U.S. lenders feel confident, but why? Compliance, risk challenges abound

The “Regulatory & Risk Management Indicator,” now in its seventh edition, canvassed 704 professionals from banks, savings and loan institutions, and credit unions in 2019. Two-thirds (67 percent) of respondents were vice presidents, C-level officers, presidents/CEOs, or on the board of directors at their institutions.

This year’s survey generated a Main Indicator Score of 95, a 5 percent increase from the 2018 score. The Main Indicator Score is based on input from survey respondents on compliance and risk management concerns coupled with regulatory data (new U.S. banking regulations, enforcement actions, and levied fines against banks and credit unions) compiled over the past 12 months.

Respondents’ high confidence levels in 2019 are unprecedented in the survey’s seven years of existence.

“These findings suggest a strengthening of lenders’ compliance program management practices,” says Timothy Burniston, senior advisor for regulatory strategy with Wolters Kluwer’s compliance solutions business. “That said, relatively high levels of concern across a range of areas remain, reinforcing the reality that regulatory compliance and risk management issues continue to significantly challenge financial institutions.”

The hike in the 2019 score was mitigated by concerns about the impact of the Home Mortgage Disclosure Act (HMDA) rules, cyber-security, credit and compliance risk, and an increased level of fines, the research pinpoints.

HMDA rules demand an expanded array of mortgage-related data collection intended to better understand fair lending compliance. A year ago, Burniston predicted that, “For those reporting [new HMDA data], they will be challenged with being able to self-assess and to have the right analytical models for making sense of all that additional information as well.”

Twelve months later, Burniston was right: Given the expanded data set, concerns about managing increased HMDA analysis and reporting obligations increased significantly year over year. Reporters expressed heightened concern about their ability to analyze newly collected HMDA data—jumping from 21 percent in 2018 to 35 percent in 2019—and about reporting more exhaustive data to regulators, increasing from 15 to 40 percent, year over year. In addition, there was an increase in challenges related to training staff, from 31 percent in 2018 to 44 percent in 2019.

Top regulatory compliance challenges

Looking to the year ahead, respondents’ most pressing regulatory compliance challenges include: managing and implementing residential mortgage regulations (23 percent cited this as their top concern); keeping current with changing regulations (13 percent); complying with the forthcoming current expected credit loss (CECL) accounting standards (11 percent); deposit account regulations (11 percent); and compliance program management (10 percent).

Respondents also expressed a high level of concern about their ability to comply with Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) requirements as well as fair lending laws and regulations. Indeed, 41 percent of reporters perceived either a slight or noticeable increase in examiner scrutiny of fair lending programs.

“Maintaining compliance with the fair lending regulations, and proving to regulators that we are, in fact, compliant seems to be a moving target at times,” one executive commented.

“With the uncertainty surrounding our governmental affairs today, I fear closer looks and tougher consequences for what used to be considered minor compliance issues. In the ever-changing compliance world, we need to focus on new regs, new reg changes and consumer-harm driven regs, which often leaves the older, simpler regs to be left on the back burner. Most institutions are unable to adequately cover all compliance risk,” another offered.

Nearly half of respondents (45 percent) see it as somewhat or very unlikely there will be any reduction in regulatory burden over the next two years. Another 33 percent anticipate no change.

Risk management concerns

Nearly two-thirds of respondents were able to pinpoint, to varying degrees, the maturity of their organization’s ERM program, while 32 percent reported they were uncertain about the ERM in their organization. Nearly a third (30 percent) indicated their system was informal. Only 16 percent of reporters stated they had a strategic, integrated ERM system in place that was actively and consistently used by departments throughout the organization.

From a risk management perspective, cyber-security risk was by far the most frequently mentioned issue likely to receive escalated priority over the next 12 months (78 percent of respondents). Compliance and credit risk were also emphasized priorities (47 percent and 45 percent, respectively).

Obstacles to compliance 

While, overall, financial institutions feel better about their compliance management practices in 2019, there are still obstacles to tackle in the coming year. Specifically, reporters cited manual processes (47 percent), inadequate staffing (45 percent), and too many competing priorities (44 percent) as stumbling blocks to achieving an effective compliance program.

Interestingly, while reporters readily cited manual processes as a significant hurdle, only 26 percent anticipated increased investment in automation. Ninety-one percent said they often or sometimes use manual processes or spreadsheets, versus automated processes, to manage regulatory compliance.

Only 6 percent of respondents indicated they are actively engaged in developing or implementing artificial intelligence (AI), machine learning (ML), or natural language processing (NLP). More than half of respondents reported they are not actively considering such solutions.