Out of the Mouths of Regulators

At ABA's Graduate School of Compliance Management, a panel of regulators was asked to identify what they consider to be the hot compliance topics of the moment. Steve Lindsey, OCC, named Y2K readiness, CRA data integrity, the CRA investment test in certain performance contexts, and fair lending procedures. Specific data problems can involve the differences between small business loans or community development loans, and the continuing debate about reporting renewals and refinancings.

Lindsey also believes that the regulatory agencies need to do a better job of evaluating what they are hearing from the community. He was influenced by discussions at the NCRC conference and came away believing that examiners should give more care and attention to community interviews.

Finally, Lindsey pointed out that changes to management information systems programs can cause slippage in compliance when there is inadequate compliance quality testing as the program is selected and set up.

Chris Lombardo, from OTS's Central Region finds that the institutions are now getting good, conservative advice on compliance issues. He advises banks to follow the advice of their compliance experts. Lombardo sees most institutions making a real effort at compliance and few who make only an inadequate effort.

Lombardo gave the audience a hot tip: because of the time period limitations for truth in lending actions set by a recent court case and staffing constraints related to Y2K, the OTS is currently limiting Truth in Lending corrective actions to periods that are generally about 2 months long. He cautioned the students that this practice does not mean that there are fewer TIL errors - it simply means that this is what OTS is currently in a position to deal with. OTS finds that the largest errors involve ARM adjustments. Developing procedures for recalculating ARM adjustments is both difficult and time consuming.

As with the other agencies, OTS examiners find that the new fair lending procedures are the major compliance push for 1999. For OTS, the new examination procedures are a big change from the agency's previous fair lending examination procedures.

OTS's second compliance priority is new entrants into the industry. Institutions now seeking OTS charters are often highly atypical in structure or market. Each new charter application seems to provide special policy issues, particularly for CRA.

Ken Keiffer, FDIC praised the audience for making his job easy. He said that FDIC in the Kansas City region is finding very few problems. Y2K is an FDIC priority. He observed that the examiners are finding few problems and that banks will be ready. Now, banks should take steps to convince their customers.

Rick Chelsvig with the FRB-Chicago, said "We try to add value to our examinations." FRB examiners are trained to avoid being adversarial. Instead, the agency is taking a more supportive role with their member banks. As with the other agencies, Y2K is special issue for the Federal Reserve. However, he pointed out that the FRB has its own special Y2K challenges through its services such as check clearing and wire transfers.

Flood insurance is another top FRB priority. FRB examiners will review Flood Hazard compliance to make sure banks check for and require insurance when needed.

Chelsvig added that CRA data accuracy is a real concern. The agency is finding a significant issue with census tract identification. Sometimes different sources that the FRB uses will give different answers for a single address. This problem occurs particularly with small farm reporting. The next problem with CRA data accuracy is reporting the applicant's income. He added that compliance with flood insurance is major priority.

Lindsey agreed with the CRA data integrity problem. OCC examiners often find that there is revenue stream information in the loan file but that income is reported as unknown. This is identified as a data reporting problem when the examiner finds evidence in the file that the applicant's income was known and used but reported as unknown. This is particularly a problem with small business and small farm loan reporting. Lindsey stated that OCC expects institutions reporting CRA data to aim for the same level of data integrity as reporting of problem loans.

Another reporting problem is inaccurate reporting of increases in lines of credit. Chelsvig told the group that the issues are how banks actually pick up increases for reporting. They also find banks reporting advances that have already been reported. And then, there is a problem with how to pick up the business firm that crosses over CRA's $1 million threshold.

Chelsvig would like to see information relating to the institutions investments analyzed over several years to see investment trends, not just the activity the bank undertook in anticipation of an examination.

Copyright © 1999 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 5 & 6, 5/99