2018 Regulatory & Risk Outlook: Survival of the Fittest | Wolters Kluwer
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  • 2018 Regulatory & Risk Outlook: Survival of the Fittest

    by Barbara Boccia, CRCM, MBA, JD

    Published January 15, 2018

    (as published in Bank News magazine)

    A New Year’s Fitness Resolution

    The New Year comes with many resolutions, including those for personal fitness. As we view the evolution of our regulatory environment, should we take time to consider how to ensure banks remain fit to survive and thrive in 2018?

    Darwin’s theory of evolution has undergone evolution itself. The “survival of the fittest” theory essentially states that in the struggle for survival, the fittest win out at the expense of their rivals not because they are the strongest, but because they are best at adapting themselves to their changing environment. How might banks better equip themselves to withstand the current winds of regulatory change?

    Piecemeal Regulatory Change

    The Trump Administration brought promises of relief to address the regulatory burden on financial institutions, particularly smaller institutions. Some expected an immediate whirlwind of change and wholesale reconstruction of the regulatory scheme–which hasn’t happened yet. Instead, we are likely to have piecemeal, perhaps more practical revisions to the post-crisis regulatory regime brought about by new appointments for various regulatory agencies and department chairs.

    Consider recent guidance by Department of Housing and Urban Development (HUD) Secretary Dr. Ben Carson.[1] Acknowledging a lack of clarity in regulatory expectations, and a concern that compliance costs can lead to higher mortgage rates for consumers, he announced that HUD was collaborating with the Department of Justice to review Fair Housing Act lending enforcement. 

    However, Carson didn’t give bad actors a free pass. He emphasized providing more certainty for good lenders making responsible loans: “We are not open for business to fraudsters, those without proper controls, or those who do not take their obligations in our market seriously. They will be found out and held accountable.”[2]

    His statements signal the need for an overall Compliance Management System (CMS), a risk-based framework featuring a strong system of underlying controls, including robust policies, procedures and training, along with targeted compliance monitoring and audits. Most banks already have a CMS firmly in place—a core competitive strength to maximize chances of survival.

    Tone at the top should remain a key driver to help keep banks on track, and to avoid institutional pitfalls such as those resulting from unbridled sales incentive practices. A bank’s board needs to play a critical oversight role, which is consistent with the Federal Reserve Board’s (FRB) proposed guidance in 2017[3] that addresses supervisory expectations. The FRB suggests boards re-focus their attention to core activities, actively manage information flow and discussions, and hold senior management accountable for implementing and maintaining a risk management and controls framework.

    Focus on the Consumer

    The 2008 financial crisis gave us the Consumer Financial Protection Bureau via the Dodd-Frank Act. While the CFPB’s priorities can be expected to change with the recent change in its leadership, its underlying focus on the consumer may remain a permanent legacy. This was recently reinforced with the Federal Financial Institutions Examination Council’s (FFIEC) revision to its Uniform Interagency Consumer Compliance Rating System, which emphasizes the importance of a CMS risk-based framework that is focused on protecting the consumer from harm.

    Within the regulations promoting consumer protection is the concept of responsible banking as a way of complying with Unfair, Deceptive or Abusive Acts or Practices (UDAAP). Regulatory enforcement is evolving as an increasingly complex area, given the panoply of federal and state laws, the adjudication of which may involve state attorney generals, class action litigation, and consumer advocacy concerns. 

    One way to address these broad concerns is to centralize risks and controls within an overarching responsible banking program that is flexible and innovative in providing a risk-based framework to address these various considerations. Such a program can address standards for risk mitigation, such as centralized decision making, reasonable exception policies, limited discretion, and consistent application of lending standards. It can include a focus on minimizing the risk of consumer harm, especially as it applies to vulnerable population groups.

    These programs typically integrate a Complaint Management System, which will address processes for intake and recording complaints from all channels, standards for timely resolutions and escalations, and opportunities to analyze these metrics and report them appropriately throughout the organization, including senior management and the board. Trend analysis is essential, and the CFPB’s database, along with other sources of complaints (such as the Better Business Bureau) provide opportunities for mining information and identifying risk exposures. A smart institution will learn from the mistakes of others and seek to avoid repeating them.

    Fair lending is a closely related subject. Wolters Kluwer’s 2017 Regulatory & Risk Management Indicator survey showed concerns over fair lending regulatory exams increased five percent over the 2016 survey, with 46 percent of respondents being “concerned” or “very concerned” over increased exam scrutiny. Moreover, the new HMDA data collection rules were cited as the “most pressing regulatory challenge” facing lenders in the coming 12 months.[4] As the new expanded HMDA fields are collected in 2018, along with expanded categories for race and ethnicity, the opportunities for data analysis expand exponentially. HMDA data forms the basis of key metrics for fair lending in the mortgage lending area, so now it is more important than ever to ensure data integrity, and to analyze one’s data to know the story that data tells about a bank’s lending practices. 


    “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.” So said Darwin, and 2018 brings an opportunity for banks to develop a clear strategic vision, a desire to evaluate new opportunities and risks, a focus on the consumer, and a drive towards innovation. If he were viewing the regulatory banking environment today, Darwin might conclude that, like the evolution of various species, it is perhaps better to consider change as an opportunity, rather than as an obligation.

    [1] Mortgage Bankers Association annual convention, October 2017

    [2]https://www.housingwire.com/articles/41635-carson-hud-working-with-doj-on-easing-enforcement-of-fha-lending?eid=391961545&bid=1903954  10.23.17

    [3]https://www.apks.com/en/perspectives/publications/2017/08/federal-reserve-board-proposes-guidance, August 9, 2017


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