A recent survey of financial industry executives conducted by Wolters Kluwer (75% of respondents represented institutions with less than $1 billion in assets) found that 73% do not anticipate significant regulatory relief before the 2024 elections. They do anticipate heightened regulatory scrutiny in 2023 in several key areas.
Section 1071 — Dodd Frank Amendment to the Equal Credit Opportunity Act
Some 68% of survey respondents said they are very or somewhat concerned about their institution’s ability to manage the small business data collection requirements for two reasons. First, lenders must develop and implement a process to obtain and report the data within 18 months of the final rule. Second, depending on what the data reveals regarding gender, race, and ethnicity of small business loan applicants, it could expose them to fair-lending issues. The proposed rule subjects a vast majority of community financial institutions to the requirement because they likely have originated at least 25 covered credit transactions in each of the two preceding years. The CFPB, which is required to collect the data under the Dodd-Frank Act of 2012, has agreed to finalize the rule by March 31, 2023.
BSA and AML — Bank Secrecy Act/Anti-Money Laundering
Some 44% of survey respondents said they are very concerned about these issues, and recent reports of cryptocurrency fraud and scams have likely further raised concerns. While it remains to be seen what will happen with crypto trading and investments going forward, financial institutions will continue to experience suspicious transaction activity and face compliance requirements including enhanced due diligence, KYC (Know Your Customer), and prevention and detection of money laundering activity.
Beneficial Ownership
Some 41% of respondents expressed a high level of concern, pending Treasury Department rules regarding the government’s creation of a beneficial ownership database. Some are concerned they could face increased compliance burdens, including a requirement to validate the accuracy of volumes of registry data and file SARs when information is suspect. FinCEN recently issued a final rule designating the legal entities that will be required to report beneficial ownership data beginning on Jan. 1, 2024, including limited liability partnerships, business trusts, most limited partnerships, corporations, and limited liability companies.
CRA — Community Reinvestment Act
Some 36% of the respondents said they are very concerned, particularly as it relates to fair lending and appraisal bias, which is increasingly pervasive in some markets. Appraisal bias occurs when a real estate appraiser assigns a lower value to a home based on its location or the homeowner’s race, ethnicity, or other factors that could be considered discriminatory. In early 2022, the Property Appraisal and Valuation Equity (PAVE) interagency task force created by a President Biden executive order and including HUD, FHFA, and other banking agencies, recommended a series of actions to: prevent unlawful discrimination in all stages of residential real estate valuation; enhance fair housing and fair lending enforcement; build a skilled, diverse appraiser workforce; empower consumers to take action against unfair appraisals; and regulate appraisers.
Third-Party Risk Management
Some 26% of respondents said third-party risk management will be a priority, up from 15% compared to the prior year. In the burgeoning open-banking environment, unregulated third-party relationships between financial institutions and fintechs are growing in order to share data and develop digital banking technologies and applications that are key to growth strategies. Regulators continue to expand risk management expectations and require regular assessment updates for such high-risk, third-party relationships.
Boards of directors and senior management teams should hold discussions regarding these topics to ensure steps are being taken to address new regulatory requirements and anticipated enhanced regulatory scrutiny. A proactive approach and ongoing strategic planning to address the ever-evolving regulatory environment will help to ensure your financial institution remains compliant with regulatory requirements.
For a comprehensive assessment of your financial institution’s compliance vulnerabilities and strategic planning to address concerns before they become issues, contact [email protected] or call 616.975.2823.