Barack Ferrazzano
New regulation puts additional burdens on compliance staff
In the current economic climate, banks are rightly focusing on safety and soundness issues. Banks must ensure, however, that they also effectively manage their compliance function because banking regulators are increasingly focused on this area in response to the numerous regulatory changes that have recently occurred and are likely to occur in the near future. Even if a bank’s compliance practices have not been criticized in the past, there is no guarantee that they will be approved by regulators at the bank’s next examination. Here are some highlights from a recent report by the Financial Institutions Group of the law firm of Barack Ferrazzano Kirschbaum & Nagelberg LLP, in Chicago:
- Banking regulators are significantly downgrading many banks’ consumer compliance ratings because they are concerned that their compliance management systems are not equipped to handle the potentially numerous regulatory changes to be implemented by the Consumer Financial Protection Bureau. Banking regulators view violations of recent regulations and/or repeat violations, even if such violations are minimal in number and the bank engages in minimal consumer banking activities, as being especially indicative of an ineffective compliance management system. Importantly, banks with weak compliance systems will likely have their management ratings downgraded as well.
- Banking regulators are conducting in-depth reviews of lending practices and are increasingly referring cases of alleged discrimination by banks to the Department of Justice. Even long-standing lending practices have recently been criticized by examiners. Banking regulators are concerned with: 1. the extent to which banks give their loan officers discretion regarding pricing and underwriting, 2. whether any pricing variances in any lending activity reflect discrimination against a particular group or in favor of another group, 3. if lending policies or practices may have a disparate impact on a protected class, 4. if assessment areas are appropriate, and the extent to which banks are lending throughout their entire assessment areas, 5. if changes in assessment areas reflect potential redlining, and 6. if banks are steering certain borrowers to particular loan products.
- Section 5 of the Federal Trade Commission Act (the “UDAP law”) prohibits unfair or deceptive trade practices, and the Dodd-Frank Wall Street Reform and Consumer Protection Act expands this area further by prohibiting “abusive” acts or practices. It is increasingly common today for banking regulators to evaluate violations of compliance regulations under the UDAP law as well, and we will now likely see banking regulators evaluate such violations under the new “abusive” standard.
- Banking regulators are delving deeply into mortgage loan originator compensation under the Truth in Lending Act and Regulation Z. Effective for compensation earned on applications received on or after April 1, 2011, a mortgage originator’s compensation cannot, with few exceptions, be based on any factor other than the amount of the credit extended. One general prohibition is the payment of compensation based on the profitability of the branch, division or entire bank.
- Recently, several large banks settled lawsuits with the Department of Justice for allegedly violating the Servicemembers Civil Relief Act (the “SCRA”). These banks allegedly foreclosed on service members without obtaining court orders and/or charged service members interest rates in excess of the 6 percent interest rate cap under the SCRA. These settlements will likely prompt additional service members to file lawsuits against banks, or file complaints with their military offices for improper treatment under the SCRA.