Lending compliance: Focus on three top priorities
It’s better to spend money on compliance than remediation.
Leading a credit union can be one of the hardest jobs in the financial services industry.
While regulators make some accommodations for credit unions with less than $100 million in assets, generally, every credit union must meet the same compliance standards.
With so many regulatory issues facing credit unions, it may seem impossible to navigate the “alphabet soup” of regulatory compliance without a full-time compliance officer or third-party vendor.
How should credit unions balance resource allocation and outsourcing to meet regulatory expectations? Focus your efforts on NCUA’s 2018 examination priorities and hot topics the NCUA and Bureau of Consumer Financial Protection (BCFP) outline.
With lending compliance alone making up a significant portion of NCUA’s examination priorities, credit unions should focus on three top issues:
1. Home Mortgage Disclosure Act (HMDA)
On Jan. 1, 2018, BCFP’s enhanced HDMA reporting requirements became effective. They include:
- A change from purpose-based to property-based testing.
- An increase in the number of data points (48) to be collected on borrower and property.
- The requirement to use the agency’s new web-based submission tool.
As you assess your implementation and execution of the enhanced requirements, consult these Federal Financial Institutions Examination Council (FFIEC) guidelines [pdf], which all federal regulators are expected to use.
NCUA has indicated it will recognize “good faith efforts” to comply during the early stages of implementation.
2. Fair lending
A new focus for federal regulators are risks associated with consumer loan pricing. Regulators are specifically concerned with financial institutions that:
- Allow originators and underwriters broad discretion to set interest rates and fees.
- Fail to have rate sheets or pricing guidelines.
- Fail to document pricing exceptions.
- Fail to monitor for potential pricing disparities on a prohibited basis.
The credit union's board and senior management are required to understand the level of risk in their portfolio.
As such, credit unions are encouraged to implement these elements of an effective compliance management system:
- Policies and procedures (such as rate sheets, checklists, job aids, etc.) designed to ensure consistent outcomes and prevent discrimination on a prohibited basis.
- Risk monitoring systems proportionate to the level of discretion permitted. Also, ensure the board of directors and senior management can identify and evaluate fair lending risk for consumer loan pricing.
- Periodic fair lending self-assessment processes, including compliance reviews and audits that are appropriate for the size, complexity, and risk profile of your credit union’s lending program.
3. Current Expected Credit Loss (CECL)
The Financial Accounting Standards Board (FASB) has given credit unions an extension to meet the new CECL rule, beginning with balances on January 1, 2022.
The new standard requires that credit unions use historical experience, current conditions, and reasonable and supportable forecasts to measure expected credit losses.
FASB suggests taking these steps for implementing CECL:
- Create a team responsible for implementing the new standard. This may include representatives from accounting, lending, collections, internal audit, and information technology.
- Gather loss and delinquency data for loans with similar characteristics.
- Work with your core processor to ensure legacy systems have the capability to communicate with any new software or vendor applications required to capture the necessary data for CECL compliance.
While 2018 has been a year of uncertainty, these topics are strong regulatory focal points. Ultimately, regulators are looking for confirmation that the board and management are in control of their credit union’s risk.
Finally, for credit unions overwhelmed by the cost of compliance, consider that it’s always better to spend more money on compliance than on remediation.