By Michele Gula, m.rae associates, as guest writer for ABA Banking Journal, from ABA Annual Convention

 

 

In the midst of this Dodd-Frank era, there is much ado about subjectivity. Even the most well-staffed and sound operating compliance programs are being worked in ways they never saw coming, especially with long-sanctioned practices now being flagged as questionable.

But in light of what is coming, none of that matters. It is time to comply. Or, simplify, as speakers Kathlyn Farrell and Susanna Tisa might be inclined to say.

The ABA Annual Convention 2011 speakers, both managing directors at Treliant Risk Advisers, LLC, introduced bank leadership attendees to the firm’s Dodd-Frank dashboard, a strategic planning tool that focuses decisionmakers on the most relevant and urgent issues; it puts education behind all the necessary next steps.

There is a logical order on tackling the bank's impacted areas and it can be broken into three groups:

• Revenue which covers products and fees.

• Financing encompassing funding and capital.

• Governance focused on oversight and risk management.

 

 

Brace your board for impact
Setting a strategic direction in a volatile regulatory environment will cause resource allocations to shift dramatically, according to the speakers. The bank’s leadership must be knowledgeable of regulatory timeframes and the potential impact.

Further, the right people need to be involved in planning for the impact and prioritizing the rollout of change initiatives. The speakers stressed that implementation:
 
• Is a multi-year effort.

• Requires that initiatives be in clear view.

• Requires that management assign priority to them.

• Goes best with  a follow-up mechanism to ensure accountability for decisions

 

 

Residential products
Residential mortgage products were discussed from the perspective of how Dodd-Frank will be viewing these products. "Are they plain vanilla or not?" was the speakers’ consistent yardstick. The idea was that the strategic options themselves are black and while: pursuing unconventional mortgage loans or restricting products to qualified mortgages only.

Action steps the speakers recommended include:

• Determining the types of loans to pursue based on your existing market.

• Evaluating the loans based on your risk-management program.

• Performing a cost-benefit analysis to determine whether the cost of originating non-qualified loans will be offset by potential income.

 

 

Mortgage servicing
In the area of mortgage servicing, once again, the strategic choice is black or white; whether to assimilate to the new standards or exit the market.

Action items to consider include:

• Evaluate revenue from force-placed insurance premiums.

• Determine if processes will support force-placing insurance on mortgages loaned.

• Evaluate both the cost of maintaining escrow accounts and the overall viability for your mortgage servicing operations.

 

 

UDAP morphs to UDAAP
Expectedly, unfair, deceptive, and abusive acts and practices (UDAAP) was given much attention within the presentation. With the increased transparency between customers and their financial institutions, consumer protection is a major federal priority.

Dodd-Frank’s insertion of UDAAP into the equation is leading to unexpected scrutiny in areas that have been acceptable for years, the speakers said. Much of compliance used to be a matter of checking off adherence to technical rules, but this new shift invites a grey area that will require banks to step over to the customer side to more clearly realize what is said and what is understood from their perspectives, especially when working with vulnerable populations.

Plus UDAAP applies universally to internal and third parties, meaning a deeper consideration of vendors by bankers is critical. Ultimately, the speakers believe this shift to UDAAP will frontload all product and service processes, especially those in development, with a new set of considerations:

1.  Is the product complicated or simple?

2.  Are the customers of these products vulnerable?

3.  Are sales practices steering people to certain products and incenting employees to do so?

4.  Are you paying a commission to the vendor of that product?

5.  Is the penalty or service charges in line with the cost of said product?

6.  Are fees communicated in a logical manner and transparent to the customer?

The bottom line here, according to the Treliant speakers, is that banks are going to have to become comfortable with being more proactive and strategic than ever before, with compliance, to successfully fulfill the rigorous compliance standards on the horizon. And with so much open to interpretation, it is clearly time to bring strategies into perspective.

Editor’s note: Treliant authors wrote a special cover story on UDAAP in our June 2011 edition, and a related podcast with ABA BJ editors is also available. Click here to access these and related resources.

 

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