Category: Financial Institutions and Banking

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Financial Institutions and Banking General

Keep It Fair – Stay Aligned With Fair Lending Practices

Abstract:   Community banks are on the front lines when it comes to ensuring people in their local areas have equal access to loans. This means they must be vigilant in maintaining stringent lending standards to avoid any suggestion of discriminatory practices. This article suggests five steps for avoiding violations of fair lending laws and developing an effective compliance program, including conducting a risk assessment and providing compliance training.

Keep it fair

Stay aligned with fair lending practices

Community banks are on the front lines when it comes to ensuring people in their local areas have equal access to loans. This means they must be vigilant in maintaining stringent lending standards to avoid any suggestion of discriminatory practices. Violations of fair lending laws have the potential to affect a community bank’s bottom line in the form of litigation or other penalties. Plus, they may cause a bank to lose customers.

The laws are clear

There are two primary fair lending laws. First, the Fair Housing Act (FHA) prohibits discrimination in residential real estate-related transactions based on race or color, national origin, religion, sex, handicap, or familial status. For example, banks can’t discriminate against households with one or more children under 18, pregnant women, or people in the process of adopting or otherwise gaining custody of a child.

Second, the Equal Credit Opportunity Act (ECOA) prohibits discrimination in credit transactions based on race or color, national origin, religion, sex, marital status, age (assuming the applicant has the capacity to contract), an applicant’s receipt of income from a public assistance program, or an applicant’s good faith exercise of his or her rights under the Consumer Credit Protection Act.

In addition, the Home Mortgage Disclosure Act requires certain lenders to report information about mortgage loan activity, including the race, ethnicity and sex of applicants. And the Community Reinvestment Act provides incentives for banks to help meet their communities’ credit needs.

These steps will help

Here are five tips for developing an effective compliance program:

  1. Conduct a risk assessment. Identify your bank’s most significant fair lending risks based on its size, location, customer demographics, product and service mix, and other factors. This can reveal weaknesses in the bank’s credit policies and procedures and other aspects of its credit operations. It’s particularly important to examine the bank’s management of risks associated with third parties, such as appraisers, aggregators, brokers and loan originators.
  2. Develop a written policy. A comprehensive written fair lending policy is key to help minimize your bank’s risks. This document can go a long way toward mitigating the bank’s liability in the event of a violation by demonstrating its commitment to fair lending.
  3. Review your data. Analyzing data about your lending and other credit decisions is important for two reasons: First, it’s the only way to determine whether disparities in access to credit exist for members of the various protected classes. These disparities don’t necessarily signal that unlawful discrimination is taking place — but gathering this data is the only way to make this determination.

Second, lending discrimination isn’t limited to disparate treatment of protected classes. Banks are potentially liable under the FHA and ECOA if their lending practices have a disparate impact on protected classes. For example, a policy of not making single-family mortgage loans under a specified dollar amount may disproportionately exclude certain low-income groups, even though the policy applies equally to all loan applicants.

Banks can defend against allegations of discrimination based on disparate impact by showing that the policy was justified by business necessity and that there was no alternative practice for achieving the same business objective without a disparate impact.

  1. Provide compliance training. Even the most thorough, well-designed policy won’t be worth the paper it’s printed on unless you provide fair lending compliance training for bank directors, management and other relevant employees. It’s also important to evaluate whether the policy is effective.
  2. Monitor compliance. You’ll need to monitor your bank’s compliance with fair lending laws and promptly address any violations or red flags. Among other things, perform regular data analysis; monitor and manage consumer complaints; keep an eye on third-party vendors; and conduct periodic independent audits of your compliance program (by your internal audit team or an outside consultant).

Stay on top of fair lending practices

Lending is a key function of any community bank, so your bank should stay alert to any potential violations of fair lending laws. Although some of these laws have been in place for many years, that doesn’t mean banks should become complacent. If not addressed properly, these issues may come back to haunt your bank’s operations and negatively affect its financial health. Contact us to learn more.

© 2024

Categories
Financial Institutions and Banking General

Consumer Reports Study Provides Insights into Mobile Banking Apps

Online and mobile banking apps have become wildly popular. According to a 2023 study by Consumer Reports (CR), 75% of Americans use one or more banking apps to check their balances, monitor transactions, transfer and receive money, deposit checks, pay bills, and perform other tasks. Of those who use banking apps, 77% use them at least once a week — and 32% use them every day, or nearly every day.

In March 2024, CR published a report, “Banking Apps: The Case Study for a Digital Finance Standard.” For this report, CR evaluated 10 popular mobile banking apps — five offered by large traditional banks and five offered by “digital” (that is, online only) banks. CR found that many apps fall short, particularly when it comes to fraud protection, privacy and accessibility. Here are some additional highlights from the report.

Fraud protection

Although CR’s 2023 survey found that the vast majority of users feel confident that their banking apps adequately protect them against fraud and scams, the 2024 report concluded that the banking apps generally don’t “adequately commit to real-time fraud monitoring and notifying users in the event of suspicious activity.” Also, while most banks provide users with basic fraud education on their websites, some fail to provide similar information in their apps.

CR recommends that banking apps make explicit commitments to real-time fraud monitoring and fraud notifications to users. The apps also need to increase education about scams and fraud.

Privacy

According to CR, “Most of the banking apps we reviewed share data beyond what is required to provide the service the user requests, and only some banking apps offer the ability to opt out of targeted advertising.” The report recommends that banks “practice true data minimization” in their apps.

It also suggests that banks should provide more meaningful information about data that’s shared with third parties. Finally, banks need to provide in-app controls over data sharing and targeted advertising to make it easy for users to opt out.

Accessibility

CR found that many banking apps are lacking when it comes to accessibility for users with disabilities. In addition, the apps aren’t necessarily accessible for those whose primary language isn’t English.

The report urges banks to “build robust accessibility features directly into mobile apps and websites,” particularly for users with visual or hearing disabilities. It also recommends making apps and account information available in Spanish and other languages.

Financial well-being

According to the report, digital banks offer maintenance fee structures that benefit users’ financial health, while traditional banks fall short in this regard. CR also found that banking apps are inconsistent in offering tools and features designed to help users improve their financial well-being, such as automated savings features, budgeting tools, goal-setting features and spending indicators. Plus, most users don’t take advantage of these resources. The report concluded that banks “can do more to educate their customers about the importance of saving and budgeting and make app design decisions that encourage active use of these tools.”

CR recommends that banks eliminate maintenance fees, seamlessly embed interactive financial health tools in their apps and track user financial well-being metrics as institutional key performance indicators.

Best practices

As mobile banking apps continue to grow in popularity and functionality, the CR report provides a useful guide to best practices when designing these apps. Banks can create a competitive edge by ensuring their mobile banking apps are up to speed. Contact us for more information.

© 2024

Categories
Financial Institutions and Banking General

Bank Wire

Abstract:   This brief summary of current developments in community banking explains the importance of having internal controls that identify, monitor and control residential real estate valuation discrimination. In addition, it notes that bank customers are generally skeptical of the use of artificial intelligence (AI) to assist in various banking services. Finally, it warns financial institutions about the increasing use of counterfeit U.S. passport cards to perpetrate identify theft and schemes.

Bank Wire

Steering clear of discrimination in real estate valuation

A recent Federal Financial Institutions Examination Council (FFIEC) statement discusses “Principles Related to Valuation Discrimination and Bias in Residential Lending.” The statement notes that “Deficiencies in real estate valuations, including those due to valuation discrimination or bias, can lead to increased safety and soundness risks, as well as consumer harm.” The statement lists several examples of potential consumer harm, such as:

  • Denial of access to credit for which a consumer is otherwise qualified,
  • Offering consumers credit at less favorable terms, and
  • Steering consumers to a narrower class of loan products.

Banks whose internal controls fail to identify, monitor and control valuation discrimination or bias may be exposed to legal and compliance risks or negative assessments by regulators. To avoid these issues, the FFIEC encourages banks to establish a formal valuation review program consistent with the Interagency Appraisal and Evaluation Guidelines.

Consumers are skeptical of AI

Banks increasingly use artificial intelligence (AI) to streamline and enhance various processes, including customer service, fraud prevention and detection, compliance, underwriting, collections, and marketing. But it’s important to recognize that customers may not be fully on board.

According to a recent survey by J.D. Power, “While banks are investing time and resources to integrating AI into their offerings, customers are simply not convinced that AI is to be trusted. More than half (56%) say they only somewhat trust the quality of the output generated by their bank’s use of AI, with 32% saying they don’t trust it at all.”

Part of the problem, the report theorizes, may be that banking customers “view their institution’s use of AI as less advanced than other industries’ solutions.” To get customers more comfortable with AI, J.D. Power says, banks “need to go the extra mile by making [customers] understand how they’ll personally benefit from it.”

Watch out for counterfeit U.S. passport cards

In a recent notice, the Financial Crimes Enforcement Network (FinCen) warned financial institutions about the use of counterfeit U.S. passport cards to perpetrate identify theft and fraud schemes. Some examples of warning signs include:

  • Photos that are in color, have a white, blurry border or have a dark gray square surrounding them,
  • Account holder photos on file that don’t match the photo on the card or the individual presenting it, and
  • A missing holographic U.S. Department of State seal or a seal from an unrelated agency.

The notice provides an overview of these schemes and highlights 17 selected technical, behavioral and financial red flags to assist banks in identifying and reporting suspicious activity. Contact us for more information.

© 2024

Categories
Financial Institutions and Banking General

Is Your Bank Ready for FDICIA Compliance?

Is your bank ready for FDICIA compliance?

The Federal Deposit Insurance Corporation (FDIC) reports that the number of insured financial institutions has dropped from around 8,000 to just under 4,600 over the last 14 years. When institutions consolidate, their average asset size swells, so it’s important for banks to be mindful of their obligations under the FDIC Improvement Act of 1991 (FDICIA).

What does the FDICIA require?

The FDICIA imposes stricter auditing, reporting and governance obligations once banks have $500 million in total assets, followed by even more rigorous requirements at $1 billion in assets. According to the FDIC’s most recent Community Banking Study (December 2020), the average asset size of community banks in 2019 was approximately $470 million. So, it’s likely that many community banks will cross the $500 million threshold in the future.

It’s important to monitor your bank’s assets closely to prepare for FDICIA compliance before you reach the threshold (ideally one to two years). An early start will help ensure a smooth transition. It will also give you an opportunity to test new controls and procedures, allowing you to remedy any deficiencies before you start submitting reports to federal regulators.

What’s required before reaching $500 million?

Your bank should take several steps as you approach the first reporting threshold. The FDICIA will require submission of comparative financial statements. If you don’t currently prepare audited financials, you can use unaudited ones for the year before you’re subject to the FDICIA. Nevertheless, it’s a good idea to obtain at least a balance sheet audit for the previous year. That way, any material weaknesses or significant deficiencies the auditor identifies can be addressed before you report to federal regulators.

Additionally, review your audit committee’s composition to ensure that a majority of its members are independent. You may need to replace some members who have conflicts and add new directors, so leave plenty of time to conduct a diligent search.

Also review your accountants’ services for potential independence issues. Early preparation will provide time to arrange separate firms for audit services and prohibited nonaudit services. Your auditor won’t be allowed to prepare financial statements, so management should be prepared to assume greater responsibility for financial statement preparation and review.

What’s required at $500 million?

When your bank’s total assets reach $500 million, key requirements include:

  • Audited financial statements. Audited financial statements must be submitted with the independent auditor’s report to the relevant federal banking agency within 120 days after the fiscal year-end (90 days for publicly traded banks).
  • Auditor independence. Your bank must comply with the strictest auditor independence standards applicable to public companies. That means your auditor must avoid conflicts of interest and prohibited financial relationships with your bank, rotate audit partners at least every five years, and refrain from providing prohibited nonaudit services to your bank. Examples include bookkeeping, financial statement preparation, valuation, internal audits and tax services for certain bank insiders.
  • Management reports. Annual reports must include statements on management’s responsibility for 1) preparing financial statements, 2) establishing and maintaining adequate internal control over financial reporting (ICFR), and 3) complying with certain safety and soundness laws and regulations.
  • Audit committee composition. Your bank’s board must have a separate audit committee, and a majority of the committee’s members must be outside directors who are independent of management.

Remember these requirements when preparing to comply.

What’s required at $1 billion?

The following additional requirements apply when your bank’s total assets reach $1 billion:

  • Expanded management reports. Your bank must submit an evaluation of the effectiveness of its ICFR as of the fiscal year-end, based on a recognized framework.
  • External opinion on ICFR. You must submit an independent auditor’s attestation report on the effectiveness of ICFR as of the fiscal year-end.
  • Fully independent audit committee. All members of your audit committee must be independent of management.

These time- and resource-intensive steps require an early start.

Create a roadmap

A smooth journey to FDICIA compliance requires a detailed plan. Contact your CPA to discuss steps needed as your bank’s total assets approach the $500 million and $1 billion mileposts.

Sidebar:   Measuring assets for FDICIA purposes

The applicability of the FDIC Improvement Act (FDICIA) is based on total assets as of the beginning of your bank’s fiscal year, per your most recent Call Report. Banks that operate on a calendar year should consult their December 31 Call Reports to determine total assets on January 1 of the following calendar year.

FDICIA coverage for a given fiscal year is based on a bank’s total assets as of the first day of that year, regardless of asset-level fluctuations during the year. For example, if a calendar-year institution’s total assets are $550 million as of September 30, 2024, it won’t be subject to the FDICIA in 2025 if total assets drop to $495 million as of December 31, 2024.

However, if the bank’s assets are greater than $500 million as of the end of 2024, it will be subject to the FDICIA throughout 2025, even if its total assets dip below the threshold during the year. Contact us for more information.

© 2024

Categories
Financial Institutions and Banking

Bank Wire: BNPL Loans: Managing the Risk

In a recent bulletin, the Office of the Comptroller of the Currency (OCC) offers guidance to community banks on managing the risks associated with buy now, pay later (BNPL) loans. These loans can take many forms, but the bulletin focuses on those that are payable in four or fewer installments and carry no finance charges. Typically, these loans are offered at the point of sale. The lender pays the merchant a discounted price for the good or service and, in exchange, assumes responsibility for granting credit and collecting payments from the borrower. The lender’s primary source of revenue is the difference between the total installment payments and the discounted purchase price, though it may also collect late fees from the borrower.

The bulletin warns banks of various risks associated with BNPL loans. For example, borrowers may overextend themselves or not fully understand their repayment obligations; applicants with limited or no credit history may present underwriting challenges; and the lack of clear, standardized disclosure language may obscure the true nature of the loan, creating a risk of violating prohibitions against unfair, deceptive or abusive acts or practices. The OCC offers tips on designing risk management systems that “capture the unique characteristics and risks of BNPL loans.” You can find the bulletin at https://www.occ.gov/news-issuances/bulletins/2023/bulletin-2023-37.html.

Guidance on venture loans

In another recent bulletin, the OCC offers guidance to banks considering venture lending — that is, commercial lending activities that target high-risk borrowers in the early, expansion, or late stages of development. According to the bulletin, the primary risks associated with venture lending include unproven cash flows, untested business models, difficulty projecting future cash flows, high liquidity needs, high investment spending, and limited refinancing or business exit options.

Typically, these risks are greater for borrowers at an earlier stage of development. The bulletin — which can be found at https://www.occ.treas.gov/news-issuances/bulletins/2023/bulletin-2023-34.html — provides guidance on managing these risks.

CFPB proposal would close overdraft loophole

The Consumer Financial Protection Bureau (CFPB) recently issued a proposed rule designed to rein in excessive overdraft fees charged by large banks. The proposal would end the exemption of overdraft lending services from the Truth in Lending Act and other consumer protection laws.

Banks would be permitted to extend overdraft loans if they comply with the requirements of these laws or, alternatively, charge a fee to recoup their costs at an established benchmark (as low as $3) or at a cost they calculate (provided they show their cost data). The proposed rule would apply only to insured financial institutions with more than $10 billion in assets, but it may be expanded to smaller institutions in the future.

© 2024

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Financial Institutions and Banking

Staying Atop the New-and-Improved CRA Rules

Final rules to strengthen and modernize the Community Reinvestment Act (CRA) were unveiled by the Federal Reserve, Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) late last year. Among other things, the new rules strive to adapt the CRA regulations to changes in the banking industry, including the expanded role of mobile and online banking.

At nearly 1,500 pages, the new rules are complex. Fortunately, with the exception of provisions that are similar to current CRA regulations, banks have until January 1, 2026, to comply. All banks should reevaluate their CRA programs in light of the new rules, and prepare for any necessary adjustments.

CRA in a nutshell

The CRA encourages banks to help meet the credit needs of the communities in which they operate — including low and moderate-income neighborhoods — consistent with safe and sound banking operations. To monitor compliance, the federal banking agencies periodically evaluate banks’ records in meeting their communities’ credit needs and make their performance evaluations and CRA ratings available to the public. The agencies take a bank’s CRA rating into account when considering requests to approve bank mergers, acquisitions, charters, branch openings and deposit facilities. A bank’s CRA rating may also affect its reputation in the community.

Highlights of the new rules

CRA evaluation standards vary depending on a bank’s size. The new rules increase the asset size thresholds as follows:

  • Small banks are defined as those with less than $600 million in assets (up from $357 million).
  • Intermediate banks are those with $600 million but less than $2 billion in assets (up from $1.503 billion).
  • Large banks are those with $2 billion or more in assets (up from $1.503 billion).

The final rules create a new evaluation framework that rates a bank’s CRA performance based on four tests: 1) a retail lending test, 2) a community development financing test, 3) a community development services test, and 4) a retail products and services test. These new tests, which are more stringent than existing standards, have varying applicability depending on a bank’s asset size.

Small banks will be evaluated under the current “small bank lending test,” though they may opt into the new retail lending test. Intermediate banks will be subject to the new retail lending test — plus, they’ll have the option of having their community development loans and investments evaluated under the existing community development test or the new community development financing test. Finally, large banks will be evaluated under all four new tests.

Rules matter

As before, banks of all sizes will still be able to request an evaluation under an approved strategic plan. The new rules also provide for the evaluation of lending by certain large banks outside traditional assessment areas generated by the growth of new delivery systems, such as online and mobile banking. Staying current with the latest CRA rules will help your bank pass the tests and maintain its good standing over time.

© 2024

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Financial Institutions and Banking

Federal Court: Financial Institution Liable for ACH Fraud Losses

In a recent case — Studco Building Systems US, LLC v. 1st Advantage Federal Credit Union — the U.S. District Court for the Eastern District of Virginia held a credit union liable for more than $500,000 in fraudulent ACH payments deposited into a member’s account and quickly withdrawn. The payments were the result of a business email compromise scam. There was little or no evidence that the credit union had actual knowledge of the scam. But the court found that such knowledge was imputed to the credit union based on real-time alerts from its anti-money laundering system and various red flags indicating that the account was being used for fraudulent purposes.

Compromised email scam

The plaintiff in Studco was a manufacturer of commercial metal building products. A supplier informed the plaintiff that it would be sending a change in banking instructions. However, a third party, which had gained access to the plaintiff’s email system, prevented the plaintiff from receiving the legitimate email from the supplier with the new banking instructions. Instead, the third party sent the plaintiff a spoofed email, purportedly from the supplier, instructing it to direct future payments to a personal account at the defendant credit union. Neither the plaintiff nor its supplier had accounts at the credit union.

Over the next few weeks, the plaintiff made four ACH deposits — totaling $558,869 — that named its supplier as beneficiary but listed the account number for the personal account created by the scammers. The individual owner of that account quickly dispersed all the funds. Although the credit union declined to make attempted international wire transfers from the account — based on Office of Foreign Assets Control alerts — it didn’t otherwise stop activity into or out of the account.

The credit union’s computer system automatically generates warnings for ACH transactions when, as in this case, the identified payee doesn’t exactly match the name of the receiving account holder. However, the system generates “hundreds to thousands” of these warnings per day, the majority of which aren’t significant, so the credit union’s personnel doesn’t actively monitor them.

Court decision

The court said, under the Uniform Commercial Code (UCC) as adopted by Virginia, the plaintiff had the right to recover the fraudulent ACH deposits received by the credit union if it showed that the credit union “‘[knew] that the name and [account] number’ of the incoming ACHs from [the plaintiff] ‘identif[ied] different persons.’” According to the UCC, “know” means “actual knowledge,” defined as follows:

Actual knowledge of information received by the organization is effective for a particular transaction from the time it is brought to the attention of the individual conducting that transaction and, in any event, from the time it would have been brought to the individual’s attention if the organization had exercised due diligence. [Emphasis added]

The UCC further provides that an organization exercises due diligence if it “maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routines.”

In Studco, the court held that the credit union would have discovered the mismatch between the intended payee and the recipient if it had exercised due diligence. Evidence at trial showed that the credit union failed to do so. Among other things:

  • The credit union allowed the recipient to open the account even though it triggered an “ID verification warning,” stating that the system was unable to verify the address provided.
  • The credit union failed to establish a reasonable routine for monitoring suspicious activity alerts. It wasn’t reasonable to ignore those alerts because of their sheer volume. The credit union could have implemented a system to “escalate pertinent alerts of high-value transactions.”
  • It was unreasonable for the credit union to allow the deposits into the personal account, which was a new account that had a small starting balance followed by multiple high-value transactions.

The court essentially applied a “knew or should have known” standard that’s a departure from the “actual knowledge” standard used by many courts. (See “What other courts have said” on page X.) As the court explained, the credit union couldn’t “ignore their own systems to prevent fraud in order to claim that they did not have actual knowledge of said fraud.”

Stay tuned

It remains to be seen whether the Studco case is an aberration, or whether it heralds a shift in how courts view financial institutions’ responsibility to monitor ACH transactions for potential fraud. The credit union has appealed the decision to the Fourth U.S. Circuit Court of Appeals.

Sidebar: What other courts have said

Before Studco (see main article), most courts have focused on a bank’s state of knowledge at the time an ACH payment is credited to the recipient’s account. They point to language in the Uniform Commercial Code regarding misdescription of the beneficiary: “If the beneficiary’s bank does not know that the name and number refer to different persons, it may rely on the number as the proper identification of the beneficiary of the order. The beneficiary’s bank need not determine whether the name and number refer to the same person.” As the comments to this provision explain, “It is possible for the beneficiary’s bank to determine whether the name and number refer to the same person, but if a duty to make that determination is imposed on the beneficiary’s bank the benefits of automated payment are lost.”

In Shapiro v. Wells Fargo Bank, a case with similar facts to Studco, the 11th U.S. Circuit Court of Appeals found that it wasn’t unreasonable for Wells Fargo to allow its automated payment system to ignore a potential name mismatch and rely on the number as the proper identification.

© 2024

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Financial Institutions and Banking

FAQs About Selling Mortgages on the Secondary Market

In an increasingly volatile marketplace, community banks need to be resourceful to take advantage of strategies that can help them maintain profitability and stability over time. Selling mortgage loans that your bank originated to secondary market investors can create a much-needed influx of cash, but it’s important to understand and mitigate the risks.

How did we get here?

Traditionally, community banks that participated in the secondary market were brokers, originating mortgages closed on behalf of larger financial institutions. In 2013, the Consumer Financial Protection Bureau (CFPB) finalized new loan originator compensation rules, which substantially limited the fees a broker could earn.

Since then, many community banks, in an effort to enhance noninterest income, have begun originating mortgages on their own behalf and then selling them to secondary market investors.

What are the risks?

Community banks that move away from the broker role and originate their own loans increase their risk exposure. For one thing, they become subject to CFPB rules, including the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rules, which were revised in April 2021 with a mandatory compliance date of October 1, 2022. Even after selling a loan to the secondary market, a bank remains liable under these rules. A bank might even be required to buy back the loan years later if it’s determined that it failed to properly evaluate the borrower’s ability to repay or to meet qualified mortgage standards.

To mitigate these risks, it’s important for banks to develop or update underwriting policies, procedures and internal controls to ensure compliance with the revised ATR and QM rules. It’s also critical for banks to have loan officers and other personnel in place with the skill and training necessary to implement the rules.

Moreover, there’s a risk that contracts to sell mortgages to the secondary market will have a negative effect on a bank’s regulatory capital. Often, these contracts contain credit-enhancing representations and warranties, under which the seller assumes some of the risk of default or nonperformance. Generally, these exposures must be reported and risk-weighted (using one of several approaches) on a bank’s call reports. In turn, this can increase the amount of capital or reserves the bank is required to maintain.

Will updated Basel III rules add risk?

In addition, the Basel III capital rules are currently being updated to reduce operational risk in banks. The update was made in response, in part, to several 2023 regional bank failures largely caused by inadequate levels of capital. Known as the Basel III endgame, the update is somewhat controversial because some see its requirements as excessively stringent. Currently, the Basel III endgame is scheduled to take effect July 1, 2025, and will phase in the capital ratio impact over three years.

Among other things, the updated rules would reduce banks’ ability to use their own models for calculating capital requirements for loans. Banks would instead be required to use standardized measures and models to evaluate loan risks.

Stay vigilant.

Community banks have much to gain by selling their mortgage loans to the secondary market, but only if they fully understand and take steps to mitigate the potential problems. Staying on top of the latest regulatory updates and developing proper procedures and internal controls will help ensure the rewards outweighs the risks.

© 2024

Categories
Financial Institutions and Banking

Bank Wire

Regulators focusing on liquidity risk management

Liquidity risk is in the spotlight, given last year’s notable bank failures and federal banking regulators’ explanations of the underlying causes. As regulators focus on liquidity risk management, they’re reminding banks that their 2010 “Interagency Policy Statement on Funding and Liquidity Risk Management (SR 10-06)” continues to be the primary guidance on the subject.

The policy statement discusses eight critical elements of sound liquidity risk management:

  1. Effective corporate governance,
  2. Appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk,
  3. Comprehensive liquidity risk measurement and monitoring systems that are commensurate with the bank’s complexity and business activities,
  4. Active management of intraday liquidity and collateral,
  5. An appropriately diverse mix of existing and potential future funding sources,
  6. Adequate levels of highly liquid marketable securities free of legal, regulatory or operational impediments that can be used to meet liquidity needs in stressful situations,
  7. Comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements, and
  8. Internal controls and internal audit processes sufficient to determine the adequacy of the bank’s liquidity risk management process.

Banks need to follow these guidelines to ensure appropriate liquidity risk management.

Junk fees in the crosshairs

Federal agencies, including the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB), are cracking down on so-called “junk fees” charged by banks and other businesses. Recently, the FTC issued a proposed “Rule on Unfair or Deceptive Fees,” which would prohibit businesses from misrepresenting the total cost of goods or services by omitting mandatory fees from advertised prices and misrepresenting, or failing to disclose, the nature and purpose of fees. Although the FTC has no authority over banks, the CFPB has indicated that it will enforce the rule against violators in the financial industry.

Watch out for pig butchering scam

In a recent alert, the Financial Crimes Enforcement Network (FinCEN) warned banks about a dangerous virtual currency investment scam known as “pig butchering.” Given the devastating impact of this scam, FinCEN has asked banks to report suspicious activities indicative of this scheme. According to FinCEN, the scam resembles “the practice of fattening a hog before slaughter.” Criminals use fake identities, elaborate storylines and other techniques to convince victims they’re in a trusted partnership before defrauding them of their assets.

The alert explains the scheme and provides a detailed list of behavioral, financial, and technical red flags to help banks identify and report suspicious activity. It also reminds banks of their reporting obligations under the Bank Secrecy Act and reviews the filing instructions for suspicious activity reports.

© 2023

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Financial Institutions and Banking

What Can Visual Analytics Do For Your Bank?

Criminals are continuously looking for ways to use rapidly advancing technology for their own nefarious purposes. This is an ongoing issue for many community banks as they try to prevent money laundering and other crimes from happening within their operations. To protect your bank from criminal infiltration and ensure your bank remains in compliance with Bank Secrecy Act/Anti-Money Laundering (BSA/AML) laws and regulations, it’s best to fight fire with fire. Consider using data visualization software to help detect possible crimes before they can take hold.

How to comply with BSA/AML

Banks that fail to take reasonable steps to detect and prevent money-laundering activity risk government fines. They also may receive severe negative publicity that harms their reputations.

Several developments over the past few years reflect the federal banking agencies’ increasing concern about BSA/AML compliance efforts. For one thing, the Financial Crimes Enforcement Network (FinCEN) introduced customer due diligence (CDD) rules that require institutions to incorporate beneficial ownership identification requirements into existing CDD policies and procedures.

Within the past few years, the Office of the Comptroller of the Currency (OCC) alerted banks to increasing BSA/AML risks associated with technological developments and new product offerings in the banking industry. In addition, regulators increasingly have been scrutinizing automated monitoring systems used by banks to detect suspicious activity to ensure that they’re configured properly.

Regulators haven’t limited their heightened scrutiny to larger banks. In fact, some large banks have restricted certain customers’ activities or closed their accounts because of BSA/AML concerns. As a result, higher-risk customers often have moved to smaller banks with less experience managing the associated BSA/AML risks.

How to use visual analytics

Data visualization software — also known as visual analytics — can be a powerful AML tool. Traditional AML software products and methods do a good job of detecting known AML issues. But data visualization software, which is commonly used as an antifraud weapon, excels at spotting new or unknown AML activity.

As criminal activity becomes more sophisticated and more difficult to detect, traditional AML software or methods may no longer be enough. Data visualization software creates visual representations of data. These representations may take many different forms, from pie charts and bar graphs to scatter plots, decision trees and geospatial maps. Visualization helps banks identify suspicious patterns, relationships, trends or anomalies that are difficult to spot using traditional tools alone. It’s particularly useful in identifying new or emerging risks before they do lasting damage.

Criminal enterprises that wish to launder money typically use multiple entities and multiple bank accounts, both domestic and foreign. Using data visualization software, banks can map out the flow of funds across various accounts, identifying relationships between accounts and the entities associated with them. Data visualization can reveal clusters of interrelated entities that would be difficult and time-consuming to spot using traditional methods.

These clusters or other relationships don’t necessarily indicate criminal activity. But they help focus a bank’s AML efforts by pinpointing suspicious activities that warrant further investigation.

Use all the tools at your disposal

Money-laundering is an insidious and ever-present risk, and fraudsters are increasingly technology-savvy. Your bank needs to be alert to the potential dangers and use every analytic tool available to head them off, including data visualization software mapping.

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