OCC report highlights elevated compliance risks in banking

In its spring “Semiannual Risk Perspective” report, the OCC found banks “face weak economic conditions resulting from the economic shutdown in response to the pandemic that will stress financial performance in 2020.” Among highlights from the report, the OCC noted that “compliance risk is elevated,” because of a combination of altered operations, employees working remotely, and several new federal and state programs designed to support consumers—such as the CARES Act, Paycheck Protection Program, and a variety of forbearance and deferred payment programs. “Among other challenges, these conditions complicate the compliance responsibilities associated with managing high volumes and various programs of consumer and business lending in a weakened economy,” the OCC said.

Related to increased compliance risk, specifically, the OCC pointed to an earlier statement it made clarifying Bank Secrecy Act (BSA) regulatory and risk management expectations and recognized that there “may be reasonable delays in meeting BSA compliance obligations during the COVID-19 pandemic.” That earlier statement highlighted that the Financial Crimes Enforcement Network (FinCEN) provided regulatory relief under the risk-based approach to BSA compliance. The Office of Foreign Assets Control (OFAC), too, issued a statement recognizing that the pandemic may cause delays in compliance.

The OCC said it “recognizes that pandemic response measures and programs may affect timely compliance with bank obligations implementing BSA programs and OFAC-administered sanctions (e.g., onboarding processes, customer due diligence updates, suspicious activity alert investigations, and blocking reports).” It went on to encourage banks to monitor information provided by law enforcement agencies and international AML standard-setting organizations regarding the ways criminals adapt their scams and money laundering techniques to exploit vulnerabilities created by the pandemic.

Among other recommendations, the OCC said banks should implement “appropriate risk-based adjustments in their BSA systems” in response to pandemic-related circumstances and keep their examiners updated on potential BSA and sanctions compliance issues, including potential delays in meeting regulatory reporting requirements. “Any deferred actions and temporary waivers should be tracked and managed so that banks can appropriately readjust their systems after the operating environment has returned to normal,” the OCC stated.

Consumer compliance and fair lending

Regarding consumer-related compliance practices, the OCC said banks “must remain diligent to ensure compliance with consumer protection, fair lending, and other laws and regulations when dealing with applicants for new or modified loans and working with customers affected by the COVID-19 pandemic.” Additionally, the increased reliance on remote work environments may create challenges to maintaining safeguards for protecting consumers’ personal financial information and for monitoring customer interactions for consistency with bank policies and procedures.”

The OCC further encourages banks to review interagency and Consumer Financial Protection Bureau statements providing information to banks working with borrowers affected by the pandemic. Such statements clarify the agencies’ supervisory and enforcement priorities and approaches for fair lending and other consumer protection laws during the pandemic.

Additional report highlights

The OCC also noted that “financial performance will be affected by higher credit losses, overhead expenses, and lower net interest income,” and that “the onset of the national health emergency created an uncertain credit environment that will test the resiliency of commercial and retail loan portfolios. Credit risk management practices will need to be flexible and proactive to meet the challenges of the current environment.”

The OCC further stated: “operational risk is heightened as banks amended business processes and engaged third parties to support widespread remote work capabilities, increased technological capacity, and solutions to maintain operations under elevated operational volumes.” The report also highlights government relief programs as a special topic in emerging risks.