Joel Williquette: COVID-19 exam concerns

Clipboard illustration

ICBA is engaging regulators so that examiners will recognize the extraordinary circumstances of COVID-19 come exam time.

By Joel Williquette, ICBA

If there’s one quality of community banks that has shone during the COVID-19 pandemic, it’s the ability to be nimble and responsive. Faced with new government programs and a dramatic change in their operating environment, community banks found ways to quickly adapt to continue to serve customers who needed the support of their local community bank more than ever.

This unprecedented flexibility didn’t come without compromise. As risk-averse institutions, community banks are by nature—and regulatory necessity—on guard when making major changes. They risk-assess a situation and take their time making a thoughtful decision and drafting policies and procedures to support them.

ICBA is working with the regulatory agencies to help ensure community banks won’t be dinged come exam time for their herculean efforts to aid customers and employees.

It’s basic risk and change management that regulators expect, but it’s also an approach that just wasn’t practical during the early stage of the pandemic. Now, with a new normal in place and exam time approaching, ICBA is working with the regulatory agencies to help ensure community banks won’t be dinged come exam time for their herculean efforts to aid customers and employees.

What’s needed from regulators now

The good news is that community banks were prepared in many ways. Working with regulators over the years, they developed and tested pandemic and business continuity plans. While the pandemic still caused disruption, the financial sector was among the most prepared thanks to this partnership with regulatory agencies. Yet, community bankers still faced time-sensitive challenges.

Earlier this summer, ICBA sent out a survey to community bankers asking them to share their biggest concerns for future exams. The theme was clear: Paycheck Protection Program (PPP) borrowers that sought smaller business loans need forgiveness.

Community bankers reviewed and approved a record number of loans to struggling small business customers, relying on the small businesses certification that the loan was necessary. This urgency replaced the methodical and thorough due diligence process that is the gold standard of community bank lending. Now community banks and small business customers are pushing for legislation like S. 4117, which would create a presumption of compliance and forgiveness for PPP loans with an original balance of $150,000 or less based on the borrower’s certification that the funds were used in accordance with the terms of the program.

Other critical changes that may require the understanding of regulators include:

  • Work from home. Most community banks hadn’t adopted a work-from-home model in large numbers before the pandemic forced it upon them. When they had to rapidly shift to a WFH model, many didn’t have the necessary equipment, technology or established procedures. Yet, they still had a duty to continue operations while protecting their employees and customers. In some cases, bringing work equipment or loan files home or using personal devices for business purposes was not permitted by acceptable use policies crafted for a pre-pandemic environment. Regardless, banks had to move forward. Community banks are now going back to write or rewrite policies and procedures and audit their performance to ensure that data remains safe and employees are compliant.
  • Vendor management. Many community banks had to beef up technology using third-party vendors. In many cases, community banks didn’t have time for the thorough risk assessments, due diligence, infrastructure design and contract negotiation that vendor management requires. They are now having to go back to perform these risk assessments, monitoring and due diligence and share the results with the board.
  • Loan folders. Some community banks rely on physical loan folders in addition to digital copies. It’s been difficult to keep these loan folders and other documents up to date with limited access to bank offices and interoffice mail. This lack of portability can introduce errors, causing issues with loan folder accuracy even though digital documentation is up to date. Again, established and practiced community bank procedures come to the rescue to mitigate errors in the form of ramped up internal audits.

Reducing exam risk

Examiners have largely been very understanding of these issues so far, but community banks can’t just expect a free pass. They need to show awareness and a proactive effort to fill in the blanks. Community banks should:

  • Maintain a relationship with examiners. The community bank and examiner relationship should not be combative. Examiners are a valuable and often underutilized resource. Community banks often have the same examiners each year, making it easy to maintain contact and build good relationships.
  • Raise potential issues before exam time. Don’t wait for exam time to ask a question or bring up a concern. Have those discussions now so you are in control of the dialogue and problems aren’t elevated during exam time.
  • Document decisions. Make sure the bank documents any actions that go outside of policies, procedures or the norm in board minutes. It’s OK to complete a document and accept a risk instead of correcting it—just be sure to document the discussion and the decision. This way, regulators know it’s not an oversight but a strategic decision in response to unusual circumstances.

ICBA will continue to have dialogue with community bankers and regulators as community banks continue to realign operations at a time of unprecedented conditions.

We appreciate the understanding of regulators and examiners who also successfully pivoted during the crisis to do their jobs and protect the financial sector.

Joel Williquette ( is ICBA senior vice president of operational risk policy