While the BSA/AML regulations are the only ones that directly mandate training course annually, it is common knowledge that banks are expected to have and maintain compliance training programs. And in point of fact, every bank that we come across does in fact have some sort of training program. Most of these programs take the form on on-line training. Online courses that for the most part been accepted as the most cost efficient way to conduct training for staff. We would like to suggest that in the case of training, cost efficiency may not ultimately be the most important consideration.
The compliance handbooks of all the regulatory agencies discuss the elements of a strong compliance program. These elements include the following;
- Policies & procedures
- Internal controls
- Management reporting
Although the handbook does not specifically say it, the fact that training is listed as one of the “pillars” of the compliance program suggests that it is at least as important as the other pillars. And yet, for reasons that are lost in tradition and some mystery, this area often is not treated as an important part of compliance.
Most compliance programs at community banks consist of online training programs that allow participants the ability to take tests multiple times until the desired score is achieved. In point of fact, we all know that the common strategy for the participants is to eschew reading the material, go straight to the test, take it, write down the answers to the questions that they got wrong and then retake the test with answer guide in hand. And while this process will help a bank ensure that everyone has received a passing grade on the training, it does little to increase staff knowledge of regulations. This is not meant to be an indictment of on line training programs at all. We often recommend many of the online courses that are currently offered.
Instead, we maintain that a complete compliance training program must have a great deal more. Consider the nature of compliance regulations. Whether we like to admit it or not compliance regulations have a history of being earned! For example, Regulation B (The Equal Credit Opportunity Act) was passed to address the fact that women and minorities were being denied equal access to credit. And the Truth in Lending Act is the result of former banking practices that mislead borrowers about the real costs of the loans they were getting. Consumer regulations have been designed to address areas that have been proven to cause consumer financial harm
Because consumer regulations are designed to either prevent certain behaviors, collect information on the results of bank practices or to provide complete information through disclosures, a great deal is left open for interpretation. There are even times when regulations direct that staff must interpret information to the best of their ability (Government Monitoring Information in HMDA). Often when a regulation is misunderstood, violations of regulation result. We have come across clients who did not understand that Regulation B applies to ALL lending. This misinterpretation has lead banks to assume that they did not have to meet the notification requirements of the regulation. Moreover misunderstandings of the recent rules about QM and the ability to repay rules have lead many banks to arbitrarily decide to cease lending programs out of fear of the regulations will require
We have found that when management and staff alike are given the opportunity to hear a bit of the history of the regulation it makes a big difference in the overall level of compliance. Knowing WHY a regulation was enacted goes a long way toward understanding what it is that the regulation is trying to accomplish. Taking this idea one step further, giving staff information of what it is that the current regulation is trying to accomplish goes a long way toward obtaining positive participation in the compliance effort.
A quick example; one of our clients was having a very difficult time with compliance with HMDA. The Bank had suffered repeat violations in this area and the regulators of this bank were threatening enforcement action if improvement was not made immediately. After we completed our compliance assessment, we noted that one of the biggest problems was being caused by the inaccurate and incomplete information being collected by loan officers. Upon interviewing the officers we found that there was a general lack of understanding of what HMDA was and why collection of the data is so important. No one could understand why the regulators were being so strict about the information. By the way, all of these officers had received passing grades on the Banks online training course.
We developed a HMDA training course for the lending department. In the course we spent at least a third of the time describing the history of the regulation and the process that the data undergoes when it is submitted by the bank. We explained that this data is critical to the studies that are performed by the Federal Reserve and therefore the data has to be as accurate as possible. By helping the staff see that they were part of something much bigger and that their accuracy really did make a difference we were able to get their “buy in”. Reporting errors dropped dramatically and the need to pursue enforcement action was extinguished.
By helping to ensure that staff members understand the specifics of compliance regulations, you can greatly enhance the effectiveness of the program. Staff who understand what it is that the regulation is trying to can feel empowered. Whether or not staff members agree with the regulation, understanding it is key. With the basic understanding of the regulation as a tool, the number of misinterpretations and resulting errors are greatly reduced.
We suggest that courses on consumer regulations at least annually include information about the history and the legislative intent of the regulation. Optimally, staff will be given the opportunity to work through case studies during the training session as we have also found that these are very helpful in increasing understanding of the regulation.
By either taking the time to develop training classes internally or by obtaining classes from an outside vendor, getting comprehensive material for staff is well worth the investment.
 A careful review of the ability to repay rules will reveal to the reader that these rules are recognizable “best practices” for consumer lending.