complaint data has suggested that collectors may be focusing on
short-term borrower outcomes, and failing to provide important
information about how to stay on track over the long term.
Federal Deposit Insurance Corporation:
In July 2016, the agency proposed Guidance for Third-Party
Lending4. Among other things, the proposed guidance expressly
incorporates examples of potential exposure related to incentive-compensation in the following risk categories:
■ ■ ■ Strategic Risk: “For instance, the potential misalignment of incentives or goals between the institution and the third-party partner
may elevate strategic risk.”
■ ■ ■ Credit Risk: “For example, often in third-party lending arrangements, the third parties sometimes have an incentive to make or
price loans to complete another transaction, such as a retail sale of
a good or service, which may result in less attention to the quality
of the loan. Certain loans may be underwritten off-site, increasing
the risk that agents or employees of third-party lenders may misrepresent information about the loans or increase credit risk by failing
to adhere to established underwriting guidelines.”
The interagency5 Incentive-Based Compensation Arrangement
Rule (Rule) proposed in 2011, was re-issued for comment on June
10, 2016 and underscored the priority that the supervisory agencies
placed on stemming risk associated with incentive-compensation.
While the proposed rule has not been finalized it outlines principles
that have already been adopted by some institutions as a means
to stem the potential for litigation or exposures identified at an
examination. Essentially the proposed Rule:
■ ■ ■ Implements Section 956 of the Dodd-Frank Consumer Protection and Wall Street Reform Act of 2010 which prohibits any type
of incentive-based compensation arrangements, or any feature
• Provides for excessive compensation for executive officers,
employees, directors, and principal shareholders who receive
incentive compensation from the institution.
• Encourages risks that could lead to material financial loss at
a covered financial institution.
■ ■ ■ Applies general provisions to financial institutions with assets of
at least $1 billion, with more prescriptive provisions covering orga-
nizations with average assets of $50 billion or more. 6 As an example
of the more prescriptive requirements, incentive compensation ar-
rangements for senior officers at the larger institution group would
be subject to a forfeiture and downward adjustment review in the
event of inappropriate risk-taking or other specified triggering events.
■ ■ ■ Requires that compensation arrangements “appropriately balance risk and reward” and adds language that expressly includes
compliance risk as one of the factor to be considered.
New York State:
On October 11, 2016, the New York State Department of Financial Services (“NYDFS”) issued guidance to its regulated banking
organizations intended to address concerns over compensation
practices and the potential risk of inappropriate sales practices.
The guidance advises that no incentive compensation may be tied
to employee performance indicators without effective risk management, oversight, and control. It also calls out certain activities
typically associated with heightened potential for risk exposure
such as cross-selling and referral bonus arrangements and the use
of performance indicators that are tied to the number of accounts
opened or number of products sold per customer. 7
How Do We Minimize
the Potential for Exposure?
Key strategies to help minimize exposure are:
■ ■ ■ Know the supervisory expectations;
■ ■ ■ Understand the major issues being cited in consent orders; and
■ ■ ■ Assess your organization’s risk, considering elements presented
in existing supervisory guidance and as appropriate, provisions
in the 2016 proposed Rule.
Know the Supervisory Expectations
Key documents that outline expectations including the following
■ ■ ■ November 28, 2016: CFPB Compliance Bulletin 2016-03, Detecting and Preventing Consumer Harm from Production Incentives.
The risk management expectations expressed in the bulletin align
with the broader risk-focused guidance issued by the prudential
regulators. For example, the Bureau’s articulated view of an effective
compliance management system (CMS), like prior interagency
guidance as well as the 2016 proposed Rule, underscores sound
governance led by the Board of Directors as a priority. The Bulletin:
1. Compiles prior guidance issued by the Bureau;
2. Highlights examples from the its supervisory and enforcement
experience in which incentives contributed to substantial
consumer harm; and
3. Describes compliance management steps that supervised entities should take to mitigate risks posed by incentives (www.
consumer-harm-from-production-incentives). As a quick
reference tool, refer to the table on the next page, on the
Compliance Management System (CMS) framework.
Despite some uncertainty regarding
current bank regulation and the
supervisory agenda, the risk associated
with incentive compensation remains
on the regulators’ radar.