B GUEST ARTICLE Navigating the Potential Impact of Recent Banks are facing unprecedented risk management challenges amid rapid technological and competitive changes. Federal and state authorities have recently issued guidance to address paradigmaltering shifts such as climate change, artificial intelligence (A.I.), cryptocurrency, digital and mobile banking, credit models, data security, and more. Financial institutions should understand how these changes could affect their operating model and strategy. Below are highlights of recent select regulatory guidance: • Climate Risk Large financial institutions are impacted first. The Federal Reserve Board will conduct a pilot to analyze climate-related financial risk involving the six largest U.S. banks in early 2023. • Small Business Lending Data Collection Most U.S. financial institutions will be impacted when it is implemented in 2023. Lenders will be required to annually report small business credit application data, including credit purpose, loan amount, business info and location, gross annual revenue, NAICS code, and more. • Expansion of UDAAP Standards The expansion broadens the scope of consumer activities subject to UDAAP beyond lending to include advertising, pricing, servicing, reporting, payments, and collections. However, a lawsuit by several banking trade associations seeks to prevent the expansion of CFPB’s UDAAP role beyond its Dodd-Frank Act statutory authority. • Reporting Credit Decisions Using Complex Models/Algorithms Lenders using A.I., machine learning, and/or complex credit models must disclose the precise reason(s) for Adverse Action Notices as required by the Equal Credit Opportunity Act. • Enhanced Consumer Privacy Laws Five states have already enacted enhanced regulations: CA, CO, CT, VA, and UT. CA has already placed them into effect; CO, CT, VA, and UT state requirements became effective in 2023. Six other states have active legislation pending: MA, MI, NJ, NC, OH, PA. • Oversight of Bank Third-Party Risk Management (TPRM) Vendor/third-party relationships are generating renewed regulatory scrutiny, especially fintech partnerships. Ineffective TPRM could be cited as unsafe or unsound practice. Banks must demonstrate TPRM through documentation of third‑party By Gale Simons-Poole, BHG Financial REGULATORY GUIDANCE 26 The Community Banker mibonline.org
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