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Embracing new technology ̶ “Lead, follow, or get out of the way”

Written by admin on . Posted in Information Technology, Management & Planning.

By Bill Elliott, CRCM; director of compliance education, Young & Associates

I have been teaching for Young and Associates for over 20 years. Twenty years ago, when I asked about “the percentage of customers that enter your lobby in any given month,” the answers I got from attendees were usually around 80 percent. Twenty years later, the answers are almost always under 25 percent. Just recently a banker in a seminar told me that they have a branch that has almost no foot traffic.

The reason for this change is obvious  ̶   why go to the bank or credit union when you can do it electronically? And the generations of customers coming up are more than willing to figure out how to do it on their smartphone. Since banking via your smartphone is readily available to anyone who has a decent cell signal, it is hard to argue with that position.

The problem for financial institutions is the constant struggle with technology and finding ways to leverage it better and faster. And the last two years of COVID have exacerbated the problem greatly, as customers were either reluctant to leave their homes, or institutions were unable to service customers except through perhaps the drive-through window. The result of all this is that some financial institutions have lost customers due to the lack of technology, while others have done very well because they had the technology available and could enable it to serve their customers.

Another question I ask in seminars is, “How many of you believe that you will get to retirement before your institution is opening accounts online?” If I have a 60-something person in the crowd, maybe I will get a hand raised. For everyone else, they can see it is either here or coming soon.

Embracing change

Management sometimes is reluctant to embrace change, which is understandable, as few enjoy it. But not changing may come at a cost that your organization is not willing to pay. To remain independent, financial institutions must step out of the comfort zone of, “We have always done it this way” and embrace the technology necessary for their survival and for their consumers’ needs. Pretending that it simply isn’t going to happen will not work ̶ it has already happened.

One of our clients is situated in an area where cows outnumber people three to one. Around 90 percent of their mortgage applications come in electronically and the bank encourages applicants to do it electronically, as that speeds the process up. A loan that closes faster means that the organization makes more money earlier, certainly a worthwhile goal.

On the deposit side, watch any football game, and major financial institutions tout the abilities that are available to the customer using their smartphone. One bank indicates that you can open a checking account online in five minutes. I’ve never tried it, but since the average customer takes more than five minutes to choose their check style, I’m not sure it is 100% accurate. But it is the wave of the future, or perhaps I should say the wave of the present.

After you decide why your organization wants to invest and leverage new technology (gain more customer insight, improve customer experience, penetrate new markets, etc.), here are some basics that you need to consider:

  • First, what systems are available that interface easily with your core processing system? If you cannot interface, you probably ought not be interested. The goal is to make everything flow from space to space to space with a minimum of human intervention, with high-quality information at each step to support why you are making this investment. While admittedly that means your staff must pay attention to get everything correct early in the process, once you do that, completing the transaction should be fairly simple. If your core processing system supports very little that would be useful to you in this new electronic banking world, it is possible that you may need to consider replacing it with something a little more flexible.
  • Second, you need to have the ability internally to manage the new processes and technologies. And you need to ensure that you have the training available to your staff so that they understand their role and responsibilities necessary to support your customer base.

More to consider

There is no question that all this costs money  ̶  but not doing anything also carries costs. Some of the cost of new technology may be offset by closing branches that are not necessary as these new delivery systems grow and mature. Closing a branch has its own real dollar costs, and management must assure that the closure will not impact the organization’s Community Reinvestment Act or fair lending positions. All this needs to be considered – and maybe discussed with regulators – before closing a branch. And even if you do not close a branch, some savings is possible with a reduction in your overall staffing levels.

I personally have a checking account that I really don’t need anymore, but I have several bills paid out of that checking account directly. Since the account is free, I’ve never bothered to do anything other than adequately fund the account, because moving all those transactions to my “main” checking account seems just too cumbersome. So, the technology keeps me a customer.

Once customers begin to intertwine bill pay, budget models and other products, they may think long and hard before unpacking all these services to move the account and business somewhere else. The digital experience is just as impactful to the overall customer experience as face-to-face contacts. And an integrated digital platform may help retain customers that may not be thrilled with your organization; however, the digital experience becomes so difficult to “unpack” that they accept their pain points and continue to remain customers. This retention provides you the time to address their pain points and transform them into advocate customers speaking highly of your quality of services to others.

“Lead, follow, or get out of the way”

Years ago, I heard the phrase, “Lead, follow, or get out of the way.” That certainly is our world today. Your best possible position is to be a leader. If you choose to follow, you may do just fine. But if you try to simply get out of the way, you may find yourself in a difficult position. So, you must consider your options here, and frankly do it very quickly.

Many in the industry are talking about Banking as a Platform (BaaP), Digital Transformation, and Banking as a Service (BaaS). These are all different concepts, yet all very relevant and available. It is our hope you make the choice to “lead” or “follow” closely and have your customers or new markets choose you for banking services. Please do not “get out of the way,” as it will be more challenging for you and your organization in the long run. Given how quickly technology and related issues advance, the “long run” is now measured in shorter and shorter time frames.

For more information on this article and how Young & Associates can assist your organization to position your organization to leverage technology to better serve your customers, contact us at mgerbick@younginc.com or 330.422.3482.

Key elements of effective credit underwriting

Written by admin on . Posted in Lending & Loan Review.

By Ollie Sutherin, chief financial officer, Young & Associates

The focus of this article is to provide an overview of what Y&A Credit Services views as key elements during the underwriting process. While there are many variables needed to effectively underwrite credits, below are the primary focal points of any quality credit presentation that we underwrite or review.

Cash is king

“Cash is king” is a saying that we use often as it translates to, “if you don’t have the cash to repay, you shouldn’t have the loan.” So often we are presented with transactions that aren’t the strongest, don’t show cash flow, and the underlying organization has no business being lent money. Lenders often try to form complex explanations regarding the guarantor’s wherewithal, global cash flow, etc., and they lose sight of the actual company, its financial condition, and its ability to service the debt on a stand-alone basis.

Every analysis should begin with the subject company and its ability to service debt. If it is a real estate holding company and the note is secured by a specific property, what is the cash flow of that property? If the most recent tax return statement, compiled, audited, etc., does not evidence the ability to service debt, what is the trend of the company? What are they doing to improve from the previous year and what is the YTD revenue/expenses compared to the prior year?

Eventually, we take into consideration the guarantor’s wherewithal and how it impacts the cash flow; however, the primary focus should always be on the company itself (the primary repayment source). If a transaction is being presented where repayment is heavily reliant on the guarantor, then the following questions must be asked: What is their character like? Have all of the assets and liabilities been verified on their personal financial statement(s)? Are other contingent liabilities factored in as well? So often, mistakes are caught when analysts simply say, “John Doe has $1,000,000 in cash and is clearly able to service the subject note should it be needed” without doing the proper due diligence verifying the source of the cash.

Quality of information

If the cash flow of the company is the backbone of the transaction, then the quality of information is the legs, providing the necessary base for everything. We are always looking at the reliability of this information as it minimizes the risks of inaccuracy and subsequently the risk of default. For example, if borrowers only give internal statements that are hastily prepared and communicate lease details in one-two sentences in an email, this poses a much greater risk than detailed property information in the actual tax return and actual signed lease agreements provided for review. Furthermore, as it pertains to C&I transactions, internally prepared statements rarely reconcile, which makes performing a UCA Cash Flow analysis much more difficult. Tax returns and audited or compiled statements always reconcile, providing an accurate analysis.

Collateral values

As it relates to the property or equipment securing an obligation, an appraisal is always going to be the safest way to measure the value. Too often, internal evaluations or estimates are utilized to justify a request during underwriting. To meet regulatory standards, the collateral securing an obligation must support the amount being considered and obtaining the appraisal during the underwriting phase can potentially save a significant amount of work if the value is insufficient to support the debt. For existing credits that are being refinanced, another important aspect of collateral valuations includes site visits by the account officers. Having photos and notes from the site visit will provide added support to the collateral pledged for the transactions.

Stress testing

Stress testing individual loans during underwriting is becoming increasingly necessary, especially in today’s rising rate environment. This was a regulatory focus back in the late 2010s as there was a rising interest rate environment. Variable rate notes, property values, vacancy rates and ultimately cash flow for debt service were adversely impacted. At the beginning of the pandemic in March 2020, rates dropped markedly and remained flat until just recently. To curb inflation, the Federal Reserve began increasing rates and the extent of the impact on variable rate loans has yet to be determined.

Stressing individual loans at origination provides the institution with a tool to better understand the impact of rate increases on cash flow, property values, and vacancy rates in different scenarios. The result is a more informed credit decision during the underwriting phase. Ultimately, these variables help determine the breakeven point of a business’s cash flow and provide great insight to the actual strength of the primary borrower.

Projections / proformas

These are something that all lenders should request from a borrower/potential borrower to justify the strength of a transaction. However, often these projections will paint an excellent picture of the company and a stellar cash flow that is more than adequate to service the underlying transaction. The intent of requesting and analyzing projections is to compare them to historical results, in many instances where the projected cash flow is higher than historical results. This is typically due to the borrower understating expenses which leads to overstated cash flow and debt service coverage. Given all of this, it is still important to obtain projections and to compare them to actual statements when available. Should they vary significantly, it will open the door to questions and force a deeper look into smaller details such as management of the company.

Y&A Credit Services

Over the past few years, a defined need has developed in the community financial institution industry. Specifically, it has been difficult for financial institutions to hire and retain quality credit professionals, especially in rural areas, to underwrite loans and perform other necessary tasks necessary for adequate credit administration. This need has led Young & Associates, Inc. to create a wholly-owned subsidiary (Y&A Credit Services) to meet the needs of these organizations. Y&A Credit Services has the mission of filling the voids of clients who have limited or even no credit staff to perform these necessary tasks. If your organization has a need for credit underwriting services, please feel free to contact us at 330.422.3482. Our services include spread sheet analyses, annual reviews, full credit underwriting and review of prepared presentations along with a full complement of other credit-related services through Young & Associates, Inc.

Considering anti-money laundering software for your institution

Written by admin on . Posted in Compliance & Regulations, Information Technology.

By: Edward Pugh, CAMS, consultant

For many financial institutions, one of the most impactful purposes of the Anti-Money Laundering Act of 2020 is the encouragement of technological innovation and the adoption of new technology by financial institutions to more effectively counter money laundering and the financing of terrorism. While a requirement to adopt technology in the AML space is not spelled out, the encouragement is being meted out in regulatory exams. Industry professionals have noted that the asset-size thresholds for scrutiny of the adoption of technology (or lack thereof) is decreasing.

AML advantages

Aside from regulatory expectations, there are many advantages in adopting AML technology solutions, which include better detection capability, more efficient workflows, better information flow, and many others. There is a plethora of providers in the marketplace offering a wide range of products and capabilities. However, the aim of this article is to lay out some considerations once the decision to adopt new technologies has been made.

Here are some things to consider:

  • Risk Assessment. Your institution’s BSA/AML risk assessment should drive the technology selection process. It is important to be able to demonstrate that the technology does in fact mitigate the risks that were assessed. The risk assessment can also serve as a guide in determining the sophistication of the software needed; a lot of products in the market may offer many features and options that may not be necessary.
  • Data. Data quality is the most important aspect of implementing AML software technology. Any implementation will require time to be devoted to data cleansing and mapping. Most vendors offer varying levels of assistance depending on your needs. Whether this part of the process is handled in-house or through a vendor, there will be costs associated with data preparation.
  • Future-proof. While no technology can be “future-proof,” it is important to have a platform that is robust and can handle upgrades or changes in your institution’s core software and any ancillary systems that may be feeding data into the AML software. There should also be a clear process for updates as regulations, laws, and criminal typologies change or are discovered.
  • Maintenance. BSA/AML evolves constantly. Financial institutions and their customers continually change. Over time, fine-tuning scenarios and thresholds is an important periodic activity. Some software allows the institution to conduct changes to the model while others require more vendor involvement. It’s an important area to consider when choosing between the numerous options.
  • Efficiency. Properly implemented, quality AML platforms will reduce the compliance burden in your institution. However, it is important to note that there will be “growing pains” in the beginning. One of the most common surprises is the often-dramatic increase in alerts generated. This is usually due to new scenarios being monitored, and much more transaction data being monitored. It can also be due to data quality issues that can arise during implementation. This surge in alerts is temporary. The efficiency comes as the system is fine-tuned and staff becomes more acquainted with the platform and its capabilities.

More on AML

One final thought: Think big, start small. AML platforms can be customized and upgraded. For many institutions, the choices are overwhelming. Of course, there are many other factors that must be taken into account, especially cost. Having a clear understanding of the above-mentioned considerations will help weigh the cost considerations in choosing between the many options available in the marketplace.

For more information on the selection of AML software, contact us at mgerbick@younginc.com or 330.422.3482. And if your institution has AML software in place, please read the following article, AML Validation & Review, to learn more about how we can assist your financial institution in the validation and review of your existing AML software. Our BSA team is uniquely qualified to guide you through this often complicated and technical process, and we look forward to working with you to achieve your goals.

AML validation & review

Written by admin on . Posted in Compliance & Regulations, Information Technology.

The increasing sophistication of Anti-Money Laundering/Combating the Funding of Terrorism (AML/CFT) software and modeling techniques and the broader application of these models have played an undeniable role in the enhanced effectiveness of AML/CFT programs in financial institutions.

The regulatory agencies are utilizing more analytical and statistical specialists in BSA examinations. Additionally, recent BSA examinations demonstrate that the de facto threshold for regulatory scrutiny of AML models continues to decrease. All AML models must follow the guidance of OCC Bulletin 2011-12 and the subsequent Interagency Statement on Model Risk Management for Bank Systems Supporting Bank Secrecy Act/Anti-Money Laundering Compliance (4/9/21), which outline the expectations for model risk management, especially the need for independent review and model validations.

Young & Associates can assist you with our AML validation and review

Customized for your institution and as required by the regulators, our AML validation and review addresses:

  • Conceptual Soundness. We focus on the design, methodology, and construction of the model. This includes analysis and review of the model documentation, assumptions and limitations, data quality and completeness, and implementation
  • Ongoing Monitoring. We make sure that the model is working efficiently and as intended to meet your institution’s business objectives, and ensure that it is tailored to the institution’s Risk Assessment (AML Program Management). This includes model tuning and calibration, which is driven by several Key Performance Indicators (KPIs).
  • Outcomes Analysis. We examine the model’s output, including alerts generated from transaction monitoring, along with the supporting information used for investigation. Above-the-line and below-the-line testing ensures that alerts are accurate and complete. The team also assesses monitoring rules and parameters.

Young & Associates collaborates with many of the AML software providers throughout the validation and review to make the process as seamless to your institution as possible.

Trusted guidance in BSA/AML compliance

Young & Associates provides an unmatched depth of practical expertise. Our BSA compliance team includes former banking executives, compliance regulators, and tenured finance professionals who hold the CAMS (Certified Anti-Money Laundering Specialist) designation. We’re uniquely qualified to understand and solve your challenges, because we have personally experienced those same issues. We can assist you with your AML validation and review, contact us at mgerbick@younginc.com or 330.422.3482.

The UDAAP hammer drops

Written by admin on . Posted in Compliance & Regulations.

By: William J. Showalter, CRCM, CRP, Senior Consultant

In our last issue, we discussed what UDAAP is and how to set up a program in your bank to avoid trouble in this important area. Our title admonished you, “Don’t Let UDAAP Spook You, Take Control.” If you have not yet taken control of UDAAP compliance, you may have been spooked by developments over the past 12 months or so. There have been three big UDAAP enforcement actions involving three financial service providers of all sizes during that time.

Background

Section 5 of the Federal Trade Commission (FTC) Act has been around for over 70 years and prohibits “unfair or deceptive acts or practices” (UDAP), the predecessor to UDAAP. Banking regulators have had the responsibility to enforce bank and thrift compliance with UDAP rules, while the FTC had the authority to interpret the statute and write any rules. The Federal Reserve Board (FRB) was given interpretive and rule-writing authority when this part of the FTC Act was amended in 1975 but continued largely to defer to the FTC.

Title X of the Dodd-Frank Act (DFA) codified UDAP law specifically for financial institutions, eliminated the FRB’s rule-writing authority, added an “abusive” standard, and moved rule-writing authority to the CFPB. The acronym became UDAAP – unfair, deceptive, or abusive acts or practices.

What are we dealing with?

All these standards or characteristics are quite subjective. The elements of unfairness and deception have been established by statute, as well as interpretation over the years by the FTC in various enforcement actions and interpretive documents. The element of being abusive was established, in general terms, in statute by the DFA.

An act or practice is unfair if it causes or is likely to cause substantial injury to consumers that they cannot reasonably avoid or that countervailing benefits do not outweigh. Substantial harm usually involves monetary harm, including a small monetary harm to each of a large number of consumers. A three-part test determines whether a representation, omission, act, or practice is deceptive. First, the representation, omission, act, or practice must mislead or be likely to mislead the consumer. Second, the consumer’s interpretation of the deception must be reasonable under the circumstances.

Lastly, the misleading representation, omission, act, or practice must be material. “Material” means that it is likely to affect a consumer’s decision regarding a product or service. An abusive act or practice materially interferes with the ability of the consumer to understand a term or condition of a consumer financial product or service. Such an act or practice also includes one that takes unreasonable advantage of: the consumer’s lack of understanding of material risks, costs, or conditions of a product or service; the consumer’s inability to protect his interests in selecting or using a financial product or service; or the consumer’s reasonable reliance on the “covered person” (including a banker) to act in the interests of the consumer.

Recent UDAAP enforcement actions

In about the year 2000, banks first saw significant enforcement of UDAP (now UDAAP) from the banking agencies when the Office of the Comptroller of the Currency (OCC) took the lead. The OCC concluded that it had authority to address a violation of the FTC Act even when a challenged practice was not specifically prohibited by regulation.

The three bank-related UDAAP enforcement actions to which we referred above are:

  • The Consumer Financial Protection Bureau (CFPB) issued a Consent Order to Discover Bank (Greenwood, DE) and two subsidiaries ordering Discover to pay at least $10 million in consumer redress and a civil money penalty (CMP) of $25 million for violating a 2015 CFPB Order, the Electronic Fund Transfer Act, and the Consumer Financial Protection Act of 2010. The 2015 Order was based on the CFPB’s finding that Discover misstated the minimum amounts due on billing statements as well as tax information consumers needed to get federal income tax benefits. The agency also found that Discover engaged in illegal debt collection practices. The 2015 Order required Discover to refund $16 million to consumers, pay a penalty, and fix its unlawful servicing and collection practices.
  • However, more recently the CFPB found that Discover violated the 2015 order’s requirements in several ways – misrepresenting minimum loan payments owed, amount of interest paid, and other material information. Discover also did not provide all the consumer redress the 2015 Order required.
  • In addition, the CFPB found that Discover engaged in unfair acts and practices by withdrawing payments from more than 17,000 consumers’ accounts without valid authorization and by cancelling or not withdrawing payments for more than 14,000 consumers without notifying them. The agency also found that Discover engaged in deceptive acts and practices in violation of the CFPA by misrepresenting to more than 100,000 consumers the minimum payment owed and to more than 8,000 consumers the amount of interest paid. Some consumers ended up paying more than they owed, others became late or delinquent because they could not pay the overstated amount, while others may have filed inaccurate tax returns
  • The Federal Deposit Insurance Corporation (FDIC) issued an order to Umpqua Bank (Roseburg, OR) that the bank pay a CMP of $1,800,000 following the FDIC’s determination that the bank engaged in violations of Section 5 of the Federal Trade Commission Act in the commercial finance and leasing products issued by its wholly owned subsidiary, Financial Pacific Leasing, Inc. According to the FDIC, these violations included engaging in deceptive and/or unfair practices related to certain collection fees and collection practices involving excessive or sequential calling, disclosure of debt information to nonborrowers, and failure to abide by requests to cease and desist continued collection calls.
  • The FDIC also issued an order to pay a CMP of $129,800 to Bank of England (England, AR). The bank consented to the order without admitting or denying the violations of law or regulation.
    The FDIC determined that the bank violated Section 5 of the Federal Trade Commission Act because bank loan officers located in the Bloomfield, MI loan production office (LPO) misrepresented to consumers that certain Veterans Administration (VA) refinance loan terms were available when they were not, and that the bank’s misrepresentations at the Bloomfield LPO regarding terms for VA refinancing loans were deceptive, in violation of Section 5.

How to deal with these issues

As we advised in our previous article, banks and thrifts should be proactive in addressing areas prone to UDAAP issues. You can anticipate potential problems by, in part, tracking enforcement actions as indicators of where regulators are looking for issues (and finding them).

The steps we spelled out to help in this proactive approach are:

  • Establish a positive compliance culture by positive words, actions, and attitudes from the top down.
  • Enforce compliance performance which, coupled with the overt support from the top, makes it clear to all that this is a crucial element in the success of the organization and any related individual rewards (bonuses, raises, promotions, etc.)
  • Involve compliance early in product design, marketing planning, and so forth.
  • Focus on vulnerable customers in your community, including the young, less educated, immigrants, and elderly, and pay particular attention to how you direct your marketing, product recommendations, and disclosures to such populations.

It is much easier – and less expensive – to plan and lay appropriate groundwork to avoid problems than it is to repair damages after inappropriate and illegal actions blow up. The reactive approach can cause the bank immeasurable reputation harm, which is much more costly than any monetary penalties, and much more difficult to recover from.

For more information on how the Young & Associates compliance team can assist with your UDAAP compliance, contact us at mgerbick@younginc.com or 330-422-3482.

Young & Associates introduces Y&A Credit Services, LLC

Written by admin on . Posted in Announcements, News.

We are proud to introduce a new line of business through an affiliated organization of Young & Associates, Inc.: Y&A Credit Services, LLC.

Y&A Credit Services is a full-service provider of outsourced underwriting and credit services and offers various commercial underwriting and credit services such as:

  • Commercial credit underwriting and credit approval presentations
  • Annual underwriting reviews
  • Financial statement spreading and analysis
  • Approval and underwriting package reviews

“Y&A Credit Services understands the challenges that financial institutions nationwide face with locating and retaining skilled credit department staff who can efficiently produce trustworthy credit risk management results while supporting an increasing volume of workflow,” said Jerry Sutherin, President & CEO of Young & Associates. “We offer an effective solution to this dilemma by employing our experienced staff, technology, and proven processes to enhance your credit administration process, mitigate credit risk, and ensure continued profitable loan portfolio growth and performance.”

Completely independent from Young & Associates, Inc. and with a name you trust, Y&A Credit Services can help large and small financial institutions increase the quality, accuracy and speed of their lending while mitigating risks in a highly regulated industry. “We are an independent entity, but we offer the same exceptional service, expertise, and integrity you’ve learn to expect from Young & Associates,” says Ollie Sutherin, Principal of Y&A Credit Services.

Visit yacreditservices.com to learn more about the new company and explore the website. And if our services sound like a viable solution to your current challenges, contact Ollie Sutherin by email at osutherin@younginc.com or phone at (330) 422-3453. We would be happy to discuss how we can help your credit department and institution achieve its objectives.

The purpose of quality control − Loan origination volume

Written by admin on . Posted in Mortgage Quality Control.

Fannie Mae predicts $2.72 trillion in mortgage originations in 2021 and $2.47 trillion in 2022. They anticipate purchase volume to go from $1.53 trillion in 2020 to $1.6 trillion in 2021 and $1.64 trillion in 2022.

The U.S. mortgage industry earned an average profit of $4,202 per loan on its way to record volume and a record $4.4 trillion in new loans originated in 2020, according to the Mortgage Bankers Association — and the perfect storm of low interest rates and high home values has kept the gold rush going in 2021. In other words, high volumes of mortgage loans are a big profit for banks, credit unions, etc.

Contrary to popular thought, most of the time when a bank originates a mortgage loan, it is sold on what is called the “secondary market” to provide the banks with instant profits/liquidity (cash). This is done simply because smaller banks/credit unions, which are the main players in the secondary market, incur costs associated with servicing or managing the loans on their books. This is where Fannie Mae, Freddie Mac, Mortgage Partnership Finance, and many other companies come into play.

Fannie and Freddie purchase home loans made by private firms, banks, and credit unions (provided the loans meet strict size, credit, and underwriting standards), package those loans into mortgage-backed securities, and guarantee the timely payment of principal and interest on those securities to outside investors. Fannie and Freddie also hold some home loans and mortgage securities in their own investment portfolios.

How can Young & Associates assist with quality control?

Loans eligible for purchase by Fannie Mae and Freddie Mac must adhere to strict size, credit, and underwriting standards. Fannie Mae and Freddie Mac require that all loans meet these standards. They then require a certain randomized sample to undergo a “Quality Control” review  ̶  which is what Young & Associates does.

We are an industry leader and provider of QC services for over 44 years and provide mortgage quality control services to meet government-sponsored enterprise and agency requirements. As a high-level definition, our QC consultants review a 10% sample of all loans originated in a period for a client (month/quarter) and reassure that it adheres to Fannie Mae and Freddie Mac Guidelines.

There are also other investors and Guarantors (two different terms), such as the Federal Department of Housing and Urban Development (HUD). HUD consists of FHA and VA loans. Fannie Mae and Freddie Mac require the reviews to be done within 90 days of the prior period-end. HUD requires the reviews to be done in 60 days.

Superior results at a lower cost

Maintaining the mortgage QC function in-house can be difficult given the time, staffing, and expertise required. Control the risks of noncompliance and reduce your costs by outsourcing your quality control to Young & Associates.

Our mortgage quality control services include:

  • Quality Control Plan Development
  • Quality Control Reviews − approved, denied, and defaulted file reviews
  • FHA Branch Audits
  • Early Payment Default Review
  • FHA/VA Denied Loan Review
  • Pre-closing QC Reviews
  • Reverse Audits

Organizations with a commitment to quality control recognize that quality begins before an application is taken. It then continues throughout the entire mortgage origination process.

Young & Associates is committed to your organization’s future success. We look forward to assisting you to ensure or enhance that success. Please visit our website, www.younginc.com, to learn more about us or contact Dave Reno at 330.442.3455 or dreno@younginc.com.

Don’t let UDAAP spook you, take control

Written by admin on . Posted in Compliance & Regulations.

The Consumer Financial Protection Bureau (CFPB) celebrated Halloween in 2012 by releasing its updated Supervision and Examination Manual (version 2.0). The manual includes updated examination procedures for assessing compliance with Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) rules. The updated examination procedures give bankers a guide for what their examiners will be looking for in terms of UDAAP compliance, including the then-new “abusive” standard.

Background

Section 5 of the Federal Trade Commission (FTC) Act has been around for over 70 years and prohibits “unfair or deceptive acts or practices” (UDAP), the predecessor to UDAAP. Banking regulators have had the responsibility to enforce bank and thrift compliance with UDAP rules, while the FTC had the authority to interpret the statute and write any rules. The Federal Reserve Board (FRB) was given interpretive and rule-writing authority when this part of the FTC Act was amended in 1975 but continued largely to defer to the FTC.

It was not until the year 2000 that banks saw significant enforcement of UDAP from the banking agencies when the Office of the Comptroller of the Currency (OCC) took the lead. The OCC concluded that it had authority to address a violation of the FTC Act even regarding a challenged practice that was not specifically prohibited by regulation.

Then, Title X of the Dodd-Frank Act (DFA) codified UDAP law specifically for financial institutions, eliminated the FRB’s rule-writing authority, added the “abusive” standard, and moved rule-writing authority to the CFPB.

What is UDAAP?

All of these standards or characteristics are quite subjective. The elements of unfairness and deception have been established by statute, as well as interpretation over the years by the FTC in various enforcement actions and interpretive documents. The element of being abusive was established, in general terms, in statute by the DFA.

In brief, these standards are:

  • Unfair. To be unfair, an act or practice must cause or be likely to cause substantial injury to consumers, harm that the consumers cannot reasonably avoid or that is not outweighed by countervailing benefits. Substantial harm usually involves monetary harm, including a small monetary harm to each of a large number of consumers.
  • Deceptive. A three-part test is used to determine whether a representation, omission, act, or practice is deceptive. First, the representation, omission, act, or practice must mislead or be likely to mislead the consumer. Second, the consumer’s interpretation of the representation, omission, act, or practice must be reasonable under the circumstances. And lastly, the misleading representation, omission, act, or practice must be material. “Material” means that it is likely to affect a consumer’s decision regarding a product or service.
  • Abusive. An abusive act or practice materially interferes with the ability of the consumer to understand a term or condition of a consumer financial product or service. Such an act or practice also includes one that takes unreasonable advantage of: the consumer’s lack of understanding of material risks, costs, or conditions of a product or service; the consumer’s inability to protect his interests in selecting or using a financial product or service; or the consumer’s reasonable reliance on the banker (or other “covered person”) to act in the interests of the consumer.

How to handle UDAAP

Banks and thrifts need to make sure their consumer compliance programs are proactive in addressing areas prone to UDAAP issues. Anticipate potential problems; do not wait for problems to arise because by then it may be too late to prevent serious consequences.

A few steps that can help establish a proactive compliance regime are:

  • Establish a positive compliance culture. Senior management and the board need to make it clear that compliance is a fundamental element of the institution’s business – both compliance with the technical requirements (disclosures, computations, etc.) and, at least equally important, with the underlying spirit or fundamental principles of the consumer protection laws.
  • Enforce compliance performance. To succeed, the bank needs to make compliance important to its officers and staff – by not only ensuring overt support from the top, but also by making it an integral part of how employees’ performance is measured and rewarded (or not). For example, an officer with high loan production with high compliance error rates or fairness issues, should not be rewarded for one (production) without being penalized for the other (compliance failures).
  • Involve compliance early. Compliance cannot be an exercise in looking for violations and other problems after the fact. To be truly effective and efficient, compliance must be integrated into the business processes – involved in product design, marketing planning, etc., at the ground level.
  • Focus on vulnerable customers. An important way to avoid UDAAP problems is to pay particular attention to those customers, or potential customers, who might be more vulnerable to unfair, deceptive, or abusive acts or practices. Examples of such potentially vulnerable populations might include the young, less educated, immigrants, elderly, and so forth. The bank should be particularly sensitive to how it couches its marketing, product recommendations, disclosures, etc., to such populations.

Benefits of a regime

Such a positive, proactive compliance regime can help the bank prevent most UDAAP (and other compliance) problems before they even arise. This approach is much more cost-efficient than running what a compliance officer I knew years ago called a “fix-it shop,” having to try to fix compliance problems after they have occurred. Years ago, such an approach was not desirable, but might have been survivable. However, today, it could prove disastrous – especially with the rise of UDAAP.

Contact Y&A today

For more information on this article or how Young & Associates can assist your organization with UDAAP compliance, contact Dave Reno at 330.422.3455 or dreno@younginc.com.

The value of internal audit through a fresh set of eyes

Written by admin on . Posted in Compliance & Regulations.

There is risk in every aspect of the banking industry and the regulatory environment seems to continually change. As to the governance and control functions of the industry, it may be refreshing to the board of directors, audit committee, and executive management to have their internal audit function re-assessed and validated through a fresh set of eyes to assure that the controls in place are functioning as intended.

Why consider an internal audit?

A strong internal control system, including an independent and effective internal audit function, is part of sound corporate governance. The board of directors, audit committee, senior management, and supervisors must be satisfied with the effectiveness of the internal audit function, that policies and practices are followed, and that management takes appropriate and timely corrective action in response to internal control weaknesses identified by internal auditors. An internal audit function provides vital assurance to a board of directors (who ultimately remains responsible for the internal audit function, whether in-house or outsourced) as to the quality of the internal control system. In doing so, the function helps reduce the risk of loss, regulatory criticism, and reputational damage to the organization.

All internal auditors (whether in-house or outsourced) must have integrity and professional competence, including the knowledge and experience of each internal auditor and of team members collectively. This is essential to the effectiveness of the internal audit function. We encourage internal auditors to comply with and to contribute to the development of national professional standards, such as those issued by the Institute of Internal Auditors, and to promote due consideration of prudent issues in the development of internal audit standards and practices.

Every activity of the organization (including outsourced activities) should fall within the scope of the internal audit function. The scope of the internal audit function’s activities should ensure adequate coverage of matters of regulatory interest within the audit plan. Regular communication by the audit committee, management, and affected personnel is crucial to identify the weaknesses and risk associated to assure that timely remedial actions are taken.

How Young & Associates can help

Young & Associates can independently assess the effectiveness and efficiency of the organization’s internal control, risk management, and governance systems and processes to provide assurance that the internal control structure in place operates according to sound principles and standards. For more information on how we might provide internal audit services specific to your organization’s needs, whether it is outsourced or co-sourced, please contact Dave Reno at 330.422.3455 or email to dreno@younginc.com.

Focus on Affirmative Action, Equity, Diversity, and Inclusion (ED&I)

Written by admin on . Posted in Human Resources.

By: Gina Sherock, Senior Consultant, and Rachel Disko, SHRM-CP, Senior HR Business Partner

Over the past several years, there has been an increased and sustained focus on workplace diversity. If this hasn’t been focal to business strategy in the past, leaders are wondering where they should start and why. The answer to this depends on several factors. But the evidence is becoming impossible to ignore − an intentional workplace diversity effort is critical.

Banks and financial institutions covered by FDIC insurance are considered government contractors. Therefore, they must develop a formal Affirmative Action Plan (AAP) to ensure equal employment opportunity for race, gender, disability, and protected veteran status if they have at least 50 employees. These requirements are enforced by the Office of Federal Contract Compliance Programs (OFCCP) to comply with Executive Order 11246 (covers race and gender); Section 503 of the Rehabilitation Act of 1973 (covers individuals with disabilities); and the Vietnam Era Veterans’ Readjustment Assistance Act of 1974, aka VEVRAA (covers protected veterans).

For those organizations that must do so to remain in compliance, the case for developing a formal AAP is clear. However, there is a strong business case for ensuring equal opportunity and embracing diversity and inclusion.

Relevant laws and risk management

Having a workforce that lacks diversity could increase risk from a legal standpoint. Discriminating against a job applicant or an employee because of the person’s race, color, religion, sex (including pregnancy, transgender status, and sexual orientation), national origin, age (40 or older), disability, or genetic information is illegal. Even if discrimination was not intended toward an applicant or employee, poor optics can lead to a complaint being filed with the Equal Employment Opportunity Commission (EEOC) and a potential lawsuit. If that happens, an organization risks a loss of productivity, incurring legal fees (including compensatory damages), and its reputation as an employer. Without strong documentation as evidence that discrimination did not actually occur, intentions are left open to interpretation and the organization could be at a disadvantage.

Lack of workforce exposure to a diverse population can also lead to implicit bias among employees, leaders, and decision makers. Implicit bias occurs when a person holds an unconscious prejudice, attitude, or opinion about others. This type of thinking increases the risk of a discrimination lawsuit, even if harm was not intended.

Benefits of ED&I

Many of us know there should be diversity and inclusion in the workplace. However, we may not necessarily know the benefits associated with a focus on diversity. Here are some reasons why equity, diversity, and inclusion are beneficial to not only businesses but also their employees.

Businesses with more diversity generally thrive when compared to companies that are less diverse. Employees from different demographic groups have different talents, experiences, and skill sets. Therefore, its more beneficial for companies to increase creativity and innovation. Increasing the diversity of leadership teams can help improve financial performance. According to a Boston Consulting group study, “companies with above-average diversity on their leadership teams receive a greater payoff from innovation and higher EBIT (Earnings Before Interest and Taxes) margins.”

Additionally, diversity also helps to attract and retain talent for the organization by promoting that you are an organization that prioritizes ED&I in the workplace. A study from Washington State University states, “by 2025, 75% of the workforce will be millennials, 32% of millennials and Gen Z believe businesses should try to improve their diversity.” Finally, workplace diversity boosts a company’s reputation, brand, and overall morale. This helps the organization to increase employee engagement and ensures a well-rounded culture.

The benefits of diversity do not stop at the employer level. Employees are proven to benefit from a diverse workforce as well. Workplace diversity can lead to better decision-making. According to Washington State University, “a study that analyzed 600 business decisions made by 200 teams found that the decision making of diverse teams outperforms individual decision-making up to 87% of the time.” Along with better decision making, diversity is proven to lead to faster problem-solving. A study published by the Harvard Business Review found that higher comprehensible diversity correlates with better performance. Additionally, diversity in the workplace may increase employee engagement and help employees to feel more included.

Your Affirmative Action Plan or other ED&I initiatives

Whether through a formal Affirmative Action Plan or other ED&I initiatives, employers are seeing the benefits both in meeting compliance obligations and increasing the overall bottom line with a more diverse workforce. We are seeing more businesses become aware of ED&I in the workplace. Candidates often wonder how they will fit in, if they will receive equal opportunity, and if they will feel welcomed.

Developing an Affirmative Action Plan or ED&I initiative may be difficult to navigate. Young and Associates is here to help. We offer a wide range of HR services for banks and financial institutions to take the guess work away. For more information on how we can assist with your HR efforts, contact Dave Reno at 330.422.3455 or dreno@younginc.com.

Annual reviews of commercial credits

Written by admin on . Posted in Lending & Loan Review.

What is the overall condition of your commercial loan portfolio? Do you focus on net charge-offs? Delinquencies? Financial statement exceptions to policy? Number and level of TDRs and non-accruals? The percent of the ALLL to total loans? While all of these broad measures can be helpful, the number and nature of grade changes coming from internal annual reviews are likely to be timelier and more accurate than all of the other measures combined.

Questions to consider

Does your credit policy contain specific criteria describing relationships which must receive annual reviews? If so, have you recently evaluated whether that level remains appropriate for your portfolio today? The commercial annual review threshold should be set at a level where the required reviews will cover at least 50 percent of commercial exposures. Each bank should do a sort of the commercial portfolio and determine what level of exposure will yield the desired coverage ratio. The annual review requirements should differ from the Watch List or Special Asset requirements as the annual reviews should be separate from those assets already identified with some level of weakness.

Now that you have set an annual review requirement, what elements of a credit analysis should be completed? Although the ultimate goal is to determine the accuracy of the risk rating, regulators will be looking for the robustness of the annual review in order to “sign off” or accept the annual review results. In addition to providing executive management and the board with timely and accurate results, a solid and meaningful annual review process can help to build confidence in your systems with the regulators and potentially allow for a more efficient third-party loan review.

Minimum requirements for annual review activities should be built into the loan or credit policies so that management and the board can demonstrate to regulators that they are determined to ensure risk ratings and, therefore, that the ALLL and criticized and classified reporting is accurate.

The annual review procedures should include the following:

  • Detail of the relationship being reviewed including borrower, guarantors, SBA or other guarantees, and note numbers included.
  • Update of all borrower/co-borrower financial information used in the original approval or the latest renewal which would include spreads, debt coverage calculations, loan-to-value calculations, borrowing base analysis, etc.
  • Update of all guarantor financial information including a new complete and signed personal financial statement, most recent tax returns and, for individuals, an updated credit report.
  • A statement of how the account has been handled since the previous annual review (or approval) including any delinquency of payment, financial information, or supporting information such as insurance, borrowing base reporting, etc.
  • In most cases, site visits by the loan officer or relationship manager or other representative of the company should have occurred since the previous annual review or approval. For CRE loans, the documentation of the visit should include perceptions by the representative of the condition of the property, occupancy trends, whether or not any deferred maintenance was noted, and if there were any changes in the neighborhood. For all credits, the representative should also use this visit to become updated on any material changes in the customer base, management, operating personnel, market conditions, condition of equipment or other fixed assets, and any other information that would help to understand the customer.
  • An update of any approval conditions and whether the borrower is maintaining those conditions, including any promises of deposit accounts, financial reporting, property improvements, and compliance with any financial or other covenants.
  • A confirmation that the existing risk rating is accurate or recommendations to change the risk rating, up or down, and the factors that the change is based on.

The financial institution that is covering 50 percent of its commercial portfolio with robust and timely annual reviews every year should provide executive management and the board with sufficient information to understand the level and direction of credit risk and whether these are in accordance with the desired risk appetite.

For more information on how Young & Associates, Inc. can assist your institution in this area, please contact Dave Reno. Reno is the Director of Lending and Business Development, at 330.422.3455 or dreno@younginc.com.

ADA website compliance, 5 key tips

Written by admin on . Posted in Information Technology, Management & Planning.

By: Mike Lehr, Human Resources and Sales Consultant

Banks must make their websites accessible to individuals with disabilities. That is how federal courts have interpreted the Americans with Disabilities Act (ADA). We have found five key tips go a long way to doing that. Ironically, software scans measuring accessibility don’t do this successfully.

That’s a key, key lesson: do not rely on scanning software to determine whether your site is accessible. Again, do not rely on this software for determining accessibility. In our audits and discussions with attorneys who have defended clients in lawsuits, these results are almost useless. What holds up best is the testimony and tests of sight-impaired users (SIUs) who have used the website. Nothing compares to observing a SIU running through a site. That’s because the WCAG 2.1 and Section 508 guidelines – used as the basis for compliance – have many interpretive elements to them. Yes, some we can quantify and code. About half we can’t. Images make the simplest examples. Scans state whether an alt-text exists. They can’t tell though whether the alt-text is necessary or even useful.

This doesn’t mean scans don’t help. They do. They look at the entire site. A human audit is just that, an audit, meaning it looks at a sample. Scans give one input to developing the site’s audit plan.

The Five Tips

We can summarize the five tips that go a long way to ensuring a site’s accessibility as easy navigation, useful alt-tags, and proper coding practices. The tips focus on SIUs rather than other disabilities because not seeing the site – or seeing it well – is the most difficult challenge to overcome even with good hardware.

1. Navigation Menu – Only One

Websites have many ways to navigate them. In addition to the traditional horizontal menu, mobile menus (hamburger menus) also exist. Sites also employ vertical menus on the left and right sides of the page. They also use fly-in menus that come in on certain pages. The tip refers to silencing all but the most comprehensive or dominant menu.

That means the site should be coded to do this when it detects a screen reader (SRs  ̶  software that allows a SIU to read a site). It should be the most comprehensive and dominant menu. Remember, SIUs can’t see the screen well. They only hear it. Most times they won’t even know how big the window is on the screen.

Yet, SIUs often program SRs to prioritize links. That means SRs will read all menus. For the SIU, that becomes confusing as to which link to click. They hear too many duplicates. Imagine now going to a site where you see double of everything.

2. Alt-tags as Signposts

As mentioned above, SRs often prioritize links. That includes non-menu links such as those imbedded in text, images, and other elements. Links tend to take users to one of four places: another page, another place on the same page, another site, or a file such as a PDF. In doing so, one of two things happen: the user remains in the same window or opens a new one.

This tip refers to using alt-tags as signposts. Two sides of this exist. The first involves telling SIUs where they are going. Otherwise, they primarily think they go to another page. The site needs to tell them even if the image’s caption or surrounding text clearly states this. That’s because SIUs can program the SR to read only the links on a page, meaning the SR won’t read context clues.

The other side of this involves making each link distinct. For instance, “click here” often appears after descriptive text such as, “To go to our checking account page click here.” It tells SIUs nothing when they program the SR to read links only. This compounds if many links say “click here.” So, choose to make the whole phrase a link or add more description to the alt-tag.

3. Alt-tags as Additional Descriptors

Many misread the guidelines when they come to alt-tags for non-links such as images. They think it says – and scanning software reinforces this – that alt-tags can’t be blank. So, sites duplicate the caption in the alt-tag or add text to a purely aesthetic design element such as a color block, shape, or filler that communicates nothing.

Imagine a great, beautiful well-designed home. However, when you enter there’s clutter everywhere. You have to move things around. You even trip over some. This is “death by a thousand cuts.” Sites do the same to SIUs when they have duplicate, nonsensical, and useless alt-tags.

In such cases, code the alt-tag with the left double quotes followed by the right double quotes (“”). This tells the SR to skip the alt-tag and tells the scanning software an alt-tag exists (so it won’t flag it as an issue).

4. H-tags and TITLE Attributes

SRs assume sites use generally accepted coding practices. That means SRs will have problems with sites that don’t. Two of the more common ones that sites overlook are the h-tag and the TITLE attribute. The first identifies headers. The second identifies the page.

Sites can prioritize headers. Headers using an h1 tag is the most important. H2 tags are second, h3 third and so on. Most web managers know these headers as ways to change the look of a header. Their use can automatically enlarge, bold, italicize, color, or underline headers.

While h-tags allow designers to quickly add design enhancements to headers, they also serve to prioritize content. In this role, they help SIUs much. Just as SIUs can program SRs to read only the links on a page, they can also have them read just the headers. Some even allow them to program what level header to read, such as “read h1 – h3 headers” only. This means that headers must accurately reflect the relative importance of the website page’s content.

Unfortunately, content managers often only look at h-tags as design elements. So, rather than code a header using an h-tag, it might be quicker and easier just to bold and color text. After all, it will just look the same. However, this just relegates a header to common text. SRs will miss it.

TITLE attributes serve no real purpose for non-SIUs. Since they appear at the top of a page’s code, they can serve to further describe the page and reassure SIUs that they arrived on the page they wanted. Again, many sites just throw something similar to the page’s visible title in this or something abbreviated. More description often helps SIUs.

5. Help Desk Phone Number

Companies increasingly employ more automated forms of problem resolution. So, they aren’t likely to list a phone number prominently on their sites. Yet, such a number can go a long way to helping SIUs work through a site. Including the phone number near the top in the page’s coding will make it invisible to non-SIUs but accessible to SIUs with their SRs.

For instance, the site could include the number (along with times of availability) in the alt-text of the company’s logo in the upper left which often includes a link to the home page. Sites often include this number before or after input elements such as account logins.

Of course, this does necessitate that the bank supports the number. That might mean changing voicemail prompts and other protocols if the number has other uses. It also means training staff to handle such calls with sensitivity and patience.

Going a Long Way

Except for the first tip regarding menus, a reasonably experienced website content manager can perform these tasks. Even then, with less than an hour’s training, others can learn. Time and discipline remain the real challenge. It can begin though with ensuring that any new content incorporates these tips.

As for policy decisions, we recommend that banks purchase scanning and screen reading software. They make a world of difference. Also, and finally, we encourage banks to contact their local society for the sight impaired and ask for their help. Most members already have SRs. See if you can observe them using your site. It’s not only good community outreach, but I guarantee you will find it an eye-opening experience. We did.

For more information on this article and how Young & Associates can assist your bank in this area, contact Dave Reno, Director – Lending and Business Development at dreno@younginc.com and 330.422.3445.

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