7 Most Confusing Areas of Compliance for Compliance Pros

Some areas of banking compliance are consistently seen as more difficult, more complex, more confusing, or more vague than others. While individual compliance pros may have a personal list of the most challenging areas, here are 7 compliance topics that are widely regarded as complex - with tips and tricks to help make them easier for you!

Confounded by Community Development? Perplexed by UDAAPs? Baffled by Beneficial Ownership? Flummoxed by Fair Lending discrimination? If so, you're not alone! 

In this post, you'll learn the essential facts to help you demystify the 7 most confusing areas of banking compliance, and get free resources to help you master them!

You'll learn about:

1. REMAs
2. Community Development
3. Beneficial Ownership
4. HMDA Reporting
5. UDAAP
6. Small Business Lending for CRA
7. Fair Lending Discrimination

In general, these seven areas of compliance are confusing because the definitions are subjective or may vary based on different factors. (For example, lots of people struggle to truly understand Fair Lending discrimination in part because there are three different types of discrimination to consider.)

[Free Resource: 5 Trends Changing the Compliance Industry]

Without further ado, here are the seven areas of banking compliance that cause the most consternation...

1. What are REMAs?

The concept of REMAs, or Reasonably Expected Market Area(s), rose to importance as Redlining compliance started dominating headlines and regulatory priorities in recent years. REMAs can be complex and confusing because they can be subjective, and because Redlining itself can be confusing. The most common questions we get about REMA are:

• What are they?
• How are they defined?

These questions are similar, but different in important ways. Here are the answers:

• A REMA is the geographic area where an institution actually marketed and extended credit, or the area where an institution could be reasonably expected to have marketed and provided credit.
• Your REMA or REMAs will be defined by a regulatory agency or examiner, and it may or may not be the same as the CRA assessment area or trade area. When defining your REMA(s), the regulators will consider some or all of the following:
  • Discussions with the Board and Senior Management and other financial institution employees;
  • Where the institution has received applications and/or originated loans;
  • The FDIC in particular emphasizes the importance of plotting lending activities on a map.
  • Broker and realtor relationships;
  • The history of mergers and acquisitions;
  • The market area as defined by the bank in its written policies;
  • Branching structure and history, including closures, acquisitions, and relocations;
  • Marketing and advertising efforts; and
  • The exclusion of Majority-Minority census tracts from the assessment area. 

Even though the regulators will define your REMA for you, you can come up with an estimated REMA, and use that for your Redlining compliance analysis. TRUPOINT can help you define your REMA; this is part of our Redlining Analytics solution. 

In some cases, the examiners may accept your estimated REMA as-is. Otherwise, they will create a new one, and you will learn how their thought process is different.

And here are three more REMA resources:

• [Blog] Regulators Release 4 Valuable Warnings about Redlining
• Redlining Analysis Software
• [Download] 3 Steps of Redlining Analysis Info Kit

And finally, if you have any other questions about REMAs, you can always send us a note or leave a comment, and we will work to answer it for you.

2. What Qualifies for Community Development Credit?

All institutions that have to comply with the Community Reinvestment Act have to get Community Development credit, but it's easier said than done. The most common question we get is "what qualifies for Community Development credit?"

First, Community Development for CRA compliance is about more than just loans. There are three key types of Community Development activities: Loans, Services, and Qualified Investments.

As far as the regulators are concerned, CRA-qualified Community Development activities refers to loans, services, or investments that serve distressed or under-served individuals or geographies in your Assessment Area. 

To qualify, Community Development activities must:

• Be responsive to the community's needs.
• Benefit the financial institution's Assessment Area(s).

The problem with that definition is that it's pretty vague. We think the reason is that the regulatory agencies want to give financial institutions enough latitude to be creative. There's no one-size-fits-all approach to improving the financial health and well-being of a community. In some cases, a loan for a new roof for a community center might qualify, while it wouldn't in others. However, it also means that the examiners have broad discretion when determining what qualifies as Community Development. 

Adding to the complexity is that Community Development opportunities have typically been difficult to attract, track, and manage. 

If you're looking to learn more about Community Development, here are a couple more resources for you:

• [Blog] How Do I Get CRA Community Development Credit?

3. What is Beneficial Ownership?

Beneficial Ownership is part of the Customer Due Diligence (CDD) requirements released by FinCEN in May 2016. (FYI The final implementation date was May 2018.)

Referred to as the 5th pillar of BSA/AML compliance, the new CDD/Beneficial Ownership requirements are often seen as challenging. They strengthen the existing CDD guidelines, and require financial institutions to identify, collect data about, and verify the beneficial owners of legal entity customers.

The CDD requirements says that financial institution need to implement "appropriate risk-based procedures for conducting ongoing CDD to understand the nature and purpose of customer relationships, ongoing monitoring to identify and report suspicious transactions, and, on a risk basis, to maintain and update customer information." [2 31 C.F.R. Part 1020.210(b)(1-5).]

We could spend multiple entire blog posts talking about the nuances of the new CDD rule - and we have! 

Related: What Is A Compliance Management System And Why Your FI Needs One

In addition, we also published this Compliance Training Rap all about BSA/AML compliance and Beneficial Ownership on the blog! 

4. How Do I Tell if a Loan is HMDA Reportable?

With the new Final HMDA Rule, the recent exceptions and updates, and the launch of our HMDA transmittal software, we have gotten a lot of questions about which loans are HMDA reportable.

The reality is that whether a loan is HMDA reportable will depend on a lot of different factors, including the size and type of your institution, your HMDA loan volume, and details about the loan itself.

According to the regulation, both closed- and open-ended dwelling-secured loans are HMDA reportable. 

In general, the following three types of loans are HMDA-reportable:

1. Home Purchase Loans
2. Home Improvement Loans
3. Refinancing Loans (this includes HELOCs and multi-purpose loans)

For specific details, the FFIEC's HMDA Reporting Guide is a great resource. Here are the links for the 2018 and 2019 versions of the guide.

Here are a few other HMDA resources that may help:

• [Website] FFIEC's HMDA FAQs
• [Resource] Hypothetical HMDA Loan Scenarios

If you're looking for help with HMDA compliance, that is one of our specialties! Learn more about HMDA software here.

5. What is a UDAAP?

This question - "What is a UDAAP?" - is deceptively simple. In consumer compliance, a UDAAP is an unfair, deceptive, or abusive act or practice. But that's not the whole story. 

"Unfair," "deceptive," and "abusive" each have their own unique definitions. For an act or practice to qualify as any one of them, it must meet specific standards. The challenge is that each definition has just enough subjectivity to leave a lot of room for error. 

• Acts and practices are considered "unfair" if:
  • They may cause substantial injury.
  • They are not reasonably avoidable.
  • Injury is not outweighed by benefit.
• Acts and practices are considered "deceptive" if:
  • They are misleading or likely to mislead.
  • A reasonable consumer would be misled.
  • A representation, omission, or practice is material.
• Acts and/or practices are considered "abusive" if they:
  • Materially interfere with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
  • Take unreasonable advantage of a consumer’s:
    • Lack of understanding of the material risks, costs or conditions of the product or service;
    • Inability to protect its interests in selecting or using a consumer financial product or service; or
    • Reasonable reliance on a covered person to act in the interests of the consumer.

Looking for more UDAAP-related resources? We've got you covered:

• [Blog] Defining Unfair, Deceptive, and Abusive for UDAAP Compliance
• [Blog] 3 Ways to Avoid UDAAP Compliance Violations

6. What is Considered Small Business Lending for CRA?

This is such a common question that we wrote an entire blog dedicated to this topic of CRA Small Business Lending. If this is a key priority for you, again, the in-depth blog is a great resource.

That said, the regulators have outlined a helpful definition. 

According to the Call Report instructions, "loans to small businesses" consist of the following:

1. Loans with original amounts of $1 million or less that have been reported as “Loans secured by nonfarm nonresidential properties” (in domestic offices) in Schedule RC-C, part I, items 1.e.(1) and 1.e.(2), column B, and
2. Loans with original amounts of $1 million or less that have been reported in Schedule RC-C, part I:
   • On the FFIEC 041 for banks with less than $300 million in total assets, item 4, column B, "Commercial and industrial loans;"
   • On the FFIEC 041 for banks with $300 million or more in total assets, item 4.a, "Commercial and industrial loans to U.S. addressees;" and
   • On the FFIEC 031, item 4.a, column B, "Commercial and industrial loans to U.S. addressees” in domestic offices.

When evaluating small business loans, "small" can refer to both the business size and the loan size. You should be aware of your small loans (i.e. loans that are less than or equal to $1M) to businesses. Are they being made to small businesses (those with less than or equal to $1M in revenue) or large businesses (those with more than $1M in revenue)?

If you are a large bank, you have to report small loans (i.e. loans that are less than $1M) to businesses.

Regulators want to evaluate you on the size of the loan and then the size or the business that the loan is going to. In essence, they’re asking “What are the small loans (</$1M loan amount) and of those small loans, how many are going to small businesses (</$1M in revenue)"?

7. What are the Types of Fair Lending Discrimination?

Discrimination is a central concept in Fair Lending compliance. Without a clear understanding, there's no way to effectively manage your risk! That said, understanding what exactly constitutes Fair Lending discrimination can be a challenge.

Here are the three types of Fair Lending discrimination:

1. Overt Discrimination: Overt discrimination in Fair Lending is the act of openly and/or actively discriminating against a consumer because of a prohibited basis factor, such as race or gender.
2. Disparate Treatment: Disparate treatment occurs when members of a prohibited basis group are treated differently than members of the control group.
3. Disparate Impact: Disparate impact occurs when a neutral policy or practice that is applied equally to all individuals nevertheless has a disproportionately adverse impact on a protected class of people.

Most of the attention on Fair Lending discrimination goes to disparate treatment and disparate impact, because these two are more nuanced.

Disparate treatment doesn't have to be intentional, which is part of the challenge. If a protected class consumer is treated differently than a control group consumer, even if it's unintentional and even if it isn't systematic, it can be an example of disparate treatment. 

Disparate impact is most often found by identifying disparities between control group and prohibited basis group consumers using Fair Lending analysis. This is why we so often say that disparities don't always equal discrimination, but analysis is the only way to know for sure! 

Looking for more resources about Fair Lending discrimination? Here are three more:

• [Blog] 3 Simple Examples of Fair Lending Discrimination

Ncontracts Viewpoint: Today's compliance landscape is changing fast, and these areas of compliance are adding to the complexity. Luckily for you, you now have access to lots of great resources you need to help manage compliance successfully. 

Finally, know that when you want help improving your Fair Lending, CRA, HMDA, Redlining, UDAAP, or BSA/AML compliance, Ncontracts is here to help. 

We offer compliance software and consulting solutions designed for your peace of mind. Just get in touch today to learn more...