Proposed new ratings for compliance- Is this a Brave New World? 

A Two Part Series.  Part Two – Change Creates Opportunity. 

 

In April of 2016, the FFIEC released proposed new guidelines for rating compliance programs at financial institutions.    Once these new guidelines are adopted, not only will they represent a strong departure from the current system for rating, they also present a strong opportunity for financial institutions to greatly impact their own compliance destiny.   Although these new guidelines have been released with limited fanfare, the change in approach to supervision of financial institutions has been discussed for some time and is noteworthy.   

 

The Proposed New Rating System 

The new rating system is designed to focus on the Compliance Management System (“CMS”) that an institution has established to administrate its compliance effort.  This assessment is supposed to be risk based which means that for each institution, the CMS should be unique.  The size, complexity and risk profile of an institution should dictate the structure of the CMS.  

The compliance ratings will focus on three specific areas

1)      Board Oversight

2)      The Compliance Program

3)      Violations of Law and Consumer harm  

The guidance notes that a part or all of the CMS can be outsourced to third party providers with the caveat that the financial institution cannot outsource the responsibility for compliance.  In other words, the financial institution will be held accountable for the failures of its third party provider.    For each of these areas, there are specific considerations that the examination team will consider.  The guidance describes the factors that should be considered by the examination team for each of the factors:

Board Oversight:   

The areas that will be evaluated for Board Oversight are listed below.   A review of these factors indicates that the examiners will be asked to focus on the compliance environment.  The overall level of importance assigned to compliance will be considered as part of the consideration of the management of the institution.   This is consistent with the growing focus placed by prudential regulators on the management component of compliance.   

•         Oversight of and commitment to the institution's compliance risk management program;

•         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

•         any corrective action undertaken as consumer compliance issues are identified.

Compliance Management System

The factors listed for the compliance management system are familiar and include the following:  

1.     Whether the institution's policies and procedures are appropriate to the risk in the products, services, and activities of the institution

2.     The degree to which compliance training is current and tailored to risk and staff responsibilities

3.     The sufficiency of the monitoring and, if applicable, audit to encompass compliance risks throughout the institution;

4.     The responsiveness and effectiveness of the consumer complaint resolution process.

These factors will allow the examination team the ability to look at a system for compliance in context of the institutions.  Since each institution is unique, the system for compliance should be reviewed in light of the overall operation of an individual financial institution.     

Violations of Law and Consumer Harm

The final area of consideration is where the “rubber meets the road” for compliance programs.  Ultimately, the goal of compliance programs has to be to mitigate against the possibility of compliance violations.  As part of evaluating compliance programs the examiners have to consider the following: 

1.       The root cause, or causes, of any violations of law identified during the examination

2.       The severity of any consumer harm resulting from violations

3.       The duration of time over which the violations occurred

4.       The pervasiveness of the violations.

The examiners will clearly be allowed to make distinctions between technical violations that don’t cause a great deal of consumer harm form severe and substantive violations.  For example, the failure to provide notice of property in a flood zone when a loan is modified is not likely to cause great consumer harm.  More often than not when this transaction occurs, the borrower has already purchased flood insurance and the notice is a technicality.   This is the sort of violation in the past lead to difficulties in providing a clear rating of a compliance program. 

Opportunities Provided by These Changes

The new compliance rating represents significant changes in the ability of banks to alter their compliance destiny.   The emphasis on self- detection and self-policing allows financial institutions to perform self-evaluation and diagnose compliance issues internally.   

In the new rating system, there is a premium placed on the idea that an institution has compliance and/or audit systems in place that are extensive enough to find problems, determine the root of the problems and make recommendations for change.  An attitude that compliance is important must permeate the organization starting from the top.  To impress the regulators that an organization is truly engaged in self-policing, there has to be evidence that senior management has taken the issue seriously and has taken steps to address whatever the concern might be.  For example, suppose during a compliance review, the compliance team discovers that commercial lenders are not consistently given a proper ECOA notification.  This finding is reported to the Compliance Committee along with a recommendation for training for commercial lending staff.   The Compliance Committee accepts the recommendation and tells the Compliance Officer to schedule Reg. B training for commercial lenders.  This may seem like a reasonable response, but it is incomplete.

This does not rise to the level of self- policing that is discussed in the CFPB memo; a further step is necessary.  What is the follow-up from senior management?   Will senior management follow up to make sure that the classes have been attended by all commercial lending staff?  Will there be consequences for those who do not attend the classes?  The answers to these questions will greatly impact the determination of whether there is self-policing that is effective.   Ultimately, the goal should be to show that the effort at self-policing for compliance is robust and taken seriously at all levels of management.  The more the regulators trust the self-policing effort, the more the risk profile decreases and the less likely enforcement action will be imposed.

Self-Reporting

At first blush self-reporting seems a lot like punching oneself in the face, but this is not the case at all!   The over-arching idea from the CFPB guidance is that the more the institution is willing to work with the regulatory agency, the more likely that there will be consideration for reduced enforcement action.  Compliance failures will eventually be discovered and the more they are self-discovered and reported, the more trust that the regulators have in the management in general and the effectiveness of the compliance program in particular.   The key here is to report at the right time.  Once the extent of the violation and the cause of it have been determined, the time to report is imminent.  While it may seem that the best time to report is when the issue is resolved, this will generally not be the case.  In point of fact, the regulators may want to be involved in the correction process.  In any event, you don’t want to wait until it seems that discovery of the problem was imminent (e.g. the regulatory examination will start next week!).

It is important to remember here that the reporting should be complete and as early as possible keeping in mind that you should know the extent and the root cause of the problem.  It is also advisable to have a strategy for remediation in place at the time of reporting.

Remediation

What will the institution do to correct the problem?  Has there been research to determine the extent of the problem and how many potential customers have been affected?      How did management make sure the problem has been stopped and won’t be repeated?  What practices, policies and procedures have been changed as a result of the discovery of the problem?  These are all questions that the regulators will consider when reviewing efforts at remediation.  So for example, if it turns out that loan staff has been improperly disclosing transfer taxes on the GFE, an example of strong mediation would include:

• A determination if the problem was systemic or with a particular staff member
• A “look back” on loan files that for the past 12 months
• Reimbursement of any customers who qualify
• Documentation of the steps that were taken to verify the problem and the reimbursements
• Documentation of the changed policies and procedures to ensure that there is a clear understanding of the requirements of the regulation
• Disciplinary action (if appropriate for affected employees)
• A plan for follow-up to ensure that the problem is not re-occurring

 

The new compliance rating systems will place a strong premium on self-policing.  There is no time like the present to institution procedures that emphasize self-policing and embrace the overall concept of compliance as a core value. 

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Proposed new ratings for compliance- Is this a Brave New World?



A Two Part Series.  Part One- Change is on the Horizon. 

In April of 2016, the FFIEC released proposed new guidelines for rating compliance programs at financial institutions.    Once these new guidelines are adopted, not only will they represent a strong departure from the current system for rating, they also present a strong opportunity for financial institutions to greatly impact their own compliance destiny.   Although these new guidelines have been released with limited fanfare, the change in approach to supervision of financial institutions has been discussed for some time and is noteworthy.   

 

The Current Rating System 

The current system for rating compliance at financial institutions was first adopted in 1980.   Performance of an institution under the Community Reinvestment Act is evaluated separately and is therefore not considered as part of the compliance examination.  Under the current system, compliance is rated on a scale of increasing concern from one to five.  An institution with a rating of one has little to no compliance concerns while a five rated institutions has severe concerns and an inoperative compliance system.   

Under the current system, the ratings that examiners assign are based upon transaction testing.  Examiners would sample a series of transactions and if there were violations of regulations, ratings would be affected.  Over the years, several problems were noted with this approach.  First, this approach does not take into account the root of the problem.  For example, suppose the problem was caused by a form that was not up to date.  Suppose further that the problem with the form was it had the wrong address for the regulator of the institution.   Using the transaction approach each loan file that contained this disclosure would count as a regulatory violation and the institution would appear to have huge number of violations.  In this case, even if the examiners determined this was a technical violation and not serious, the possibility existed the overall rating would have to be a bad one to reflect the number of violations noted. 

However, what if in this case, the compliance staff was well aware of the changed address, had performed training and endeavored to change all of the required forms.  Unfortunately, one branch or division of the Bank still had old forms and was still using them.  It is of course not good that the old forms were still being used, but the finding certainly does not indicate a severe risk at the institution. 

A second problem with the current guidelines is that they do not clearly match the risk based approach for examinations that regulators have employed for several years.  Each regulator has received the mandate that examinations should be tailored using a risk based approach.  The examination should focus on the size, complexity and overall risk portfolio of a financial institution.  The compliance examination is supposed to evaluate the effectiveness of overall system that has been employed at an institution.   In that regard, each financial institution is unique in the products and services that they offer.  For example, a community bank that makes five HMDA reportable loans a year doesn’t have the same compliance needs as an institution that makes five hundred HMDA loans in the same time.  

Yet another concern with the current rating system is that it tends to be “one size fits all” and as a result, outcomes are unpredictable.   Examiners, for some time have considered compliance systems on a contextual basis.  The relative size of an institution, its activity in a given area and the resources  realistically available have all been factors examiners consider when assessing a compliance program.  Unfortunately, under the current system there is no mechanism to clearly reflect these considerations.   In many cases, an overall rating of “two” is assigned to a financial institution followed by a litany of criticism that leaves the reader confused about how the rating was possible. 

In the last two years in particular, there has been a push from regulators to encourage “self-policing”, which is the process of self-detecting and correcting compliance problems at institutions.  And while there have been supervisory directives that encourage self-policing, the current rating system does not allow this behavior to be properly recognized.  

 

New Ratings

The proposed guidance discusses the key principals of the new ratings system: 

 

“The proposed System is based on a set of key principles. The Agencies agreed that the

proposed ratings should be:

·         Risk-based

·         Transparent

·         Actionable

·         [A]n Incentive for Compliance.

 

Risk Based: the principal here is that not all compliance systems are the same.  They will vary based upon the size, complexity and risk profile of the bank.  The examiners will be asked to evaluate the compliance system as it relates to the particular institution that is being reviewed.  For example, written procedures that are very general in nature may be appropriate at an institution that has stable staff that has and experienced little to no turnover.  On the other hand, those same procedures may be inadequate at a new and growing institution.  

Transparent: The scope of the review and the categories that are being considered should be clear and published.  Each institution should be able to understand that the rating is based on specific considerations made during the current examination.  Past examinations results may or may not be considered; the description of the rating criteria should detail the factors that were deemed important.  

Actionable:  The evaluation should include recommendations that address the overall strengths of the compliance program and specific areas that should be enhanced.   The idea here is that management’s attention should be drawn to specific steps that should be taken to enhance the overall compliance program. 

Incent Compliance: The examiners should consider the level to which the institution has instituted a program that self-detects and corrects problems.   In this case, remember self-detecting and correcting includes an analysis of the root of the problem and remediation testing before the matter is considered closed. 

 

Overall Ratings

Under the new rating system, there will still be a “one” through “five”, but the ratings will be given on three distinct components of compliance;

1.       Board & management Oversight

2.       The Compliance management program

3.       Violations of law and Harm to consumers

In part two of this series we will discuss the new ratings and the opportunities this system presents.  

Using Self-Policing to Create Better Compliance Outcomes

Imagine the following scenario: you are the compliance officer and while doing a routine check on disclosures, you notice a huge error that your institution has been making for the last year.  The beads of sweat form on your forehead as you realize that this mistake may impact several hundred customers.   Real panic sets in as you start to wonder what to do about the regulators.  To tell or not to tell, that is indeed the question! 

There are many different theories on what to do when your internal processes discover a problem.  Although it may seem counterintuitive, the best practice, with certain caveats, is to inform the regulators of the problem.    CFBP Bulletin 2013-06 discusses what it calls “responsible business conduct” and details the grounds for getting enforcement consideration from the CFPB.  In this case, consideration is somewhat vague and it clearly depends on the nature and extent of the violation, but the message is clear.  It is far better to self-police and self-report than it is to let the examination team discover a problem!    

Why Disclose a Problem if the Regulators Didn’t Discover it?  

It is easy to make the case that financial institutions should “let sleeping dogs lay”.  After all, if your internal processes have found the issue, you can correct it without the examiners knowing, and move on. Right?  In fact, nothing could be further from the truth.   The relationship between regulators and the banks they regulate was once collegial, but that is most certainly not the case any longer.   Regulators have been pushed by legislation and by public outcry to be proactive in their efforts to regulate.  Part of the process of rehabilitating the image of financial institutions is ensuring that they are being well regulated and that misbehavior in compliance is being addressed. 

Self- Policing

It is not enough to discover one’s own problems and address them.  In the current environment, there is a premium placed on the idea that an institution has compliance and/or audit systems in place that are extensive enough to find problems, determine the root of the problems and make recommendations for change.  An attitude that compliance is important must permeate the organization starting from the top.  To impress the regulators that an organization is truly engaged in self-policing, there has to be evidence that senior management has taken the issue seriously and has taken steps to address whatever the concern might be.  For example, suppose during a compliance review, the compliance team discovers that commercial lenders are not consistently given a proper ECOA notification.  This finding is reported to the Compliance Committee along with a recommendation for training for commercial lending staff.   The Compliance Committee accepts the recommendation and tells the Compliance Officer to schedule Reg. B training for commercial lenders.  This may seem like a reasonable response, but it is incomplete.  

This does not rise to the level of self- policing that is discussed in the CFPB memo; a further step is necessary.  What is the follow-up from senior management?   Will senior management follow up to make sure that the classes have been attended by all commercial lending staff?  Will there be consequences for those who do not attend the classes?  The answers to these questions will greatly impact the determination of whether there is self-policing that is effective.   Ultimately, the goal should be to show that the effort at self-policing for compliance is robust and taken seriously at all levels of management.  The more the regulators trust the self-policing effort, the more the risk profile decreases and the less likely enforcement action will be imposed. 

Self-Reporting

At first blush self-reporting seems a lot like punching oneself in the face, but this is not the case at all!   The over-arching idea from the CFPB guidance is that the more the institution is willing to work with the regulatory agency, the more likely that there will be consideration for reduced enforcement action.  Compliance failures will eventually be discovered and the more they are self-discovered and reported, the more trust that the regulators have in the management in general and the effectiveness of the compliance program in particular.   The key here is to report at the right time.  Once the extent of the violation and the cause of it have been determined, the time to report is imminent.  While it may seem that the best time to report is when the issue is resolved, this will generally not be the case.  In point of fact, the regulators may want to be involved in the correction process.  In any event, you don’t want to wait until it seems that discovery of the problem was imminent (e.g. the regulatory examination will start next week!).

It is important to remember here that the reporting should be complete and as early as possible keeping in mind that you should know the extent and the root cause of the problem.  It is also advisable to have a strategy for remediation in place at the time of reporting. 

Remediation

What will the institution do to correct the problem?  Has there been research to determine the extent of the problem and how many potential customers have been affected?      How did management make sure that whatever the problem is has been stopped and won’t be repeated?  What practices, policies and procedures have been changed as a result of the discovery of the problem?  These are all questions that the regulators will consider when reviewing efforts at remediation.  So for example, if it turns out that loan staff has been improperly disclosing transfer taxes on the GFE, an example of strong mediation would include:

• A determination if the problem was systemic or with a particular staff member
• A “look back” on loan files that for the past 12 months
• Reimbursement of any all customers who qualify
• Documentation of the steps that were taken to verify the problem and the reimbursements
• Documentation of the changed policies and procedures to ensure that there is a clear understanding of the requirements of the regulation
• Disciplinary action (if appropriate for affected employees)
• A plan for follow-up to ensure that the problem is not re-occurring

Cooperation

Despite the very best effort at self-reporting and mediation, there may still be an investigation by the regulators.  Such an instance calls for cooperation not hunkering down.  The more your institution is forthcoming with the information about its investigation, the more likely that the regulators will determine that there is nothing more for them to do. 

At the end of the day, it is always better to self-detect report and remediate.  In doing so you go a long way toward controlling your destiny and reducing punishment.

Community Outreach- Why Bother? 

One of the many requirements of the Community Reinvestment Act (“CRA”) is that all financial institutions that are subject to it make an effort to do outreach to the community.  There are similar requirements in both state and federal fair lending laws.   We believe that the need to do community outreach goes far beyond the regulatory requirements of fair lending and the CRA. 

Re-Visiting Your Approach to the CRA- Embracing the Needs of Your Community

Since its inception, the Community Reinvestment Act (“CRA”) has received a great deal of attention. From consumer’s advocacy groups, the reception of the CRA has been positive, while many in the banking community are either ambivalent or downright hostile towards this legislation. During the financial crisis of 2008, the CRA enjoyed a special, albeit unfair place of contempt from those who insisted that compliance with the CRA was somehow at the root of the financial meltdown. But wait, what if the CRA had nothing to do with the financial crisis? What if instead of being an administrative burden, compliance with the CRA resulted in greater marketing opportunities and greater opportunities for overall profitability? These opportunities exist if you embrace the concept of outreach to your community. 

When the CRA was first enacted, it was designed to get financial institutions to take a second look at communities that had been historically overlooked for credit by financial institutions. Though these communities tended to be populated with low to moderate income borrowers, these borrowers represent significant opportunities for good credit. The CRA was a means to an end to get banks and financial institutions to “meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations” [1]  

Over the years, even though billions of dollars of investments have been made in communities that were being overlooked[2]http://www.blogger.com/blogger.g?blogID=3530472396892716457, the reputation of the CRA has become one of the regulation that forces banks to make “bad loans”. However, the true emphasis of the regulation has been and always will be to encourage banks to assess the credit needs of the communities they serve. In other words, one of the main goals of the regulations was to get banks to find credit “diamonds in the rough” in areas that had traditionally been written off. , the reputation of the CRA has become one of the regulations that forces banks to make “bad loans”. However, the true emphasis of the regulation is to encourage banks to assess the credit needs of the communities they serve. In other words, one of the main goals of the regulations was to get banks to find credit “diamonds in the rough” in areas that had traditionally been written off.

The strategy of serving communities that have been overlooked has been successfully and very profitably employed by none other than hall of fame basketball star Earvin “Magic” Johnson. His Magic John Enterprises has partnered with all manner of fortune 500 companies to invest over $500 million in communities that had been overlooked.  Using the approach of finding the “diamonds in the rough” Johnson’s companies continue to grow and show amazing profits by investing in low to moderate income communities.  So how does he find these opportunities? “Magic Johnson Enterprises is known for successfully staying rooted in communities because they understand those communities’ unique needs and personalities”[3]  In other words, he knows the needs of his communities and provides services that meet those needs.

Why Should a Bank Market to the Entire Community?

The obvious answer to this question is that failure to market to the whole community may result in a violation of CRA or Fair Lending.  The exclusion of one or more protected groups from marketing efforts can easily be interpreted as a form of “redlining” or discouragement, both of which would be seriously regulatory compliance problems.   

The less obvious answer is that by including the entire community of your field of customers, the Bank can become a significant part of the community.  Community banks are an indispensable part of any community. Though it may not seem this way, the trend is that the regulatory agencies are beginning to recognize that community banks are an indispensable part of small communities and should be treated that way. [4] [4] The more that the bank can show that it is truly serving the needs of its community, the stronger the argument becomes that it is indispensable.  An indispensable bank is one that communities will fight for in times of trouble. Moreover, regulators are more likely to give assistance to true community banks

Product Development Anyone? 

One of the best ways to determine whether your institution is offering products that people actually want is to ask.  Getting out into the community and talking to customers allows senior management to get to know what mobile phone and computer applications people are using so that when the time comes to invest in new technology, the money can be well spent.  

Can you Say KYC?  

The heart and soul of a strong BSA/AML compliance program is the ability of the staff at a financial institution to know its customers and their individual business plans.  By reaching out to the community it is possible to obtain feedback on how some of your customers are doing.  Suppose it turns out that one of your biggest customers has a terrible reputation in the community; especially one for charging high fees for cashing checks.  This could be particularly upsetting if you were unaware that they were cashing checks at all.  

Untapped Resources

Community outreach allows the senior management of your institution to discover potential new and diverse staff members.  There are many small private programs that are designed to train young people for business and these programs can be a strong source of future management candidates. 

Just What IS Your Entire Community?

The first step in the process is to make a determination of just who is part of the entire community that that your bank serves!  When was the last time that you performed an assessment of the communities that make up your assessment area? There is a wealth of information available about the makeup of people who live in your assessment area.  For example, the US Census Bureau publishes information about the households in the tracts in your assessment area.  The information includes statistics on the median income, age and races on the people in your area.  There is also information on minority and business ownership that is available by county and MSA.  The FFIEC website has a link to the Census Bureau. [5]  Another good source of data are reports prepared by county and state Chambers of Commerce. In addition to public sources of information, there are several services that provide economic data about the economic status of counties and communities[6]. However, it should be noted that these services tend to be expensive.

A much better source of information is personal contact with community groups in your area. Not all community organizers are anti-banks! In point of fact, many are doing all they can to get their clients actively involved in the banking community and away from the clutches of ‘’payday’’ lenders.

The goal here is to develop as much information as possible about just who your community is and how they fit into your business plan.  Oftentimes, this process results in discovering new and heretofore untapped opportunities. One of the main thrusts of CRA that often goes unmentioned is the push to get banks to find lending opportunities that would go completely unnoticed if not for requirements of the regulation.   Remember, CRA specifically states that the intention is not to get banks to make bad loans, just loans that would otherwise be overlooked.[7]

Marketing to Your Entire Community

One of the key elements in the overall commercial success of a bank is its ability to market itself to its community.  It is through marketing that the bank lets their communities know that it is around and that it is open for business.   Putting a marketing plan together can sometimes be a daunting task indeed.  This is especially true in the current cost conscious environment.  As you put you marketing plans together we suggest that there are two other areas to consider-both Fair Lending and the Community Reinvestment Act.  Your banks’ overall effort at compliance in these two areas can be either greatly enhanced or harmed by the marketing that is done.   We suggest that marketing should always be directed at the client’s entire community.  Failure to include all potential customers in marketing can result in both missed opportunities and the potential for CRA and Fair Lending issues.

 

 

 How to Market

Today there are so many different venues for advertising that provide for effective low cost communication with customers that the bank opportunities are limitless. Social media has become a staple of the advertising for many banks. Good old fashion newspaper advertising works for others.  The idea is to make sure that you strive for inclusion and meet people where they are.  Do people speak different foreign languages in your assessment area? Make sure that you reach out to them in publications aimed at serving these communities. 

 

In the end, comprehensive marketing programs serve both compliance and the bottom line.

---

[1] Don't Blame Subprime Mortgage Crisis or Financial Meltdown on CRA  Stable Communities.com 2008

[2] See The Community Reinvestment Act: 30 Years of Wealth   Building and What We Must Do to Finish the Job John Taylor and Josh Silver National Community Reinvestment Coalition

[3] Magic Johnson Enterprises Helps Major Corporations Better Serve the Multicultural Consumer  Business Wire 2008

 

[4] See Oklahoma Bankers association update June 3, 20123; 2011 Speech by  Ben Bernanke to federal Reserve Board

 

[5] http://www.ffiec.gov/; http://www.econdata.net/content_datacollect.html

[6] Dun& Bradstreet provides one such service

[7] The Community Reinvestment Act of 1977 instructs federal financial supervisory agencies to encourage their regulated financial institutions to help meet credit needs of the communities in which they are chartered while also conforming to “safe and sound” lending standards.

 

 

 

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 is now an entirely different agency that regulates banks.  Right now, most are unsure just how the Consumer Financial Protection Bureau (“CFPB”) will affect the banks it does not primarily regulate.   However, it is a good bet that much of what is done by the CFPB 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 financial institutions to the very idea of compliance.  Even institutions with good compliance records often tend to do only that which is required by the regulation.  In many cases, they do the minimum for the sole purpose of staying in compliance and not necessarily because 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 an institution. 

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. What should be 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 may help to convince a skeptic. 

1)      Compliance regulations have been earned by the financial industry.  A quick review of the history of the most well-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 from hurting the public. 

2)      Compliance will not go away!  Even though there have been changes to the primary regulations, there has been no credible movement to do away with them. Banking is such an important part of our economy that it 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 banking as the need for deposit insurance.  Since compliance is and will be, a fact of banking 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 from compliance examinations that require “look backs” into past transactions and reimbursement to customers who were harmed by a particular practice is an extremely expensive experience.  The costs for such actions 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 help prevent these costs from being incurred and protect the institution’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 institutions 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, additional risk is added without being aware of how the additional risk can be mitigated.   When compliance is considered in the strategic plan, 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 institution wants it to make all the money that it possibly can while staying in compliance 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 there are 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 powerful arguments about how compliance can become a key component in your relationship with the regulators. 

First, the prudential regulators have made it clear that they intend the review of the compliance management program to directly impact the overall “M” rating within the CAMEL ratings.   The thought behind evaluating the compliance management program as part of the management rating is that it is 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 is so that institutions can more fully address the highest areas of concern.  By “addressing”, 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 getting flood insurance, 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 responses?  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, the compliance conversation can enhance the overall relationship between your institution and your regulator.