The regulatory compliance environment for financial institutions is becoming increasingly complex, demanding meticulous attention from internal audit and compliance teams. Here, we delve into five pivotal challenges shaping the industry’s compliance agenda today:
Addressing Representment and NSF Fees
One key compliance challenge that financial institutions should be considering at this time is the handling of fees related to representments, specifically non-sufficient funds (NSF) fees.
A representment occurs if a check is presented to the bank and the item is returned for insufficient funds, and then that same check is “re-presented” for deposit and still has insufficient funds. This can lead to multiple representment fees being charged to consumers, despite the fact that the insufficient funds cause was out of their control.
Due to this, there have even been class action lawsuits. In response, the FDIC released new guidance in 2022, with updates in June 2023, to ensure that financial institutions clearly disclose these fees and avoid charging excessive fees for items represented multiple times.
What Should You Be Doing?
- Review and Update Disclosures and Fee Schedules: Conduct a comprehensive review of your current disclosures and fee schedules to ensure they are clear, accurate, and up to date.
- Evaluate Fee Structures: Consider eliminating representment fees altogether or, at the very least, limit the number of times these fees can be charged, based on your system’s capabilities.
- Ensure System Compliance: Verify that your core banking system is accurately implementing your fee policies in accordance with your updated disclosures.
Ensuring Fair Lending
Fair lending continues to be a significant area of regulatory scrutiny, with targeted exams emerging from both state and federal banking regulatory agencies. These examinations aim to ensure that financial institutions maintain robust fair lending practices and are not engaging in discriminatory behaviors.
Particularly for financial institutions involved in indirect lending, such as auto lending, but spanning all loan types, the emphasis on fair lending is critical. Regulators are focusing on areas such as appraisal bias, where appraisers might unfairly influence property values. This bias can manifest in two ways: undervaluing properties in certain areas to restrict lending, or overvaluing properties to increase lending availability for specific consumers. Both practices can have detrimental effects on communities and individuals.
What Should You Be Doing?
- Establish Strong Policies and Procedures: Ensure comprehensive policies and procedures are in place to prevent any discriminatory practices.
- Conduct Robust Internal Reviews: Regularly review lending practices and consider hiring third-party experts to assist in compliance, especially if your institution has an indirect lending portfolio.
- Implement Rigorous Appraisal Review Practices: Develop thorough appraisal review processes that include checks for biases, integrating these practices into your regular checklists and protocols.
Use of AI Technology and Privacy Concerns
Many financial institutions have been exploring the use of AI technology for several years, integrating it into various chat services, automated phone systems, and more. However, as the use of AI by employees becomes more widespread, it introduces new risks, particularly concerning privacy and data security. Ensuring that robust policies and procedures are in place is crucial to mitigate these risks.
Employees must be clearly instructed on what information can and cannot be entered into open AI software, such as customer information and account numbers. Additionally, similar precautions must be taken when financial institutions use AI to carry out functions for customers, ensuring data security and compliance with privacy regulations.
What Should You Be Doing?
- Establish Comprehensive Policies and Procedures: Develop and implement clear guidelines for AI usage, specifically detailing what type of information employees can input into AI systems.
- Conduct Proper Due Diligence: If your institution is using AI for customer interfacing or handling customer data, ensure rigorous due diligence to secure data and protect privacy. Assess how data is stored, processed, and protected within AI systems.
Adjustable-Rate Loan Compliance
Adjustable-rate loans (ARMs) are experiencing a resurgence in popularity due to rising interest rates and market fluctuations. However, these loans pose significant compliance challenges, particularly concerning TILA-RESPA Integrated Disclosures (TRID) and other ARM-related disclosures. The complexity increases further when adjustable-rate features are combined with construction or renovation loans.
What Should You Be Doing?
- Prioritize Staff Training: Given the high turnover in the industry over the past few years, many employees may lack experience with ARMs. Comprehensive training is essential to ensure staff are well-versed in the intricacies of these loans.
- Ensure Accurate Disclosures: Regularly review all disclosures related to ARMs for accuracy and compliance. This is especially critical when dealing with construction or renovation loans that have adjustable-rate features.
Asset Liability Management & Interest Rate Risk
Recent bank failures and interest rate fluctuations have intensified the focus on Asset Liability Management (ALM) and Interest Rate Risk (IRR) management. Although the foundational guidance in these areas remains unchanged, an addendum to the original Liquidity Risk Management Guidance has been issued, emphasizing the importance of contingency funding.
If you are interested in learning more about Liquidity Risk Management, please check out our recent article: “Examining Liquidity Management Before and After the March 2023 Bank Failures.”
What Should You Be Doing?
- Strengthen Liquidity Monitoring: Implement robust monitoring systems for liquidity management to ensure real-time tracking and response capabilities.
- Customize Your Models: Regularly update your ALM models to reflect institution-specific characteristics and risks. This customization helps in accurately assessing and managing your institution’s unique risk profile.
- Regularly Update Stress Testing and Rate Shock Scenarios: Ensure that your stress testing and rate shock scenarios are frequently updated to reflect current market conditions and potential future risks. This proactive approach allows for better preparedness and resilience.
Addressing the multifaceted challenges in financial institution compliance is crucial for mitigating risks and maintaining regulatory adherence. To navigate these challenges effectively, financial institutions should connect with a trusted advisor to stay ahead of regulatory changes, strengthen operational resilience, and enhance overall compliance efforts in an evolving financial landscape.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
