CSBS Issue Briefings - August 2020

Compliance Examination Process

CSBS Official Public Position

CSBS has identified multiple inconsistencies and pain-points in compliance examination procedures and processes across the federal banking agencies. Processes followed by the agencies lack transparency and inefficiencies have resulted in lengthy examinations and a climate of fear within the industry regarding the impact of compliance violations. State regulators strongly believe that federal consumer compliance exam processes should be corrective rather than punitive.

Summary

In recent years, state regulators have shared many instances in which their supervised banks experienced difficulty with the opaque and inconsistent fair lending examination process. Although there has been an overall decline in the number of formal enforcement actions against banks, the monetary cost associated with these actions can be significant.

Several issues with the current compliance examination process include:

• Examinations in which fair lending issues are identified can span multiple years, often resulting in confusion for institutions and an inability to continue normal operations. • There is a lack of transparency regarding analysis methods and an inconsistent degree of communication and coordination between federal regulators, banks and state regulators. • Federal regulators a ssert compliance violations based on the recurrence of a “pattern or practice,” but they have not provided a definition of what this means. • Thresholds for violations differ among regulators. • Lack of clarity regarding “disparate impact” analysis inhibits th e ability of banks to understand how they are being evaluated and limits ability for self-analysis and compliance monitoring. • Perception that minor violations result in severe regulatory consequences. • Regulatory expectations regarding pricing practices force banks to reduce and sometimes eliminate discretion in pricing. This is counterintuitive to the traditional community bank model. Although only a handful of states (MA, ID, UT, NY) do their own compliance examinations, almost every state is becoming increasingly involved in the compliance examination process. Having a seat at the table during state supervised bank compliance exam ensures that the local perspective of the state regulator is heard. It also ensures that state regulators will be aware of compliance issues that could lead to CAMELS downgrades and/or have an impact on a bank’s safety and soundness rating. State participation is especially important given that much of the analysis and decision making related to a federal compliance examination happens at the regional or national level. State regulators share the desire of the federal agencies to ensure that banks are providing fair access to credit and complying with consumer laws. However, state regulators believe that the small sample sizes and analysis methods used by the federal agencies within the exam process do not provide substantial value and/or weight towards a fair lending analysis and do not always capture the intent of the relationship lending model. Why it Matters to State Regulators

FOR STATE REGULATOR USE ONLY