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What Banks Must Do To Protect Against Noncompliance Risks

compliance is cheaper than finesBanks and credit unions are subject to extensive federal regulations regarding how they interact with customers and handle customer data, especially as it relates to lines of credit. Examples of consumer lending regulations include:

  • The Fair Credit Reporting Act (1970): Regulates the collection, dissemination, and use of customers’ private information as it pertains to their credit reports
  • The Truth in Lending Act & Regulation Z (enacted 1968 under the Federal Reserve; turned over to Consumer Financial Protection Bureau in 2011): Standardizes the disclosure of costs and charges associated with lending so consumers can shop around
  • The Credit Card Accountability Responsibility and Disclosure (CARD) Act (2009): Emphasizes fairness and transparency in the credit application process; also known as the Credit Card Holders Bill of Rights
  • The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010): Created an independent watchdog agency to hold lenders accountable and prevent the risky, exploitative behavior that contributed to the recession of 2008

In the wake of the 2008 recession, the issue of regulation has been highly visible, both to those inside the financial industry and to consumers who benefit from these protections. Lenders who are found to be noncompliant with any of these regulations face heavy punitive fines. In 2014 alone, U.S. and European banks paid out nearly $65B in noncompliance fines, according to Boston Consulting Group. That’s not to mention the cost of litigation above and beyond the fines themselves.

With so much at stake, banks must be proactive about compliance.

any institution that offers lines of credit is subject to annual compliance auditsFinancial institutions that offer credit cards, mortgages, specialized loans, and co-branded credit cards through retail partners are subject to annual audits to assess their compliance status. Many institutions may think they are ready for these audits, but could be more proactive about ensuring their safety.

Customer service and sales personnel could be considered to be on the front lines of compliance efforts. Their behavior toward customers who are applying for credit is a make-or-break factor. In order to protect themselves against noncompliance risks, banks need to take steps before, during, and after the application process.

  • BEFORE: Thorough training for customer-facing staff, and regular follow-up on this training, are essential. Anyone in a lending role must be aware of the behaviors that could trigger a noncompliance red flag. These can include their professionalism, comprehensive knowledge of fees and policies, ability to answer customers’ questions, “pressuring” behaviors that could influence customers to apply or not apply, and whether the customer is treated differently based on factors like race, gender, age, and household income.
  • DURING: Treat customers according to the best practices covered in training. Explain all pertinent details to the customer and provide the disclosures required by law. Make sure the customer has the opportunity to speak up with any questions, concerns, or needs for clarification, so that by the time they walk out your door, they are well-equipped to make an informed decision.
  • AFTER: Surveying customers following their application process helps banks assess whether the above criteria were actually met. Data produced by these surveys proves useful during the audit process. Conducting surveys also helps banks identify potential red flags in nearly real time and address them with the necessary measures.

Leniency or human error across any regulatory criteria comes with mighty consequences. Having the right people in the right roles, emphasizing training and adherence to regulations, and following up with surveys and research, are among the best steps banks can take to protect themselves. This is especially relevant for co-branded credit cards that banks may offer in partnership with retailers, where the training element is out of the bank’s direct control. (Read more about the risks of co-branded credit card partnerships.)

Who holds the banks accountable for compliance?

Following the recession, the Obama administration created the Consumer Financial Protection Bureau via the Dodd-Frank Act. Rather than leave everything to the Federal Reserve, the administration saw it necessary to appoint this agency as an objective third-party witness to lenders’ behavior.

Individual institutions, too, can benefit from appointing an objective, reliable outside party to monitor compliance. To help banks and credit unions insure their compliance status, CSP’s compliance solutions address the “After” portion of the credit application process. We collect data from customer surveys to support a bank’s position in the event of a complaint or an audit. This solution, which is entirely customizable, also allows us to notify a bank of potential red flags as they occur and reduce the risk of oversights or surprises.

To find out more about how we help banks protect themselves, contact John Berigan with your questions by email or by calling (800) 841-7954 ext:101.

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