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Why don’t the Regulators Just Understand?

8 June 2015

To paraphrase the great Will Smith, actor and rapper extraordinaire – sometimes it just seems like “regulators just don’t understand”! Have you ever felt like you were being singled out during an examination?  You are most certainly not alone!  Despite the fact that it seems like the examiners often don’t understand the fact that banks are for-profit organizations, there is hope.  You would be amazed by how much a few conversation with your regulator might change things.  As with many things, a journey towards self – knowledge and self-discovery can lead to enlightenment!

They just don’t like us (or the Examiner had his own agenda)

It can often seem like from the very moment the examiners come in the door they have very specific things they are looking for and this in fact is the case!  Examiners use a specific set of metrics and rules as they put together the scope for the examination of your bank.  The really good news here is that these metrics are not a company secret.  In fact, regardless of who your regulator might be, the examination manual, which directs the development of the scope of the examination is public information.  All regulators use a form of risk based examination these days.  The scope of the examination will be based upon several factors including:

  • past performance
  • type of products offered
  • changes in management
  • changes in the banking environment
  • changes in regulations
  • This, of course, is not a complete list, but it covers the basics.  The point is that the examiners will develop a scope for the examination based upon a known set of variables.  There is no secret
  • to this and it is simply not the case that they just don’t like your bank.

They don’t understand that banks have to make money to live

Again, it can seem that every year brings more and more regulation.  In fact, there were more than 80 regulations that were implemented in 2014 alone!  The idea that a bank has to make a profit to keep its doors open can sometime seem overwhelmed by the need to comply with regulations.  However, there is an inconvenient truth in the life of a regulatory agency; without institutions to regulate, the need to exist ceases.  The Office of Thrift Supervision serves as a poignant example.  Regulators are interested in keeping strong banks that have a good compliance record alive and thriving.

The fact of the matter is that there are no consumer banking regulations that have not been well earned.  A review of the history of some of the seminal consumer banking regulations provides us with a history of bad behavior that cried out for regulation.

For example:

  • The truth in lending act was passed in response to the growing number of Americans who were getting credit, but not being properly informed of the cost1
  • Regulation B was passed as a direct result of discriminatory lending behavior on the part of banks.
  • The SAFE ACT which requires loan officers to register and be part of a national data base, is the direct result of the financial meltdown of 2009.

Notably, consumer regulations are a part of the history of banking in the United State and are woven into the fabric of the business of banking.

The regulators are just out to get us!

There are many reasons why a community bank. in particular, might feel this way.  Quite often the bad behavior discussed above was actually conducted by the much larger brethren of community banks.  Despite this fact, the community banks are painted with the same broad brush and held to the same standard as the giant miscreants.  There have been many commentaries questioning whether regulatory agencies simply want to do away with community banks.  We believe that this is far from the case.  There is and will always be a significant market in which community banks can grow and prosper.  Regulators have recognized the need for a different set of standards and regulations for community banks for some time.  Political considerations and logistics have stymied the effort to date, but the drive continues for a separate set of regulatory standards for community banks.

How can I get them to understand us?

Far too often the only communication between banks and their regulators is through the examination process.  As many banks have discovered, this is not the optimal time to discuss hot topics in regulation!  Examiners are on a tight time schedule and generally must answer to supervisors at their regional office.  The job is to gather the information pertinent to the scope, analysis the information and communicate areas of concern.  In this environment the examiners rarely have the time or the resources to discuss ideas about how to enhance the overall compliance program.

One way to greatly improve the overall examination experience is to develop an ongoing relationship with the regulatory office that is assigned to your bank.  It may seem unnatural to talk with the very organization that “torments” you, but ongoing communication can easily become a two way street.  Examiners who feel that they have good communication with a bank will be forthcoming with information about changes in regulations.  More importantly, information about changes in regulatory approach can be communicated.  This can invaluable information.

A long standing, but not very well understood axiom is “self-detected/self-corrected”.  Banks that make a point of finding a compliance issue, correcting the problem and then reporting it to the regulators, get way more than a mere “gold star”.  Again, even though it may seem counter-intuitive, but making a practice of reporting issues that you have found and corrected goes a long way toward building credibility and understanding with your regulator.

So in the end, it is not so much that regulators just don’t understand. It is more the case that you have help them understand.

1 See Preamble to 15 U.S.C. 1601 (1970)