The pace of regulatory and compliance change isn’t likely to slow down in 2020. Lawmakers, regulators and community bankers are weighing reforms to the CRA, banking marijuana-related businesses and more.
By Mary Thorson Wright
Ah, 2020. Arduous regulatory upheaval from recent years, like that under the Dodd-Frank Act, Truth in Lending Act (TILA)-Real Estate Settlement Procedures Act (RESPA) reform and expanded Home Mortgage Disclosure Act (HMDA) recordkeeping and reporting, has been digested and is becoming distant in the rearview mirror.
While community banks and other financial institutions have not been deregulated, the tide of new regulatory initiatives has been curtailed, and a trend toward regulatory relief and more reasonable oversight has begun.
Time to sit back and relax? Well, no. The industry awaits guidance to implement certain provisions of S.2155 (the Economic Growth, Regulatory Relief, and Consumer Protection Act), and an evolution of other regulatory areas has begun. Community banks must be prepared to make changes.
Focus on CRA reform
Calls from across the industry to reform the Community Reinvestment Act (CRA) framework have prompted regulators to act.
This year is ripe for a discussion of CRA reform, and, while the outcome is yet to be determined, prospective improvements to CRA for consistency and transparency include:
- a clear, consistent and timely examination process
- asset thresholds adjusted to reflect the current banking environment
- assessment areas identified and delineated by the community bank
- expanded and consistently applied CRA-qualifying activities
- metric-based systems, if they allow for inherent bank characteristics
- alternative approaches for minority- and women-owned financial institutions and certified community development financial institutions (CDFI)
- parity in the application of CRA to all financial service providers that serve consumers and small businesses
“CRA will be an area for community banks to watch and focus on in 2020,” says Lilly Thomas, senior vice president and senior regulatory counsel for ICBA. “Community banks may need to change their handling of CRA programs and record keeping. Effective CRA modernization should reduce regulatory uncertainty and complexity and should clarify and enhance the ability of banks of all charter types and sizes to serve their communities.”
Reforms coming from Congress
According to Paul Merski, ICBA’s group executive vice president of congressional relations and strategy, several pieces of legislation are advancing in Congress that could dramatically reform Bank Secrecy Act (BSA) and anti-money laundering (AML) compliance for community banks.
The House vote passing the Secure and Fair Enforcement Act (SAFE) in September 2019
In May 2018, the Financial Crimes Enforcement Network’s (FinCEN) Customer Due Diligence Requirements for Financial Institutions Rule (CDD Rule) became effective. It, among other things, required financial institutions to identify and verify the identity of the beneficial owners of companies opening accounts. Now, legislative efforts are underway to remove banks from the beneficial ownership reporting process and change how companies disclose their beneficial owners.
A bill introduced in and passed by the House Committee on Financial Services as the Corporate Transparency Act of 2019 (H.R. 2513) would ensure that persons who form corporations or limited liability companies in the U.S. report the beneficial owners of those corporations or limited liability companies to FinCEN when they are formed, relieving community banks of the burden of collecting this information from their customers. Meanwhile, there has been bipartisan support in the Senate Banking Committee for such an action, including federal reporting requirements and maintaining all beneficial ownership information in a federal database. It is likely that further actions to vote on the bill in the House and Senate could occur in 2020.
Additional reforms could result from the Coordinating Oversight, Upgrading and Innovating Technology, and Examiner Reform (COUNTER) Act (H.R. 2514), which includes provisions for a feedback loop between law enforcement and the banks. The bill also recognizes the outdated currency transaction report (CTR) thresholds and would begin to address more meaningful filing of CTRs by increasing the threshold for CTR reporting to $20,000 or more from the current $10,000 threshold and indexing this threshold to inflation with adjustments made in five-year increments.
“Another area advancing to change the regulatory environment is uncertainty around banking cannabis-related legitimate businesses and service providers because of conflicting federal and state laws,” Merski says. At the time of this writing, the House had passed legislation the Secure And Fair Enforcement (SAFE) Banking Act of 2019 (H.R. 1595) to establish a cannabis-banking safe harbor in states where cannabis is legal in some form—currently 33 states.
Other regulatory reforms
There are many other regulatory issues on the 2020 horizon.
“Data security remains a focus,” says Viveca Ware, ICBA’s group executive vice president of regulatory policy. “Initiatives are growing to compel all participants in the processing chain to be subject to the same requirements for data security standards. Also, product and service innovation for community banks must meet the needs of customers while meeting reasonable and prudent regulatory requirements.”
Regulatory reform is shifting from creating new and strengthened rules to refining and modifying bank regulation to right-size regulatory requirements to the financial institutions to which they apply, to adjust requirements perceived as overly burdensome and to refine expectations communicated to banks by regulators. Community banks might not expect to be free of regulatory change, but the industry may breathe a sigh of relief at the potential changes to come in 2020.
Mary Thorson Wright, a former Federal Reserve examiner, is a financial writer in Virginia.