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!
You'll learn about:
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...
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:
These questions are similar, but different in important ways. Here are the answers:
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:
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.
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:
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:
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!
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:
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:
If you're looking for help with HMDA compliance, that is one of our specialties! Learn more about HMDA software here.
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.
Looking for more UDAAP-related resources? We've got you covered:
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:
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)"?
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:
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:
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...