VIEWPOINT: Strategies for Success: Top 5 Audit & Compliance Challenges

For financial institutions

The regulatory compliance environment is becoming increasingly complex for financial institutions. A multitude of challenges — ranging from representment fees and fair-lending practices to AI privacy concerns, adjustable-rate mortgage compliance, and interest-rate risk management — demand meticulous attention from internal audit and compliance teams. Here are several strategies that financial institutions can employ to address these challenges and maintain regulatory compliance: 1. Representment fees A representment occurs if a check is presented to the bank, returned for insufficient funds, and then “re-presented” for deposit while still having insufficient funds. This can lead to multiple representment fees being charged to consumers, even though the cause of the insufficient funds was beyond their control. Not surprisingly, this issue has resulted in several class-action lawsuits. Some banks may consider eliminating representment fees altogether or limiting the number of times these fees can be charged. At the very least, banks should conduct a comprehensive review of their current disclosures and fee schedules to ensure they are clear, accurate, and up to date. Financial institutions should then verify that their core banking system is accurately implementing their fee policies in accordance with their updated disclosures. 2. Fair lending Both state and federal regulatory agencies are continuing to emphasize fair-lending practices. This is particularly true for financial institutions involved in indirect lending, such as auto lending. Regulators are focusing on areas such as appraisal bias, where appraisers might unfairly influence property values. This bias can manifest in two ways: undervaluing properties in certain areas to restrict lending, or overvaluing properties to increase lending availability for specific consumers. Both practices can have detrimental effects on communities and individuals. To support fair lending, banks should ensure comprehensive policies and procedures are in place. Regularly reviewing lending practices, hiring third-party compliance professionals, and developing a thorough appraisal-review process can also help guard against discriminatory lending behaviors. 3. AI privacy Many financial institutions have been exploring the use of AI technology for several years, integrating it into various chat services, automated phone systems, and more. However, as the use of AI by employees becomes more widespread, it introduces new risks, particularly concerning privacy and data security. Ensuring that robust policies and procedures are in place is crucial to mitigate these risks. Employees must be clearly instructed on what information can and cannot be entered into open AI software, such as customer information and account numbers. Additionally, similar precautions must be taken when financial institutions use AI to carry out functions for customers, ensuring data security and compliance with privacy regulations. 4. Adjustable-rate mortgage compliance Adjustable-rate mortgages (ARMs), home loans with varying interest rates, are experiencing a resurgence in popularity due to rising interest rates and market fluctuations. However, these loans pose significant compliance challenges, particularly concerning TILA-RESPA Integrated Disclosures (TRID) and other ARM-related disclosures. Ensuring accurate disclosures is critical when it comes to ARM compliance. Banks should regularly review all disclosures related to ARMs for accuracy and compliance. This is especially critical when dealing with construction or renovation loans that have adjustable-rate features. Prioritizing staff training is also important. Given the high turnover in the industry over the past few years, many employees may lack experience with ARMs. Comprehensive training is essential to ensure staff are well-versed in the intricacies of these loans. 5. Asset-liability management & interest-rate risk Recent bank failures and interest-rate fluctuations have intensified the focus on asset-liability management (ALM) and interest-rate risk (IRR) management. ALM is the process through which financial institutions balance assets and liabilities to reduce risk and increase profitability, while IRR management looks to control an institution’s exposure to interest-rate fluctuations. What can banks be doing in this regard? One strategy is to implement robust monitoring systems for liquidity management to ensure real-time tracking and response capabilities. They should also regularly update their ALM models to reflect institution-specific characteristics and risks. Lastly, ensuring that stress testing and rate-shock scenarios are updated to reflect current market conditions and potential future risks allows for better preparedness and resilience. For additional guidance and support, financial institutions should connect with a trusted advisor to stay ahead of regulatory changes, strengthen operational resilience, and enhance overall compliance efforts in an evolving financial landscape.                 

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Mallory Conway is an executive VP in The Bonadio Group’s Advisory & Consulting division. She has provided financial institutions with internal audits and regulatory compliance services for more than 15 years.