As almost everyone in the financial institution trenches knows, ever-expanding compliance requirements are taking a toll on banks of all sizes, and some banks are simply resigning themselves to the need to hire additional employees to help shoulder the burden. But many institutions might be able to avoid, or at least reduce, the associated costs by looking within for a solution.
The Federal Reserve Bank of Minneapolis has estimated the relative number of new employees that banks of different sizes might need to hire in response to the same regulatory requirement. It estimated that hiring one additional employee would reduce the return on assets by 23 basis points for the median bank in the group of smallest banks, those with total assets of $50 million or less. Such a decline could cause about 13 percent of the banks that size to go from profitable to unprofitable.
Banks with total assets between $500 million and $1 billion would have to hire three employees and would experience a decline of about 4 basis points in return on assets as a result, according to the Minneapolis Fed. Although very few banks in the larger group would go from being profitable to unprofitable as a result of the heightened regulatory burden, 4 basis points is still a significant reduction in return.
In response to complaints about the dramatic potential effect on “smaller” banks, regulators have indicated that certain new regulations might apply only to big banks or, alternatively, they might adopt a tiered approach. Even if the regulators do demonstrate some flexibility on how new regulations are applied, smaller banks still will need to meet a rising compliance burden for rules and regulations already in place.
In the past five months, for example, relatively small community banks have been hit with severe penalties for fair-lending violations. Three or four years ago, regulators wouldn’t have focused on such institutions, but fair-lending oversight has taken on a new dynamic, and now banks of every size are expected to have robust fair-lending programs. Similarly, oversight of unfair, deceptive or abusive acts or practices (UDAAP) has expanded to cover a much broader scope of activities in the past two years.
While certain sections of the recently implemented servicing amendments to the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (otherwise known as Reg Z) apply only to banks that handle at least 5,000 mortgage applications a year, nearly every other aspect of these regulations treats all banks the same, regardless of size, and imposes the same fines for violations.
In short, regulators have raised their compliance expectations for every bank these days.
Look Inside First
The bottom line is that your bank, whatever its size, needs someone to be responsible for and well-versed in the regulatory requirements and also to manage the compliance program. Instead of going out and hiring an additional compliance subject-matter expert (SME) to complement your existing compliance manager, though, consider working from within your organization.
You might already have on staff individuals who are qualified to assist with tasks such as monitoring and testing, perhaps an experienced credit analyst, personal banker or loan originator who has shown a strong ability to learn and interest in a long-term career in the banking industry.
For example, you could “borrow” a credit analyst or someone else who is adept at using spreadsheet software and could spare five hours a month to run some spreadsheet sorts of loan application data—both real estate and consumer—for the compliance manager to use for a high-level fair-lending data analysis. Or a personal banker who has shown an understanding of the common deposit regulations could do occasional testing of check holds and error resolution with the appropriate testing spreadsheets.
Don’t limit your consideration to employees with college degrees in finance and accounting. After all, you would be hard-pressed to find compliance SMEs who took a Reg Z course during their college days, even if they majored in finance or accounting. That expertise accrues through real-life experience and continued education. Once you look, you’ll likely find that your front-line people harbor extensive knowledge waiting to be tapped.
Make It a Team Effort
With a strong management structure—including representation and a commitment from all lines of business and senior management—compliance can become a cost-efficient team effort built upon existing resources.
Ongoing monitoring can be conducted within each line of business, with the compliance department merely reviewing it to see that the trends aren’t of concern. Occasional loan data analyses can be conducted by someone outside the compliance department, with the compliance manager providing guidance to confirm the analyst understands the basic concepts of fair lending.
And monthly meetings can be held to recap compliance activities, be they forthcoming new rules, testing and monitoring results, new training requirements or similar topics, and those meeting minutes can be presented to the audit committee. Ultimately, compliance is a long-term commitment, and you might be able to meet your institution’s rising compliance requirements if you look for ways to leverage the talent and experience of your existing personnel.