Defense, Defense, Defense!

Your Compliance Team is the First Line of Protection against Regulatory Penalties

Matt Goble
Matt Goble – Senior Compliance Advisor

“Defense! Defense! Defense!” With football season just weeks away, I can hear it now. A stadium filled with 100,000 die-hard fans cheering on their favorite football team in hopes of keeping their rival out of the end zone. There is nothing better than watching the defense go head-to-head against their opponent in a goal line stand with the game on the line. Relishing in the moment, you feel the opposing offense lose their momentum. The defense is fired-up and ready! You have no doubt a victory is just moments away, but wait … please, no! The referee throws a flag, blows his whistle and stops the game clock. Your defense just received a penalty. Now, the offense is halfway closer to the goal line, and your stomach is in knots as you watch the opposing team march the football across the line on the next play for a touchdown.

Any coach will tell you that a championship caliber team is one with a great defense. The same concept applies to the compliance department of your financial institution. After all, your compliance team is the first line of defense against regulatory penalties that can become very expensive. We certainly all make mistakes at times, and some of those mistakes may be costly, but with proper training and having the right policies and procedures in place, you can prevent those penalty flags from regulators during future exams and come out with a victory!

In this week’s article, we will look at a few common compliance violations as indicated by regulators and determine how you can avoid making those same mistakes. Unfortunately, we don’t have enough space to cover them all, but check out some of the common violations in the following areas:

Equal Credit Opportunity Act: Regulation B’s requirement for joint signatures and incomplete or missing adverse action notices.

In general, a creditor may not require the signature of a spouse on an individual’s application for credit if the applicant qualifies on his or her own. In most instances, regulators discovered that institutions implemented a practice to require spousal signatures for all commercial loan applications. Additional lender training and regular compliance testing is an effective way to avoid making this type of mistake. Additionally, there is no harm in requiring an applicant to subsequently obtain a co-signor or guarantor on the loan, but you must not require that such guarantors be a spouse.

Flood Insurance (Regulation H): Failure to obtain sufficient flood insurance and failure to implement force placement procedures in a timely manner.

The amount of flood insurance purchased is often inadequate due to misunderstandings of structures that should and should not be covered. To clarify, flood insurance, either issued through the National Flood Insurance Program (NFIP) or from a private insurance provider, is required for the term of the loan on buildings or mobile homes when an institution makes, increases, extends or renews a loan. The loan (commercial or consumer) is secured by improved real estate or a mobile home that is permanently affixed, the property securing the loan is located or will be located in a Special Flood Hazard Area (SFHA) as identified by the Federal Emergency Management Agency (FEMA), and the community in which the property is located participates in the NFIP.

The minimum amount of flood insurance required must be at least equal to the lesser of the outstanding principal balance of the loan, the maximum amount available under the NFIP for the type of structure or the insurable value of the property. Keep in mind, flood insurance coverage under the NFIP is limited to the building or mobile home and any personal property that secures the loan and not the land itself.
Additionally, regarding force placement requirements, an institution — or servicer acting on its behalf — upon discovering that the security property is not covered by an adequate amount of flood insurance, must provide notice to the borrower that the borrower should obtain flood insurance. If the borrower fails to purchase flood insurance in the appropriate amount within 45 days, the lender must purchase insurance on the borrower’s behalf. An institution may force place and charge for insurance beginning the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount.

Unfair Deceptive Abusive Acts of Practices Act (UDAAP): Failure to disclose fees associated with overdrafts, deposit accounts and loan fees.

Providing complete and accurate disclosures to your consumers is imperative for them to understand the true nature of the costs and terms of the product requested. Otherwise, not only will you violate the disclosure requirements of the particular regulation such as Reg. DD and Reg. E, but you also will create the risk of a UDAAP violation. Best practice is to disclose the worst case scenario to the consumer to avoid surprises. Also, be particularly cautious with the language of advertising campaigns promoting certain products or add-on features. If the ad could be misleading or confusing to the consumer, then you have an increased risk for potential UDAAP.

Bank Secrecy Act (BSA): Failure to properly monitor high risk accounts such as money service businesses (MSBs).

Regulators often cite accounts for MSBs for the lack of documentation of their customers’ activities. Without such documentation, an institution cannot fully understand the nature of the customer’s business and how it’s making money. As a best practice, if your institution cannot fully comprehend the operations of the business customer, then banking services may need to be denied to avoid the risks associated with such accounts.

In closing, remember that compliance is every employee’s responsibility every day. It truly is a team effort! So, when you find yourself in a goal line stand faced with the challenges resulting from today’s comprehensive regulatory environment, rely on your policies and procedures implemented by a well-trained staff as your line of defense to avoid those unnecessary and costly penalties. If you’re a member of the Compliance Advisory Service here at Temenos, then you can always rely on the guidance from our team of experts to ensure you remain compliant. We can help relieve your institution of the burden of compliance.

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Matt Goble
Matt Goble – Senior Compliance Advisor