ABA Banking Journal
By Evan Sparks
The regulatory front offers the possibility for meaningful regulatory relief, but the timetable for obtaining that relief is uncertain. Although ABA staff are working now with members to identify regulatory changes that will encourage economic growth, we may not see results immediately, says ABA SVP Virginia O’Neill, who leads the association’s Center for Regulatory Compliance.
This is because the top officials of the independent banking agencies have terms that do not expire with the inauguration of a new president. Comptroller of the Currency Thomas Curry’s term expires in March 2017, while FDIC Chairman Martin Gruenberg’s ends in November 2017, Federal Reserve Chairman Janet Yellen’s in February 2018 and Consumer Financial Protection Bureau Director Richard Cordray’s in July 2018. (The case of the CFPB’s director, whose protection from presidential dismissal was voided by a federal appeals court in ongoing litigation, remains to be seen—O’Neill reports that Cordray has instructed his staff to proceed with business as usual.)
As a result, ABA’s regulatory experts are turning bankers’ attention to several matters that are expected to see action in 2017 across a wide range of compliance topics.
Mortgage mop-up
The CFPB has kept mortgage bankers and compliance officers extremely busy for the last few years, implementing the Ability-to-Repay/Qualified Mortgage rule, the TILA-RESPA integrated disclosures, new rules on escrows and loan originator compensation and a massive set of changes to loan servicing.
On servicing, lenders may finally get a glimpse of light at the end of the tunnel with the fifth set of amendments to the servicing rule finalized in 2016. “Hopefully it will be the last big rulemaking we’ll see on servicing for a while,” says ABA VP Krista Shonk, noting that the CFPB is “sweeping up” issues—most significantly on successors in interest, loss mitigation and the provision of modified periodic statements for borrowers in bankruptcy.
Most of the provisions take effect in October 2017, while requirements involving successors in interest and periodic statements for borrowers in bankruptcy will go into effect in April 2018. Shonk offers a “note of caution” on early adoption, since certain provisions cannot be implemented before the effective dates. (ABA will soon release a guide to the servicing rule that will explain.)
As for TRID, “bankers at every level have struggled with these regulations,” says ABA SVP Rod Alba, noting that the rules contained numerous mistakes and did not comport with all product variations. TRID is also the subject of a mopping-up rule expected to be finalized in March, with more than 100 changes to manage. “Be prepared to engage in system tweaks across all mortgage product lines,” Alba says.
He adds that the controversial lack of a liability and cure provision for inadvertent TRID errors is not expected to be in the final rule. “This will be a big legislative issue for ABA in the coming months,” Alba said.
Inclusion in focus
Fair lending and redlining continues to be top priorities for regulators and law enforcement, with several high-profile regulatory actions in 2016. Gender inclusion is a current hot topic, says ABA VP Rob Rowe. For example, the impact of decisions on women who are out of work on maternity leave is a growing concern. The CFPB in late December said it would focus on potential gender discrimination in small business lending, for example, while also increasing its focus on redlining and fair servicing of mortgage loans.
Key to fair lending concerns is the “influence of loan officer discretion in underwriting,” Rowe explains. “How much discretion is an individual loan officer given in terms of increasing or decreasing a rate? What kind of impact does that have on your markets?”
Closely related is the Community Reinvestment Act, with agencies continuing to update their guidance amid extensive debate over the need to revisit CRA to respond to the growth of non-depository fintech lenders. In the meantime, “make sure your assessment area is current,” says Rowe. “Look at where you’re marketing.” Agencies are looking at banks’ “reasonably expected market area” and where they are making loans outside of them.
Farther on the fair lending horizon is a regulatory initiative to collect data on small business lending. While no proposal is imminent, the CFPB has hired a head of its small business division and is engaged in “pre-rule” activities. “Congress thought it would be good to have a data set that looked at small business lending,” says Rowe. Critical elements in any future rulemaking would be the definitions of women-owned business, minority-owned business and small businesses themselves. “We’re going to keep a close eye on this,” Rowe adds.
Finally, while not a fair lending matter per se, website and app accessibility is going to be a top compliance priority in 2017, says ABA’s Toni Cannady. Website accessibility under the Americans with Disabilities Act is a top priority for the Department of Justice—and while the ADA’s “auxiliary aids” definition does not explicitly include websites, although it seems strongly implied, and there are no firm standards for what constitutes compliance—plaintiffs’ lawyers have smelled blood in the water.
In the past year, law firms have sent thousands of “demand letters” under the ADA and filed at least 244 federal website accessibility lawsuits since the beginning of 2015. These suits are hard to dismiss and often settle. To mitigate compliance risk, Cannady recommends that banks adopt an accessibility policy and standard, audit their websites for accessibility, appoint people to oversee all IT accessibility, train their website teams, direct the IT department to create implementation plan, create accessibility webpage, require accessibility in vendor contracts and conduct annual audits for conformance.
Third-party risk
Vendor management is “a topic of increasing regulatory focus,” notes Krista Shonk, who flags proposed guidance from FDIC in 2016 that has “largely flown under the radar,” adding that “we think you should keep an eye on this in the coming year.”
While the proposed FDIC guidance on third-party lending includes several topics that bankers have long dealt with, “there would be additional granularity in the FDIC guidance,” Shonk says. Most noteworthy: the expectation that institutions with “significant” third-party lending relationships may be subject to increased supervisory attention—including a 12-month exam cycle, even if the institution otherwise qualifies for a longer cycle. Banks should pay particular attention to the types of lending-related relationships that are included in any final guidance from the FDIC.
“Even if you’re not regulated by the FDIC, keep an eye on this topic,” says Shonk. “Vendor management is a key issue for all regulators [and] they tell us they’re talking to each other about it.”
Hot topic: sales incentives
In the wake of the Wells Fargo scandal over the creation of unauthorized accounts, regulators and Congress are taking a much closer look at sales practices and incentive compensation.
“The bureau and banking agencies are engaged in horizontal exams of the sales practices and incentive compensation programs of midsize and large institutions,” says Virginia O’Neill, although she notes that agencies say they have “no intention to conduct community bank exam programs at this time.” Shonk adds that regulators have also indicated they will look at third-party incentive compensation.
However, O’Neill suggests that “even smaller banks want to take a look at sales practices and incentive compensation programs to identify any potential issues. We believe it would be prudent for those who want to do so to go ahead.”
For banks that conduct these internal reviews, O’Neill recommends reviewing sales practices and account opening procedures for all products and services, the channels through which they are offered, controls designed to identify non-compliance, controls to assess account closings for inappropriate openings, incentive programs and payments made to employees, training programs and documentation for employees in sales, employee terminations, whistleblower concerns, SAR filings and consumer complaints.
O’Neill adds that ABA expects to release a guide for sales practices and incentive compensation compliance in the coming weeks.
For more information on these and other compliance priorities—including small-dollar lending, anti-money laundering, the Telephone Consumer Protection Act, debt collection, flood insurance and the Military Lending Act—download a recording of ABA’s webinar on 2017 compliance priorities.
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