper level of resources can be dedicated to all levels of management and internal controls. 

 

5)      There is nothing about being in compliance that will get in the way of the bank making money and being successful.  Many times the compliance officer gets portrayed as the person who keeps saying no; No!” to new products, “No!” to new marketing” and “No!” to being profitable.  But the truth is that this characterization is both unfair and untrue.  The compliance staff at your banks wants the bank to make all the money that it possibly can while staying incompliance with the laws that apply.  The compliance team is not the enemy.  In fact, the compliance team is there to solve problems.  

Getting  the Conversation to Address the Future. 

Today, we are seeing  changes in the expectations that regulators have about responding to examination findings and the overall maintenance of the compliance management program.   There are three fronts that may seem unrelated at first, but when out together make a powerful arguments about how compliance can become a key component in your relationship with the regulators. 

First, the Comptroller of the Currency has made it clear that he intends to evaluate the review of the compliance  management program to  directly impact the overall “M” rating within the CAMEL ratings.   The other prudential regulators are soon to follow.  The thought behind evaluating the compliance management program is that it is in fact the responsibility of management to maintain and operate a strong compliance program.  The failure to do so is a direct reflection of management’s abilities.  Compliance is now a regulatory foundation issue. 

Second, now more than ever, regulators are looking to banks to risk assess their own compliance and when problems are noted, to come forward with the information.  The CFPB for example, published guidance in 2013 (Bulletin 2013-06) that directly challenged banks to be corporate citizens by self-policing and self-reporting.  It is clear that doing so will enhance both the reputation and the relationship with regulators.  The idea here is that by showing that you take compliance seriously and are willing to self-police, the need for regulatory oversight can be reduced.

Finally, the regulators have reiterated their desire to see financial institutions address the root causes of findings in examinations.   There have been recent attempts by the Federal Reserve and the CFPB to make distinctions between recommendations and findings .  The reason for these clarifications are so that banks can more fully address the highest areas of concern.  By address, the regulators are emphasizing that they mean dealing with the heart of the reason that the finding occurred.  For example, in a case where a bank was improperly completing Good Faith estimates in violation of RESPA, the response cannot simply be to tell the loan staff to knock it off!  In addition to correcting mistakes, there is either a training issue of perhaps staff are improperly assigned.  What is the reason for the improper disclosures?  That is what the regulators want addressed.   

The opportunity exists to enhance your relationship with your regulators through your compliance department.  By elevating the level of importance of compliance and using your compliance program as a means of communicating with your regulators

BSA is Good for You- and Especially Good for your High Risk Customers!   

We hope that title got your attention!  It certainly got our attention when the comptroller of the currency Tim Curry  said it recently!  When Mr. Curry was speaking before the Association of Certified Anti-Money Laundering Specialists  convention earlier this year[1], he noted that when a financial institution has a strong  BSA program, its ability to service high risk clients increases.    

One of the many points that Mr.  Curry was making goes against  trends that we often see in banks,   when regulators increase the focus on a given area, the tendency is to cease the product line or service being offered.  One obvious example of this tendency was the response from many banks to the Qualified Mortgage rules.  These rules required the lenders who originate higher priced mortgages  to fully document the borrower’s ability to repay the loan before the loan was made.  The rule carved out a “Safe Harbor” for banks that did not make higher priced mortgages.  This exception,  the qualified mortgage (“QM”) exception, became the path of least resistance to many banks.  As of today there are still many banks that have decided to limit the non “QM” activity to zero.    In point of fact, a quick review of the requirements for documenting the ability to  repay,  reveals that these requirements are little more than best  practices for lending that have been established for many years. 

Mr. Curry pointed out that in many cases, banks suffer from similar over reaction in the BSA area.   Just because there is a great deal of attention paid to BSA, doesn’t mean that banks should immediately stop servicing high risk clients.   

Common Problems with BSA 

The biggest areas of concern for BSA be can be categorized into four major areas, according to Curry:

·         The culture of Compliance at the Bank;

·         The resources (or lack thereof) that are dedicated to BSA;

·         The strength of the information technology;

·         The quality of risk management

It is interesting to note that the very first item on this list is the compliance culture of the bank.  Regulators have made it clear that in 2014 and beyond, the area of compliance will directly impact the  “M” in a banks CAMEL ratings.   The expectation is that senior management including the Board of Directors will make compliance an issue that is fundamental to the ongoing operation of the Bank. 

The implications for the AML/BSA compliance program are clear; regulators expect that banks will spend the necessary resources to fully staff and administrate BSA/AML compliance.  Further, accountability for compliance rests at the highest levels of management at the bank. 

While all of this may seem ominous , it can actually result in a positive outcome.  The flip side of the coin is that when resources are properly allocated and the CMP is strong, there is absolutely no reason to turn large amounts of high risk business away.  This is not to say that a bank can use the excuse of  a strong BSA program to  add any and all high risk clients.  It does however, mean that with the proper screening and monitoring,  banks can offer their natural clients a full range of services.  So how does one get the Bsa Department in shape?  We have a few suggestions.  

Suggestions for Strengthening the BSA Program

 Make the BSA/OFAC  Risk Assessment Process More Dynamic

This is oftentimes a document that is often either overlooked or completed as a  “fill in the  blanks” document that captures general information about BSA risks.   It is also extremely rare that at the end of reviewing the  BSA assessment significant change is generated.  We recommend the risk assessment process should be dynamic.  Not only should all departments heads have input, but the conclusion from the document should be incorporated into the decisions for resource allocation to the BSA department.  In this manner, the risk assessment is tied directly to the resource allocation, the compliance culture and  strength of monitoring technology.  Discussions about the plan should be comprehensive and evidence that senior management and the Board have fully considered the risk associated with BSA and made decisions based on that risk.  The level and quality of training should also be tied directly to the risk assessment review process. 

Combine CIP/EDD with Business Development.  

In many banks, the business development department works at cross purposes with the BSA department.   While account officers do their best to obtain new clients by signing them up to as many new products as possible, the requirements of CIP can feel like they are in the way of the relationship.  Oftentimes, pertinent information about the client is not passed on to the compliance staff.  Many times, only the basic CIP data is obtained and the BSA staff is left to try to develop a risk profile using limited information.   However, it is often the case that it is the account officer that knows these customers best and can/should be able to fully describe what it is that they do.   We recommend that banks attempt to get the Bsa and business development units to work together to produce EDD that is based upon knowledge of the customer, knowledge of the industry and knowledge of the requirements of BSA. 

Develop Training that Meets the Specific Needs of Your Bank

Online training for staff is widely accepted and fine for a start.  However, we recommend that you augment this training with information that is specific to your client base.   For example, a bank that serves an area that has a great number of high tech firms can greatly enhance its BSA program by training staff the operations of these firms.  Is it likely that a high tech firm would have a large number of cash deposits?  Probably not!  On the other hand, such a firm would be likely to send wires to foreign countries.  If staff at the bank have been well informed, they can recognize a suspicious transaction even before software might have a chance to do so.  In addition a well-trained and well-informed staff can perform much more effective and complete  risk management.  

Technology must be powerful  AND  Match  the Abilities and Skills of the BSA staff

We have had the experience more than once of meeting with a client who had purchased powerful  BSA/AML software, only to become frustrated and resort back to manual monitoring.  Oftentimes, the thinking of senior management was that the examiners have told the bank that they need software and the response has been to buy software, get the basic training that come with the software license and wait for miracles to happen.  Unfortunately the trainers from the software companies are focused on the operation of the software and not the meaning of the reports that are generated.  It is critically important that when considering upgrades that the upgrade are comprehensive.  Make sure that the BSA staff knows how to use the software in a manner that is most effective. 

At the end of the day, regulators are not advising banks to run away from high risk clients, but  instead to be ready,  willing and able to handle the risk.  So a strong BSA program is good for one and all!

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[1]  Remarks by  Thomas J. Curry  Comptroller of the Currency  Before the  Association of Certified Anti-Money Laundering Specialists  Hollywood, Florida  March 17, 2014

Why IS there a Regulation C? 

As anyone in compliance can attest to, there are Myriad consumer compliance regulations.  For bankers, these regulations are regarded as anything from a nuisance, to the very bane of the existence of banks.  However, in point of fact, there are no bank consumer regulations that were not earned by the misbehavior of banks in the past.  Like it or not these regulations exit to prevent bad behavior and/or to encourage certain practices.   We believe that one of the keys to strengthening a compliance program is to get your staff to understand why regulations exist and what it is the regulations are designed to accomplish.  To further this cause, we have determined that we will from time to time through the year; address these questions about various banking regulations.  We call this series “Why is there….” 

Introduction

As we have mentioned in the past in blogs, there are no consumer compliance regulations that were not  “well earned” by bad behavior in the financial industry.  The Home Mortgage Disclosure Act and its implementing regulation, Regulation C  are no different. 

This law came into being during a  time when a great deal of attention was being paid to the lending practices of financial institutions in urban areas.  In the late 1950’s and early 1960’s Congress conducted several  hearings on the lending practices of banks and financial institutions.  These hearings resulted in the passage of several pieces of legislation aimed directly at opening the credit market to women and minorities.  Among the legislation that passed during this period was the Fair Housing Act and  the Equal Credit Opportunity Act.  

The net effect of the these two powerful pieces of legislation was to help to open the credit application process for minorities and women.   However, unfortunately, just the opportunity to apply for credit Is not a guaranty of fair treatment or a positive outcome.  It soon became evident that financial institutions had taken a different approach to denying credit.  One of the most pervasive practices that caused concern was the practice of “red lining”.  This was a practice where a lender would  take a map of its  assessment area and would literally draw a red circle around certain areas  The areas that were circled were to receive no loans.  This was despite the fact that many people within the redlined areas were customers of the bank and kept their deposits in the bank’s branches. 

Economists noted that the practice of red lining caused “disinvestment “ in the red lined communities.   In other words, deposits were being taken in from the redlined area, but those same funds were being loan out in other areas.  Money was flowing from one community and then distributed elsewhere.  As a result,   Congress decided in 1975 that HMDA would be created. 

HMDA  1.0

The practices of redlining and disinvesting in communities was the first target of HMDA.  The initial idea was to get banks to disclose the total amounts of loans that they made in specific areas.   Congress theorized that redlining would be quickly unmasked as banks would have to show the places where the loans were made.  It would become evident that certain neighborhoods were getting no loans.    The problem here was that the Banks did not have to show individual loans; only the total amount of loans in a given census tract.  Financial institutions did not have to show the individual loans, and as a result, a few loans strategically placed could give the impression of strong community service when this was not that case at all.  For example, one  million dollar loan to a business in the census tract could give the impression that a bank was investing  this in the community.   Ultimately, HMDA proved to be ineffective in addressing redlining. 

HMDA 2.0

Starting in the late 1970’s the mortgage industry experienced significant change.  Banks and Savings & Loans that had dominated the market began to experience competition.  Finance companies, mortgage bankers and other financial institutions began to enter the market.  These lenders were aggressive and as a result many of the redlining and disinvestment practices that had been in place were simply overrun by the demand for more and more mortgages. 

However, this did not end the need for disclosure of lending information.   The experiences of women and minorities in getting mortgages was still less than satisfactory.  The focus of regulatory agencies changed from redlining to the lending practices of individual institutions.  By collecting information about the experience of borrowers at individual institutions, the regulatory agencies theorized that  valuable information could be gleaned about how people in protected classes were being treated.  

HMDA was amended after that as more than just banks were providing mortgage funding.   In the  late 1980s, HMDA was amended and the information that all lenders had to collect was enlarged to include  racial, ethnic, and gender information, as well as income for each applicant, and reflected both rejected and accepted applications for loans that did not close. ^[1]

HMDA 3.0

The mortgage industry continued to grow and change and as it did, the types of mortgages being offered also changed.  By the turn of the century, the questions wasn’t  about people in protected classes being denied credit.  Instead, it was more the type of credit being offered.  In the early part of the decade the number of adjustable rate mortgage ballooned,  Many of these products had “teaser rates” which were significantly below the actual rate that would be paid on the loan.  This decade saw “predatory lending” practices explode.  Predatory lending  is in essence,  the practice of  making loans with complicated  high rates and fees to unsophisticated borrowers.  The unsuspecting borrower believes that he/she is paying a low loan rate when in fact, at the time the loan re[prices, the rate is several times higher.  A huge number of these loans were included in the financial melt down of 2008. 

 

The third iteration of HMDA was then, the result of changed practices by mortgage lenders.  In early 2000 the issue was no longer discrimination in approvals or denials, but in pricing (predatory lending) .  HMDA was again amended to add the information about pricing and lien status.   In an effort to improve the quality of HMDA data, the revised regulation also tightened the definitions of different types of loans and required the collection of racial and ethnic monitoring information in telephone applications

So What do They Do With the information? 

When the information is collected by the regulators, it is actually used by many different agencies for various purposes.  Community advocacy groups use the information to bolster arguments about various issues they wish to emphasize.  The government uses the information for economic studies and as a basis for amending regulations and laws.  HMDA information has been at the heart of many studies about lending discrimination.  Many argue that the information collected by HMDA doesn’t tell the full story of whether or not a borrower suffered discrimination.  It does however, raise a threshold issue and it is often the case that HMDA is used to determine whether further study is indicated. 

The HMDA LAR is used to create the database  that is used by all of these agencies and for all of these studies.   This is why the examiners are so fussy about getting those entries correct!

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[1]

 The Home Mortgage Disclosure Act: Its History, Evolution, and Limitations†

By: Joseph M. Kolar and Jonathan D. Jerison

The Case for Complex Training

While the BSA/AML regulations are the only ones that directly mandate training courses annually, it is common knowledge that banks are expected to have and maintain compliance training programs. And in point of fact, every bank that we come across does have some sort of training program.  Most of these programs take the form on on-line training.  Online courses are for the most part accepted as the most cost efficient way to conduct training for staff.  We would like to suggest that in the case of training, cost efficiency may not ultimately be the most important consideration.

The compliance handbooks of all the regulatory agencies discuss the elements of a strong compliance program.  These elements include the following:

• Policies & procedures
• Internal controls
• Management reporting
• Training

Although the handbook does not specifically say it, the fact that training is listed as one of the “pillars” of the compliance program suggests that it is at least as important as the other pillars.  And yet, for reasons that are lost in tradition and some mystery, this area often is not treated as an important part of compliance.   

Most compliance programs at community banks consist of online training programs that allow participants the ability to take tests multiple times until the desired score is achieved.  In point of fact, we all know that the common strategy for the participants is to eschew reading the material, go straight to the test, take it, write down the answers to the questions that they got wrong and then retake the test with answer guide in hand. And while this process will help a bank ensure that everyone has received a passing grade on the training, it does little to increase staff knowledge of regulations. This is not meant to be an indictment of on line training programs at all.  We often recommend many of the online courses that are currently offered.  

Instead, we maintain that a complete compliance training program must have a great deal more.  Consider the nature of compliance regulations. Whether we like to admit it or not compliance regulations have a history of being earned!  For example, Regulation B (The Equal Credit Opportunity Act) was passed to address the fact that women and minorities were being denied equal access to credit.  And the Truth in Lending Act is the result of former banking practices that mislead borrowers about the real costs of the loans they were getting.   Consumer regulations have been designed to address areas that have been proven to cause consumer financial harm

Because consumer regulations are designed to either prevent certain behaviors, collect information on the results of bank practices or to provide complete information through disclosures, a great deal is left open for interpretation.  There are even times when regulations direct that staff must interpret information to the best of their ability (Government Monitoring Information in HMDA).  Often when a regulation is misunderstood, violations of regulation result.   We have come across clients who did not understand that Regulation B applies to ALL lending.  This misinterpretation has lead banks to assume that they did not have to meet the notification requirements of the regulation.  Moreover misunderstandings of the recent rules about QM and the ability to repay rules have lead many banks to arbitrarily decide to cease lending programs out of fear of the regulations will require^[1]

We have found that when management and staff alike are given the opportunity to hear a bit of the history of the regulation it makes a big difference in the overall level of compliance.  Knowing WHY a regulation was enacted goes a long way toward understanding what it is that the regulation is trying to accomplish.  Taking this idea one step further, giving staff information of what it is that the current regulation is trying to accomplish goes a long way toward obtaining positive participation in the compliance effort. 

A quick example; one of our clients was having a very difficult time with compliance with HMDA.  The Bank had suffered repeat violations in this area and the regulators of this bank were threatening enforcement action if improvement was not made immediately.  After we completed our compliance assessment, we noted that one of the biggest problems was being caused by the inaccurate and incomplete information being collected by loan officers.  Upon interviewing the officers we found that there was a general lack of understanding of what HMDA was and why collection of the data is so important.  No one could understand why the regulators were being so strict about the information.  By the way, all of these officers had received passing grades on the Banks online training course. 

We developed a HMDA training course for the lending department.  In the course we spent at least a third of the time describing the history of the regulation and the process that the data undergoes when it is submitted by the bank.  We explained that this data is critical to the studies that are performed by the Federal Reserve and therefore the data has to be as accurate as possible.  By helping the staff see that they were part of something much bigger and that their accuracy really did make a difference we were able to get their “buy in”.  Reporting errors dropped dramatically and the need to pursue enforcement action was extinguished. 

By helping to ensure that staff members understand the specifics of compliance regulations, you can greatly enhance the effectiveness of the program.  Staff who understand what it is that the regulation is trying to can feel empowered.  Whether or not staff members agree with the regulation, understanding it is key.  With the basic understanding of the regulation as a tool, the number of misinterpretations and resulting errors are greatly reduced. 

We suggest that courses on consumer regulations at least annually include information about the history and the legislative intent of the regulation.   Optimally, staff will be given the opportunity to work through case studies during the training session as we have also found that these are very helpful in increasing understanding of the regulation.  

By either taking the time to develop training classes internally or by obtaining classes from an outside vendor, getting comprehensive material for staff is well worth the investment. 

 

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[1] A careful review of the ability to repay rules will reveal to the reader that these rules are recognizable “best practices” for consumer lending.