EMERGING CONSUMER RISKS FOR COMMUNITY BANKS

Transcription

1 November 14, EMERGING CONSUMER RISKS FOR COMMUNITY BANKS 2016 ANNUAL RISK MANAGEMENT CONFERENCE NOVEMBER 14, 2016

2 November 14, Paul J. Stark, SVP & Chief Credit Officer Civista Bank, Sandusky Ohio, $1.5 billion Jeffrey M. Bajek, SVP & Chief Credit Officer Venture Bank, Golden Valley Minnesota, $625 million

3 November 14, Emerging Risk?? Constantly changing landscape Emergence of Regulatory Risk Fallout of the Credit Crisis: Legislators to the Rescue! Legislative Action New Laws - New Regulations New Risk! Dodd-Frank is the leader of the pack! This Emerging Risk comes in two forms: New Laws and Regulations Enhanced Reinforcement of Existing regulations Surveys show significant concerns

4 November 14, 2016 New Laws and Regulations 4

5 November 14, RMA Survey of Community Bankers Objective: Identify Trends and Issues in Risk Management: Respondents identified the Most important risks identified: 46% - Cyber Risk 45% - Regulatory Compliance Risk 41% - Credit Risk 55% of respondents said that the cost to comply has risen at least 10% 85% of respondents cited residential mortgage regulation as one of the more expensive regulations to implement. BSA/AML followed closely behind.

6 November 14, Challenges / Impact 2016 Thompson Reuters Cost of Compliance Survey: More change 69% expect regulators to publish more rules Resource Challenges Difficulty finding skilled and experiences staff; (84%) Existing staff to cost more (67%) Technology and Reporting Driving technological change with new systems Increased reporting requirements Change / Complexity will continue More regulations / requirements Increased compliance staffing / Cost Ongoing enforcement effort / actions from exams New Agency The CFPB

7 November 14, We are from the government and we are her to help you!

8 November 14, CFPB Impact on Community Bank Emergence of CFPB Title X of Dodd-Frank gave a single agency the authority to write or update regulations for 18 consumer protection laws Supervision has been expanded to consumer reporting agencies, consumer debt collection, student loan servicing, international money transfers and most recently automobile financing s The CFPB mission is specifically focused on the consumer Not mandated to address safety and soundness of the financial entity Their mission is to Protect the Consumer The rule has also expanded federal regulatory supervision to nonbank financial institutions. Jurisdiction over Small Business Lending. Evaluation process has already started with hire of Grady Hedgespeth assistant director for the CFPB s new Office of Small Business Lending Markets

9 November 14, CFPB Impact on Community Banks Trickle Down Impact on Other Regulators The CFPB has the authority to enforce its rule making and many of the rules apply to the industry. The prudential regulators are discussing CFPB rules with community banks and encouraging community banks to implement as best practices. Frequently results in field recommendations. FDIC and OCC ae actively cooperating and collaborating with the CFPB OCC 2017 Operating Plan FDIC 2016 Annual Performance Plan CFPB has an indirect role in overseeing community banks.

10 November 14, RMA Role in Emerging Consumer Risk No shortage of industry opinions OR concerns about the current trends; Great resources available-- materials, newsletters & Webinars RMA Community Bank Council Members Share regulatory views from the top Offer real-world observations from our own banks to the challenges of compliance. Reams of material available from multiple sources Great amount of concern with rules for Mortgage Banking Other sessions of this conference will cover a number of residential mortgage (TRID, Mortgage Servicing, HMDA)

11 November 14, RMA Role in Emerging Consumer Risk Many Emerging Consumer Risks too many to cover all. We will cover the following: UDAAP Fair Lending Debt Collections HELOC End of Draw Periods Fintech Considerations Military Lending Act Loan Origination Compensation Interactive session feel free to ask questions and share experiences

12 November 14, UDAAP- Unfair, Deceptive or Abusive Acts or Practices UDAP Originated as section 5 of the Federal Trade Commission Act Expanded to UPAAP by Title X of Dodd-Frank - Unfair, Deceptive or Abusive Acts or Practices DEFINITION: An unfair act or practice is one that: (A) causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers, and (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition. DEFINITION: An abusive act or practice (1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

13 November 14, UDAAP Application of Rules A lot of words in the definition A very Broad interpretation of unfair or deceptive actions. The regulators will know it when they see it? In effect, they are Regulating Fairness Simple errors could be considered violations. Reports of increased UDAAP referrals Common themes: Add on products / benefit packages Banks actual practice does not align with legal contract and or disclosures Overdrafts

14 November 14, Implications: UDAAP- What to Do? Significant impact on your compliance management rating Directly impacts your Community Reinvestment Act (CRA) rating Could severely restrict banks ability to add branches or make acquisitions Remediation process moves slowly! Actions: Increase UDAAP training and awareness! Make sure consumers are properly informed of benefits and related fees before they agree to benefits package? Evaluate if servicing contracts and disclosures agree? Do servicing systems reflect contract at setup, system updates and conversions? Use strong project management and vendor management and remember to TEST! TEST! TEST! Review and monitor activity, product usage and fees and communicate with your customers

15 November 14, Fair Lending FDIC and OCC Highlight Fair Lending as an Emerging Risk OCC s 2017 Operating Plan and FDIC 2015 Winter Insights FDIC specifically mentions underwriting practices and implication on fair lending. High growth areas and auto lending. Equal Credit Opportunity Act Regulators are implementing statistical analysis & modeling on consumer loan portfolio s during exam process. Risk based pricing models can reduce the risk of discriminatory practices, but is not the magic bullet Use of risk-based pricing that is not based on objective criteria or applied consistently.

16 November 14, Fair Lending Reasonably Expected Market Area (REMA) Excepted area for marketing credit and where it actually marketed credit Regulation C Rule Making (HMDA) Dodd-Frank Act transferred to the CFPB Regulation C rule making authority New rule effective January 1 st, 2018 Depository institution that originated fewer than 25 home purchase loans, including refinancings of home purchase loans, in each of the two preceding calendar years, would not be required to report HMDA data 25 new data fields will be reported, for a total of 48 reported fields.

17 November 14, Fair Lending Implications Increased data gathering and reporting demands. Lesser ability to provide lending solutions for loans outside the box. Fines and penalties. Impact on CRA ratings and ability to acquire or expand. Actions Review current portfolio for pricing exceptions. Consider establishing a risk based pricing matrix and apply consistently. Set-up secondary approval for non-compliance loans (pricing and underwriting). Clearly document mitigating factors for non-compliance loans. Review legally prohibited factors on the CFPB web site and train your staff.

18 November 14, Debt Collection Fair Debt Collection Practices Act 2015 Semi-annual CFPB report outlines concerns about bank and non-bank collection efforts. For consumer loans only; driven by CFPB, but applies to all banks. Proposal under consideration to overhaul the debt collections market. Collect the correct debt. Limit excessive or disruptive communications. Make debt details clear and disputes easy. Document debt on demand for disputes. Stop collecting or suing for debt without proper documentation. Stop burying the dispute.

19 November 14, Debt Collection Implications: Primarily targeted at the non-bank collection industry, however, the same rules will apply to community banks. In 2014, the FTC: filed 10 new cases against 56 new defendants; resolved nine cases and secured nearly $140 million in judgments; and banned 47 companies and individuals from the debt collection business. Actions: Review coding on your loan accounting system for accurate reporting to the CRA. Review existing procedures for handling internal collection efforts. If outsourcing collection efforts, audit their procedures and practices. Utilize CRA s exceptions reports.

20 November 14, HELOC End of Draw Period HELOCs generated pre-recession have been and continue to mature. Joint statement issued on HELOCs in July 2014 defining expectations. Goes beyond monitoring of those with ending draw periods.

21 November 14, HELOC End of Draw Period Implications: This is an emerging examination issue Customers facing full repayment structures may have difficulty refinancing or restructure based on weaker credit and underlying LTV. Focus is on working with customers early to transition to amortization; Expectation is to have adequate systems to manage the process. Actions: Revisit the Joint statement Evaluate the size and complexity of your portfolio Assure that your procedures address each component

22 November 14, What is Fintech? Fintech Considerations Algorithmic underwriting, mobile payments, virtual currencies and crowdfunding Comes in all shapes and sizes depending on bank needs and appetite. Many agencies are reviewing oversight options. OCC, FTC, CFPB, FCA February, the CFPB finalized its No-Action Letter Policy. Under the Policy, companies developing financial products can receive clarification as to how CFPB regulations would apply to the proposed product April, the Senate Banking Committee asked the Government Accountability Office to update a 2011 report on marketplace lending, citing Fintech concerns. September, OCC publicly stated they are considering a Fintech charter.

23 November 14, Fintech Considerations Risk and Preparedness for Community Banks: Caution on partnering with a Fintech to chase fee income or loan growth. Understand your technology as it relates to movement depositor money. Vendor Analysis is critical. Data security is a threat and the CFPB has issued fines to non-bank entities (Dwolla, Inc.)

24 November 14, Military Lending Act (MLA) Military Lending Act of 2006 Military Lending Act amended by The Department of Defense (DOD) on 7/21/15 - Effective October 3, MLA Enacted in 2006 to provide specific protections for active duty service members and their dependents Applies to all forms of consumer loans except residential mortgage loans Extends MLA protections to a wider range of credit products: Includes the 36 percent Military Annual Percentage Rate (MAPR) cap Modifies the MAPR to include all related fees for credit-related ancillary products Modifies the disclosures that a creditor must provide to comply with TILA Banks must determine if borrowers are active duty military or dependents Modifies the existing prohibition on rolling over, renewing or refinancing consumer credit.

25 November 14, Military Lending Act (MLA) Implications Effective October 2016; Open ended October 2017 Need to confirm that they are not a service member, spouse, or the dependent of a service member; Thru a nationwide Credit Reporting Agency(CRA) or the DOD s own database Automated systems alone could be insufficient to monitor and track Subjects creditors to civil liability and administrative enforcement for MLA violations More reporting of data demonstrated compliance expected. Be prepared to show data to examiners. Actions Review product offerings where the MAPR could exceed 36%. Review your loan documentation software for adequate disclosure Establish procedures for verifying military status through a CRA or DOD MLA Document the file for Safe Harbor rule.

26 November 14, Loan Originator Compensation Requirements CFPB focuses on Loan Officer Compensation in As competition increases, Banks are looking to enhance compensation to attract originators. Regulators have taken notice. Your Fair Lending exam will encompass compensation rules for adherence to the CFPB guidance and Regulation Z. If accepting mortgage loan applications from brokers, determine whether these relationships conform to requirements under Regulation Z and the Truth in Lending Act, as well as CFPB guidance for MLO compensation Determine whether any part of overall compensation might be linked to loan terms or pricing.

27 November 14, Loan Originator Compensation Requirements Implications Fines and Penalties Mainly assessed to non-bank companies, but risk still exists with community banks, Reporting and record keeping. Must maintain for 3 years records sufficient to evidence all payments to originators and compensation agreement that governs each payment. Actions Create policy around your compensation rules and ensure policy is compliant. Prepare data analytics reports for review by senior management and audit committee.

28 November 14, Questions??