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Back to School vs. Prep for Exam

By Blair Rugh 10 Aug 2016

By: Blair Rugh & Leah M. Hamilton

As summer school breaks come to a close, you may find yourself scurrying for that last minute shopping… Notebooks – check; pens, pencils, glue sticks – check; schedule… “Ahm, where’s your class schedule?” – check; “Who’s driving who? When?” – check.  Getting ready for back to school is much like prepping for your regulator’s exam:

  • Initial Letter Request
  • Policies, procedures, risk assessments
  • Audit / monitoring schedule
  • Primary contacts for lending, deposits, compliance
  • On-site arrangements, dates, location

As September draws near, we typically see an increase in the number of exams scheduled. This year as you begin your compliance exam preparations, keep in mind the following, which may not necessarily be tested but examiners are highly likely to inquire:

TRID. The reprieve of “reasonable best efforts” to comply is likely, if not certain, passed. Be prepared to address civil liability exposure.  Remember the reprieve only pertained to regulatory compliance; civil liability was not deferred. As such, your examiners may inquire as to how you monitored and mitigated any potential risk.

Change Management

New HMDAThe first round of changes, effective January 1, 2017, address who will be required to report. Are you closely monitoring any potential impact? Your examiners may inquire about such monitoring and any corresponding risk assessment. Don’t be surprised if they inquire on your HMDA preparations for 2018. Questions heard from the field already include what is your change management process for the new HMDA and what risk assessments have you completed.

Mortgage Servicing Rules. Although one year out, the amended mortgage servicing rules fill a backpack of nuances and changes regarding force-placed insurance notices, policies and procedures, early intervention, and loss mitigation requirements under Regulation X’s servicing provisions; and prompt crediting and periodic statement requirements under Regulation Z’s servicing provisions.  In addition, the amendments address proper compliance regarding certain servicing requirements when a person is a potential or confirmed successor in interest, is a debtor in bankruptcy, or sends a cease communication request under the Fair Debt Collection Practices Act.  Examiners will be looking at your change management process to ensure that you will be ready for the effective date in 2017.

Diversity.  Although not an item typically on the compliance checklist, we are hearing from several folks that examiners are inquiring about diversity standards. As you may recall, last year, the interagencies issued the Final Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated by the Agencies (Interagency Policy Statement). The statement became effective five days later on June 15, 2015.

The Interagency Policy Statement puts the initial responsibility on each institution’s Board of Directors to have a comprehensive diversity and inclusion policy. It suggests that the policy include the appointment of a diversity officer who will make regular progress reports to the board. The policy should provide that the institution will take proactive steps to promote a diverse pool of candidates, including women and minorities, in its hiring, recruiting, retention, and promotion, as well as in its selection of board members, senior management and other senior leadership positions.

To develop a diverse pool of employment candidates, the standard should provide that the institution will make an outreach to minority and female candidates by making employment opportunities known to minority and women organizations and to educational institutions serving significant minority or women student populations. It also suggests that the institution participate in job fairs, workshops and other events to promote its employment opportunities.

The Interagency Policy Statement also places a significant emphasis upon supplier diversity.  An institution’s diversity and inclusion policy should provide for a fair opportunity for minority-owned and women-owned businesses to compete for the institution’s contracts for the procurement of business goods and services. It should provide for an outreach to minority and women owned potential suppliers, and then it should have analytics to determine the percentage of contracts and contract dollars paid to minority and women owned suppliers.

Next, the Interagency Policy Statement recommends that each institution make its diversity and inclusion standards transparent, that is available to the public either on the institution’s website or by other methods of publication. It suggests that each institution publish its diversity and inclusion strategic plan, its diversity and inclusion policy, an analysis of its progress in achieving diversity and inclusion and a listing of employment opportunities.

Finally, the Interagency Policy Statement provides that each institution do a self-assessment at least annually of its progress in diversity and inclusion.  Here’s where the rope and the hanging come into play. The Interagency Policy Statement suggests that each institution should share its self-assessment with its primary regulator and the public.

The agencies were clear in their publication of the standards that they were not intended to create any new obligation on financial institutions. They are, on the surface, intended to be more in the nature of a best practice or a “strong suggestion.” Because of comments that were received, the Agencies added the following language: “This document is a general statement of policy under the Administrative Procedure Act, 5 U.S.C. 553. It does not create new legal obligations. Use of the Standards by a regulated entity is voluntary.” The only legal obligation of a financial institution to diversity and inclusion are the various federal and state laws regarding equal employment. That said, if an institution is being challenged in that area and it has not complied with the standards, it will have a steep hill to climb in justifying its positions.

If your institution has not revised its employment and vendor selection policies in light of the standards, we recommend that you do so and that you implement, to the extent practicable, the other provisions of the interagency statement.

Fair lending and UDAAP continue to be hot, hot, hot.  Be sure you have risk assessments for both and are prepared with strong monitoring processes for both.

Now that your backpack is full, time to hit the books.  Scan new and proposed rules, dust off the policies and procedure manuals, ensure staff are also prepped, walk through branches for non-compliance signage, etc. Share your exam schedule with staff and management alike.  Keeping on track before and during a compliance exam is just like it was when we went to school – prepare, execute and hope.

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