Strategies, Best Practices and Thought Leadership

Regulations Continue to Stay Top of Mind for Foreseeable Future

Nearly ten years after the financial crisis, the long shadow it has cast has started to fade – except with respect to regulations. From the new CECL standards to HMDA, compliance remains top of mind for bankers.  

In the past, bankers relied on their experiences and knowledge to understand the various requirements. Now, these regulations are embedded into software to streamline processes, which has created a reliance on this technology, making it crucial that institutions ensure their systems are effective and up to date. Otherwise, they face severe fines and penalties from regulators.  

Financial institutions may think that 2020’s top-of-mind regulations will bog down processes with extensive reporting, operational implicationstechnological considerations, and so on. However, there is a heightened importance on having the right tools in place to adhere to the requirements. Looking past these short-term struggles, financial institutions will see opportunity for growth and profitability on the horizon.  

2020: The Year of the Regulation 

CECL After much anticipation and maybe some dread, the time has come for the FASB’s CECL standard to take effect. Potentially one of the most drastic changes to date in bank accounting, this standard obligates financial institutions to calculate the expected loss over the life of each loan and allocate reserves to cover those losses at the time of origination.  

The purpose of the standard is to improve measurement of potential credit loss, giving banks and credit unions a clearer view of their loans and allowing for effective segmentation to gain deeper insights on the performance and influences of each loan pool. A primary concern among financial institutions is that a significant increase in the loss allowance on their loans could ultimately impact their net income.  

Although it brings considerable change to the lending industry, CECL lays the foundation for institutions to achieve growth and remain competitive. The advantages of data collected to adhere to CECL are vast: improved decisioning and monitoring of loans; expanded loans and credit product offerings; updated loan pricing models; precision in targeting borrowers; accurate forward-looking loss estimatesminimal income volatility; and most importantly, minimized risk.   

HMDA First introduced in 1975, HMDA is implemented by Regulation C and requires many financial institutions to maintain, report and publicly disclose loan-level information about mortgages – increasing both costs and risks associated with consumer and some commercial lending.  

In October, the CFPB issued its final rule, modifying the current temporary threshold for collecting and reporting data on closed-end loans and open-end lines of creditThe new threshold takes effect this year, however, the CFPB is expected to issue a final rule that addresses these thresholds later in the year.  

Although HMDA reporting raises the cost of compliance, the data collected from the millions of mortgage applications submitted each year stands as a learning opportunity for financial institutions to better protect themselves and ensure borrowers are treated fairly. Implementing risk management software to ensure compliance will be the game changer, allowing banks and credit unions to save time, lower operating costs, make data-driven decisions, increase profitability and minimize risk. 

The Lending Landscape is Transforming 

Regulations such as CECL and HMDA were established to prevent discriminatory and predatory loan practices. As the regulatory environment continues to evolve, risk management processes must also adapt. Failure to comply with lending regulations exposes institutions to financial liabilities and reputational damage. One compliance misstep could be detrimental to an institution’s reputation, instantly breaking the trust that has been carefully fostered throughout the years. Although burdensome, these standards help protect your institution, employees and customers.  

 

Leveraging Risk Management to Achieve Growth and Profitability 

With the right technology and automation in place, banks and credit unions can effectively and efficiently monitor for risk while using significantly less manual intervention that ties up resources and adds costs, increasing profitability. A singular platform for loan origination and portfolio risk management that drives continuous, automated monitoring throughout the entire loan life cycle makes it easier when it comes time to report data to regulatory authorities.  

Financial institutions should look for tools that feature concentration analysis by specific regulatory requirements to power more strategic, data-driven decisions. Additionally, portfolio risk management software gives greater insight into the profitability of certain borrowers, identifies troubled accounts ahead of time, and highlights high-performing loans best for renewals and cross-sellingThis data-backed insight helps financial institutions determine where they are most profitable and where they should focus for improvement and growth.

Presenting both challenges and opportunity, industry mandated regulations bring an onslaught of time-consuming work to financial institutions. However, with software in place, institutions can streamline processes to pass over the challenging aspects of remaining compliant and skip straight to the benefits. Portfolio risk management helps institutions managing risk before it becomes problematic, maximizing opportunities for growth and increased profitability in 2020 and beyond.  

Topics: CECL, Market Trends, Risk Management

Baker Hill

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