Tips From The Regulators

At ABA's 1996 Compliance Conference, the panel of regulators brought out some important points. On the panel were Carmen Sullivan, FDIC; Bert Otto, OCC; Glen Loney, FRB; and Tim Burniston, OTS. This article summarizes the highlights of that discussion.

Training
Each of the agencies is adjusting and improving their training programs for examiners. Achieving uniformity in the agencies' approach to CRA is a clear priority in the training agendas. To better reflect present compliance knowledge needs, the FRB is shortening its basic school and lengthening its advanced school.

Examination Procedures
Compliance examination procedures are undergoing change at each agency. Risk management is the basis of the current changes at OCC. That agency is studying the possible use of statistical modeling to evaluate the use of those methods to reduce the amount of time spent on fair lending file comparisons. The FRB's present examination procedures were put in place in the late 1970s. The agency is presently conducting a zero-based review of its examination approach, including consideration of a risk-based examination approach. One goal of the review is to reduce the burden of examinations on banks. Techniques being considered include the use of technology such as electronic data transfer and analysis techniques such as credit scoring. One other possibility is shortening the examination. The FDIC is updating its procedures and expects to have new procedures this summer.

And They Discussed CRA?Limited Purpose Designation
Asked about applications for limited purpose designation, Bert Otto responded that most of the applications to the OCC have come from credit card banks. The FRB has received only a few applications. The FDIC has received approximately 25 applications for limited purpose designation, including several applications from niche banks. Carmen Sullivan opined that these applications will probably be denied because they have the legal authority to offer a full range of products and services. Designations for limited purpose will be limited to those banks that are legally barred from carrying out traditional CRA programs.

Tim Burniston believes many of the banks seeking limited purpose designation are under the impression that the special status would exempt them from CRA. He reminded the audience that designation as a limited purpose bank is not an exemption. It is a >
Burden Reduction
The original goal in developing the new CRA regulation was to reduce paperwork burden. When the old regulation was put under review, paperwork burden meant the extensive documentation of board meetings, and bank activities such as outreach and needs assessment. Tim Burniston observed that by redesigning the examination and taking on the burden of the market analysis and bank lending performance, the agencies have increased the examination burden. As a result, they still receive complaints from bankers about the burden of CRA. Burniston believes that, as the agencies acquire experience with the new procedures, the examination time will go down and banks will begin to see relief.

Standardized agency approaches
The interagency CRA team in Washington is reviewing and comparing examination reports of each agency in an effort to establish and maintain uniformity in the agencies' approach to the new CRA examination. This group is charged with evaluating whether the standards and procedures being used in each agency and each region are in fact similar.

Q&As
The new regulation has generated a lot of very detailed questions. The agencies expect to issue Q&As to answer some of these questions. We can expect the Q&As to be heavily drawn from the spring, '95 Federal Register document that accompanied the publication of the new regulations.

Performance Context
The burden of building the performance context is totally up to the examiner. It is not something the bank is required to do. Glen Loney stressed that whether a bank should develop its own performance context prior to an examination is "totally up to the bank." He did point out that, if a bank does prepare its own analytical piece, the examiners will look at it. He stressed, however, that it is "not a writing exercise." The bank should not put effort into preparing a fancy piece or presentation. Information is all that matters.

Needs Assessments
Burniston explained that performance context and needs assessment are totally different concepts and should not be confused. While the regulation has dropped the requirement to perform a needs assessment, he urged banks to continue that effort. Although the file-stuffing requirement is gone, Burniston encouraged banks to maintain the process of gathering information but to think about what information is really useful and how it should be used. Keep that which is useful.

Conflicts with Safety and Soundness
Banks have frequently complained that safety and soundness examiners criticize the quality of loans made in CRA programs. Such criticism can make it difficult and expensive for banks to maintain active CRA lending programs. Tim Burniston agreed that OTS has found individual loans in affordable housing programs that may be risky, but where OTS finds such loans, it also finds that the program itself is "not a bad program." His point was that it is important to consider the portfolio as a whole, rather than the fact that a few loans in the portfolio may have been criticized.

The agencies have taken steps to increase the skills of both safety and soundness examiners and compliance examiners. OTS runs an Affordable Housing School for safety and soundness examiners. They also send some compliance examiners to the school so that they will better understand the housing programs. The FRB also offers a >
The Last Word: Compliance Challenges of the Future
Tim Burniston observed that the compliance laws we presently work with were written with traditional products in mind. Compliance laws and regulations will inevitably undergo significant changes to reflect changes in the industry. However, he warned that these changes are likely to be reactive, following and responding to changes in banking and banking products. Compliance managers will therefore be carving out new territory and sometimes operating without clear guidance from the regulatory agencies.

ACTION STEPS

Review your regulatory agency's examination procedures. Compare them to your internal audit and monitoring procedures. Determine whether you check everything they do - and more.
Review all product and decision-making software used in your bank. Keep a list of these and look for ways to use them to support or streamline internal audits.
Review your old and new CRA program. Make sure any new program or procedures maintain outreach. You are now free to design your own method of tracking or managing outreach and credit needs assessment.
Make it work.
Do what you can to ensure uniformity in the new CRA examination. Set up a "CRA buddy" system to learn about the CRA examinations in your region. Discuss the factors that the examiners considered and the weights they gave to different types of performance. If you find discrepancies, notify your regulator (or notify us.)
Review your most recent safety and soundness examination report to see how the "CRA" loans were treated by the examiner. If any loans were flagged as problems, review those loans and the underlying lending policies and procedures to determine whether the CRA program needs to be strengthened.
Read news articles on new and emerging bank products and delivery systems. Consider how these products are affected by existing regulations. Consider what concerns consumers might have about the new products. Look for viable ways to respond and be ready to contribute solutions.