Banking regulators are temporarily reducing their examination schedules. At first glance, this reduction may seem to indicate that it is appropriate to ditch your compliance hat until the current quarantine period is behind us. Hold on to that hat though – while the examination schedule is delayed, regulatory requirements continue, and this new environment makes compliance more complicated for several reasons.
Part of the reasoning provided for reducing examinations (especially for smaller banks and mortgage lenders) is to allow financial institutions to focus on heightened risks and to assist consumers in this current situation. Still, it is good news that the regulators are recognizing this challenge and working to assist bankers along the way.
The current regulatory environment is very fluid
As an example of how quickly things are moving, banking agencies released an interagency statement regarding loan modifications on March 22, then revised and replaced that statement on April 7 in response to the Coronavirus Aid, Relief and Economic Security Act (CARES Act) passed in late March. In the revised statement, the agencies encourage financial institutions to work constructively with borrowers affected by COVID-19 and state they will not criticize institutions for prudent loan modifications.
This flexibility is welcomed; however, it comes with its own new set of risks. Consumers are already flooding financial institutions with requests for leniency, and institutions are working diligently to meet those requests. Compliance personnel must remain on top of a very fluid regulatory environment and quickly disseminate information to all relevant staff. Mortgage servicers must balance assisting all borrowers whose payment capability is affected by COVID-19 and ensure their borrowers are not misled concerning forgiveness of the debt or the impact of the delayed payments in the long run.
Communication is crucial
The procedures for all communications with borrowers during this time must be clear to all lending personnel so they are applied consistently throughout your organization. Updated procedures and training are critical to ensuring equal treatment of all borrowers, with no disparate treatment or impact for protected borrowers. This is challenging under any circumstances, but especially in an era where complaints are immediately made public through various forms of media.
A prime example of this environment is illustrated in a recent NPR article reporting consumer complaints about a bankers’ instructions concerning borrower repayment options. Banks are named and inconsistencies reported – based on a few quick phone conversations.
Now is the time to update and strengthen compliance programs
Ongoing training and monitoring of Fair Lending related issues must be conducted through these next few weeks and months, regardless of the regulators’ examination schedules. For example, a few months’ reprieve in the examination cycle may buy you the time needed to verify the accuracy of your HMDA data and analyze lending patterns before the agency examiners re-enter the compliance picture. The opportunities for strengthening your compliance position during this time are plentiful. Keep in mind also, while the agencies may abate examinations for a period of time, public interest groups certainly will not.
Unique opportunities for working with community leaders in meeting a variety of needs in your CRA assessment area or reasonably expected marketing area may also present themselves during this extraordinary time. As you assess your lending patterns and work to enhance your overall CRA and Redlining performance, federal assistance may provide a boost to these efforts. Once again, prepare to be held accountable by regulators and public interest groups for how these federal funds are used, especially concerning their impact (or lack thereof) on low- and moderate-income and majority-minority census tracts.
This unprecedented time in history holds both challenges and opportunities to be met. Combine your marketing, Fair Lending compliance, and CRA actions to promote your institution as a strong supporter of individual borrowers and your community as a whole. Hold on to that Fair Lending /CRA compliance hat – and be ready to tell a good story when the examiners make it back around. In the meantime, with your proactive efforts leading the way, perhaps your institution will be one of the “some good news” stories filling our newsfeeds.