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Examiners Take a Comprehensive Approach to Reviewing Executive Compensation

An increasing number of our community bank clients report that regulators are focusing significant examination effort on compensation policies and the related risk-assessments and controls. By now, most bankers are aware of the Consumer Financial Protection Bureau’s (“CFPB”) new rules regarding mortgage loan originator compensation that will go into effect in January of 2014. Banks that make residential mortgage loans will likely be reviewing their compensation policies with an eye toward compliance with those regulations long before the effective date. But even now, months before those rules go into effect, examiners are taking a much broader look at bank compensation policies – not just focusing on mortgage loan originators and consumer compliance, but also on a bank’s overall risk-assessments and controls related to all types of incentive compensation. Accordingly, as you think about reviewing mortgage compensation for compliance with the new CFPB rules, we encourage you to expand your review to incorporate the more comprehensive risk-assessment and mitigation components that your safety and soundness examiners will be looking for.

Merging or Acquiring Another Institution? Don’t Forget your Compliance Due Diligence

If you have filed a federal regulatory application for a bank merger or acquisition recently, you probably noticed a new question in the standard application form. Bank regulators are now routinely asking for a description of the acquirer’s due diligence review of the target institution, as well as the scope of resources committed to the review, any significant adverse findings and, if applicable, the corrective actions to be taken to address those findings. Essentially, the regulators want to make sure you have done your homework. They will also use the provided information to issue-spot in connection with their review of the transaction and as a piggy-back for any related examinations. In our experience, regulators take responses to the due diligence question very seriously, and an incomplete or shallow response can result in significant delays in obtaining regulatory approval.

Bankers Caught Between the Fair Lending Rock and the Credit Quality Hard Place

In the wake of the housing and foreclosure crisis, the United States Department of Justice (“DOJ”) and federal bank regulatory agencies have made fair lending enforcement a top priority. As a result, banks have become subject to severe examination criticism, enforcement actions and even civil actions alleging discrimination in loan pricing, particularly with respect to unsecured consumer loans. Banks have endured these harsh consequences, even where there was no evidence or even any allegation that the bank intended to discriminate. In response, many community banks have revised lending policies to eliminate virtually all loan officer discretion in the pricing of unsecured consumer loans, with the inevitable result that unsecured credit is generally less available to the very consumers that the fair lending laws were designed to protect.

The Guaranty of Swap Obligations Raises Enforceability Issues Under Dodd-Frank Regulations

The business borrower entering into a secured financing transaction at a floating interest rate typically attempts to manage the interest rate risk by entering into a “swap” with a “counterparty” resulting in fixing the interest rate the borrower is required to pay. Lenders almost always require that commercial loans to a privately owned business be guaranteed by its owners. As a swap involves some potential liability to the lender, the lender normally includes such liability in the definition of the “Obligations” being incurred and required to be paid by the borrower, secured by any collateral and guaranteed by the borrower’s owner.

Reducing the Bank’s Liability for Internet and Electronic Fraud Losses

Internet and electronic fraud losses are increasing drastically for financial institutions.  Although the fraudster has ultimate liability for the fraud loss, the fraudster rarely can be found so the liability for the fraud loss generally is shifted to the bank.  This article explains how the bank can reduce its liability for Internet and electronic fraud losses with respect to commercial accounts if the bank utilizes reasonable security procedures and a properly drafted agreement with its customer.

Top Tips: What To Do When Litigation Happens – Part II

Doug Weems reminds employers although litigation risks can be minimized, litigation is a fact of life in the United States.

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