The Cost of Dodd-Frank Compliance

Greg Jones

Director of Regulatory Compliance Services

July 20, 2016

The more we learn about the Dodd-Frank Wall Street Reform and Protection Act, the more there are unanswered questions that seem to arise. For community banks, there are many areas of concern, including limits on capital, restraints on activities that may force some institutions out of the mortgage business, increased risk and uncertainty, and a greatly increased cost to comply with all the new rules.

Dodd-Frank was signed into law on July 21, 2010, yet many unknowns remain and some provisions of the law that are clear have small banks nervous, despite assurances that there will be some exemptions for community banks.

At most lending institutions, compliance officers are already burning the midnight oil, trying to keep up with their existing workload. As more provisions of Dodd-Frank kick in, bank executives are weighing the pros and cons of the various solutions they have at their disposal to ensure compliance with the law.

Should they divide up the additional work among existing bank employees? Hire new staff to create a dedicated compliance department? Invest in more sophisticated software?  Or just outsource the work? Whichever solution is chosen, it is likely to be both time consuming and expensive.

Here is a closer look at some of the options that community banks can pursue. ..

The Challenges of In-House Compliance

Developing an adequate in-house compliance department has many pros and cons. Finding and hiring the right people can be a tough task for community banks, especially when many of them operate in rural or sparsely populated areas where experienced bank compliance professionals are hard to come by.

Some community banks have decided to promote from within and grow their own crop of compliance experts. That creates a wonderful opportunity for bright employees, especially those who have prior experience dealing with compliance issues. But the learning curve is steep. It’s not enough to know the new regulations and requirements brought about by Dodd-Frank. Compliance personnel have to understand the new rules in the context of existing laws and those laws run deep. In the meantime, while newly promoted employees are learning on the job, banks are forced to accept the increased risk that mistakes will be made during the learning process.

Some banks are seeking to hire former regulatory compliance examiners to serve as their key compliance officers. If such individuals can be found and hired, they could be a great asset not only in heading the department, but in training other personnel to do the job. However, hiring former examiners is not cheap as there is a premium associated with the knowledge they acquired while conducting numerous bank examinations.

Is Outsourcing the Answer?

Given the pressures to find suitably qualified compliance personnel, does it make sense to take a different approach to compliance? Instead of a newly hired or promoted employee climbing a steep curve, outsourced compliance professionals already have considerable compliance expertise. What is left is the task of learning the unique aspects of each bank’s operations.

Depending on the third-party firm selected to provide consulting services, outsourcing is generally less expensive than finding and hiring suitably qualified full-time employees. And, professional compliance officers who work for many banks have the opportunity to see best practices employed at other institutions and share them. They essentially function as the “canary in the mine” regarding the compliance risks that other banks are addressing, and more specifically, government auditor reactions to deficiencies uncovered during audits.

Critics of using outsourcing as a compliance solution point out a few of the cons.

  • Loss of control. Using an outsourcing firm means you’ll be trusting critical tasks to people who are serving many clients, rather than an internal compliance officer who is dedicated to the success of the bank.
  • Loss of continuity. By relying on an outside firm, you may have no choice but to work with different compliance officers on every engagement.

Whatever path your bank pursues to address the increased compliance demands that it faces, several industry analysts believe that the increased workload may not last too long. The burden will be heavy, at least initially, as banks invest the time to correctly decipher and apply the new regulations peppered throughout the Dodd-Frank Act. If that prediction is accurate, community banks may just need to hold on tight for now and weather the storm.

For more information on how we can help your community bank make these decisions, contact Greg Jones.

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