What Regulators See As Hot Topics

At ABA's 1997 National Graduate School of Compliance Management, a panel of regulators from the FDIC, FRB, and OCC answered students' questions.

CRA
Considerations under the new performance tests were the basis of several questions. What constitutes a qualified investment and how the investment test would operate relative to the lending test was a common concern.

One student asked whether making loans through a loan production office ("LPO") outside of the bank's assessment area would count against bank even though similarly located investments would count as a positive in the investment test. Marge Wagner, Supervising Examiner with the Federal Reserve Bank of Kansas City, responded that the weight that this would be given would depend on the overall fact situation. The examiner should take into account the bank's service to its assessment area relative to the volume of lending outside of its assessment area. This points out the importance of the performance context.

Rick Freer, Director of Compliance Operations, OCC, stated that the LPO is part of the bank's performance context. The key consideration would be the bank's leading line of business. OCC believes CRA should fit the bank's structure, that the bank should not have to change its structure to "fit" CRA. Freer stated that there is presently some inter-agency disagreement on whether an LPO can be the basis for defining an assessment area. The OCC thinks using an LPO location to define an assessment area is acceptable, but other regulators disagree. Freer stated that this issue will be discussed in coming months.

Wagner recommends fashioning an analysis that loans originated through an LPO have a defined geographic area, unlike investments where you can't define area. Freer stated that the agencies expect to issue new Q&As that would clarify some of these questions. He encouraged the audience to send in questions to help the agencies identify the issues to address.

Ken Keiffer, Review Examiner in FDIC's Kansas City office, stated that before an examiner criticizes a bank for lending outside its assessment area, the examiner should look at two things. First, is the bank's assessment area too small? If so, the bank should consider expanding the area. Second, the examiner should also look at demand and how the bank is meeting demand in its assessment area relative to lending outside of the assessment area.

Wagner stressed the importance of maintaining a dialogue with examiners throughout exam. She recommended that bankers make an effort to begin the dialogue early on and maintain it throughout the exam. The bank should never wait until the examination findings are close to complete. She suggested that banks consider holding a presentation or briefing for examiners at beginning of CRA exam to give a jump-start to the examination and help the examiners understand the bank's performance context. Freer explained that OCC examiners are under pressure to work faster. They have been told they have 25% less time to complete exams. Therefore, any information that the bank prepares and presents could be important to exam. Freer stressed that this is not a requirement, but it may have a positive influence on the exam process.

Fair Lending
Wagner stated that the FRB is finding a resurgence of spousal signature violations. This is a particular problem in commercial loan files.

When asked whether the DOJ is looking for a fair lending case involving small business lending, Freer responded that all of the DOJ inquiries to OCC have involved HMDA data. He is not aware of any specific effort to seek out a discrimination case based on small business lending practices.

Truth in Lending
Wagner sees a serious increase in credit card compliance problems. These usually result from discrepancies in the disclosures and the operating system which generates calculations and statements. She recommends that before selecting an outside vendor for credit cards, a bank should have a compliance specialist check the vendor's product.

Compliance should also periodically check the vendor's calculation systems. Violations frequently occur when the vendor makes changes to the calculation method without notifying the bank. When that happens, the bank can end up with restitution problems.

BSA
The most common problem Wagner sees in banks are deficiencies in getting information and training - including refresher training - to people with responsibilities such as Know Your Customer ("KYC"). She stated that controls are also important.

One student asked whether it is necessary to do a drive-by to verify that the business really exists. Freer responded that this is more than OCC would expect, but that the bank should know something about the business. KYC requires you to decide how you know about customers and businesses.

Freer compared Know Your Customer to a building security system. The system is designed to keep people out who are not supposed to be there and to keep property in that isn't supposed to leave. Know Your Customer should serve the same function with customers and their assets.

ACTION STEPS

Review and compare your bank's lending within and outside of your bank's assessment area. Do this for each major loan product. If any major loan product has a significant portion of loans outside of the assessment area, consider expanding the assessment area.
Review application practices in the commercial loan department. Look particularly at whether there are any illegal signature requirements on approved loans. Talk with commercial loan officers to alert them to regulatory concerns. Remember, you're just trying to help them stay out of hot water!
If you offer credit cards, audit your periodic statements. Compare the periodic statements, initial disclosures, and contracts. If you find differences, correct them.
Review your BSA Know Your Customer procedures. Talk with selected loan officers, CSRs and tellers to see how well they know the procedures. If you find any weaknesses, schedule training.