The current mood in Washington is tipping toward a period of greater regulatory activism than seen in recent years, with the Biden administration, the Consumer Financial Protection Bureau (CFPB) and Congress all increasing their scrutiny of how banks and credit unions serve their customers.
That is the leading compliance trend to watch in 2022, but it’s not the only one. Financial institutions should be prepared for a fairly active regulatory environment in 2022, one that will be significantly impacted by the post-pandemic recovery as well as fluid geopolitical forces in play.
5 Hot Topics in Financial Institution Regulatory Compliance
- Rising interest rates: The consensus of Federal Reserve Bank watchers is that the Fed will begin raising interest rates in March and continue on that path well into 2023, with a total increase of about 150 basis points this year.
Although rising rates generally have a positive impact on earnings over time, financial institutions must keep an eye on short-term fluctuations that may lead to increased balance sheet and income statement risk. Because longer-duration assets like residential and commercial mortgages are held on the books for 10, 15 or 30 years, they reflect market pricing much more slowly than short-term liabilities like demand deposit accounts. For this reason, bankers need to carefully watch this imbalance and its effect on profitability.
Regulatory examiners place greater emphasis on interest rate risk during times of rate volatility, so institutions can expect it to be a focus of their safety and soundness exams this year.
- Fair Lending and CRA: Another area primed for greater regulatory scrutiny is fair lending. The Department of Justice recently spearheaded an overhaul of the Community Reinvestment Act (CRA) in coordination with the CFPB and Office of Comptroller of the Currency (OCC). CFPB Director Rohit Chopra is focusing his agency’s efforts not only on traditional redlining, but also on newer methods that use digital algorithms to reinforce long-held lending biases against certain groups of borrowers.
In addition, the CFPB has begun requiring financial institutions to capture and report HMDA-like small business loan data for the first time under guidance originally laid out in section 1071 of the Dodd-Frank Act, which “amended the Equal Credit Opportunity Act to require, subject to rules prescribed by the Bureau, financial institutions to collect, report and make public certain information concerning credit applications made by women-owned, minority-owned, and small businesses.”
In addition, the Small Business Lending Disclosure Act of 2021 was introduced in the House of Representatives in November, and similar legislation has been proposed in at least six states.
“Fair lending is probably one of the highest risks financial institutions are dealing with right now,” says Lori Anderson, director of Compliance Services at HORNE. “Changes to the Community Reinvestment Act as well as fair lending are issues that bankers need to stay on top of. The fair lending item, in particular is one that’s catching a lot of financial institutions off guard.”
- Overdraft protection and fees: Continuing on the theme of consumer protection, overdraft protection (ODP) programs and related fees are getting much attention from both the CFPB and Congress. Director Chopra has made the review of predatory overdraft practices a priority for his agency, and the acting Comptroller of the Currency has also stated that the current system has a disproportionate impact on lower-income consumers.
Given how important non-interest income is to financial institutions’ bottom lines, banks and credit unions should employ a prudent risk management program to assess their current ODP program that includes a competitive analysis of fees and careful monitoring of any new guidance coming down the pike.
- Bank Secrecy Act and Anti-money Laundering: This area has received less focus during the pandemic as risk and compliance efforts have shifted to credit and interest rate risk, but that is likely to change this year. Regardless, BSA/AML is always a complex and important area of compliance and risk management.
Compliance professionals should keep a sharp eye on geopolitical developments over the next few months. Already, the U.S. and other nations have applied economic sanctions against Russia in protest of the nation’s military attack on Ukraine and frozen the assets and accounts of prominent Russian individuals and businesses.
“Based on all of the information we’re getting from industry groups, we may see some new BSA/AML rules introduced,” Anderson says. “One that would shift the burden of maintaining the beneficial ownership database from financial institutions to the federal government is already in process. However, banks would still be responsible for gathering the information. “
Anderson also sees the industry pushing for an increase to the Currency Transaction Reporting (CTR) threshold above the current level of $10,000.
“For most financial institutions that seems grossly low,” Anderson says. “It’s not uncommon see a customer with more than $10,000 in cash coming in or out of their institution. So, it is reasonable to expect these limits to be increased. If that occurs, it will necessitate a change in how financial institutions monitor and report compliance in their systems.”
- Environment, social and governance (ESG): ESG has become an increasingly important area of compliance and governance in recent years, with the ongoing climate crisis getting more attention in boardrooms and the halls of government. Meanwhile, social unrest and activism is driving change in hiring and human resources practices, especially around diversity, equity and inclusion.
These are rapidly evolving areas, and financial institutions should be engaging in active discussion at the board, supervisory committee and senior leadership levels to ensure full compliance with all federal and state laws and guidance.
In the climate arena, organizations face risks associated with maintaining facilities and employees in geographic regions subject to extreme weather events like hurricanes, tornadoes, floods and forest fires. Lenders must also account for the unique credit risks associated with loans to residential and commercial properties and businesses located in areas subject to extreme weather patterns as well as longer-term climate issues, such as drought and shoreline erosion.
We recommend taking a “three lines of defense” approach toward assessing climate risk within your organization and portfolios, and developing policies and procedures designed to actively assess, report on and mitigate such risks.
As we put the pandemic behind us and move forward into 2022, banks and credit unions should gear up for a busy year in risk and compliance. HORNE’s Financial Institutions team is here to offer guidance in all aspects of regulatory compliance and risk management, from developing comprehensive policies and procedures to helping you prepare for your next safety and soundness exam. Contact us today.