Managing Product Impacts
it seeMs like eveRy new Rule that comes out these days is a game changer. the regulators’ reign of terror—bringing seemingly endless changes to Regulation Z, new ResPa disclosures, new overdraft rules, and internet gambling regulations, to name just a few—has caused countless overtime hours lately. But perhaps more important is the degree to which these new rules affect how your bank does business, meaning
what products and services are offered, how it promotes itself, and more.
types of consequences. Thus a compliance mandate may drive a product
decision: to cease making loans having
rates above the HPML threshold.
This emphasizes the need for compliance officers to be an integral part of
the management team and to be more
“management” than “compliance.” Because so many of these changes have
significant operational impacts on your
systems and delivery channels, you have
to be more involved than just contributing, “We have a new disclosure that
we have to provide.…” Compliance is
driving product decisions like never
before; a major responsibility of compliance officers in 2010 and beyond
will be to provide input that shapes the
operational and financial consequences
of major regulatory
changes for their
banks.
Can You Escrow?
A perfect example of this is the higher-priced mortgage loan (HPML) rules
under Reg. Z, which became effective last October 1. These new rules
impose significant requirements and
restrictions on loans having rates a set
number of points above an “annual
prime offer rate” threshold. Not to
rehash the rule, but significant documentation of underwriting is required
and there are restrictions on prepayment penalties, among other things.
These will affect both operations and
the profitability of such loans.
But most significant for many banks
is the fact that beginning April 1, 2010
(October 1 for manufactured housing
HPMLs), taxes and insurance must
be escrowed on HPMLs for at least
the first year. Does your bank have
the capability to escrow? Many don’t
or don’t want to, because the costs to
develop and maintain the necessary
systems and disclosures can be high,
especially for a pool of loans that
may be only a small part of the
bank’s business. Part of the
compliance officer’s job is
to consider and communicate these
Monitoring Overdrafts
New Reg. E overdraft rules (effective
July 1, 2010) that require a consumer’s
opt-in pose similar problems. The
rules cover only overdrafts created by
ATM or one-time debit card transactions; they don’t cover overdrafts created by other means, such as checks or
recurring debits. This means that before assessing an overdraft fee, a bank
must figure out how the overdraft was
created in order to determine whether
“affirmative consent” is required, and
if it is, whether it has been obtained.
The Fed says that the transaction code
may be used to do this, but again this
is a significant systems issue that will
take resources to implement.
To make things more difficult,
banks are prohibited from making
the payment of other overdrafts (from
checks, for instance) conditional upon
whether or not the customer has opted
into ATM or one-time debit card overdraft fees. Continuing to depend on
an important source of revenue for
many banks will require resources and
costs to figure out how to differentiate
overdraft types and to provide and
maintain opt-ins. You’ve got to know
who’s opted in and who hasn’t; that
will impact your decisions on which
overdrafts to pay. Again, that’s as much
a product decision as a compliance one.
