Strong Compliance Programs Must Focus on Bank-Specific Risks

The Treasury Department  Financial Stability Oversight Council‘s 2017 annual report describes significant financial market and regulatory developments and recommendations to promote U.S. financial stability, noting that regulatory agencies should promote economic growth by preventing financial crises and minimizing regulations that increase costs without commensurate benefits.

This report is relevant to bank management because it underscores an emerging trend among examiners who are focusing on an individual bank’s ability to acknowledge, manage and mitigate their own unique risks as part of a larger strategy that will allow for easing regulations while ensuring stability of the financial system.

“Properly structuring regulation of the U.S. financial system is critical to achieve the administration’s goal of sustained economic growth and to create opportunities for all Americans to benefit from a stronger economy,” said U.S. Treasury Secretary Steven T. Mnuchin. He also expressed a goal of providing regulatory relief to community banks by working with Congress to enact change, including:

  • Raise the enhanced prudential standards (EPS) threshold from $50 billion in assets
  • Raise the threshold for submitting resolution plans from $50 billion in assets to match the revised EPS threshold
  • Raise the Dodd-Frank Act stress test threshold from $10 billion to $50 billion in assets; eliminate mid-year cycle
  • Reform the structure of the CFPB
  • Create a Volcker Rule “off-ramp” for highly capitalized banks; exempt banks with less than $10 billion in assets
  • Assess how the Community Reinvestment Act (CRA) could be improved

When the implementation of reforms will take place, and how extensive they will be, remains to be seen. Nonetheless, amidst the regulatory uncertainty, banks are moving from a post-crisis mode of survival and rebuilding to sustainability. Among other issues and trends, bank leadership should consider the following when determining their risk management policies and procedures:

  • Abrupt Shifts in Markets. Asset markets and stock prices have risen in recent months, despite Fed tightening and global geopolitical volatility. Some  commercial and residential real estate markets have experienced price bubbles, requiring some buyers to finance larger percentages of their purchases. While increased consumer debt may indicate increased consumer confidence, too-high levels worry economists. Examiners expect bank leadership to focus on their unique ability to deal with the downside risks of an abrupt shift in markets.
  • Demographics and Technology. Examiners increasingly challenge boards, risk committees, and senior management to demonstrate they understand the impacts of changing demographics and emerging technologies on their business model and risk profiles, and they are prepared to mitigate those risks when warranted.
  • Data Management and Reporting. Rather than store and manage data independently within each business line, banks should view it as an enterprise-wide asset that is managed from the highest levels. This entails not only a paradigm shift as it relates to information, but also  employee retraining, including streamlined, automatic reporting processes, and significant investment in systems and infrastructure to integrate data and overcome patchwork legacy systems. Data should be effectively utilized across many areas to drive strategic decisions and guide tactical efforts for sustainability.

Click here to read to U.S. Treasury Department Report. 

Final HMDA Regulation C

The CFPB finalized Regulation C on January 1, 2018, directing financial institutions on how they must collect and report data related to home loans. HMDA requires banks to annually disclose data about real estate loans for which they receive an application, originate or purchase. Data must also be reported for loan requests under a preapproval program if the preapproval request is denied, approved but not accepted by the applicant, or results in the origination of home purchase loan. The CFPB instituted this regulation in an effort to ensure a bank is serving the housing needs of its community, to assist in attracting private investment in areas where it is needed, and to assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination laws.

Specifically, data to be collected on a loan application register includes (among other data points):

  • Universal Loan Identifier
  • Application date
  • Purpose of loan – home purchase, home improvement, loan refinancing or cash out, or another purpose
  • If the loan involved a pre-approval request or not
  • Whether the construction of the property is site-built or manufactured off site
  • How the property will be used – principal residence, vacation home, or investment property
  • Amount of loan/amount applied for
  • Ethnicity, race, sex, age of applicant and how that information was collected (visual observation or surname)
  • Principal reason for loan denial
  • Interest rate for the approved application
  • Ratio of the applicant's or borrower's total monthly debt to the total monthly income relied on in making the credit decision (except for purchased covered loans)
  • Ratio of the total amount of debt secured by the property to the value of the property relied on in making the credit decision (except for purchased covered loans)
  • Loan terms months
  • Contractual terms such as balloon payment, interest only payments, and negative amortization loan

Banks are required to send a completed loan/application register to the CFPB by March 1 following the calendar year for which the loan data are compiled.

Click here for CFPB information and instructions on reporting requirements.

Click here for guidance on how the FDIC will assess HMDA compliance. 

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