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Checking your BSA program is more important than ever

Written by admin on . Posted in Advice, Blog, BSA & AML, Compliance & Regulations, Consultation, Internal Audit, News.

By William J. Showalter, CRCM; senior consultant, Young & Associates

Over the past year, we have seen at least 27 Bank Secrecy Act (BSA) enforcement actions from an array of financial institution supervisory agencies.  Banks of all sizes continue to be hit with cease and desist (C&D) orders, formal agreements, consent orders, and even civil money penalties (CMP).  Five of these actions involved monetary penalties of some sort totaling nearly $4 billion – all but about $109 million coming from one case with four federal agency actions against one bank, and one $100,000 CMP imposed against an individual for BSA noncompliance.  These enforcement actions remind us that even community banks and thrifts must have thorough and well-managed BSA compliance programs.

The enforcement actions do not spell out specifics of what the agencies found at each institution, but they do give us important insights into what the regulators will expect during your next BSA compliance exam.

Community banks should evaluate their BSA compliance programs in light of the corrective actions that regulators require these institutions to take.

Another important issue that financial institution management should remember is that the USA PATRIOT Act made BSA compliance as important as Community Reinvestment Act (CRA) compliance in getting an application approved.  The act adds BSA as a factor for consideration in merger transactions. The agency must take into consideration “the effectiveness of any insured depository institution involved in the proposed merger transaction in combating money laundering activities.”  This means that banks and thrifts must have more than a written BSA program.  They must be able to demonstrate that the program works.

BSA compliance programs

All insured banks and thrifts must develop, administer, and maintain a program that assures and monitors compliance with the BSA and its implementing regulations, including recordkeeping and reporting requirements. Such a program can help protect a bank against possible criminal and civil penalties and asset forfeitures.

At a minimum, the board of directors must approve a bank’s written internal compliance program and note the approval in the board meeting minutes.

The program must include at least the following elements:

  • A system of internal controls to assure ongoing compliance
  • Independent testing of compliance
  • Daily coordination and monitoring of compliance by a designated person
  • Training for appropriate personnel
  • Risk-based customer due diligence/beneficial ownership procedures

Internal controls for the BSA

Senior management is responsible for assuring an effective system of internal controls for the BSA, including suspicious activity reporting, and must demonstrate its commitment to compliance by:

  • Establishing a comprehensive program and set of controls, including account opening, monitoring, and currency reporting procedures
  • Requiring that senior management be kept informed of compliance efforts, audit reports, identified compliance deficiencies, and corrective action taken – to assure ongoing compliance
  • Making BSA compliance a condition of employment
  • Incorporating compliance with the BSA and its implementing regulations into job descriptions and performance evaluations of bank personnel

Independent testing of compliance

The bank’s internal or external auditors should be able to:

  • Attest to the overall integrity and effectiveness of management systems and controls, and BSA technical compliance
  • Test transactions in all areas of the bank with emphasis on high-risk areas, products, and services to assure the bank is following prescribed regulations
  • Assess employees’ knowledge of regulations and procedures
  • Assess adequacy, accuracy, and completeness of training programs
  • Assess adequacy of the bank’s process for identifying suspicious activity

Internal review or audit findings should be incorporated after each assessment into a board and senior management report and reviewed promptly.  Appropriate follow up should be assured.

Regulators increasingly expect the BSA audit or testing program to also include these elements:

  • Confirmation of the integrity and accuracy of management information reports used in the AML compliance program
  • Overall integrity and effectiveness of the program
  • Evaluation of management’s efforts to resolve violations deficiencies
  • Evaluation of the effectiveness of the suspicious activity monitoring systems
  • Review of the BSA risk assess­ment for reasonableness given the bank’s risk profile

BSA compliance officer

A bank or thrift must designate a qualified bank employee as its BSA compliance officer, who has day-to-day responsibility for managing all aspects of the BSA compliance program and compliance with all BSA regulations.  The BSA compliance officer may delegate certain BSA compliance duties to other employees, but not compliance responsibility.

The bank’s board of directors and senior management must assure that the BSA compliance officer has sufficient authority and resources – time, funding, staffing – to administer effectively a comprehensive BSA compliance program.  And, the BSA officer must have a direct reporting channel to the board of directors.

Board of directors

The board must ensure that it exercises supervision and direction of the BSA/AML program.  This involves making sure that the institution develops sound BSA/AML policies, procedures, and processes that are approved by the board and implemented by management.  The board also has to ensure that the bank maintains a designated BSA officer with qualifications commensurate with the bank’s situation.  As noted above, the BSA officer must report directly to the board and be vested with sufficient authority, time, and resources.  The board must provide for an adequate independent testing of BSA/AML compliance.  The board should bear in mind that it has the ultimate responsibility for the institution’s BSA compliance.

Training

Financial institutions must ensure that appropriate bank personnel are trained in all aspects of the regulatory requirements of the BSA and the bank’s internal BSA compliance and anti-money laundering (AML) policies and procedures.

An effective training program includes provisions to assure that all bank personnel, including senior management, who have contact with customers (whether in person or by phone), who see customer transaction activity, or who handle cash in any way, receive appropriate training.  Board members also need to receive regular BSA/AML training, though at a much higher level with less detail than institution line employees.

The training needs to be ongoing and incorporate current developments and changes to the BSA, AML laws, and agency regulations.  Banks should address new and different money laundering schemes involving customers and financial institutions. The program should also include examples of money laundering schemes and cases, tailor them to the audience, and explain how the audience can detect or resolve such activities.

Another focus of the training should be on the consequences of an employee’s failure to comply with established policy and procedures (e.g., fines or termination).  These programs also should provide personnel with guidance and direction in terms of bank policies and available resources.

Beneficial ownership procedures

The beneficial ownership rule contains three core requirements:

  • Identifying and verifying the identity of the beneficial owners of companies opening accounts
  • Understanding the nature and purpose of customer relationships to develop customer risk profiles, and
  • Conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information

A beneficial owner is an individual who owns more than 25 percent of the equity interest in a company or is the single individual who exercises control.  Also subject to these requirements is the one person who has control of each legal entity customer.

Beyond the basics

BSA enforcement actions continue to raise the bar for all financial institutions. BSA compliance programs must meet additional standards to be considered adequate to address the ever‑evolving challenges that arise over time.

  • Customer due diligence (CDD). Verifying a customer’s name, address, date of birth and identification number will satisfy the basic BSA customer identification requirements.  However, these four pieces of information will not be enough to help an institution deter­mine a customer’s typical account activity.  The recent C&D orders make clear that regulators expect community bank managers to use information collected as part of the institution’s CDD process to predict the type, dollar amount, and volume of transactions that a customer is likely to conduct.  This expectation goes beyond the new beneficial ownership rule to extend CDD expectations to the broader customer base. Regulators directed several institutions subject to the recent round of enforcement actions to develop specific procedures to describe how the institution will conduct customer due diligence. As computer and software technology has improved, regulators have come to expect small and large banks to gather and review information about the normal range of a customer’s banking activities.  They view the CDD processes and analysis as providing the framework that enables institutions to comply with suspicious activity reporting requirements.
  • Account & transaction monitoring. A number of institutions that received the most recent orders did not have adequate, or any, procedures for detecting and reporting suspi­cious activities. The enforcement actions make clear that community banks must specify in writing how the institu­tion will analyze and use customer information to detect suspicious activities.  As this area gets more complex, it becomes more difficult to try to maintain an adequate suspicious activity monitoring regimen without some form of automated monitoring.

Conclusion

The costs of being subject to an enforce­ment action go beyond extra regulatory scrutiny in subsequent examinations.  Institutions under the latest round of actions must report the enforcement action in communications with their shareholders and spend significant sums of money to hire outside consultants to train employees, audit the revised BSA programs and backfile required reports.  They also must submit planned actions to the regulators involved for prior approval, as well as report regularly (usually quarterly) on their progress in remediating the deficiencies that led to their particular enforcement action.

An interagency BSA enforcement policy statement clarifies that regulators will not issue formal enforcement actions for minor BSA infractions.  These enforcement actions are levied against financial institutions – including community banks – with significant breakdowns in their BSA compliance systems. The consent and other orders show that regulators expect all banks to have very specific procedures for collecting customer information, predicting customer account activity, utilizing transaction monitoring reports, and training and managing employees with BSA-related responsibilities.

Be sure that you are not an object lesson for your banking fellows.  If we can help, contact us today.

The future of mortgage loan buybacks

Written by admin on . Posted in Advice, Blog, Compliance & Regulations, Consultation, Internal Audit, Mortgage Quality Control, News.

By Donald Stimpert, manager of secondary market QC, Young & Associates

Understanding the rising risk of loan buybacks

The secondary mortgage market is evolving rapidly, and with it, lenders face increasing pressure to maintain strict quality control (QC) standards. Loan buybacks — once considered an occasional risk — have become a growing concern as investors, government-sponsored enterprises (GSEs) and regulatory bodies scrutinize loan origination and underwriting processes more closely.

Recent economic uncertainty, fluctuating interest rates and regulatory changes have only amplified repurchase risks, making it imperative for financial institutions to adopt proactive strategies to mitigate potential buybacks before they impact profitability.

Why are mortgage loan buybacks increasing?

Several factors contribute to the rise in loan repurchase demands, including:

1. Heightened investor scrutiny

With a more volatile lending environment, investors and GSEs such as Fannie Mae and Freddie Mac are intensifying post-closing reviews to identify underwriting errors, miscalculations, and misrepresentations.

2. Rising interest rates and loan performance issues

As interest rates climb, borrowers with recent mortgages may be at a higher risk of delinquency. A worsening performance trend in loans increases investor caution, leading them to revisit underwriting quality and enforce buybacks when defects are found.

3. Evolving regulatory standards

The Consumer Financial Protection Bureau (CFPB) and other regulators continue to refine lending requirements, particularly around fair lending, borrower income verification, and compliance with TRID (TILA-RESPA Integrated Disclosure) rules. Lenders who fail to maintain strict adherence to these standards may see increased buyback requests.

4. Defect trends in loan underwriting

Recent QC reports indicate a surge in defects related to:

  • Income calculation errors
  • Debt-to-income (DTI) miscalculations
  • Missing documentation
  • Undisclosed liabilities
  • Misrepresentation of borrower information

Even minor discrepancies can trigger a repurchase demand, highlighting the need for enhanced QC measures.

Strategies to minimize repurchase risk

To reduce exposure to loan buybacks, lenders must strengthen their QC frameworks and proactively address risk areas before loans reach the secondary market.

1. Strengthen pre-funding and post-closing QC reviews

Implementing a robust pre-funding QC process helps catch potential defects before loans are sold, significantly reducing repurchase risk. Post-closing audits should be conducted consistently, ensuring that any issues are corrected before investor scrutiny.

2. Enhance data validation and borrower verification

Investors are increasingly focused on data integrity. Lenders must adopt advanced verification tools to cross-check borrower information, income, employment history, and undisclosed debts, minimizing the risk of fraud and errors.

3. Implement targeted sampling for QC reviews

Rather than relying solely on random sampling, lenders should integrate risk-based QC sampling that focuses on high-risk loan categories, such as self-employed borrowers, non-traditional income sources, or jumbo loans.

4. Maintain open communication with investors and GSEs

Establishing proactive dialogue with investors, servicers, and GSEs can help lenders identify evolving QC expectations and regulatory shifts, allowing them to adjust policies before issues escalate into buyback requests.

5. Conduct regular staff training and compliance refreshers

Underwriting and QC staff should receive continuous training on updated investor guidelines, industry best practices, and regulatory changes. Well-informed teams are less likely to overlook critical details that lead to defects.

A more proactive approach to mortgage QC

The risk of loan buybacks is unlikely to disappear, but financial institutions that take a proactive approach to mortgage quality control will be better positioned to minimize losses, maintain strong investor relationships, and protect their bottom line.

By integrating technology-driven audits, enhanced borrower validation, and risk-based QC sampling, lenders can significantly reduce repurchase exposure and navigate the evolving secondary market with confidence.

Is your institution prepared to mitigate repurchase risk? Young & Associates offers customized Mortgage QC solutions designed to enhance your quality control processes and protect your loan portfolio. Contact us today to learn how we can help safeguard your secondary market loan sales.

Key insights from CFPB Supervisory Highlights, winter 2024

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

As the regulatory environment continues to evolve, the latest CFPB Supervisory Highlights offer crucial insights for financial institutions navigating an increasingly complex landscape. Issue 37 shines a spotlight on deposit operations, credit furnishing practices, and the burgeoning short-term lending market, while also addressing significant enforcement actions and new rules. Here’s what community banks need to learn — and act on.

Overdraft fees: A continuing challenge

For years, overdraft and non-sufficient funds (NSF) fees have drawn regulatory scrutiny. This issue of Supervisory Highlights confirms that some practices—such as re-presentment NSF fees and Authorize-Positive Settle-Negative (APSN) overdraft fees — remain problematic. Despite progress, core processors often set fee structures to charge these fees by default unless institutions actively intervene.

Takeaway for community banks
It’s time to re-evaluate fee structures. Ensure that your core processor’s systems are configured to align with updated regulatory expectations. Educate staff and consumers about these changes to build trust and avoid regulatory pitfalls.

Furnishing data: Accuracy matters

Banks that furnish data to credit reporting agencies are under the microscope. The CFPB found widespread failures to maintain procedures for identity theft notifications, conduct thorough investigations of disputes, and ensure data accuracy. This isn’t just about compliance—it’s about your reputation.

Actionable Insight
Community banks should strengthen internal controls and train employees on handling credit disputes. Investing in accurate, consumer-friendly data practices not only mitigates risk but also reinforces your institution’s credibility.

Short-term lending: Transparency is key

The Supervisory Highlights also scrutinize the exploding popularity of Buy Now, Pay Later (BNPL) programs and paycheck advance products. Findings revealed deceptive marketing practices, delayed dispute resolutions, and loan denials tied to trivial payment processing errors.

Why it matters
Even if your bank doesn’t offer these products, they’re reshaping consumer expectations. Transparency in terms and processes isn’t optional—it’s a competitive necessity.

Technology pitfalls: Lessons from enforcement actions

This issue features notable enforcement actions, including a $1.5 million penalty against VyStar Credit Union for botching the launch of an online banking platform. Consumers faced months of restricted access to their accounts, incurring fees and frustration.

A word of caution
Digital transformation is critical for community banks to stay relevant, but poorly executed rollouts can damage trust. Rigorous testing and a solid contingency plan can safeguard against consumer harm and regulatory penalties.

New rules to watch

The CFPB issued a final rule governing overdraft practices at large institutions, capping fees unless they are minimal. Additionally, supervisory authority now extends to digital payment platforms processing over 50 million transactions annually.

What’s next for community banks?
Stay proactive in monitoring new rules and adapting processes. Even if you’re not directly impacted by these changes, they signal the regulatory trends shaping the future.

Final thoughts: Protecting your institution

The themes in this issue of Supervisory Highlights boil down to a central lesson: consumer protection is non-negotiable. Whether it’s ensuring accurate reporting, transparent lending, or seamless technology implementation, community banks must prioritize their customers’ experience.

By addressing these areas, you’re not just avoiding penalties — you’re fortifying your role as a trusted partner in your community. For tailored guidance, connect with Young & Associates, your partner in navigating the ever-changing regulatory landscape. Contact us for tailored solutions to support your institution’s goals.

U.S. industrial transition: Insights for metro areas and community banks

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

The FDIC’s analysis of U.S. industrial transitions between 1970 and 2019 reveals the profound effects of economic shifts on metro areas and the community banks serving them. These transitions, driven by the decline of manufacturing and the rise of service-based economies, created challenges and opportunities for local economies and financial institutions. Below, we explore the key findings from this study and their implications for community banks.

The decline of manufacturing and economic shifts

Over five decades, the national economy moved away from manufacturing, with industries like steel, textiles, and machinery experiencing steep employment declines. Metro areas heavily reliant on these sectors, particularly in the Northeast and Midwest, faced significant economic stagnation. For example, cities like Youngstown, Ohio, and Flint, Mich., struggled to replace lost industries, leading to slower population growth, aging demographics, and economic contraction. Meanwhile, metro areas in the South and West benefited from population inflows and economic diversification, fostering stronger economic growth.

Challenges for community banks in high-transition metros

Community banks in metros with high levels of industrial transition faced significant challenges. These banks experienced weaker deposit and branch growth compared to their counterparts in other regions. Their loan portfolios were heavily concentrated in single-family residential loans, with less exposure to business-related lending, which limited their growth potential. Despite these challenges, community banks in high-transition metros showed resilience during periods of economic stress, such as the Savings and Loan Crisis and the Great Financial Crisis, with lower failure rates than banks in other regions.

Strategies for success: High-performing banks

Amid these challenges, a subset of high-performing community banks in high-transition metros found success through strategic adaptability. These banks diversified their loan portfolios, expanded operations beyond their local metro areas, and emphasized commercial lending. By focusing on growth opportunities outside their immediate regions and strengthening their balance sheets, these banks outperformed both their local peers and many banks in more stable metros. Their success underscores the importance of innovation and diversification in navigating economic transitions.

The role of metro diversification

Larger, more industrially diversified metros, such as San Jose, Calif., demonstrated the benefits of economic adaptability. San Jose successfully transitioned from computer manufacturing to a broader technology-driven economy, supported by high-paying jobs in professional, scientific and technical services. This highlights the critical role of industrial diversity in building resilience during times of economic change. Smaller, less diversified metros struggled to recover, illustrating the importance of proactive economic planning and investment in diverse industries.

Lessons for future transitions

The FDIC study offers valuable lessons for navigating future economic shifts. These include those driven by climate change and clean energy transitions. Metro areas and community banks that prioritize diversification, invest in high-growth industries and adapt to changing market demands will be better equipped to manage these transitions. By learning from past challenges, financial institutions can position themselves as resilient and innovative partners in their communities.

Supporting community banks through transition

As community banks navigate the challenges of economic shifts, Young & Associates is here to help. Our expert guidance can assist financial institutions in diversifying portfolios, expanding operations, and developing strategies for resilience. Contact us today to learn more about our tailored services. Also, subscribe to our newsletter for the latest insights and updates.

Understanding NCUA’s guidance on overdraft and NSF fees: Key takeaways for credit unions

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

The NCUA released its December 2024 Letter to Credit Unions (24-CU-03), which sheds light on the risks and regulatory concerns surrounding overdraft and non-sufficient funds (NSF) fee practices. This guidance helps federally insured credit unions mitigate compliance, reputation and litigation risks while maintaining fair and transparent practices for their members. Below, we break down the essential points of the letter, tailored for credit union leaders.

The problem with unanticipated fees

Credit unions may face significant risks if their overdraft or NSF fee policies result in fees that members cannot reasonably anticipate or avoid. These fees can lead to:

  • Substantial Member Harm: Unexpected fees strain members financially and undermine trust.
  • Regulatory Violations: Such practices may be deemed unfair or deceptive under the FTC Act and the Consumer Financial Protection Act (CFPA).
  • Heightened Risks: Credit unions expose themselves to reputational, consumer compliance, third-party, and litigation risks.

NCUA IDs key risk areas in overdraft and NSF fee practices

The NCUA identified several problematic practices:

  1. Authorize Positive, Settle Negative (APSN) Fees:

    • Credit unions charge fees when a transaction is authorized with sufficient funds but settles with insufficient funds because of intervening transactions.
    • Such practices are likely unfair under federal regulations, especially if members cannot anticipate the fees.

  2. Multiple NSF Representment Fees:

    • Credit unions charge additional fees when a returned check or ACH item is presented multiple times without sufficient funds.
    • Members cannot often control or predict when items will be represented, which makes these fees unfair and deceptive.

  3. Returned Deposited Item (RDI) Fees:

    • Credit Unions assess fees on members for depositing checks that are returned unpaid.
    • Members typically have no way to foresee these occurrences, increasing compliance and reputational risks.

  4. Other High-Risk Practices:

    • High or No Limits on Fees: Charging excessive fees in a single day creates undue financial burdens on members.
    • Inaccurate Disclosures: Failing to clearly disclose fee practices or transaction cutoff times can mislead members and violate regulations.
    • Reordering Transactions: Prioritizing larger transactions to maximize overdraft fees is likely to be considered unfair.

Risk management best practices

To address these risks, the NCUA recommends that credit unions:

  • Conduct comprehensive reviews:

    • Analyze all aspects of overdraft and NSF fee programs, including disclosures, processing systems and member communications.
    • Evaluate member complaints and fee structures for fairness and transparency.

  • Mitigate risks:

    • Eliminate fee practices that members cannot reasonably anticipate or avoid.
    • Self-identify and reimburse members for fees assessed under unfair practices.
    • Consult legal counsel to ensure compliance with applicable laws.

  • Enhance member support:

    • Offer alternatives such as linked savings accounts, affordable lines of credit or short-term loans.
    • Provide educational resources to help members manage their accounts effectively.

NCUA’s supervisory approach

The NCUA will continue reviewing overdraft and NSF programs during examinations to ensure compliance and risk mitigation. The agency encourages credit unions to take proactive measures and will view self-corrected violations and member reimbursements favorably during examinations. Enforcement actions may include restitution for harmed members and other penalties for non-compliance.

This guidance emphasizes the importance of transparency, fairness and compliance in managing overdraft and NSF fee practices. By implementing the NCUA’s recommended best practices, credit unions can reduce risk exposure, enhance member trust and align with regulatory expectations.

How we can help

At Young & Associates, we specialize in helping credit unions navigate complex compliance requirements. Contact us for tailored solutions to evaluate and improve your overdraft and NSF fee programs. Sign up for our newsletter to stay informed about the latest regulatory updates and best practices in the credit union industry.

The OCC 2024 Annual Report: A summary for financial institutions

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

The OCC 2024 Annual Report provides a comprehensive overview of the federal banking system, highlighting stability, strategic priorities and regulatory advancements. This report underscores the importance of proactive risk management, fairness in banking practices and adapting to evolving technology and environmental challenges.

The report reaffirms the strength of the federal banking system and notes that 99 percent of banks hold strong capital positions, while 92 percent maintain strong capital adequacy, asset quality and management. These metrics reflect the resilience of financial institutions in the face of economic uncertainties.

Strategic priorities for the Federal Banking System

The OCC’s strategic priorities for 2024 focus on four critical areas:

  • Guarding against complacency: Banks are encouraged to remain vigilant and manage both traditional and emerging risks effectively.
  • Promoting fairness: Efforts to reduce lending inequities and biases in financial practices continue to be a priority.
  • Adapting to digitalization: The integration of financial technologies and artificial intelligence must be managed responsibly to ensure security and trust.
  • Addressing climate risks: Large banks are expected to develop frameworks to mitigate climate-related risks, both physical and transitional.

Key focus areas for financial institutions

  1. Fraud prevention and cybersecurity:
    • Rising threats, including AI-driven fraud, call for advanced detection systems and secure authentication processes.
    • The increasing reliance on fintech partnerships highlights the need for robust third-party risk management frameworks.
  2. Operational resilience:
    • Operational resilience, including robust recovery planning, is critical to maintaining financial stability.
    • Recent regulatory updates require banks with over $100 billion in assets to expand recovery planning and testing.
  3. Regulatory modernization:
    • Enhanced transparency in bank mergers aims to foster competition and benefit underserved communities.
    • Updates to the Community Reinvestment Act (CRA) strengthen fair lending practices and promote financial inclusion.
  4. Digital innovation:
    • Artificial intelligence and automation are reshaping the banking landscape. The OCC emphasizes fairness, accountability, and transparency in AI applications.
    • Open banking and real-time payment systems offer growth opportunities, but financial institutions must implement them with customer trust and regulatory compliance in mind.

Financial System Resilience

The federal banking system demonstrated financial resilience in 2024, but challenges persist:

  • Revenue growth: The OCC’s revenue increased by 2.8% in FY 2024, totaling $1.22 billion, driven by higher interest earnings and bank assessments.
  • Profitability pressures: Declines in net interest margins and rising credit costs affected profitability, particularly for community banks.

Operational resilience remains a cornerstone of financial stability. The OCC highlights the importance of maintaining adequate liquidity, robust capital levels, and strategic recovery planning to mitigate risks.

The OCC’s 2024 Annual Report emphasizes the importance of adaptability, fairness, and resilience in navigating an increasingly complex financial landscape. Financial institutions must align their strategies with these priorities to ensure compliance, enhance customer trust and foster long-term stability.

Learn More:
Young & Associates offers expert guidance in compliance, risk management, and operational resilience. Contact us for tailored solutions to support your institution’s goals. Sign up for our newsletter to stay informed about the latest industry trends and insights.

Key insights from the OCC Semiannual Risk Perspective (fall 2024)

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

Top trends in banking risk

The OCC’s report emphasizes maintaining sound risk management practices to address growing challenges.

  • Fraud activity: External fraud schemes targeting consumers and banks are rising. Sophisticated tactics, including AI-driven fraud, demand enhanced detection and prevention measures.
  • Credit risks: Commercial real estate (CRE) remains a focal point, with stress in office and luxury multifamily segments. Retail credit risks are stable but show signs of increased delinquencies in auto loans and credit cards.
  • Operational risks: Cybersecurity and third-party risks are elevated, reflecting the increasing complexity of the banking environment.
  • Compliance pressures: Adapting to dynamic regulatory changes and addressing data governance gaps are critical to ensuring compliance.

Fraud and cybersecurity: A call for action

Fraudulent activities targeting the banking system have surged, driven by innovative schemes such as:

  • Wire transfer fraud: Fraudsters impersonate trusted entities to steal funds.
  • Check fraud: Criminals manipulate stolen checks or sell them on dark web platforms.
  • AI-driven attacks: Deepfakes and AI-enhanced social engineering pose new threats.

What banks can do:

  • Implement advanced fraud detection systems.
  • Educate customers about fraud prevention.
  • Strengthen authentication and transaction monitoring systems.

Credit risk: Stabilizing but uneven

The report identifies pockets of credit risk:

  • Commercial Real Estate (CRE): Stress is evident in the office sector, with rising costs and valuation declines. Multifamily CRE faces challenges from oversupply and increased regulatory expenses.
  • Retail credit: Stable overall but experiencing increased delinquencies in credit cards and auto loans.

What banks can do:

  • Conduct regular stress testing for CRE portfolios.
  • Enhance monitoring and adjust allowances for credit losses based on emerging risks.

Operational resilience and technology adoption

The banking sector is rapidly digitizing, adopting new technologies to meet evolving customer needs.

However, these advancements come with heightened risks:

  • Third-party risks: Increased reliance on fintech partnerships expands the cyberattack surface.
  • Legacy system challenges: Aging infrastructure complicates modernization efforts.
  • AI adoption: Compliance risks are significant as banks explore advanced AI applications.

What banks can do:

  • Strengthen third-party risk management frameworks.
  • Invest in post-quantum encryption and legacy system upgrades.
  • Implement comprehensive governance for AI-based tools.

Market and climate-related financial risks

Banks face dual pressures from market dynamics and climate-related risks:

  • Net Interest Margins (NIM): Higher funding costs are compressing margins, requiring strategic adjustments.
  • Climate impact: Increased natural disasters highlight the importance of climate risk management frameworks.

What banks can do:

  • Focus on liquidity stress testing and modeling depositor behavior.
  • Engage with clients to manage climate-related transition risks effectively.

Economic outlook: Challenges ahead

The U.S. economy remains resilient but shows signs of slowing:

  • Housing market: Affordability issues and “rate lock-in” effects are dampening demand.
  • Consumer spending: Despite strong spending in 2024, rising costs and a cooling labor market could create headwinds.

Preparation tips:

  • Monitor consumer credit health closely.
  • Adapt lending standards to evolving economic conditions.

Staying ahead in a dynamic environment

The OCC’s Fall 2024 Semiannual Risk Perspective outlines a roadmap for navigating complex risks in the federal banking system. Financial institutions should prioritize robust fraud prevention, proactive credit risk management and strategic technology adoption. By addressing these challenges, banks can safeguard their operations and thrive in an ever-changing economic landscape.

Explore more:
Discover how Young & Associates can help your institution mitigate risks, strengthen compliance and enhance operational resilience. Contact us today for tailored solutions to navigate these challenges effectively. Sign up for our newsletter to stay informed about industry insights and updates.

2025 Rescission Calendar – Free download now available

Written by admin on . Posted in Advice, Announcements, Blog, Compliance & Regulations, Consultation, Lending & Loan Review, News.

The right of rescission, governed by Regulation Z under the Truth in Lending Act (TILA), remains a cornerstone of consumer protection in the lending industry. For financial institutions, ensuring compliance with rescission rules is not only a regulatory requirement but also a reflection of their commitment to protecting borrowers’ rights. However, the intricacies of rescission—covering timing, disclosure requirements, and exceptions—can make this area of compliance challenging for many lenders.

To support your institution in navigating these complexities, Young & Associates is proud to offer a free downloadable Rescission Reference Chart, designed to simplify compliance with rescission rules.


Click Here to Get Your 2025 Rescission Calendar

 

What is the 3 Day Right of Rescission?

The right of rescission provides consumers with the ability to cancel certain credit transactions that involve a lien on their principal dwelling. This cooling-off period, typically three business days, is intended to allow borrowers time to evaluate the terms of their transaction without pressure. While the concept is straightforward, compliance involves navigating strict rules related to timing, notification and disclosure.

Does Presidential Inauguration Day affect rescission periods?

No. While federal employees in the Washington, D.C. area are granted a holiday on Presidential Inauguration Day (January 20th), this holiday applies only to those “employed in” the designated Inauguration Day Area and does not affect rescission periods.

According to § 1026.2(a)(6) of Regulation Z, a “business day” for rescission purposes is defined as all calendar days except Sundays and the legal public holidays listed in 5 U.S.C. 6103(a), such as New Year’s Day, Martin Luther King Jr. Day, Washington’s Birthday, and others. Inauguration Day is not among these specified legal public holidays and therefore does not impact rescission timelines.

Common challenges in rescission compliance

Despite its importance, rescission often presents challenges for financial institutions. Here are some common issues:

  1. Identifying covered transactions
    Not all transactions are subject to rescission. Determining whether a loan qualifies—such as refinances or home equity lines of credit—requires careful evaluation of loan terms and lien positions.
  2. Proper timing of the rescission period
    The rescission period must be calculated accurately, taking into account business days and excluding holidays. Miscalculations can result in compliance violations.
  3. Providing accurate and timely disclosures
    Borrowers must receive clear and complete rescission notices and required disclosures at the time of closing. Any inaccuracies can extend the rescission period or expose the lender to liability.

  4. Handling rescission notices
    If a borrower exercises their right to rescind, lenders must act swiftly to return funds and terminate the lien within 20 calendar days. Delays or errors in this process can lead to penalties.

How do you calculate a 3 day rescission period?

The rescission period typically begins the business day following the signing of loan documents and ends at midnight on the third business day.

How the calendar can help

Young & Associates’ Rescission Reference Chart is a comprehensive tool that simplifies the complexities of rescission compliance. This chart provides:

  • A clear breakdown of covered and exempt transactions.
  • Guidelines for accurately calculating the rescission period.
  • Tips for ensuring proper disclosure and handling rescission notices.

Whether you’re training new staff or refreshing your understanding of rescission rules, this chart offers a practical and easy-to-use resource to enhance your compliance program.

Why rescission matters

Non-compliance with rescission rules can result in extended rescission periods, regulatory scrutiny or even legal action. By ensuring your institution has a solid grasp of rescission requirements, you not only avoid potential risks but also reinforce your reputation as a trusted and reliable lender.

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Young & Associates is dedicated to helping financial institutions like yours maintain compliance while streamlining operations. Our Rescission Reference Chart is just one of the many tools we offer to support your success. Equip your team with the knowledge and tools they need to navigate rescission with confidence. With Y&A by your side, you can focus on serving your customers while staying compliant with ease.

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. 

Young & Associates graduates from prestigious Scalerator® program

Written by admin on . Posted in Announcements, Blog, News.

July 24, 2024 – Cleveland, Ohio – Young & Associates (Y&A) is proud to announce the successful completion of the renowned Scalerator® program. Jerry Sutherin, CEO; Joanne Sutherin; Michael Gerbick, President; Ollie Sutherin, CFO; Nicole Conrad, Director of Marketing; and Clarissa Sinchak, Director of Human Resources, have graduated from the intensive program. The program aims to help accelerate Y&A’s revenue growth, profitably and sustainably.

Implementing Scalerator® Principles

Since January 2024, the Y&A leadership team has been diligently working under the guidance of the Scalerator® program. The company focused on the three critical elements of scaling up – Customers, Capacity and Cash. On July 24th, they presented their ScalePlan at MAGNET in Cleveland, Ohio, detailing their strategies for achieving and sustaining growth in the coming years.

“The Scalerator® program has provided us with invaluable insights and tools to drive our growth objectives,” said Jerry Sutherin, CEO of Young & Associates. “Our primary focus has always been to help community financial institutions ensure sustainability while achieving their strategic goals. We are excited to implement these new concepts to enhance our support for our clients.”

About the Scalerator® Program

The Scalerator® program is a proven, results-driven initiative designed to help entrepreneurial leaders rapidly and sustainably grow their businesses. The program consists of a unique blend of proprietary tools, frameworks, team exercises, and faculty-led discussions that have propelled nearly 400 companies into new growth trajectories. Participants from Scalerator® NEO have reported transformative impacts on their businesses, newfound growth opportunities, and enhanced resilience.

A world-class team of practitioner-academics lead the program. These individuals have experience growing companies and have taught scaling strategies at prestigious institutions such as Harvard, Columbia and Babson. The Scalerator® NEO program was brought to Northeast Ohio in 2017 by the Burton D. Morgan Foundation and the Richard J. Fasenmyer Foundation and continues to be supported due to its success. Scalerator® NEO is a highly competitive and sought-after program due to be offered at no cost to selected companies.

Young & Associates looks forward to implementing Scalerator® principles across the organization to drive sustained growth in the years ahead. By passing on these principles to its clients, Y&A aims to further assist community financial institutions in ensuring sustainability while achieving their strategic goals.

For more information about Young & Associates and their participation in the Scalerator® program, please contact:

Nicole Conrad
Director of Marketing
Young & Associates
Email: nconrad@younginc.com

About Young & Associates: Young & Associates, Inc. is a leading provider of consulting, education, and outsourcing services to community financial institutions nationwide. Founded in 1978, the firm offers expertise in a wide range of services including risk management, strategic planning, regulatory compliance, and more.

About Scalerator®: Scalerator® is a rigorous, cohort-based program designed to help entrepreneurial leaders quickly, profitably, and sustainably grow their businesses. Since its inception, Scalerator has facilitated the growth of nearly 400 companies worldwide through its unique approach combining academic insights and practical business strategies.

Ready to elevate your financial institution’s success? Reach out to us today to learn more about our top-notch consultancy services.

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.

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