Keeping Ahead of a Changing Banking Environment

September 11, 2018

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The Atlanta Fed's Tony Curtis (left) and Ron Garner. Photo by David Fine

The banking business is changing, and nowhere is that more evident than in the work of the Atlanta Fed's Ron Garner and Tony Curtis.

The two are portfolio senior examiners in the Bank's Supervision, Regulation, and Credit Division. They manage a portfolio of community banks and required supervisory events and examinations for consumer compliance. That work includes not only reviewing balance sheets but also evaluating compliance risks, checking to see that banks comply with fair lending laws and the Community Reinvestment Act (CRA), and assigning ratings and imposing penalties for violations.

"When banks disclose to borrowers that they will pay a certain interest rate, we try to validate that their payment is in line with that interest rate and loan amount," Garner said. "We verify the disclosures and calculations for loan and deposit products."

For banks, compliance has become a critical issue in the wake of the financial crisis. The government imposed new regulations to monitor banks and protect consumers. Banks found in violation of consumer laws could face civil money penalties, be prohibited from expanding or opening new branches, or suffer legal and reputational consequences.

For example, on August 10, 2018, the Federal Reserve said it fined Citigroup $8.6 million for the improper execution and notarization of certain mortgage-related affidavits prepared by its CitiFinancial subsidiary. The improper practices transpired in 2015 and were corrected, and CitiFinancial quit the mortgage-servicing business in 2017.

In assessing a bank's performance, Garner and Curtis review information including risk assessments, audits, and previous exam results before making an onsite visit to determine areas for examiners to focus on. Community banks with satisfactory ratings are generally reviewed every two to four years, depending on their size. Banks with less-than-satisfactory ratings are examined more frequently.

A number of agencies monitor bank compliance

The Federal Reserve is just one of the federal regulatory agencies that monitor banks' compliance with laws intended to protect consumers. The others are the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Consumer Financial Protection Bureau.

Financial institutions supervised by the Atlanta Fed are state-chartered and members of the Federal Reserve System. Garner and Curtis have oversight responsibility for community banks, which have assets under $10 billion. As a result of bank failures during the Great Recession and mergers since that time, the Atlanta Fed now regulates fewer than 40 community banks.

As digital technology continues to advance the banking industry, ensuring that banks are adhering to consumer regulations has become more important and more complicated. Community banks could inadvertently encounter some compliance issues, Garner and Curtis said, as they look to improve their fortunes by expanding their markets or products and services.

For example, banks need to be careful when offering new products, especially if they team up with third parties to provide them.

"Banks need to do their due diligence and give customers full disclosure on what they are agreeing to," Curtis said. He said consumers may sign up for a new product or service, perhaps unaware of accompanying terms and conditions. "Banks should ensure that all disclosures provided to consumers include terms and conditions, and are displayed clearly and concisely," he added.

In recent years, concerns have arisen tied to the CRA, a law passed to prevent discrimination and make sure banks meet the credit needs of their communities, including low- to moderate-income areas. The intent of the law is to ensure that all members of the public have access to the financial products and services for the territory a bank serves.

When the act was passed in 1977, most banks operated in much the same way they had for years, mainly serving nearby customers who banked in person. Now, online financial transactions, the emergence of online-only banks, and industry consolidation have created larger financial institutions with broader areas that serve a wider variety of customers in different ways.

"The [CRA] law has not kept up with changes in how banking operates in the wake of new technology and internet banking," Garner said.

Updates to law proposed

U.S. regulators are looking at revamping the CRA to reflect innovations in banking and changes in consumer behavior. "Internet banking enables banks to have customer relationships all over the nation," Curtis said.

In April, the Treasury Department suggested a number of reforms to the law, saying it was too rigid. The recommendations included expanding the types of loans eligible to meet CRA requirements, improving the timeliness of evaluations, and broadening the geographic regions banks serve.

"The CRA's concept of community should account for the current range of alternative channels that exist for accepting deposits and providing services arising from the ongoing evolution of digital banking," the Treasury memo states.

Other fair lending laws also seek to ensure access to credit. For instance, some banks are looking to move beyond the geographic zones where they have branches to gain new business. However, such efforts could prompt regulators to watch banks a little closer to make sure they are complying with fair lending requirements.

Curtis offered an example of a community bank in rural Tennessee that proposes to open a branch in Nashville in hopes of capitalizing on the growth in Music City. "The bank has to know that the Fed will look at how it serves the low-income, moderate-income, and minority areas and people within that Nashville market," Curtis said.

In other words, when a bank enters a new market, it must develop a strategy to serve the entire market, not just a segment of it.

"A lot of our community banks are from the rural outskirts and may have originated in a community that doesn't have major minority populations," Garner said. But when venturing into an area like metro Nashville, "banks will need to consider how to identify and penetrate low- and moderate-income census tracts for CRA, and majority minority census tracts for fair lending."

Banks can take steps to guard against the risks associated with the biggest areas of concern around compliance, Garner and Curtis said.

For one, banks can make sure they know the demographic makeup of their CRA assessment areas, especially when contemplating business model changes such as branch expansion and acquisitions, Curtis said.

Garner said banks need to have adequate compliance controls in place so they can identify the problem areas in their consumer operations. A bank that is growing also needs to make sure its compliance department's capacity expands as well, he said.

To facilitate this sort of understanding, in July the Fed introduced the Consumer Compliance Supervision Bulletin, a new publication that highlights compliance violations and offers guidelines for banks.

photo of Karen Jacobs
Karen Jacobs

Staff writer for Economy Matters


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