Don't Roll Over and Play Compliant

Are examiners always right? Actually, the better question to ask is do all examiners really know what they are doing? With apologies to the many highly skilled, fair-minded, excellent examiners out there, we have to give an honest answer to these questions and say that not all examiners are always right and, unfortunately, there are times when some examiners don't know what they are doing. And instead of admitting their continuing need to learn, they make up the answers.

This is how compliance takes on monstrous proportions. We start out with relatively simple rules. At least, they may look simple in retrospect. Take CRA, for example. What could be simpler than to take into account a bank or thrift's record of helping to meet credit needs of its market, including low and moderate areas?

The problem was in determining how much was enough. Over a period of almost three decades, CRA has evolved from a relatively simple concept to a detailed set of tests, quantifications, and measurements. And we still don't know how much is enough. It comes down to judgment, and examiners aren't comfortable with concepts that cannot be measured, sorted, or quantified, such as Truth in Lending disclosures. Judgment can always be second guessed. The math - if you can agree on what constitutes a finance charge - can be proved. The answer that is correct today should still be correct tomorrow.

Not so with CRA. With CRA it all depends on how you look at it. It also depends on when you look at it. What is innovative today is ho-hum next year. What was enough in 1992 is a needs-to-improve in 2005. This makes the last exam report look wishy-washy when an examiner is preparing for a new exam. Not wanting to end up looking as bad as the predecessor who wrote that wishy-washy exam report (never mind that it was state-of-the-art when it was done) the new examiner thinks up some new questions. And we keep climbing the ladder, higher and higher.

And now, there is BSA, risk rating of customers, and CIP. Where, on earth, is that headed? The CIP rule looks fairly straightforward. Before opening an account, take steps to check the customer's identity and develop a comfort level that the customer is legitimate and plans to conduct only legal transactions with your institution.

Sound reasonable? It is, in theory. But here's the problem. Identifying a customer is not fool-proof. Instead, the steps in the CIP are designed to develop a comfort level with each customer based on the perceived risk that customer brings to the institution. But examiners, true to their training and the many hours spent with calculator in hand, want certainty. There is no certainty here, so what happens is that examiners ask for more. They ask for changes to the policies or additional steps to procedures - such as asking every innocent consumer seeking to open a savings account to provide the institution with a complete financial statement.

When examiners do this, most bankers assume the examiners know what they are doing. (Here's a tip: they don't.) Bankers roll over and play compliant. They agree to do whatever nonsensical thing the examiner has suggested. They do this because they believe the examiner's ideas are not suggestions but orders. Many bankers tend to assume that they have missed something or that they were on vacation when the CIP rule was revised.

But to quote a song from the opera, Porgy and Bess, It Ain't Necessarily So. Examiners are often as lost in compliance rules as a new compliance manager. However, too many examiners are reluctant to admit that they don't know something - even to their peers. And they are also uncomfortable ending an examination without making a recommendation or two. And thus are rules invented.

So when an examiner suggests something that simply doesn't make sense or that is not consistent with your understanding of the rule, it is time to ask questions. Ask why the recommendation is being made. Ask where it came from. Ask what the result is supposed to be. But don't just sit back and do things that aren't necessary.

Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 6, 5/05