Western Independent Banker - November/December 2008 - (Page 33)

By Blair Rugh A Bank Director’s Obligation to Be Aware of Regulatory Change THERE ARE MORE regulatory changes pending today than at any time during the 20 years in which I have been involved in banking compliance. There are regulatory changes that have been finalized but have not yet become effective and regulatory changes that have been proposed that will probably be finalized soon. Some of the changes are not terribly significant, but some may significantly alter some of the ways in which your bank conducts its business, designs its products, services its accounts and advertises and markets its products. Many of the changes will require considerable study and consideration on how your bank wants to react to them, and, after that, significant time to implement the changes. Certainly the changes will put a strain on your compliance budget and your employee education budget. A director must be aware of the nature of the changes that are occurring so that he or she can gauge their impact and provide meaningful guidance on the direction the bank should take to comply with the change. An excellent example is the change to Regulation Z that was recently finalized and that becomes mandatory on October 1, 2009. Among other things it defines a “higher priced mortgage.” If a bank makes a higher priced mortgage, the underwriting requirements are onerous. Moreover, the bank must make a determination that the borrower can afford the loan. That determination must be made on a caseby-case basis. The fact that the borrower’s debt-to-income ratio meets some standard is not sufficient. Can the borrower afford the loan? If your bank makes the loan and the borrower subsequently defaults, that is certainly evidence that the decision was wrong and it may give the borrower an action against the bank. It probably is not possible to avoid making any higher priced mortgage loans, but most banks will try to avoid making them whenever possible. In many cases this will cause the bank to have a higher denial ratio for loan applications from protected class persons under Regulation B. It will also adversely affect the bank’s lending patterns from a CRA perspective. A bank must think through in advance all of the potential unintended consequences of any change it may make in its lending patterns and then determine the best course for it. If a director is not aware of the pending regulatory changes he or she cannot be sure that the bank is reacting at all and if reacting is it doing so properly? If a bank has a courtesy overdraft program, the current rules require that if the bank markets the program it must put information on its customers’ periodic statements detailing the month-to-date and year-to-date charges for overdrafts and non-sufficient funds. Many banks have ceased the marketing of their courtesy overdraft programs or have decided not to provide a courtesy overdraft program at all because of the disclosure requirement. A proposed change to the regulation will require all banks—whether they have a courtesy overdraft program, and if they do whether they market it—to provide those periodic statement disclosures. Since a bank is going to have to provide the disclosures in any event, why not have a marketed program and take advantage of the income that they generate? Again a director must be aware of the regulatory changes in order to evaluate the efficacy of potential operational changes. I have described only two of about 20 compliance changes that are pending. There also have been huge changes on the safety and soundness side of the bank. A bank today must have a program for monitoring concentrations in commercial real estate loans; it must have enhanced programs for calculating its allowance for loan and lease loss; it must have an enhanced program for projecting and protecting its liquidity; and on and on. A bank examiner expects the bank’s board of directors to guide the management of the bank— not to micromanage it on a day-to-day basis, but to set the standards for management. A director cannot perform that function unless he or she understands the rules by which the bank must play. Virtually every rule by which the bank is playing this year will change either marginally or dramatically by the end of next year. Examiners expect bank directors to be aware of the regulatory changes that will have a substantial impact on the director’s bank so that the director has the information necessary to fulfill his or her function. Blair Rugh is senior vice president of Metavante Reg ul ator y S e r v ice s for Metavante Risk and Compliance Solutions in Orlando, Fla. He can be reached at 800547-2462 x3207 or blair.rugh@metavante. com. A bank examiner expects the bank’s board of directors to guide the management of the bank— not to micromanage it on a day-to-day basis, but to set the standards for management. A director cannot perform that function unless he or she understands the rules by which the bank must play. Western Independent Banker November/December 2008 33

Table of Contents Feed for the Digital Edition of Western Independent Banker - November/December 2008

Western Independent Banker - November/December 2008 Contents A Message from the President & CEO A Practical Approach to Director Evaluations Director Assessment: New Standards for a High Performing Director The Best of the West: Traits of High Performing Banks Best Practices Checklist for the Audit Committee The Real Performance Metric: It Takes a Balance of Profitability and Growth to Be Successful The Role of the Board in a Credit Crisis A Bank Director's Obligation to Be Aware of Regulatory Change Benefits Tied to Performance Receive Higher Approval Rating by�Board Members Increasing Shareholder Value: Key Profitability Drivers Board Portals Streamline Efficiency for 21st Century WIB Service Corporation Report WIB Calendar Welcome New Members Index to Advertisers advertiser.com

Western Independent Banker - November/December 2008

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