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Managing customer complaints is important to an effective CMS

Written by admin on . Posted in Advice, Blog, Compliance & Regulations, Consultation, News.

By William J. Showalter, CRCM, Senior Consultant, Young & Associates

Financial institution supervisory agencies view a formal process for managing complaints from bank customers as an important element in an effective compliance management system (CMS). The second 2024 issue of the Consumer Compliance Outlook from the Federal Reserve Board (FRB) includes three articles on this.

The FRB is quoted in one of these articles in an unequivocal statement on this issue:

“Consumer complaints are a critical component of the risk-focused supervisory program. The Federal Reserve uses data on consumer complaint activity in its supervisory processes when monitoring financial institution, scoping and conducting examinations, and analyzing applications.”

The other federal agencies agree with this viewpoint. So, banks and thrifts have found that, if they do not handle customer complaints in a formal, consistent manner, their CMS will be viewed with a more critical eye.

Benefits of managing customer complaints

One positive aspect of proactively managing the customer complaint process is there is no real downside. The only “downside” is that such a process shines a light on the extent of complaints, and their underlying causes. But, this disadvantage is actually an advantage. What you don’t know really can hurt you.

The positive results from complaint management can include:

  • Uncovering and dealing with shortcomings in product features, bank processes, customer service and more early before they present real threats
  • Improving customer satisfaction with the bank, and enhancing the bank’s efforts to serve the banking needs of its community
  • Resolving fair treatment issues at an early stage
  • Realigning bank products, processes, and services with regulatory requirements and expectations
  • Heading off potential UDAAP (unfair, deceptive, or abusive acts and practices) issues
  • Reducing the institution’s reputation risk.

Managing customer complaints

The bank already has formal processes, with assigned responsibilities, for handling errors/disputes asserted by customers related to electronic banking (Regulation E, EFTA), open-end credit (Regulation Z, TILA) and mortgage loan servicing (HUD Regulation X, RESPA). Appropriate treatment of complaints in these areas are mandated by the respective regulations.

A formal process to address customer complaints in other areas is considered an industry best practice. It is also a necessary component of an effective CMS by regulators. The structure of this program will vary depending on the culture of the bank and other internal factors.

There are some common elements that form the basis of any sound customer complaint program, including:

  • Define what is considered as a “complaint.” This is considered as crucial to success in this area, so defining “complaint” broadly is seen as a sound practice.
  • Make sure everyone knows how important it is to respond promptly and accurately to any customer complaints. This is a basis for giving good customer service.
  • Appoint a central point (an individual or an office) to be in charge of your complaint response program, especially those referred by the regulators. Also, make sure that all bank staff is aware of how to handle complaints, including where to refer them. Branch managers can be charged with handling customer service issues occurring at their branches that do not involve regulatory issues (fair lending, EFTA, etc.). However, they should report on these complaints and resolutions to the central complaint point to track any trends that arise.
  • Establish uniform standards and timeframes for investigating customer complaints. The time limits you set should be reasonable and probably not significantly longer than those set by regulations for some error resolutions (EFTA, TILA).
  • Ensure that the process includes determining the root cause of complaints being investigated.
  • Document your investigation (e.g., copies of relevant documents and reports) of each customer complaint and the bank response.
  • Ensure that regulators are informed promptly of the results of investigations of any complaints referred by regulatory agencies.
  • Maintain a database of your customer complaints, either manually or using some spreadsheet or database software. This step allows you to mine the data related to this process for information about problems with your products, customer service, potential fair treatment/lending issues and so forth.

Results

The database discussed in the final bullet above can provide a wealth of information about how customers view your bank, your product mix, your service levels and many other facets of your business. It also provides you with an opportunity to discern trends in their infancy, allowing you to deal with negative issues early or enhance the benefits from positive developments.

A proactive approach to customer complaint management derives many benefits for the bank. These include reducing conflicts with customers, enhancing the bank’s public image, improving bank relations with regulators and creating a competitive advantage for the bank.

The newest supervisor

For the past decade or so, there has been a more active and visible regulatory presence in this area – the Consumer Financial Protection Bureau (CFPB). The CFPB established a complaint database to which consumers can submit complaints about financial service providers, have their complaints forwarded to the providers for response and give the public a window on this process and its outcomes.

The CFPB also periodically analyses the results of this process, usually for one or another particular financial service area – student loans one time, mortgage servicing another, yet another financial service another time. The other agencies, as noted earlier, analyze data related to consumer complaints that are handled through each of them.

The agencies often view data about consumer complaints to be an indicator of a need for future regulations. This view is reinforced by provisions in the Dodd-Frank Act of 2010.

The purpose of the CFPB database is to provide consumers with one central point through which they can submit complaints about financial service providers, without having to search through the maze of regulatory agencies first, and follow the results. Another purpose is to provide a gauge for how well financial service providers are serving their particular customer bases.

While the CFPB database can be a useful tool, financial institutions should have a goal of trying to deal with their own customers’ complaints and concerns themselves, before customers become so frustrated that they feel the need to turn to supervisory agencies.

How Y&A can help

At Young & Associates, we understand the critical role that managing customer complaints plays in building an effective compliance management system. Our full suite of regulatory compliance consulting and advisory services is tailored to the needs of community financial institutions. We help ensure you can navigate complex regulatory requirements with confidence. We can help with compliance outsourcing, our VCC Program, compliance management reviews or risk assessment facilitation. Let us simplify your compliance processes so you can focus on achieving your strategic goals. For more information, please contact us today. 

Internal audit: Your third line of defense in third-party risk management

Written by admin on . Posted in Advice, Blog, Compliance & Regulations, Consultation, Cybersecurity & Information Security, Information Technology, Internal Audit, Management & Planning, Risk Management.

By Jeanette McKeever, CCBIA, director of internal audit, Young & Associates

In today’s financial landscape, banks and credit unions increasingly rely on third-party vendors to meet regulatory demands, leverage technological advancements and maintain competitive edges. However, these relationships introduce various types of risks in internal audit, from compliance and operational risks to reputational and strategic risks. Amidst economic uncertainty, increased digitalization and growing supervisory attention, many financial institutions are reviewing their third-party risk management (TPRM) frameworks to ensure they are robust and comprehensive.

Here, the role of internal audit becomes indispensable. Internal audit’s role in TPRM goes beyond mere compliance. By leveraging their unique skills and perspectives, internal auditors can help institutions identify, monitor and control risks while achieving strategic goals.

Understanding third-party risk in banking

Third-party relationships and their associated risks require careful management. Ineffective oversight of the complex operational, financial, technological, and legal agreements governing these extended business relationships can lead to brand or reputation damage, data security breaches, and significant financial losses. Additionally, such oversight failures can result in errors in financial reporting, compounding the challenges and potential impacts on the institution.

Financial institutions are entrusting an increasing percentage of their operations to third parties, prompting regulators to scrutinize these relationships more closely. The updated interagency guidance from the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (FRB) and the Office of the Comptroller of the Currency (OCC) outlines the regulatory expectations for managing third-party risks throughout the relationship lifecycle: planning, due diligence, selection, contract negotiation, ongoing monitoring and termination.

Monitoring vendor performance is also a regulatory requirement for credit unions. The National Credit Union Administration (NCUA) specifies the criteria for assessing vendor performance in their 2007 supervisory letter SL No. 07-01, “Evaluating Third-Party Relationships.” This guidance emphasizes key areas for third-party relationship management, including risk assessment and planning, due diligence, risk management, monitoring, and control.

The role of internal audit in third-party risk management

Though Chief Risk Officers are typically responsible for managing third-party risks, internal audit plays a crucial role as the third line of defense. Internal auditors bring essential skills, capabilities, and perspectives to thoroughly examine TPRM programs, identifying gaps or areas for improvement that might have been missed by the second line of defense. The board relies on internal auditors as an extra layer of security to ensure that third-party risks are properly identified and assessed, appropriate internal controls are in place, and timely risk intelligence is generated to inform decision-making.

Leveraging internal audit to improve third-party risk controls

Internal audit can contribute significantly to managing third-party risks through various areas:

  • Pinpointing critical contracts: Internal auditors can assist in identifying high-risk third parties and ensure they receive more frequent scrutiny. This can help with prioritizing risk management efforts.
  • Assessing risk management programs: They can evaluate the effectiveness of third-party due diligence processes and controls, conducting research to gauge the risk level and reputation of third parties.
  • Reviewing compliance with governance standards: Internal auditors can verify if the financial institution’s processes for selecting and managing third parties adhere to governance requirements and include necessary risk and compliance clauses in contracts.
  • Evaluating and improving risk controls: They can assess the effectiveness of risk management controls, ensure regulatory compliance, and check for “right to audit” clauses in third-party agreements.
  • Facilitating informed decision-making: Auditors offer valuable insights into third-party risks. They also evaluate decision-making and contract management processes. This ensures that these processes align with the bank or credit union’s strategic objectives. Additionally, auditors verify that the processes provide sufficient risk protection.
  • Assessing performance and identifying opportunities: They review global third-party performance, detect inconsistencies, and recommend best practices for effective risk and performance management.

Integrating internal audit into third-party risk management strategies

1. Independent vendor risk assessment and identification

Conducting a risk assessment is essential for the initial decision-making process regarding whether to establish a third-party relationship. Internal auditors bring an independent perspective to the assessment and identification of third-party risks. They can perform thorough risk assessments to identify all third-party relationships and associated risks. This independent evaluation helps ensure no significant risk is overlooked, and it provides a holistic view of the financial institution’s third-party risk landscape.

2. Vendor due diligence and selection oversight

The due diligence process equips management with the necessary information to evaluate both the qualitative and quantitative aspects of potential third parties, determining whether a relationship will support the financial institution’s strategic and financial goals while mitigating identified risks.

If your financial institution has its own internal audit team, involving them in the due diligence process for vetting potential third-party relationships can be highly beneficial. Though not prevalent practice in community banks and credit unions yet, leveraging your institution’s third line of defense can enhance third-party risk management processes and provide an extra layer of protection.

Internal audit teams can provide oversight during the due diligence and selection phases of third-party relationships. They can assess the processes used for selecting third parties to confirm that the institution has effective policies and procedures in place. By ensuring thorough due diligence, internal auditors help identify potential risks early on. Their oversight includes evaluating the third party’s operational quality, compliance capabilities, risk profile, and long-term viability.

3. Contract management and compliance

Financial institution management should ensure that the specific expectations and obligations of both the financial institution and the third party are clearly defined in a written contract before finalizing the arrangement. Board or committee approval is required for many material third-party relationships, and significant contracts should be reviewed by appropriate legal counsel before finalization. The level of detail in contract provisions will depend on the scope and risks associated with the third-party relationship. Effective contract management is crucial for mitigating third-party risks. This involves not just due diligence but also thorough processes in agreement formation, publication, activation, compliance with service delivery, analysis, optimization, and offboarding.

The internal audit function can engage in contract management in two key areas:

  1. Auditing the overall contract management process.
  2. Reviewing active contracts with critical vendors.

Auditing the contract management process

An effective contract management process is crucial for maintaining strong performance across your institution. Even minor inefficiencies can lead to significant issues, particularly when your financial institution aims to grow and scale. A robust contract management system contributes to a thriving institution.

Regular audits of your contract management lifecycle can reveal hidden costs and growth opportunities. These audits should assess process deficiencies, compliance issues, and historical management practices. Start by identifying key stages in your process and setting benchmarks for measurement. Key stages often include planning, due diligence, selection, contract negotiation, ongoing monitoring, and termination, as outlined in regulatory guidance.

Evaluate your management practices within each stage. Is the contract management process clearly defined? Are roles and responsibilities assigned? Who ensures compliance with service-level agreements (SLAs)? Addressing these questions through a contract management audit can help identify risks and gaps, ensuring a more effective and efficient process.

Reviewing active contracts with critical vendors

Begin by inventorying and segmenting critical vendors based on risk levels to identify those most critical to audit. Incorporate audits of high-risk and important service provider contracts into your annual audit plan. Gain an understanding of the key risks associated with each service provider and thoroughly review their contracts.

Internal auditors can review critical third-party contracts to ensure they include comprehensive risk and compliance clauses. This includes verifying that contracts have “right to audit” provisions, which allow the institution to monitor third-party compliance continuously. Once you’ve established your audit rights, you can start the contract audit by assessing key legal and business risks. Look for deficiencies and compliance issues in the contract, and consider conducting on-site reviews if your audit rights permit. An efficiency audit may also be warranted to ensure services are delivered as per the contract and service level agreements.

After completing the audit, validate the results, identify root causes, and propose solutions. Finally, communicate the results to the contract owner and key stakeholders, ensuring they are informed of the findings and recommended actions.

4. Ongoing monitoring and reporting

Once a third-party relationship is established, continuous monitoring is essential to manage evolving risks. Internal audit can play a vital role in developing and implementing monitoring frameworks that track third-party performance, compliance and risk exposure. Regular audits and reviews can provide senior management with timely risk intelligence. This enables informed decision-making and ensures that effective internal controls are in place.

5. Internal audit collaboration with risk management functions

Internal audit of third-party risk management becomes more effective when auditors and risk managers collaborate and share information. This allows both to leverage each other’s abilities and tools. By working closely with risk, compliance and other departments, internal auditors can ensure that third-party governance policies and procedures are consistently applied across the bank or credit union.

By integrating third-party risk assessments with audit plans, both auditors and risk management teams can eliminate redundancies in the risk evaluation processes. This approach also helps standardize the risk language used. It offers management teams and boards a comprehensive view of the financial institution’s third-party risk profile. This collaboration integrates TPRM into the overall risk management strategy, enhancing the institution’s ability to manage third-party risks.

Building a robust third-party risk management framework

To effectively manage third-party risks, financial institutions should establish a comprehensive TPRM framework. TPRM necessitates a framework that holds the board of directors and senior management accountable. It requires them to adjust the principles based on the size, scope and criticality of the products or services provided by third parties. This framework should be consistently applied across the institution and integrated into its operational, risk, and compliance management activities. As discussed, key components of a robust TPRM framework include:

  • Defining and Inventorying Third-Party Vendors: Internal audit can assist in identifying and inventorying all third-party relationships, categorizing them by risk level and criticality.
  • Risk Appetite Assessment: Assessing the bank or credit union’s risk appetite concerning third-party relationships, particularly those in high-risk locations or industries.
  • Enhanced Vendor Due Diligence: Conducting enhanced due diligence for critical third-party relationships, ensuring alignment with the institution’s risk profile and regulatory requirements.
  • Ongoing Monitoring and Performance Standards: Establishing and maintaining rigorous monitoring and performance standards for third-party relationships, ensuring continuous compliance and risk management.
  • Training and Awareness: Providing training for stakeholders on TPRM processes and the importance of effective third-party risk management.

Risk-based internal audit for financial institutions

With regulatory bodies calling for enhanced third-party oversight, the imperative for thorough risk and assurance functions has never been greater. These functions must delve deeply into the third-party network. This helps to ensure that critical risks and compliance requirements are diligently managed and monitored. Internal auditors are pivotal in this endeavor and should seek to broaden their role in fortifying third-party risk management.

At Young & Associates, we understand the critical importance of robust TPRM processes. We offer expert consulting services to help banks and credit unions strengthen their internal audit functions, risk management, and more. By leveraging our expertise, financial institutions can enhance their third-party risk management frameworks, ensuring compliance, mitigating risks and achieving strategic objectives. Ultimately, effective TPRM is not just about regulatory compliance; it’s about creating a resilient and thriving financial institution.

For more information on how Young & Associates can support your internal audit needs, click here.

Upcoming Nacha Rule changes in 2026: What you need to know

Written by admin on . Posted in ACH, Advice, Blog, Compliance & Regulations, Consultation, News.

By Mindy Shadoin, Consultant, Young & Associates

On March 15, 2024, Nacha announced significant updates to ACH (Automated Clearing House) Rules, aimed at enhancing fraud management and improving the recovery of funds. These updates are set to roll out in phases, with some changes effective as early as June 2024 and others beginning March 20, 2026. This article summarizes the key changes that will take effect in 2026, providing a concise overview of what community financial institutions need to know.

Key Nacha changes effective March 2026

The changes effective March 20, 2026, are designed to address fraud more effectively and enhance the recovery of funds when fraud occurs. Therefore, institutions must adapt to these new rules to comply with regulatory requirements and improve their fraud detection and management practices.

Fraud Monitoring (Phase 1)

Who’s Affected: Originating Deposit Financial Institutions (ODFIs) and each Non-Consumer Originator, Third-Party Service Provider, and Third-Party Senders with annual ACH origination volume of six million or greater in 2023.

Requirements: Institutions must implement risk-based processes for ACH entry fraud detection and review these processes annually. The final rule emphasizes specific process requirements over the previous “commercially reasonable” standard.

Reason: The amendment is designed to cut down on fraud. By regularly monitoring for fraud, institutions can create a baseline of normal activity, which makes it easier to spot unusual or suspicious behavior.

RDFI ACH credit monitoring

Who’s Affected: Receiving Depository Financial Institutions (RDFIs) with annual ACH receipt volumes of 10 million or more in 2023.

Requirements: RDFIs must develop fraud detection systems for incoming credit entries, using a risk-based approach to monitor transaction patterns and account anomalies.

Reason: The rule aims to decrease successful fraud and improve the recovery of funds in case of fraud. Also, it supports an institution’s regulatory duty to monitor suspicious transactions. Additionally, it promotes better communication between compliance, operations, product management, and relationship staff.

New definitions and descriptions

False pretenses

The updated rules introduce the term “False Pretenses,” which refers to fraud involving misrepresentations of identity, authority, or account ownership. This definition aims to cover common fraud scenarios like Business Email Compromise (BEC) and vendor impersonation, enhancing clarity in handling such cases.

Standard company entry description: payroll

Effective March 20, 2026, regardless of ACH volume, all Prearranged Payment and Deposit Entry (PPD) Credits for wages and similar compensation must include the description “PAYROLL” in the Company Entry Description field. This standardization will help RDFIs better identify payroll-related transactions and prevent fraud associated with payroll redirections.

Standard company entry description: purchase

Effective March 20, 2026, regardless of ACH volume, this amendment requires that e-commerce purchases use the description “PURCHASE” in the Company Entry Description field. This change will help differentiate e-commerce transactions and prevent misclassification of transactions.

Nacha changes effective June 2026

Fraud monitoring (Phase 2)

Starting June 22, 2026, the rules from Phase 1 will apply to all RDFIs not previously covered. These Phase 2 changes will further enhance fraud detection and fund recovery processes, ensuring comprehensive coverage across the industry.

Preparing for the Nacha Rule changes

The upcoming changes to the Nacha Operating Rules represent a significant step forward in managing ACH fraud and improving fund recovery. Financial institutions will need to prepare by refining their fraud monitoring processes and adapting to the new definitions and descriptions outlined in these rules. For detailed information, you can find the Nacha Operating Rules and Guidelines on Nacha’s website.

Staying informed and compliant with these rules will be crucial for maintaining effective fraud management and regulatory adherence. This article provides a simplified overview of these updates, focusing on key changes and their implications. For a more comprehensive understanding, inquire about the in-depth article featured in the August edition of our Compliance Update newsletter, including details on the final rule changes, adjustments from the original proposal issued in May 2023, and specific actions required.

Each month, our Compliance Update newsletter offers in-depth analysis and insights on regulatory updates and amendments impacting the banking industry. Our compliance experts review new developments. We provide valuable guidance to help you maintain regulatory compliance and navigate the evolving landscape. To receive timely and detailed compliance information, we encourage you to subscribe. Click here to learn more about our Compliance Update newsletter and purchase a subscription.

Young & Associates provides a full suite of regulatory compliance consulting services tailored to meet the unique needs of your institution. Our offerings include ACH self-assessment reviews, compliance outsourcing, our Virtual Compliance Consultant Program, and more. These services are designed to simplify complex regulatory requirements and allow you to focus on strategic goals. For more information on how we can support your institution, please contact us.

Spotlight on compliance training: Showalter featured in In Touch Magazine

Written by admin on . Posted in Advice, Blog, Compliance & Regulations, Consultation, News.

William Showalter, CRCM, CRP, a senior consultant with Young & Associates, was recently featured in an issue of In Touch Magazine, the publication of the Community Bankers Association of Kansas. The article, “Training: The Foundation of Effective Compliance,” underscores the critical role that comprehensive compliance training plays in building and maintaining a robust compliance program within financial institutions.

Training: The bedrock of compliance

In his article, Showalter highlights a timeless truth: employees can’t be expected to comply with laws and regulations if they haven’t been properly instructed on them. Training is the bedrock upon which a thriving compliance program is built, enabling institutions to manage compliance risks effectively. With over 20 years of experience transitioning into a new compliance management model, Showalter emphasizes pushing responsibility and involvement down to the front lines, making well-versed employees essential for success.

Why train? Reducing risk and ensuring compliance

Training employees in compliance is not just about meeting regulatory requirements; it’s about reducing the risk of noncompliance. Showalter points out that educating the bank’s board of directors, management, and staff is essential for maintaining an effective compliance program. Compliance training helps mitigate various risks identified by federal banking supervisors, including compliance risk, transaction or operational risk, and reputation risk.

Customizing training programs for success

Effective compliance training varies from one institution to another. Showalter offers practical guidance on setting up a successful compliance training program, stressing the importance of a thorough needs assessment. Identifying the types of products and services offered, the regulations impacting these processes, and the current knowledge level of staff are crucial steps in this process. The article also provides insights into choosing the right format and media for training, from online programs to classroom-style sessions, ensuring that the training is relevant and engaging for all employees.

Keeping compliance on track: Testing and record-keeping

An essential component of any training process is testing to measure success and maintain records. Showalter emphasizes the need for continuous assessment and refresher training to keep up with evolving regulations and ensure that all employees remain knowledgeable and compliant.

William Showalter’s expertise and practical advice in this article underscore the importance of a proactive approach to compliance training, helping financial institutions navigate the complex regulatory landscape with confidence. For more insights and to read the full article, click here. Stay informed with the Community Bankers Association of Kansas and discover more industry insights in In Touch Magazine — the leading publication dedicated exclusively to serving the interests of Kansas community banks.

Regulatory compliance Training for financial institutions

Investing in the training and development of your staff is the most important investment your financial institution can make. Competent, well-trained employees not only ensure compliance but also contribute to the overall success and profitability of your institution.

Young & Associates is a national leader in continuing education and training for financial professionals. Our consultants bring unmatched real-world expertise in topics such as lending, underwriting, regulatory compliance, and director development. We offer a wide range of education and training services for financial professionals. Our training is flexible, with options for off-site, in-house, and virtual sessions. These are all customized to meet the specific needs and objectives of your institution.

Take a proactive approach to regulatory compliance with our comprehensive training for your personnel. Our training provides the latest information and techniques for maintaining an effective internal program. Whether you need to establish a compliance program or update your knowledge on changing regulations. Topics include the Bank Secrecy Act, Privacy, Fair Lending, and more, all customized to the specific needs of your institution. Investing in our training services helps ensure compliance and boosts your institution’s overall success.

We also offer the Community Bankers for Compliance Program (CBC), the longest-running compliance program in the country. This program equips banks with comprehensive tools for managing in-house compliance. This includes live seminars, webinars, a compliance hotline, a members-only portal and a monthly newsletter.

Discover our full range of compliance training services and explore our comprehensive regulatory compliance consulting offerings.

Contact us today to see how we can support your bank or credit union in achieving your strategic goals.

Implementing compliance: Key principles and practices

Written by admin on . Posted in Advice, Blog, Compliance & Regulations, Consultation.

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

There is no question that laws and regulations materially change the way banks do business. The recent new laws and regulations have, more than ever before, crossed over the consumer protection regulatory line and into bank management. This complicates your life, and the starts and stops do not make it easier. 

Consider the “1071 Rule,” which amounted to HMDA for commercial loans, with even more invasive questions. The underlying law was passed in 2010 (the Dodd-Frank Act), and the CFPB took almost 13 years to implement it, only to be stopped by the courts for stepping way beyond the requirements of the law. The updated CRA regulation is also now being challenged in the courts. 

Compliance does not happen in a vacuum. Many of the regulations cover multiple disciplines within the bank, and many departments have to be involved in implementing the solution. This article discusses some of the basics of implementing compliance within your organization, as well as an approach that we believe is critical to the success of any bank. 

The key ingredients for successful compliance

To establish a successful program, the following ingredients must exist:  

  • Board of Directors support 
  • Management support 
  • Staff development 
  • A viable and structured compliance network (compliance council) 
  • Compliance monitoring  

Board of directors support

The board is ultimately responsible for the success or failure of the program, just as they are for any other aspect of the bank’s risk management. The board needs a flow of information to assist them in understanding the compliance function and the current status of the program. It must also understand the stresses for compliance and ensure that there are adequate resources to facilitate success. 

Management support

Management must be actively involved in the development of the program. Although management may not design and develop the program, they should provide direction and ensure that there are resources to support its establishment and maintenance. Management must stay involved by monitoring the progress of the program through requiring periodic reports. 

Staff development

Staff development involves providing staff with the necessary background to understand the purpose of compliance, the structure to support the program and the technical skills to it out effectively. Management must direct the designated person or council and allow them the resources, including the resource of time, to fully implement the compliance program. 

A practical solution: The compliance council

In order to address the compliance burden, we believe banks should use a compliance council. This is NOT a committee. It is a reporting mechanism, where each area of the bank is responsible for the compliance duties that impact their jobs. At the council, they report progress or lack thereof in meeting those requirements.  

The results of the compliance council meeting are reduced to writing. Those minutes then go to management and the board so that they understand the current compliance situation in which the bank finds itself. A compliance council aids the institution in the following ways: 

  • The compliance council is comprised of representatives from each major area of the institution, thereby building continuity into the program. 
  • The compliance council builds compliance into the daily operational procedures of each area so that the institution can function from a practical and preventive focus. 
  • The compliance council incorporates comprehensive compliance coverage through its composition, i.e., lending, customer service, and operations. 
  • The compliance council establishes a compliance link to planning for new products and services. Each area of the institution can establish the compliance details during the planning and implementation stages. 
  • The compliance council allows the institution to include monitoring procedures in the daily workflow that integrates compliance without creating unnecessary work burdens i.e., the use of checklists and most common concern policies. 
  • The compliance council enables the institution to create an effective training and communications channel for all compliance issues. The council members will be able to take information back to their respective areas. 

Choosing the compliance council

The compliance council’s objective is to spread the duties among a small group of individuals to reduce the burden on anyone and increase coverage of the compliance function. Compliance has expanded far beyond just “letting the compliance officer deal with it.” 

The persons who are chosen might be representatives from: 

  • real estate lending, 
  • consumer lending, 
  • customer service, 
  • deposit operations, and 
  • compliance administration. 

Of course, banks are free to add others, such as BSA, branch administration, etc. 

The use of management in an advisory capacity can help to ensure accountability. It is difficult to say “I did not have time” or something similar in front of a senior manager. But hopefully, this is not necessary in most banks. The “minutes” of the meeting become a useful tool for management and the board to understand the current compliance position of the bank. 

If there is a regulatory change that involves multiple disciplines, then and only then does the “council” become a “committee” to address the common issue. 

Authority and credibility

It is important for the compliance officer and the compliance council to develop sufficient authority to operate within the bank. Without this authority, the officer and the council will be ineffective.  

Assuming that the board of directors and executive management have clearly granted the compliance officer and the compliance council sufficient authority with which to operate, the compliance officer and the compliance council must ensure their own credibility to retain any authority that the board of directors and management have granted them. 

The compliance council’s biggest barrier involves establishing credibility with the bank’s employees. For example, if in the eyes of the employees, the compliance council is an informational source to help them do their job, the council will succeed. If communication channels are established but never work, the council will fail. The key to the success of the compliance council is to establish, implement, monitor, and enforce the compliance function throughout the bank. 

Effective compliance implementation

Navigating the dynamic landscape of banking regulations requires proactive strategies and a collaborative approach across all levels of an institution. As the regulatory environment continues to evolve, compliance becomes increasingly complex, necessitating a robust framework, dedicated oversight, and effective implementation to ensure adherence. 

Empowering banks for regulatory compliance success

At Young & Associates, we understand the challenges banks face in implementing and maintaining effective compliance programs. Our team of experts is committed to providing tailored solutions that empower banks to navigate regulatory requirements with confidence and efficiency. 

Ready to streamline your compliance efforts and fortify your institution against compliance risk? Partner with Y&A for comprehensive regulatory compliance consulting services. Contact us today to learn more about how we can support your bank in alleviating regulatory burdens. 

ACH risk management: Understanding NACHA’s rule changes

Written by admin on . Posted in ACH, Advice, Blog, Compliance & Regulations, Consultation, News.

By: Mindy Shadoin, Consultant at Young & Associates

On March 15, 2024, Nacha (previously the National Automated Clearing House or NACHA) approved 15 new Automated Clearing House (ACH) rule changes surrounding ACH risk management. These changes are specifically targeted at reducing the incidence of successful fraud and improving the recovery of funds.  

Overview of NACHA’s rule changes 

These new rules establish a base-level of ACH payment monitoring on all parties in the ACH Network, except consumers. The new rules do not shift the liability for ACH payments; however, receiving financial institutions or RDFIs will have a defined role in monitoring the ACH payments they receive.  

Rule changes effective June 2024 

The following rule changes take effect June 21, 2024: 

  • General Rule Definitions for Web Entries: Rewords the WEB general rule and definition in Article Eight to make is clearer that the WEB SEC Code must be used for all consumer-to-consumer credits regardless of how the consumer communicates the payment instructions to the Originating Depository Financial Institution (ODFI) or P2P service provider.  
  • Definition of Originator: Clarifies changes and alignments to the definitions of Originator to include a reference to the Originator’s authority to credit or debit the Receiver’s account and that the Rules do not always require a receiver’s authorization (Reversals, Reclamations, Person-to-Person Entries).  
  • Originator Action on Notification of Change (NOC): Provides Originators discretion to make NOC changes for a Single Entry, regardless of the SEC Code.  
  • Data Security Requirements: Clarifies that, once a covered party meets the volume threshold for the first time, the requirement to render account numbers unreadable remains in effect, regardless of future volume.  
  • Use of Prenotification Entries: Aligns the prenote rules with industry practice by removing language that limits prenote use to only prior to the first credit or debit entry.  
  • Clarification of Terminology: Subsequent Entries: Replace references to “subsequent entry” in various Rules sections with synonymous terms to avoid any confusion with the new definition of “Subsequent Entry.” 

Rule changes effective October 2024  

The following rule changes take effect October 1, 2024: 

  • Additional Funds Availability Exceptions: Provide RDFIs with an additional exemption from the funds availability requirements to include credit ACH entries that the RDFI suspects are fraudulent. 
  • Codifying Use of Return Reason Code R17: Allow RDFIs to return an entry believed to be fraudulent using Return Reason Code R17. 
  • Expand Use of ODFI Request for Return/R06: Expand the permissible uses of the Request for Return Reason Code (R06) to allow an ODFI to request a return from the RFI for any reason. 
  • RDFI Must Promptly Return Unauthorized Debit: Require that when returning a consumer debit as unauthorized in the extended return timeframe, the RDFI must do so by the opening of the sixth Business Day following the completion of its review of the consumer’s signed Written Statement of Unauthorized Debit (WSUD).  
  • Timing of Written Statement of Unauthorized Debit (WSUD): Allow a WSUD to be signed and dated by the Receiver on or after the date on which the Entry is presented to the Receiver, even if the debit has not yet been posted to the account.  

Rule changes effective 2026 

The following rule changes take effect March 20, 2026: 

  • Company Entry Description – Payroll: Establish a new standard description of Payroll for PPD Credits for payment of wages, salaries, and other similar types of compensation. 
  • Company Entry Description – Purchase: Establish a new standard description of PURCHASE for e-commerce purchases. 

The following rule changes take effect in two phases.  

  • Phase 1 is effective March 20, 2026, for all ODFIs and non-Consumer Originators, Third-Party Service Providers (TPSPs), and Third-Party Senders (TPSs) with an annual ACH origination volume of 6 million or greater in 2023. 
  • Phase 2 is effective June 19, 2026, for all other non-Consumer Originators, TPSPs, and TPSs   
    • Fraud Monitoring by Originators, TPSPs, and ODFIs: Requires each non-Consumer Originator, ODFI, TPSP, and TPS to establish and implement risk-based processes and procedures reasonably intended to identify ACH Entries initiated due to fraud. 
    • RDFI ACH Credit Monitoring: Requires RDFIs to establish and implement risk-based processes and procedures reasonably intended to identify credit ACH Entries initiated due to fraud.  

Ensuring a secure ACH landscape through proactive risk mitigation 

The recent ACH rule changes approved by NACHA signify a significant step towards enhancing ACH risk management and fraud prevention. These changes aim to reduce the incidence of successful fraud and improve the recovery of funds, ultimately safeguarding the integrity of the ACH Network. 

With the implementation of these rule changes, financial institutions and other stakeholders involved in ACH transactions will need to adapt their policies, procedures and risk management processes accordingly. It’s essential for organizations to stay informed about these regulatory updates and ensure compliance to mitigate ACH-related risks effectively. 

Enhance your ACH risk management framework with Young & Associates’ proven expertise 

Are you seeking expert guidance and support to navigate these ACH rule changes and ensure compliance with regulatory requirements? At Young & Associates, we understand the unique challenges faced by financial institutions in today’s evolving regulatory landscape.

We specialize in providing tailored regulatory compliance consulting services. These include comprehensive support with ACH functions such as ACH audit and ACH risk assessment. Our team of experienced professionals is committed to helping you strengthen your ACH risk management practices and achieve regulatory compliance seamlessly. 

Contact us today. Explore how we can assist your financial institution in meeting its regulatory obligations while optimizing operational efficiency and minimizing risk exposure. Or, click here to discover the benefits of our customizable ACH policy. Together, let’s navigate the complexities of ACH compliance and ensure the security and integrity of your financial transactions.

Modernized FDIC signage & advertisement requirements: What banks need to know

Written by admin on . Posted in Advertising, Blog, Compliance & Regulations, Consultation, News.

In today’s dynamic regulatory landscape, keeping pace with regulatory updates is critical for community banks to maintain compliance and uphold depositor trust. To adapt to shifts in the banking industry and consumer behavior, the Federal Deposit Insurance Corporation (FDIC) has finalized a rule to modernize the requirements for official signs and advertising statements for insured depository institutions (IDIs). This modernization signifies a crucial change in regulatory expectations, demanding a thorough understanding and proactive approach from financial institutions.

Background: Understanding the updated part 328 rules

The banking industry has experienced significant transformations. These include the evolution of bank branches, heightened reliance on internet and mobile banking, and increased partnerships between IDIs and financial technology (fintech) companies. These shifts have heightened the potential for consumer confusion regarding FDIC deposit insurance coverage.

In response, the FDIC has introduced substantial updates to Part 328 of its regulations, specifically addressing the use of official FDIC signs and advertising statements by IDIs. Additionally, it clarifies regulations concerning false advertising, misrepresentations of deposit insurance coverage, and misuse of the FDIC’s name or logo. This revision underscores the FDIC’s dedication to aligning regulatory standards with the evolving banking landscape, especially in digital and mobile channels.

Key changes to note: New FDIC official signage requirements

The modernized FDIC signage and advertisement requirements bring about significant changes. The aim to enhance consumer understanding and confidence in deposit insurance coverage. Beginning in 2025, FDIC-insured institutions are mandated to prominently display the official FDIC digital sign across digital platforms, including bank websites, mobile applications, and ATMs. This expansion to digital channels ensures consistent depositor confidence and clarity regarding deposit insurance coverage.

Moreover, the updated rule emphasizes the differentiation between insured deposits and non-deposit products across all banking channels. Regulations now require financial institutions to provide conspicuous disclosure indicating that certain financial products are not insured by the FDIC, are not deposits, and may incur value loss. These changes aim to extend the certainty and confidence associated with FDIC protection to digital channels. All while ensuring that consumers are properly informed about the status of their deposits and the scope of FDIC insurance coverage.

Quick reference: FDIC modernized signage rule requirements and compliance deadlines

Purpose of the updated FDIC signage requirements

The rule updates regulations governing the use of official FDIC signs and advertising statements to reflect contemporary banking practices. It also clarifies regulations regarding false advertising, misrepresentations of deposit insurance coverage, and misuse of the FDIC’s name or logo.

Changes to official signs

The traditional black and gold FDIC sign displayed at bank branches will now be complemented by a new black and navy blue FDIC digital sign. Banks will be required to display this digital sign on their websites, mobile applications, and certain ATMs starting in 2025.

Differentiation of products

Banks must use signs to differentiate insured deposits from non-deposit products across banking channels. They also need to indicate that certain financial products are not insured by the FDIC, are not deposits and may lose value.

Clarification on misrepresentations

The rule addresses scenarios where misleading information about deposit insurance coverage could confuse consumers. It prohibits the use of FDIC-associated terms or images in marketing materials to inaccurately imply that uninsured financial products or non-bank entities are insured or guaranteed by the FDIC.

Objectives for IDIs

For IDIs, the rule modernizes rules for displaying the FDIC official sign in branches and extends requirements to other physical premises. It establishes and mandates the display of the FDIC official digital sign on bank websites, mobile applications and certain IDI ATMs. Regulations also require IDIs to differentiate insured deposits from non-deposit products across banking channels.” They provide a one-time per web session notification when a logged-in bank customer leaves the IDI’s digital deposit-taking channel for non-deposit products on a non-bank third party’s website. Additionally, IDIs must establish and maintain written policies and procedures for compliance with part 328.

Compliance and effective dates

The amendments made by the final rule are effective on April 1, 2024. There is an extended mandatory compliance date of January 1, 2025.

Navigating compliance with Young & Associates

At Young & Associates, we recognize the complexities and challenges community banks face in navigating regulatory changes effectively. We offer a customizable FDIC Signage and Advertising Requirements Policy to assist community banks in complying with the modernized rule. Additionally, our comprehensive suite of regulatory compliance services includes compliance outsourcing, advertising review and more solutions. Our team of compliance experts commits to guiding institutions toward regulatory compliance excellence while minimizing operational disruptions.

Ensuring compliance with FDIC signage and advertisement requirements is paramount for community banks. Embrace proactive compliance practices and partner with Young & Associates to navigate the complexities of regulatory change effectively. Contact us today to embark on your journey towards compliance excellence and safeguard the integrity of your institution in the ever-evolving financial landscape.

Stay compliant. Stay confident. Choose Young & Associates.

Understanding ACH risk management for community financial institutions

Written by admin on . Posted in ACH, Blog, Compliance & Regulations, Consultation.

Automated Clearing House (ACH) risk management is a topic of paramount importance for community financial institutions. In the realm of modern banking, ACH payments have emerged as a cornerstone of electronic fund transfers, offering unparalleled efficiency and convenience for businesses and consumers alike. However, with the benefits of ACH come inherent risks. Financial institutions must proactively address to safeguard their operations and protect their stakeholders.

Spectrum of ACH risk categories

From compliance and credit risk to fraud, operational challenges, and systemic vulnerabilities, each facet of ACH risk poses unique challenges. It demands strategic foresight and diligent risk mitigation efforts. By understanding the intricacies of ACH risk management, financial institutions can fortify their resilience and ensure compliance with regulatory standards while fostering trust and reliability in the digital banking ecosystem.

The five basic types of ACH risk

1. ACH requirements compliance risk

Compliance risk encompasses the threat of legal or regulatory sanctions, financial loss, or damage to reputation resulting from failure to comply with laws, regulations, and internal policies. For community financial institutions processing ACH transactions, compliance risk looms large due to the intricate web of regulations governing ACH transfers, including Regulation E and Article 4A of the Uniform Commercial Code, as well as Bank Secrecy Act/Anti-Money Laundering (BSA/AML) requirements, and the NACHA Rules and Guidelines. Institutions must conduct comprehensive ACH reviews to ensure adherence to regulatory standards and promptly rectify any violations or errors detected.

2. Credit risk from ACH transactions

Credit risk arises from the potential for financial loss due to the failure of parties involved in ACH transactions to fulfill their payment obligations. Community financial institutions face credit risk when originating or receiving ACH transactions, especially with the proliferation of high-risk activities such as nonrecurring payments. Establishing rigorous underwriting standards, evaluating originator creditworthiness, and setting appropriate exposure limits are crucial risk mitigation strategies for managing credit risk effectively.

3. Fraud risk

Fraud risk encompasses the threat of unauthorized or deceptive activities resulting in financial loss or reputational damage. With the increasing sophistication of fraudulent schemes targeting ACH transactions, community financial institutions must remain vigilant against fraudulent activities such as account takeover, unauthorized returns and unauthorized transactions. Implementing robust authentication measures, monitoring transaction patterns for anomalies and conducting regular audits of third-party service providers are essential components of an effective fraud risk management framework.

4. ACH processing operational risk 

Operational risk stems from the potential for disruptions or failures in internal processes, systems or human factors leading to financial loss or operational inefficiencies. Community financial institutions face operational risk in ACH processing operations. These are due to factors such as technological failures, human error and inadequate controls. Implementing comprehensive policies and procedures, ensuring adequate training for staff and conducting regular audits of ACH operations are critical steps in mitigating operational risk.

5. Systemic risk

Systemic risk refers to the threat of widespread disruptions or failures within the financial system resulting from interconnectedness and interdependencies among institutions and market participants. Individual community financial institutions may have limited exposure to systemic risk in ACH processing. But they remain vulnerable to broader systemic events impacting the financial industry as a whole. Vigilance, collaboration with industry stakeholders, and contingency planning are essential strategies for managing systemic risk effectively.

Effective ACH risk management for community financial institutions

In conclusion, effective ACH risk management is paramount for community financial institutions to navigate the evolving landscape of electronic payments. It’s a must to uphold their commitments to regulatory compliance, financial integrity and customer or member trust. By understanding and addressing the five basic types of ACH risk—compliance, credit, fraud, operational and systemic—financial institutions can fortify their resilience and sustain long-term success in the dynamic world of electronic banking.

Young & Associates offers ACH self-assessment reviews. Our compliance experts evaluate your policies, procedures, and test components to ensure compliance with the NACHA Operating Guidelines. For tailored guidance to your unique circumstances, reach out to our team of experts. We help you navigate the regulatory compliance landscape and keep your financial institution on the path to success. Contact us today.

HMDA and CRA adjustments are here

Written by admin on . Posted in Advice, Compliance & Regulations, Consultation, HMDA.

By: William J. Showalter, CRCM, CRP

There are changes that arrived with the new year of 2024 to Home Mortgage Disclosure Act (HMDA) compliance for banks and thrifts in many areas. No, the Consumer Financial Protection Bureau (CFPB) is not repealing Regulation C or adding more detail to the required data we collect and report. The existing rule is still in place. 

The changes we will look at here are driven by the decennial (every 10 years) adjustments by the Office of Management and Budget (OMB) to geographic units used by the federal government, including the Census Bureau, for statistical purposes. The particular geographic units that impact bank and thrift HMDA compliance are Metropolitan Statistical Areas (MSAs) since they are a qualifying location factor for lenders in determining HMDA coverage. 

The OMB’s changes will also have possible effects on bank and thrift compliance with the Community Reinvestment Act (CRA) in the drawing of institutional CRA “assessment areas.” 

These latest changes were effective when issued by OMB – July 21, 2023 – so they can impact 2024 HMDA coverage. 

OMB action 

The OMB completed a process of delineating Core Based Statistical Areas (CBSAs) based on 2020 Census data and the American Community Survey and Census Population Estimates Program for 2020 and 2021. A CBSA describes a geographic entity with at least one core of 10,000 or more population, plus adjacent territory that shows a high degree of social and economic integration with the core as measured by commuting ties. The standards designate and delineate two categories of CBSAs: Metropolitan Statistical Areas and Micropolitan Statistical Areas.  

The general concept of a metropolitan statistical area is that of an area containing a large population nucleus and adjacent communities that have a high degree of integration with that nucleus. The concept of a micropolitan statistical area closely parallels that of the metropolitan statistical area, but a micropolitan statistical area features a smaller nucleus. The purpose of these statistical areas remains the same as when officials first delineated metropolitan areas: The classification offers a nationally consistent set of delineations for collecting, tabulating, and publishing federal statistics for geographic areas.

The new delineations are found in OMB Bulletin 23-01 at https://www.whitehouse.gov/wp-content/uploads/2023/07/OMB-Bulletin-23-01.pdf.  

HMDA coverage 

Regulation C covers any “financial institution,” as defined by the regulation and its underlying HMDA statute. “Financial institution” means, in part, a bank, savings association, or credit union that: 

  • On the preceding December 31, had assets in excess of the asset threshold established and published annually by the CFPB for coverage by HMDA, based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted, for each 12-month period ending in November, rounded to the nearest million – $56 million for 2024 HMDA coverage 
  • On the preceding December 31, had a home or branch office in a Metropolitan Statistical Area (MSA) [Micropolitan Statistical Areas have no HMDA impact.] 
  • In the preceding calendar year, originated at least one home purchase loan (excluding temporary financing such as a construction loan) or refinancing of a home purchase loan, secured by a first lien on a one-to four-family dwelling, and 
  • Meets one or more of the following two criteria: is federally insured or regulated; or the mortgage loan referred to in the previous bullet was insured, guaranteed, or supplemented by a federal agency or was intended for sale to Fannie Mae or Freddie Mac
  • Meets at least one of the following criteria in each of the two preceding calendar years: originated at least 25 closed-end mortgage loans that are not excluded by §1003.3(c)(1) through (10) or (c)(13), or originated at least 200 open-end lines of credit that are not excluded by the cited section of Regulation C 

There are also similar qualification criteria for for-profit mortgage lenders that are not banks, thrifts, or credit unions, which we will not detail here. 

The qualification criterion impacted by OMB’s action is the geographic one, the second bullet above. If a financial institution that otherwise meets HMDA coverage criteria has an office in an MSA on December 31, then it is covered by HMDA for the following year. For many lenders, determining HMDA coverage is a one-time exercise (other than those who are right around the asset-size threshold). 

Ohio MSA changes 

I will use my native Ohio as an example of what the MSA changes mean to banks and thrifts and their compliance with HMDA requirements. 

Three counties in Ohio were shuffled into Metropolitan Statistical Areas in this latest OMB action – one being added to an existing MSA and two comprising a new MSA. This time, the MSAs kept all Ohio counties that they formerly included.

The Cleveland MSA now includes Ashtabula County. The new Sandusky MSA now includes Erie and Ottawa counties.

There were also some changes in non-Ohio parts of MSAs that include other Ohio counties. Lenders in the Cincinnati, Huntington-Ashland, and Youngstown-Warren MSAs should look for these additions and deletions of neighboring states’ counties. 

The OMB Bulletin mentioned above contains all the details of the new Ohio geographic delineations. The list of MSAs and micropolitan statistical areas by state is in List 6 (with Ohio on pages 168-169) of the OMB Bulletin, while five additional lists in the bulletin give other breakdowns of the geographic delineations, including the counties included in each. 

HMDA impact 

In 2023, there was no impact for HMDA reporting because the new MSA delineations were not in effect on December 31, 2022. 

However, they were in effect December 31, 2023, which has the following impacts: 

  • Banks and thrifts with offices in Ashtabula, Erie, and Ottawa counties, and in no other MSA counties, now have to begin collecting HMDA data January 1, 2024, and make their first reports of that data by March 1, 2025.
  • Unlike 10 years ago, there are no banks and thrifts whose offices in Ohio counties have made them subject to HMDA reporting (i.e., no offices in other MSA counties) that will no longer have to collect HMDA data beginning in 2024. (Note: Banks must still report their 2023 HMDA data by March 1, 2024.) 

If your institution has an office in any of the counties affected by the MSA changes, be sure to review how this action affects your HMDA compliance beginning in 2024. 

CRA impact 

MSAs affect the CRA compliance efforts of banks and thrifts, too. They come into play in drawing up an institution’s CRA assessment area (AA), as well as in the small business and small farm lending disclosure statements prepared by regulators annually for institutions reporting their data (all except for “small” retail banks and thrifts).  

The CRA rules require that an institution’s CRA AA consist generally of one or more MSAs or metropolitan divisions – using the MSA or metropolitan divisions boundaries that were in effect as of January 1 of the calendar year in which the delineation is made – or one or more contiguous political subdivisions e.g., counties, cities, or towns). 

A CRA AA may not extend substantially beyond an MSA boundary or beyond a state boundary unless the assessment area is located in a multistate MSA. If a bank or thrift serves a geographic area that extends substantially beyond a state boundary, the bank must delineate separate AAs for the areas in each state. If a bank or thrift serves a geographic area that extends substantially beyond an MSA boundary, it must delineate separate AAs for the areas inside and outside the MSA. 

The regulators prepare annually, for each MSA and the nonmetropolitan portion of each state, an aggregate disclosure statement of small business and small farm lending by all institutions subject to reporting of that data (all except “small” retail banks and thrifts). 

Therefore, the redrawn MSA boundaries might have an impact on your institution’s CRA compliance. Each bank and thrift with the affected counties in its CRA AA should review its delineation to make sure that the changes do not require an adjustment to those delineations. Make any adjustments by April 1, when you must complete any updating of CRA public files (including the map of your CRA AA).

Links 

This OMB Bulletin provide the six lists of statistical areas that are available electronically at the link stated above or from the OMB website at https://www.whitehouse.gov/omb/information-for-agencies/bulletins/.  This update, historical delineations, and other information about population statistics are available on the Census Bureau’s website at https://www.census.gov/programs-surveys/metro-micro.html.

Young & Associates: Your trusted partner in regulatory compliance

In navigating the intricacies of HMDA and CRA compliance, Young & Associates stands ready to support community banks and credit unions. Our regulatory compliance consulting services ensure a seamless adherence to evolving regulations. Stay ahead with Young & Associates – your trusted partner in compliance excellence. Contact us today for tailored solutions that empower your financial institution.

2024 Rescission Reference Chart

Written by admin on . Posted in Compliance & Regulations.

View and download the Young & Associates 2024 Rescission Reference Chart to assist your lenders in preparing the Notice of Right to Cancel. Please forward this document to someone in your organization who will use this helpful tool.

For over 45 years, Young & Associates has provided consulting, training, and practical tools for the banking industry. Thank you for the opportunity to serve your needs.


Looking for the latest calendar? Click here to access the 2025 Rescission Reference Chart!

 

Navigating compliance challenges: Reg Z, Reg E, and Flood Rules

Written by admin on . Posted in Blog, Compliance & Regulations, Consultation.

Expert Regulatory Compliance Services for Financial Institutions

Are you finding the ever-evolving web of financial regulations a challenge to navigate? In the intricate landscape of compliance, regulations like Z, E, and Flood can be complex and overwhelming for financial institutions. Young & Associates offers a comprehensive suite of solutions specifically tailored to alleviate the burden of regulatory compliance challenges for community banks and credit unions.

Regulatory challenges made simple

Regulation Z compliance: Comprehensive TILA support

A cornerstone of financial institution compliance, Regulation Z delineates the implementation and execution of the Truth in Lending Act (TILA). Our experts understand the nuances of Reg Z and can guide your institution through its complex requirements. Our Reg Z compliance solutions are meticulously crafted to not only ensure your institution’s compliance but also to ensure transparency and fairness for your valued customers or members.

  • Loan Disclosures.  We review your financial institution’s disclosures – both open-end and closed-end (including TRID) disclosures – to help ensure compliance with these measures to inform customers, and to help your institution avoid potential required reimbursements, regulatory penalties, and civil liability.
  • Right of Rescission.  We help your lending personnel navigate the intricacies of the right of rescission, making sure that the proper consumers are recognized for this right and given required notices and disclosures, and that disbursements and other lender actions are delayed until it is confirmed that the customers have not exercised their cancellation right.  Proper observance of rescission requirements will help your institution avoid significant penalties – extended rescission rights, regulatory penalties, and civil liability.
  • Other Consumer Protections.  We facilitate your financial institution’s efforts to comply with, or avoid, significant requirements related to high-cost mortgages, home equity lines of credit, higher priced mortgage loans, private education loans, and others.

Regulation E compliance: EFTs and error resolution

The Electronic Fund Transfer Act (EFTA) brings its own set of challenges. The EFTA, implemented by Regulation E, governs electronic transactions. As the volume of EFT transactions continues to rise, so does the complexity of associated error claims. Resolving these claims can pose a significant challenge for banks and credit unions. Our team specializes in providing tailored guidance and support for Reg E compliance, including:

  • Error Resolution Procedures: We review your financial institution’s error resolution procedures, ensuring strict adherence to meet regulatory standards.
  • Electronic Payment Systems: We facilitate adherence to Reg E requirements by ensuring your financial institution’s electronic payment systems and procedures are diligently followed.
  • Consumer Protection: We review your Reg E compliance program to confirm that your institution’s procedures and adherence align with regulations aimed at safeguarding your customers’ rights, privacy, and security.

You can rely on our Reg E compliance guidance to navigate the complexities of regulatory requirements, effectively mitigating the risks of violations and penalties in the dynamic landscape of electronic transactions.

Flood insurance compliance: Ensuring flood disaster protection

Navigating the intricacies of federal flood regulations is crucial for financial institutions, given the increased scrutiny by regulators and the potential risks and penalties associated with noncompliance. Monetary penalties for such violations underscore the importance of a robust compliance program. Young & Associates is committed to providing comprehensive compliance solutions to guide your institution through the complex requirements of the Flood Disaster Protection Act encapsulated in the flood insurance rules.

At Y&A, our commitment to comprehensive compliance solutions extends to helping your institution navigate the nuances of federal flood-related requirements. Our seasoned experts specialize in helping your institution navigate federal flood-related requirements, offering tailored solutions to minimize exposure to potential risks. We can review your financial institution’s Flood Act compliance program to ensure compliance with variables such as flood zone determinations, borrower notifications, lender placement, and more.

Key components of our flood compliance reviews dial in on common areas of violations, including:

  • Compliance with Flood Regulations for Lenders: Our experts understand the intricacies of flood regulations, addressing common areas of violations such as proper loan file documentation, justified waivers, insurance coverage requirements, notice to borrower requirements, forced placement of flood insurance requirements, and more. We ensure your institution adheres to the most stringent regulatory standards, mitigating risks associated with non-compliant loans.
  • Flood Insurance Notice to Borrower Requirements: Timely and accurate notices to borrowers are critical. Our comprehensive reviews focus on your institution’s process for delivering and receiving acknowledgement of flood insurance-related notices, ensuring compliance with regulatory timelines and requirements.
  • SFHA Flood Insurance Requirements: Staying abreast of FEMA’s special flood hazard areas and implementing appropriate flood insurance requirements is essential. Our compliance reviews are designed to assist your institution in adhering to evolving SFHA standards.

As your trusted partner, we streamline the compliance process. This allows your institution to focus on core functions while remaining resilient in the face of regulatory challenges. Let us guide you through the intricate web of flood-related regulations, ensuring your institution stays protected from compliance violations in the ever-evolving financial landscape.

Expert guidance on Regulation Z, Regulation E, and Flood Compliance

Regulations such as Z, E, and Flood are just the tip of the iceberg. Our consultants are well-versed in all aspects of federal banking consumer regulations. We ensure you’re not just compliant but also in the best possible position to thrive in a highly regulated environment. We can assist you in understanding the intricacies of Truth in Lending, Electronic Fund Transfers, or Flood Compliance Requirements.

Why partner with Young & Associates?

At Y&A, we’ve been a trusted partner in regulatory compliance for over four decades, and here’s why:

  • Stay Ahead of Regulatory Changes: We keep you informed and prepared in a constantly evolving regulatory landscape. We help you navigate the intricate landscape of financial regulations, so you can focus on your core mission.
  • Comprehensive Solutions Tailored to Your Institution: We understand that a one-size-fits-all approach doesn’t work in regulatory compliance. We customize our solutions to address your institution’s unique needs.
  • Real Solutions for Real Challenges: We provide practical, real-world recommendations, enabling your bank or credit union to not only meet regulatory requirements but also implement best practices for a robust compliance framework.
  • Experienced Team: Our seasoned consultants bring decades of experience in banking and financial regulation to the table, ensuring you receive expert guidance.
  • Unmatched Quality: With over 45 years exclusively dedicated to financial institutions, excellence is our trademark. We maintain meticulous standards, offering precision, thoroughness, and a steadfast commitment to delivering actionable results.
  • Comprehensive Support: We offer end-to-end support, and our full-service approach covers all aspects of financial institution consulting. When you partner with Y&A, you gain access to a comprehensive team of industry experts.

Let’s navigate compliance challenges together

Don’t let regulatory compliance challenges hinder your institution’s growth. Contact Young & Associates to ensure your institution meets compliance standards and prepares for success. We’re here to help you navigate the intricate world of Regulations Z, E, H, and beyond. With our expertise, your institution can thrive in a highly regulated environment.

In addition to our full suite of compliance consulting services, we offer:

  • Virtual Compliance Consultant (VCC) Program: Receive access to all the invaluable compliance tools and services that we have to offer including compliance coaching, compliance products and policies, regulatory manuals, access to an online forum with experts from Y&A, and more.
  • Compliance Policies, Tools, and Workbooks: We offer customizable resources designed to simplify complex compliance tasks. From policies to interactive workbooks, our tools facilitate smoother compliance operations.
  • Compliance Update Newsletter: This monthly newsletter provides a thorough compliance review and covers developments that affect the banking industry. Each month our compliance experts scour the regulatory issuances, final rules, and amendments. They then provide you with the compliance information you need. The newsletter includes hot topics, action items, a compliance calendar, and more relevant information and resources.
  • Education Services: In addition to timely, easily accessible webinars, we offer customizable training solutions.

Contact us to explore how our tailored solutions can address your regulatory challenges.

Overdraft programs and fees: Navigating the regulatory maze

Written by admin on . Posted in Advice, Compliance & Regulations, Consultation.

By: Karen S. Clower, CRCM and William J. Showalter, CRCM, CRP

Fee income practices in overdraft programs have garnered increasing attention from regulatory bodies such as the CFPB, OCC, NCUA, and FDIC. The risks associated with overdraft practices are growing, and overlooking them can pose significant threats to your financial institution.

These regulatory developments are of particular concern for both APSN (Authorize Positive, Settle Negative) and NSF (Non-Sufficient Funds) fee practices. With both federal and state regulators scrutinizing these areas, it’s a critical time for financial institutions to review their overdraft and insufficient funds procedures. Unpacking the intricate world of overdraft programs, understanding fair banking risks, and adopting best practices to mitigate them have never been more crucial.

Multiple re-presentment fees under the microscope

The FDIC revised their Supervisory Guidance on Multiple Re-Presentment NSF Fees in June 2023. The core message from this guidance is the importance of transparency in re-presentment practices. The FDIC emphasizes that re-presentment practices may be deceptive when lacking clear disclosure and unfair when they lead to the assessment of multiple NSF fees for a single transaction.

A re-presentment occurs when a transaction is initially declined due to insufficient funds, followed by the merchant resubmitting the transaction, which may incur additional NSF fees. In many instances, customer disclosures do not fully convey the nature of these re-presentment practices, elevating the risk of consumer harm and regulatory violations. It is prudent for financial institutions to review and update disclosures to avoid causing consumer harm and accumulating violations.

Identifying potential risks associated with NSF fees on re-presented transactions

Examiners have identified several risk factors related to the assessment of NSF fees on re-presented transactions:

  • Consumer compliance risk: Charging multiple NSF fees for the same unpaid transaction can breach Section 5 of the FTC Act, which prohibits unfair or deceptive practices. Not adequately informing customers can mislead and potentially harm them.
    • Deceptive Practices: The FDIC finds charging multiple NSF fees without proper disclosure deceptive.
    • Unfair Practices: Inadequate customer advice on fee practices can be unfair, particularly if it causes harm and offers no benefits to the consumer.
  • Third-party risk: Third-party involvement in payment processing and tracking re-presented items can lead to risks. Institutions should monitor these arrangements closely.
  • Litigation risk: Charging multiple NSF fees may lead to litigation. Many institutions have faced class-action lawsuits and substantial settlements for inadequate fee disclosures.

Managing NSF fee risks

The FDIC encourages financial institutions to review their practices and disclosures regarding NSF fees for re-presented transactions. Note that a highlight of the most recent update to their supervisory guidance is that their current approach does not involve requesting financial institutions to conduct lookback reviews absent a likelihood of substantial consumer harm. To mitigate the risk of consumer harm and legal violations related to multiple re-presentment NSF fees, financial institutions are encouraged to consider the following:

  • Eliminating NSF fees.
  • Charging only one NSF fee for the same transaction, even if it’s re-presented.
  • Reviewing policies and practices, clarifying re-presentment practices, and providing customers with updated disclosures.
  • Clearly and prominently disclosing NSF fee amounts, when they are imposed, and the conditions under which multiple fees may apply to a single transaction.
  • Reviewing customer notification practices and fee timing to enable customers to avoid multiple fees for re-presented transactions.

These recommendations are based on supervisory observations to date and do not impose any legal obligations to financial institutions. While not mandatory, these steps help in reducing the risk of consumer harm.

FDIC’s supervision of re-presentment NSF fees: A closer look

The FDIC has a specific approach when it comes to overseeing and enforcing regulations regarding multiple re-presentment NSF fee practices. Their main aim is to identify and correct issues related to re-presentment, with a focus on ensuring that customers who have been harmed receive the necessary solutions.

As part of their process for assessing compliance management systems, the FDIC acknowledges institutions that take proactive steps to identify and rectify violations. Importantly, if institutions have already addressed these violations before a consumer compliance examination, examiners generally won’t cite UDAP violations.

When financial institutions proactively identify issues related to re-presentment NSF fees, the FDIC has clear expectations:

  • They should take corrective actions, which include providing restitution to affected customers.
  • There should be a prompt update to NSF fee disclosures and account agreements for all customers, both new and existing.
  • Consideration should be given to implementing additional risk mitigation practices to reduce potential unfairness risks.
  • Monitoring of ongoing activities and customer feedback is essential to ensure that corrective actions are sustained over time.

The FDIC evaluates the need for restitution by considering the potential harm to consumers as a result of the practice, the institution’s record-keeping practices, and any challenges associated with collecting and reviewing transaction data or information related to the frequency and timing of re-presentment fees. In cases where examiners identify law violations related to re-presentment NSF fee practices that have not been self-identified and fully corrected before an examination, the FDIC may contemplate various supervisory or enforcement actions, including the imposition of civil monetary penalties and the requirement for restitution where necessary.

What about APSN fee practices?

The regulatory focus extends beyond just re-presentment fees. One noteworthy concern is the practice of charging overdraft fees for transactions that were initially authorized with a positive balance but later settled with a negative balance, referred to as APSN transactions. Below is an overview of the FDIC’s Supervisory Guidance on Charging Overdraft Fees for Authorize Positive, Settle Negative Transactions, which was revised in April 2023 to expand upon the related 2019 Supervisory Highlights article.

Guidance overview

Complexity in Overdraft Programs: Overdraft programs, transaction clearing, and settlement processes are intricate. APSN transactions involve consumers being assessed overdraft fees when they had sufficient account balances at the time of transaction initiation but no longer at settlement. This means it is hard for consumers to predict when fees might be assessed and how to avoid them.

Available Balance vs. Ledger Balance: Financial institutions typically use either an available balance method or a ledger balance method for assessing overdraft-related fees. The available balance can be affected by pending debit transactions. Some institutions, especially with the available balance method, assess overdraft fees on transactions authorized when the available balance is positive but posted when the balance is negative.

Unintended Consequences: In some cases, this practice leads to multiple overdraft fees being charged. Unanticipated overdraft fees can cause considerable harm to consumers. The consumer cannot reasonably avoid these fees, and their complexity further compounds the issue. This situation raises the risk of violations of consumer protection laws.

Mitigating risks: Financial institutions are encouraged to review their practices regarding charging overdraft fees for APSN transactions. This entails ensuring that customers are not charged overdraft fees for transactions they could not anticipate or avoid. This includes monitoring third-party arrangements for compliance, evaluating core processing systems, and improving disclosures to accurately convey fee practices.

With a deep understanding of re-presentment and APSN transactions, financial institutions can effectively navigate the complex landscape of fee income and compliance. A proactive approach can aid in protecting consumers, ensuring regulatory compliance, and maintaining your institution’s reputation.

Balancing overdraft fee income and compliance

Weighing compliance and reputational risks against the revenue your overdraft program generates is crucial. While fee income is essential, safeguarding your financial institution’s reputation should always be a top priority. Striking the right balance between compliance and revenue is key.

Regulatory insights and recent enforcement actions

To stay ahead in the realm of overdraft programs, monitoring the insights and actions of regulatory bodies is essential. The CFPB, FRB, OCC, NCUA, and FDIC provide guidance and updates that can directly impact your operations. Recent enforcement actions underscore the consequences of non-compliance. Analyzing these cases can provide insights into areas where institutions have faltered and help you steer clear of similar missteps.

Your overdraft compliance solution: Young & Associates

Managing overdraft programs while staying compliant with fair banking regulations is a complex task. At Young & Associates, we are here to guide you through this maze. We help ensure that your institution not only thrives financially but also maintains a strong reputation. By understanding the risks, learning from common pitfalls, and implementing best practices, you can create a robust overdraft program..

For more in-depth guidance tailored to your unique circumstances, reach out to our team of experts. Together, we can navigate the regulatory compliance landscape and keep your financial institution on the path to success. Contact us today.

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