Reg reform hasn't translated into relaxed enforcement

Banks may have secured some regulatory relief, but they still have to worry about enforcement actions.

Lawmakers and regulators have eased up in several areas, including qualified mortgages, exam schedules, call reports and reciprocal deposits. The threshold for becoming a systemically important financial institution was raised, and pending legislation would reduce the reporting burden for suspicious activity reports.

Though welcome news for bankers, the reality is that regulators will remain diligent in their oversight of areas such as fair lending, money laundering compliance and the Community Reinvestment Act, industry experts said.

Many hot-button issues remain for regulators to enforce, said Pam Perdue, chief regulatory officer at Continuity, a consulting firm. “My advice to bankers: Don’t take your eye off the ball when it comes to regulations you know are already there.”

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There was a 63% increase in net new enforcement actions in the second quarter from a year earlier, at 116, based on data compiled by Continuity. Nearly 40% of new actions were taken against banks with more than $50 billion in assets.

Recent reform of the Dodd-Frank Act doesn’t necessarily mean banks will see drastic changes, said Peter Dugas, a managing principal at Capco’s Center of Regulatory Intelligence. Rather, the main difference could be in regulators' interpretation and approach to compliance issues.

In fact, the changes mean extra work in the short term for bankers because they will need to update every business process affected by the reform, Perdue said. Bankers should identify how risk exposures have changed and establish policies and procedures to reflect new standards. After that, management must revise or develop training, operating, and audit procedures to reflect the new normal.

It could take time before recent reforms reduce work loads, Perdue said. “There’s a long delay and a flurry of activity before changes manifested in Washington take hold inside a financial institution.”

Still, there is optimism among bankers.

Regulators will likely be more sophisticated with future examinations, said Ciaran McMullan, CEO of Suncrest Bank in Visalia, Calif. McMullan said he expects more remote examinations and increased use of technology to share and review bank data. He also expects exams to become more tailored to specific risks for individual banks.

Suncrest has an internal compliance group to monitor new and upcoming regulation, McMullan said. At the beginning of each year, the group establishes a job-specific training curriculum to test each employee’s understanding of relevant regulations. Tests are administered at regular intervals during the year; questions are updated for any change to existing regulations or the introduction of new guidelines.

The $883 million-asset bank also works with several outside companies that audit the effectiveness of its compliance management program. Findings and recommendations are reported directly to the board’s audit committee for revisions and improvements.

Such efforts should “improve the level of oversight while … decreasing the level of burden on the bank,” McMullan said.

Unless legislators make more changes, regulators will remain strict in overseeing anti-money laundering and CRA issues because violations in those areas are very “clear-cut, easy to spot, and easy to report,” Perdue said.

“There is still a heavy reliance on the good, old ‘tried and true,’” Perdue said. “In an era of uncertainty, regulators fall back on the examination areas they are most familiar with.”

Regulators are also apt to monitor issues that are not directly associated with specific laws, including risk tied to credit quality and interest rates, industry experts said.

Banks are generally doing a better job with management, said Jon Winick, CEO of Clark Street Capital. Bankers are also getting ahead of problems and becoming more diligent monitoring early warnings for things that could trip them up in an exam.

Red flags include a rise in delinquent loans, an auditor’s comment or concerns raised by directors or employees. Executives “are listening and looking out for signs of trouble, whereas 10 years ago they’d probably be asleep at the wheel,” Winick said.

Underwriting standards are often loosened in a strong economy, leaving banks exposed when circumstances change, McMullan said. He predicted that regulators will look for cases of relaxed underwriting and loan concentrations.

“Regulators will want to make sure — and seriously test — that banks can fund loan growth with sufficient and stable sources of liquidity … and that net income and equity value can be protected as rates rise,” McMullan said. “We expect regulators to closely scrutinize a bank’s deposit management program.”

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