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Facing compliance unknowns with get-ready know-how

Ask any financial services leader who’s been a scout and they’ll tell you that “Be Prepared” is great advice for organizations as well as life itself. But how do financial services organizations prepare when the future is really unclear?

The banking compliance world stands on the verge of what could be huge, unprecedented change. With a new president at the helm and a Republican-controlled Congress, the Trump administration is expected to make significant alterations to the Dodd-Frank Act and other industry regulations. However, in the absence of any definitive information, banks big and small must properly ready themselves for new regulations set to go into effect as well as stay compliant with existing regulations that soon could be drastically altered.

“It’s overwhelming both in terms of the amount and the rate of change happening now in compliance,” says Tim Tedrick, partner in Wipfli’s financial institutions practice. Case in point: Each quarter, Tedrick assembles an update for BAI on compliance changes and enforcement actions. Before the 2008 financial crisis, these reports ran a few pages. But in the years since, the “snowball effect of regulation” has these quarterly reports approaching 200 pages, Tedrick notes.

Indeed, one of the administration’s first acts was to initiate a review of Dodd-Frank, signaling an intention to scale back, if not dismantle, the weighty banking regulation. For example, a new uniform loan-volume threshold within the Home Mortgage Disclosure Act (HMDA) rule is set to go into effect Jan. 1, 2018. But many industry insiders believe it could get hung up should existing regulations change.

Also, many of the country’s top regulators may soon be replaced. Among them, and their expiring terms: Comptroller of the Currency Thomas Curry (March); FDIC chairman Martin Gruenberg (November); Federal Reserve chair Janet Yellen (February 2018); and Consumer Financial Protection Bureau director Richard Cordray (July 2018).

“The level of uncertainty is higher than we’ve ever seen it,” says Vincent Hui, senior director for Cornerstone Advisors. “When people plant their business plans, that want a higher level of certainty. Not knowing what will happen creates a lot more strategic as well as compliance risk.”

Hui agrees that there is “absolutely optimism” among bankers, who generally expect greater deregulation. But he adds that aside from not knowing how to adequately prepare for regulatory changes—which may or may not be modified rapidly—concern also exists regarding restraint and appropriate compliance to prevent another event such as the collapse of Lehman Brothers. A repeat could open the door to another flood of regulation.

Also, Hui points out that the Trump administration is fighting tough battles on many fronts, including changes to healthcare insurance, immigration policies, income tax codes, and deregulating other industries such as energy and pharmaceuticals—so banking deregulation might be delayed.

“There is optimism,” Hui counters, “but if I’m a bank CEO, I’m not holding my breath.”

And as Tedrick says, “Many of the administration’s promised plans have been more challenging to implement than planned. As President Trump said on Feb. 27, ‘Nobody knew health care could be so complicated.’” Banking deregulation may well follow suit.

While “something of a pessimist,” Tedrick believes incremental changes will come to the most stringent and burdensome banking regulations, such as those in Dodd-Frank. Yet whether that will actually reduce compliance costs for banks remains to be seen.

He points out that even if TILA-RESPA Integrated Disclosure (TRID) (part of “Know Before You Owe” mortgage rules) are rolled back, bankers will still be expected to follow previous compliance of the CFPB’s consumer credit Regulation Z—for which they may need to retrain employees, or purchase new software or modules for their systems. “Rather than trying to repeal existing regulations, unless they are extraordinarily expensive,” Tedrick suggests, “it might be better to create a prohibition against new regulations.”

He adds that for community banks with fewer resources and smaller budgets than larger counterparts, “the pain of change exceeds the expense of continuing,” even when regulations are reduced or reverted. “The added cost of unlearning will be challenging as well.”

While banks may be tempted to get a jump on implementing changes based on revisions to HMDA Regulation C and other measures, they may be better served to take a “wait and see” approach to  staffing up and adding new technology—even if it costs them a bit more in the long run, Hui suggests.

Smaller financial institutions should consider more actively working with vendors, on which they more heavily rely, to ensure that when compliance changes do take effect, service providers are prepped. “I’ve heard horror stories about vendors who were not ready in time,” Hui says. “Banks need to hold their feet to the fire.”

Ultimately, Hui encourages bankers to use this uncertain time to think “more strategically” about compliance preparedness—to review and optimize their current processes, in particular with loan origination and account opening.

Says Hui: “Banks should plan for the worst, but hope for the best with the idea that they will be in an even better position once the shackles are off.”


Karl Dahlgren is managing director, Learning & Development, at BAI. He can be reached at [email protected]