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ComplianceFebruary 01, 2022

Pandemic impact, regulatory changes among industry’s 2022 challenges

(As published by October Research, “State of the Industry 2022 Special Report”)

By Elizabeth Childers, editor, Dodd Frank Update; Feb. 1, 2022

It now may be safe to call 2020, 2021, and the beginning of 2022 officially the “pandemic era.” Although improvement has been seen on the COVID-19 front over the last year with statistics like the unemployment rate and delinquent mortgages returning to near pre-pandemic numbers, the mortgage and banking industries will be dealing with the outcomes for some time. 

As 2022 begins, it is natural for the industry to turn to experts to get a feel for what is coming on the horizon. Dodd Frank Update spoke to Anthony Alexis, Goodwin Procter LLP partner, Complex Business Litigation and Dispute Resolution and Financial Industry Litigation, and Tim Burniston, Wolters Kluwer Compliance Solutions senior advisor for regulatory strategy, to provide their perspectives on current industry concerns and to give input on what banks, lenders, and originators should be aware of as the year progresses. Alexis told Dodd Frank Update the industry’s biggest accomplishment in 2021 was the quick transformation out of pandemic programs and getting back to business as usual, as well as adjusting to remote business practices. He said he was surprised by the industry’s speedy adjustment to compliance programs to demonstrate adherence to laws, and how quickly consumers received remediation for errors.

Burniston offered his analysis on Wolters Kluwer’s annual Indicator survey, which gauges banker sentiment on several issues related to regulatory and risk management. Respondents were primarily bank management, executives, and compliance roles, with strong representation from those in lending functions. Their top concern from an enterprise risk standpoint was the threat of ransomware attacks, with 63 percent giving it “significant consideration” and an additional 22 percent marking it for “some consideration” in their planning, Wolters Kluwer stated.

Other concerns were the pandemic’s ongoing impact (49 percent); loan default risk (46 percent); inflation concerns (42 percent); business resilience and adaptability (41 percent); recession fears (34 percent); and climate-related financial risks (21 percent). Cybersecurity also was the top risk management priority at 70 percent, followed by compliance risk and credit risk, both at 43 percent. “Credit risk continued to rank very high, but we saw quite a drop in the level of concern,” Burniston said.

“Last year (the 2020 survey) we saw that 61 percent of our respondents indicated they were very concerned about credit risk, but it dropped down to 43 percent in the 2021 survey. I think that reflects the fact the industry is feeling a little bit better about their credit profile now that the pandemic is not raging at the same rate it was when we did the last survey a year ago. It is noteworthy, however, that the Omicron variant had not been identified when we did the 2021 survey.”

Burniston said he was surprised compliance risk did not rank higher as a management priority because of the change in administration, new agency leaders, and a lot more attention being paid to compliance and consumer protection issues. He also said he expected third-party risk to register a bit higher because of new and “reinvigorated” Consumer Financial Protection Bureau (CFPB) leadership and significant attention to third-party risk management coming from the prudential regulators.

Many in the industry have been concerned about a return to a more Cordray era-like approach with Rohit Chopra’s confirmation as director of the CFPB, which has been said to be akin to regulation-by-enforcement. However, Alexis predicted the bureau was more likely to use 1022 orders instead of enforcement-only mechanisms to address market topics. Orders issued pursuant to §1022 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires participants in the payments market to turn over information to help the CFPB monitor for risks to consumers and to publish aggregated findings that are in the public interest.

The CFPB recently has issued such orders to tech companies like Amazon, Apply, Facebook, Google, and Paypal relating to their payment technologies. The bureau also issued one to companies who offer buy now, pay later products, which have become increasingly more popular during the pandemic and 2021 holiday season. Alexis also forecasted the CFPB may be more likely to hold individuals responsible in routine CFPB investigations, as opposed to only the entities themselves.

The industry saw an example of this in the bureau’s recent settlement against Access Funding, which allegedly was steering consumers considering signing away future structured settlement payments for a lump sum payment to receive “independent advice” from an attorney who was paid directly by the company and indicated to consumers the transactions required very little scrutiny. Two executives and the attorney were listed as defendants who unlawfully aided illegal conduct and engaged in abusive acts.

The Wolters Kluwer survey asked respondents their opinion on the prospect for reduced regulatory burden. Seventy-two percent responded the odds of regulatory relief was either “somewhat unlikely” or “very unlikely.” This was a year-over-year increase of 16 percentage points, showing bank executives are more pessimistic about regulatory burden reduction than years prior. However, the survey also showed banks have become more confident in their ability to keep up with regulatory changes and compliance requirements.

“The ability to keep up with change, and manage it across the enterprise, continues to be a key consideration because change is not necessarily slowing down,” Burniston said. “Something financial institutions want to make sure they have in place are adequate programs and systems to manage regulatory change.

“Is the industry feeling more confident in its ability to do that because they’ve ramped up or built up their systems for risk management? “Probably so,” he continued. “I think that’s a good thing. But that doesn’t necessarily take away from the fact that keeping up with change isn’t a major challenge.” In the coming year, Alexis recommended the industry keeps an eye on rules, regulations, and bills related to the small-business rule and consumer data.

Respondents to the Wolters Kluwer Indicator survey also listed the Dodd-Frank §1071 small business reporting rule as one of their most pressing regulatory challenges in the coming year. Those surveyed also mentioned Bank Secrecy Act/Anti-Money Laundering requirements; forthcoming Beneficial Ownership requirements; fair lending laws and regulations; unfair, deceptive, or abusive acts of practices standards; Community Reinvestment Act rule changes; current expected credit losses (CECL) standards; and state-issued regulatory requirements were on their radar.

“What surprised us there was we didn’t see fair lending rank higher,” Burniston said. “It was up a little bit from 2020, but not quite as much as I had expected.” Burniston mentioned that many of the regulators are devoting significant amounts of examination time and resources to fair lending issues such as redlining, pricing, use of artificial intelligence, and credit determinations. Additionally, the Department of Justice has issued a couple of significant fair lending settlements in the last few months.

“My understanding is we may see more soon,” he continued. “Fair lending is up there, but as I mentioned, not quite as high as I expected to be going forward into 2022. We’re likely to see a jump there in next year’s survey.”

With the regulatory environment heating up, Burniston said a lot of institutions will be looking to build up their compliance staff again, and that may present a challenge. Good compliance people are not easy to find, and the demand for compliance resources is high.

When dealing with the aftermath of the COVID-19 pandemic, Alexis said lenders and originators will likely face the challenge of “calibrating potential adverse consequences to consumers with incredibly challenging obligations to the businesses under various rules related to forbearance, etc.”

“Based on what we’ve been seeing from the regulators and law enforcement community, we should all expect a very, very active 2022 in key areas of risk and compliance,” Burniston said. To keep up with such regulations, Burniston recommended a regulatory change management program that includes an up-to-date living “library” of regulatory content that is able to map the changes as they are put in place.

He also suggested a strong compliance and operational risk management system, including a robust third-party relationship management component. “You can never underestimate the importance of having fully updated policies and procedures across the organization,” he said. “It is the first thing regulators are looking for to see whether the organization has been able to fully operationalize regulatory requirements.”

The ability to keep up with change, and manage it across the enterprise, continues to be a key consideration because change is not necessarily slowing down.
  Tim Burniston,Senior advisor for regulatory strategy,Wolters Kluwer Compliance Solutions  
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