The year’s compliance challenges you need to know

While the Paycheck Protection Program and COVID-19 rightly dominated much of community banks’ attention this year, 2020 still brought some regulatory changes.

By Mary Thorson Wright

Community bankers felt some relief going into 2020 having conquered the challenges of the Dodd-Frank Act, TILA-RESPA reform and expanded HMDA recordkeeping and reporting in 2019. Hope sprang from changes promised by S. 2155, or the Economic Growth, Regulatory Relief, and Consumer Protection Act, for refinements and modifications that aimed to right-size regulatory requirements. Federal regulatory agencies responded to bank demands for Community Reinvestment Act (CRA) reforms to improve industry consistency and transparency.

The new year was young, however, when the global COVID-19 pandemic hit, leaving many people struggling to maintain their livelihoods. Community banks, faced with huge economic and operational challenges, shifted gears to bring about what they do best: Act to benefit their customers and communities.

“Early on, we began reaching out to our customers to evaluate their needs and see how we could best address them,” says Tim Grooms, chief risk officer for $591 million-asset First State Bank in Winchester, Ohio. “We also reviewed our loan workout and appraisal processes to see how they could be implemented in the most beneficial manner for our customers experiencing problems.”

As Congress sought to ease economic hardship, community bankers embraced the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) to assist their small business customers and communities. According to the SBA’s report of closed new PPP loan applications as of Aug. 8, banks with assets of less than $10 billion accounted for nearly 2.75 million loans and nearly $234 billion of total PPP loans (about 45% of them). Banks with less than $1 billion in assets counted nearly 1.1 million loans and a total of nearly $85 billion.

The surge in loan volume demanded efficiency and expediency. It also caused inflations in assets that could create issues for some community banks based on accounting and compliance requirements founded on asset size. Most asset-size thresholds are measured at year-end and could require adjustments to certain recordkeeping and reporting. ICBA has requested that federal regulators exclude PPP loans from total assets, similar to the rulings on exclusion from capital requirements and FDIC insurance.

“The Regulation D changes did bring some relief. … [It] has not felt consequential in most cases to limit transactions for consumer accountholders and even close their accounts.”
—Tammy Christianson, Viking Bank

Reg D, CRA and CTR changes

This year also brought a handful of regulatory compliance changes. In April, the Federal Reserve Board announced an interim final rule to amend Regulation D. The change allows consumers to make an unlimited amount of withdrawals or deposits from savings deposit accounts instead of being limited to six.

“The Regulation D changes did bring some relief,” says Tammy Christianson, compliance and Bank Secrecy Act (BSA) officer at $221 million-asset Viking Bank in Alexandria, Minn. “Monitoring, recordkeeping and preparing customer notices has been time consuming, but, moreover, it has not felt consequential in most cases to limit transactions for consumer accountholders and even close their accounts.”

The Office of the Comptroller of the Currency (OCC) issued a unilateral final rule of CRA changes effective Oct. 1, 2020, with some requirements to be phased in at a later date. The rule marks the first major revision to the CRA framework since the 1990s. Changes include four key areas:

  • CRA-qualifying activities
  • Preserving facility-based assessment areas and requiring deposit-based assessment areas of significant concentrations of retail domestic deposits
  • Establishing a more objective, consistent and transparent means of evaluating CRA performance
  • Imposing significant data collection, recordkeeping and reporting requirements intended to standardize the reporting process, increase transparency and reduce the lag time in preparing CRA exam reports

As of mid-October, action from the Federal Reserve and FDIC is still pending. In April, the Financial Crimes Enforcement Network (FinCEN) suspended until further notice the implementation of its Feb. 6 ruling for Currency Transaction Report (CTR) filing obligations when reporting transactions involving sole proprietorships and entities operating under a “doing business as” (DBA) name. FinCEN issued new guidance in August regarding customer due diligence (CDD) requirements for covered financial institutions in the form of frequently asked questions. The FAQs address requirements to 1) collect information under the CDD Rule, 2) use specific methods or categories to risk rate customers and 3) update customer information on a specific schedule.

Compliance hurdles

Community bankers juggled the pandemic with other challenges. Viking Bank dealt with compliance and operational changes from outsourcing compliance audits and converting a new branch from a state bank to a national bank branch. “We’ve also experienced an increase in scams this year,” Christianson says. “They’ve primarily been directed at older customers.”

Grooms says First State Bank has also seen and addressed an uptick in fraud and attempted fraud incidences.

From unpicking the PPP process to addressing more predictable compliance challenges, community banks faced another eventful year in compliance with diligence.

Mary Thorson Wright, a former Federal Reserve examiner, is a writer in Virginia.