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Under the strain of increasing regulatory pressure? Here’s how compliance automation can help

Fair lending compliance is a critical risk area for banks today, with scrutiny from government regulators only intensifying

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  • Written by  Tyler Barron
Under the strain of increasing regulatory pressure? Here’s how compliance automation can help

Fair lending compliance is a critical risk area for banks today, with scrutiny from government regulators only intensifying. Under increasing regulatory pressure to deliver accurate data in a timely fashion, it’s become imperative for chief compliance officers to improve how they collect and report on HMDA and CRA data, as well as small business lending data in anticipation of the upcoming Dodd-Frank “1071 rule” change.

Having issues with this data can have significant, far-reaching consequences. Not only can missing information or discrepancies lead to hefty fines that could potentially sink some institutions, but it can also impact a growing bank’s reputation and ability to successfully complete mergers and acquisitions.

Exam procedures for HMDA are stringent and it’s a challenge to get it perfect enough. Even if a bank is not facing the challenge of passing an exam, they will still want to get it correct because they will be compared to peers based on that data. It's important to get it right.

As compliance leaders search for additional staff to ease their regulatory burden, many are left grappling with both labor shortages in the banking industry and internal pressure to limit overhead costs and improve margins. It’s a perfect storm of intensifying risk and demands amidst ever shrinking budgets and capacity.

I was recently chatting with one of our customers, Rhonda Carroll, the chief compliance officer at Houston-based Prosperity Bank, one of the largest banks in Texas. She has firsthand experience leading her team through the changing, complex requirements for fair lending data reporting.

“As we were planning for the new regulations on the horizon, we realized it was going to require increasing staff to implement,” says Carroll. “That’s why the bank decided to bring on automation to support the tasks associated with the data validation.”

Compliance Automation: An Overlooked Solution in Banking

Automating compliance processes is an effective solution for the challenges of this high-stakes environment. However, while banking automation is nothing new, it is rarely applied to compliance. There has been a big push for digital transformation in lending and origination, but compliance professionals have been left at the mercy of having to accurately store, synthesize and review fair lending data manually. This creates undue burden and risk on financial institutions that automation can easily and reliably solve.

Here are four ways that automating fair lending data compliance processes for can improve outcomes for banks:

1. Data integrity

Chief compliance officers in the banking industry bear a huge responsibility around data integrity. Not only do they have to understand and stay up to date on regulations so they can ensure compliance, but they also have to hold the bank accountable for accurately collecting and storing the data. Right now, the only way to solve that regarding fair lending guidelines is through manual data audits.

The problem is, the more often humans handle fair lending data, the more it introduces the potential for error

Without compliance automation, mortgage QC teams must manually review data exported from the LOS before it came to compliance, who then have to check data in the system back to the source documents for all the required HMDA fields. It’s an un-scalable process — as volumes increased, QC runs behind.

By automating QA/QC checks and integrating with the loan origination system and other systems to cross-validate for consistent data, it’s possible to significantly reduce the number of human touch points, increasing data accuracy and reducing risk.

2. Workflow efficiency

Manual compliance reviews not only increase risk, but they are also typically highly complex, checklist-driven and redundant processes, leaving teams overloaded and burned out. If your compliance staff is spending all their time manually finding a needle in a haystack of lending documentation, automation can reduce their workload and free them up to concentrate on more high-value tasks.

Compliance automation systems constantly sweep the documents, LOS and LAR to discover errors and pinpoint their exact location. Then, staff can easily resolve them — no digging through countless files required. As a result, compliance automation reduces busywork and burnout for compliance teams, ultimately improving performance and retention.

3. Labor costs

When the work to manually review data errors piles up, it piles up quickly and massively. This forces many compliance leaders to significantly increase their staff to handle the workload, resulting in skyrocketing labor costs.

Hiring more people to manually review and correct data to reduce risk is counter to the financial operating pressures compliance leaders are under today. (Plus, even if throwing more people at the problem were the answer, there's still an ongoing labor shortage to contend with.) Though automation is an upfront investment, for an institution that would otherwise be sinking millions in additional labor to take up the slack, it’s actually more fiscally responsible.

4. Peace of mind

A valuable benefit of compliance automation is the confidence it provides in the face of ever-increasing regulatory pressures. Automation systems can generate daily reports that reveal errors in fair lending data on an ongoing basis, providing extra assurance there are no surprises waiting around the corner — and that your bank is always on track to pass its next data integrity review.

When it comes to adopting compliance automation, now is not the time to “wait and see.”

Compliance officers need to prepare today for the increasingly stringent regulatory environment to come. It may sound like it’s a long time off, but it really isn’t a whole lot of time to get where you need to be. Banks need to start looking at new solutions now.


Tyler Barron is the Chief Revenue Officer at Encapture, an intelligent automation platform providing banks with documentation efficiency.

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