UNINTENDED DISCRIMINATION AI IN LENDING DECISIONING AND TRAINING – THE FOUNDATION OF EFFECTIVE COMPLIANCE 2023 • Issue 6 The Nebraska Independent Banker
I always enjoy when Tim Burns visits our bank. The knowledge he has of the banking industry and the services MIB provides to community banks, helps our bank to be able to offer additional products and services to our bank customers. We consider Tim, and MIB, to be an important part of our banking family. Tim Burns with customer Kurt Pickrel of Fullerton, Nebraska Bank Stock Loans — Acquisition, Capital Injection, and Shareholder Buy Back/Treasury Stock Purchase Officer/Director/Shareholder Loans ( Reg-O) Participation Loans Purchased/Sold — Commercial, Commercial Real Estate, Agricultural, and Special Purpose Loans Leases Midwest Image Exchange – MIE.net™ Electronic Check Clearing Products Information Reporting – CONTROL Electronic Funds Cash Management and Settlement Federal Funds and EBA Certificates of Deposit International Services/Foreign Exchange Safekeeping Directors’ Exams Loan Review Compliance Audits IT Audits Lending Services Operational Services Audit Services WHY ? Kurt Pickrel, President First Bank and Trust of Fullerton mibanc.com MEMBER FDIC Contact Tim Burns 402-480-0075
6 ©2023 The Nebraska Independent Community Bankers are proud to present The Nebraska Independent Banker as a benefit of membership in the association. No member dues were used in the publishing of this news magazine. All publishing costs were borne by advertising sales. Purchase of any products or services from paid advertisements within this magazine are the sole responsibility of the consumer. The statements and opinions expressed herein are those of the individual authors and do not necessarily represent the views of Nebraska Independent Community Bankers or its publisher, The newsLINK Group, LLC. Any legal advice should be regarded as general information. It is strongly recommended that one contact an attorney for counsel regarding specific circumstances. Likewise, the appearance of advertisers does not constitute an endorsement of the products or services featured by The newsLINK Group, LLC. Nebraska Independent Community Bankers 1001 S. 70 Street, Ste. 101 Lincoln, NE 68510 (402) 474-4662 nicbonline.com The Nebraska Independent Banker is a Publication of The Nebraska Independent Community Bankers Association Issue 6 • 2023 INSIDE TAKE A LOOK 10 22 NICB Executive Committee Chairman Rick Heckenlively Points West Community Bank Sidney Chairman Elect Dave Ochsner Commercial Bank Nelson Vice Chairman Jim Niemeier Citizens State Bank Friend President/CEO Dexter Schrodt Secretary Kelly Lenners First State Bank Nebraska Pickrell Treasurer Arnold Lowell CerescoBank Ceresco Immediate Past Chairman Corby Schweers Elkhorn Valley Bank Wayne 4 President’s Message Navigating the Year-End Waters By Dexter Schrodt, President and CEO, NICB 6 Flourish Cryptocurrency: A Solution Without a Problem By Rebeca Romero Rainey, President and CEO, ICBA 8 Surviving Versus Thriving in Today’s Market By DCI 10 Mortgage Mélange Volatile Rates Create a Cornucopia of Options By Jim Reber, President and CEO, ICBA Securities 13 2024 IT Budgeting Guide Where to Allocate Your Bank’s Resources By Mike Gilmore, Chief Compliance Officer, RESULTS Technology 17 Training: The Foundation of Effective Compliance By William J. Showalter, CRCM, CRP, Senior Consultant; Young & Associates, Inc.; Kent, Ohio 22 AI in Lending Decisioning and Unintended Discrimination By Shelli J. Clarkston, Spencer Fane, LLP 24 NICB Endorsed Partners 24 Associate Members 2023 26 Bank Training Webinars
PRESIDENT’S MESSAGE NAVIGATING THE YEAR-END WATERS By Dexter Schrodt, President and CEO, NICB As the year draws to a close, it is a fitting time to reflect on the challenges and triumphs that have defined the landscape of community banking in the past 12 months. As President and CEO of the Nebraska Independent Community Bankers, I find myself contemplating the unique journey that our member banks have undertaken in the uncertain year that was 2023. This year has been marked by a series of unprecedented events, from the bank failures in March to the increased rate environment and the ever-escalating regulatory scheme. However, amidst the challenges, community banks have demonstrated remarkable resilience. They have adapted swiftly to the changing circumstances, implementing innovative strategies to support their customers and communities, all while trying to maintain a profitable business. The regulatory landscape this year has been dynamic, to say the least. It seems the federal government never stops when it comes to pushing new regulations onto community banks, with absolutely no recognition of the burden that keeps compounding under these regulations. Through engagement with regulatory bodies by NICB and ICBA, community banks have made strides in pushing back on the regulatory burden and contributed to shaping policies that align with their unique needs. Two successful examples of this include community banks being exempt from the special assessment to the Deposit Insurance fund following the large bank failures and Congress passing a resolution to rescind the CFPB’s rule on Section 1071. Although regulators can be a drag, one of the most inspiring aspects of this year has been witnessing the unwavering commitment of community banks to the development of the areas they serve. Whether through small business loans, home mortgages, or community outreach programs, community banks have stood as pillars of support, recognizing the importance of fostering economic growth and stability on a local level. I’m fortunate to have seen some of these examples firsthand as I made member visits across the state this year. Each time, I’m reminded of what makes community banks unique: they just care. As we bid farewell to 2023, it is important to celebrate the achievements of community banks throughout the year. Many have successfully navigated Community banks are poised to play an even more integral role in the financial landscape, and the NICB is committed to supporting them on this journey. 4 NEBRASKA INDEPENDENT BANKER
ASSURANCE / TAX / ADVISORY FORVIS is a trademark of FORVIS, LLP, registration of which is pending with the U.S. Patent and Trademark Office. FORward VISion counts Our vision is helping make yours a reality. Whether you’re looking to stay compliant, manage risk, or grow strategically, our forward-thinking professionals can help you prepare for what’s next. forvis.com/financial-services FOR unmatched industry insight, VISion matters economic uncertainties, expanded their customer base, and continued to make significant contributions to the communities they call home. Their dedication to the principles of community banking serves as a testament to the enduring strength of the sector. As we turn our gaze toward the future, there is a sense of optimism within the community banking sector. The challenges of the past year have forged a path for growth and evolution. Community banks are poised to play an even more integral role in the financial landscape, and the NICB is committed to supporting them on this journey. In closing, the end of the year is not just a time for reflection but also a moment to express gratitude for the resilience and commitment demonstrated by community banks across the nation. As we stand on the cusp of a new year, the Nebraska Independent Community Bankers remains steadfast in its dedication to advocating for the interests of its members and fostering a thriving community banking sector for the benefit of all in the state. NEBRASKA INDEPENDENT BANKER 5
In today’s environment, we hear a lot of hype about different technologies. That buzz leads to oversaturation, which can leave us questioning, “Am I missing something?” when we don’t feed into the frenzy. When it comes to cryptocurrency, this is certainly the case. I’m frequently asked in interviews about ICBA’s thoughts on cryptocurrency, inclusive of stablecoins and central bank digital currency (CBDC), and I typically respond by asking, “What problem are we trying to solve with it?” That will often leave the interviewer stumbling for a response because the answer is truly unclear. While we have heard a wide range of rationale, those concepts don’t seem founded in need as much as in justification. Here are three that easily spring to mind: 1. The claim that it will provide support for global payments is particularly baffling. With a currently unregulated entity, global collaboration and compliance standardization will be essential to ensure that transactions remain safe, secure and legitimate. In short, it’ll take a mountain of global collaboration to make that possibility realistic. 2. The thought that cryptocurrency will enable faster payments is equally troubling. Instant payments platforms are already available in the U.S. — you can’t get much faster than that. 3. The concept of a payments system that’s completely anonymous and frictionless is another point of contention. That anonymity easily can lead (and has led) to illicit payments, so it may not be what it’s cracked up to be. FLOURISH CRYPTOCURRENCY A Solution Without a Problem By Rebeca Romero Rainey, President and CEO, ICBA 6 NEBRASKA INDEPENDENT BANKER
As a financial services industry, we can’t fall victim to shiny object syndrome. 4. Whether it’s nonbank payment providers like PayPal, states that want to issue their own stablecoins, CBDC or a piece of legislation trying to create a regulatory framework, this is a space to keep a handle on. Know that ICBA is observing and advocating on your behalf. As a financial services industry, we can’t fall victim to shiny object syndrome; we need to keep peeling back the onion to determine what we are solving for and, from ICBA’s perspective, how that can be done in a way that works with and for community banks. With emerging technology, knowledge is power, which is why we’re offering ongoing opportunities to stay in the know on cryptocurrency’s evolution. We encourage you to remain up to speed on developments, whether through digital asset courses with Community Banker University (CBU) or our payment team’s online analysis. We will keep providing information that helps you know how cryptocurrency is living up to the hype — or, more than likely, not. On a personal note, I wanted to thank all of you for being part of this collective community bank journey; we couldn’t do it without you. Please take time to celebrate all you do for your communities. I know they are, as are we, grateful for you. Rebeca Romero Rainey is the President and CEO of ICBA. Connect with Rebeca on X @romerorainey. MINDY KOEHLER Senior Registered Institutional Sales Associate mkoehler@dadco.com Your Nebraska source for all of your bank’s portfolio needs! • Municipal bonds – Nebraska and nationwide • Corporate bonds • Agency bonds • CMOs • CDs • Whole loans (both buying and selling) We have a combined 57 years of experience working exclusively with banks, insurance companies, and registered investment advisors. JON MORTEN Senior Vice President, Institutional Sales jmorten@dadco.com TYLER MORTEN Senior Vice President, Institutional Sales tmorten@dadco.com 5701 S. 34th St., Suite 202 Lincoln, Nebraska 68516 (800) 955-2557 | (402) 420-8200 NEBRASKA INDEPENDENT BANKER 7
Community bankers have long been community changers. Through their service to small businesses and local economies, their impact on the lives of their customers and neighbors is undoubtedly far-reaching. Nevertheless, the community of community bankers and changers is, in and of itself, changing rapidly — enough for some to declare it under attack. Why is that? Today’s digital age has posed, to some extent, challenges for all financial institutions. Not least of which, however, are community banks. Many in the community banking industry watch as digital evolution takes wind and ask themselves, “How am I to keep up?” They face the challenge of providing a competitive rate of return. They wonder how to maintain efficient operations with limited resources. Often, they turn to what they perceive as the only clear solution: merging. They do this because one look at today’s technology tells them they are being left behind, and in some cases, they are. The question is not whether technology renders community banks vulnerable in today’s market, but rather, what are we to do about it? Driven by the passionate belief that community banking is worth fighting for, we look beyond the bounds of the traditional core ecosystem to find our answer: opportunities to innovate and diversify income streams. Consider these examples: • BaaS • Fintech partnerships • Digital banking/expanded market reach • Robust product offerings By embracing innovation and building partnerships with trusted technology providers, community banks can expand their reach, diversify their income streams, and thrive in the digital age. SURVIVING VERSUS THRIVING IN TODAY’S MARKET By DCI 8 NEBRASKA INDEPENDENT BANKER
In capitalizing on these opportunities, the importance of choosing the right technology partner is stronger than ever. For community bankers who want their foot in the door of new markets, a trusted partnership yielding new technologies, product offerings, and more is invaluable. Accordingly, the answers to the following questions must inform community bankers’ decisions: 1. Which partner can provide the most consistently innovative and agile technology? 2. Which partnership will equip my bank with the most robust set of product offerings and capabilities? 3. Which partner recognizes the true value of community banking and intends to uphold and build on my bank’s identity and legacy? 4. Which partner can be trusted to expertly guide this journey and deliver the information my bank needs to excel in the digital age? As community bankers make the careful choice of whom to partner with in charting their future course, settling for a provider who falls short in their answer to one or more of these questions is simply not enough. Too often, for example, a provider will attempt to sell community bankers the assurance of technology that is not yet live. They market the anticipation of forward-thinking innovation without the active, proven products to back it. Remaining mindful of such deception is important. When a partnership signifies an investment in the continued success of a community bank, there is no room for false promises. In exceeding expectations through ever-evolving, cutting-edge technology, a community bank’s partner should of course augment the products and services offered both locally and digitally. Trusted guidance and a customized, consultative approach should help determine exactly how that is executed. Doing so successfully, however, demands a commitment to customer-centricity. Larger institutions may have the technological advantage, but a community bank’s dedication to strong customer relationships will always be its greatest differentiator. As such, a technology partner who recognizes, values, and upholds this standard of people-first banking is essential — that is how community banking endures and prospers. Sarah Fankhauser, President and CEO of DCI (the privatelyowned developer of core processing, digital banking, and Fintech processing solutions), shares her insight on the matter, saying, “DCI’s community banking partners might come to us for our technology, but our commitment to customer service is why they stay. In addition to innovative offerings, finding a technology provider who cares enough to be your partner through it all is what makes a successful collaboration. It’s the difference between surviving versus thriving in today’s market.” The task of adapting and advancing in a financial landscape where technology dominates is certainly a challenge for community banks. More than that, however, it is an opportunity. By embracing innovation and building partnerships with trusted technology providers, community banks can expand their reach, diversify their income streams, and thrive in the digital age. With regard to the challenges ahead, there is no doubt that leveraged technology and a continued commitment to customer service will lead this vital force for our economy far. Rest assured: the future of community banking is bright. To learn more, please visit www.datacenterinc.com. Is your community bank secure? Meet Dina. Dina provides clients with the guidance they need to steer clear of card fraud all year long. Working together with ICBA Payments partners, she ensures client banks are receiving the level of care and support they deserve. Even when she’s waiting to pick up her kid from practice, she’s scribbling notes on how we can better protect banks from fraud. By working with ICBA Payments, your bank has Dina’s ongoing support. Learn more at icbapayments.com NEBRASKA INDEPENDENT BANKER 9
I’m going out on a limb here, but one day, mortgage rates will not only quit rising; they will actually begin to fall. When that happens, community bank bond portfolio managers will have to deal with a host of factors (most of them positive) they haven’t seen in a while, if ever. The sheer scale of the Fed’s tightening has produced a number of mortgagebacked securities (MBS) that appear to be custom-built for a flat or falling rate environment. So, let’s take a stroll around the MBS supermarket to see what’s on your favorite brokers’ shelves. Crowd Pleasers This column will focus on 15-year MBS and alternatives, as those are clearly the preference of depositories. You might find the above subheading a bit ironic, as there are precious few 15-year pools being created now. Between record-high housing prices and loan rates we haven’t seen since 2007, the average P&I payment has increased by 67% for new purchases in just 18 months. That’s taken a lot of 15-year borrowers out of the market. In fact, it’s been more than a year since there has been a net growth in that sector; recent production levels are down over 90% from the peak in April 2021. Despite the relative lack of supply, yield spreads on 15-year paper are historically wide, even though prepayment risk is low. But why are yields still attractive? Several probably temporary factors: lack of depository buyers, liquidation of several notable failed bank portfolios (which had very few short MBS pools), the debt ceiling showdown and the Fed’s winding down of its portfolio. A reasonable case can be made that spreads will begin to narrow, which sets up the 15-year sector to outperform others, mortgage-related or otherwise. Main Course Some of you will say you already have enough (too much?) exposure to 15-year pools. What’s the next best option? Jim Reber (jreber@icbasecurities.com) is President and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. Education On Tap Mortgage Analytics Monthly Stifel Mortgage Strategy produces an MBS Prepayment report monthly that is available to all ICBA members. This report contains commentary and a comprehensive look at the overall MBS market with tables, charts and graphs. To begin receiving copies, contact your Stifel rep. MORTGAGE MÉLANGE VOLATILE RATES CREATE A CORNUCOPIA OF OPTIONS By Jim Reber, President and CEO, ICBA Securities 10 NEBRASKA INDEPENDENT BANKER
For the past few months, mortgage strategists from Stifel have been suggesting hybrid adjustable rate mortgage (ARM) pools. These securities have a “fixed-tofloat” structure, and the investor can pick the term of fixed period from three to 10 years. With the inverted yield curve, the shorter “roll date” securities have higher initial yields and lower effective durations, both of which bargain hunters seek. Many other measures of relative value favor hybrids over straight pass-throughs: lower prices, wider spreads, better total returns. About the only metric that would favor the MBS over the hybrid is liquidity, which is a conversation worth having with your brokers. Another favorite entrée is a well-structured collateralized mortgage obligation (CMO). One of the benefits of a CMO over the “collateral,” which is the MBS used to build out the various classes of an issue, is that an investor can choose tranches with specific coupons, prices, cash flows and principal payment windows that better fit the community bank’s needs. Finally, while supplies of these MBS alternatives are limited, brokers should be able to locate some offerings of both given reasonable parameters. This includes securities bearing the GNMA label, which many investors like for the full-faith-andcredit, 0% risk-weighting feature. Just Desserts The final item on this month’s menu has been offered before (see Independent Banker March 2023), but now with a few additional ingredients. Rarely, if ever, have such a wide range of pass-through rates on mortgage securities been available simultaneously. This gives a portfolio manager a delectable set of options. The only selections that are not available at the moment are premium MBS; par (100.00) and discount pools are what the market is serving. The good news is that discount pools can be found at virtually any price. As of this writing, 15-year 4.0% pools are priced with a 96 handle, while 15-year 2.0%s are in the 86 range. (Disclosure: Be aware that the lower the coupon, the tighter the yield spreads.) You can also take this one step further with the CMO market. It’s possible to locate a given tranche with a significantly discounted price, even though the collateral is more “current coupon.” This could potentially create an opportunity for some improved cash flow if and when rates begin to recede, as the newer loans with 7%- plus borrowers’ rates will be the most responsive to refinance opportunities. In Epicurean terms, it “tastes great, less filling.” There, you have an enticing bill of fare. Straight pass-throughs with wide yield spreads, hybrid ARMs with great total return characteristics and well-built CMOs can create a veritable smörgåsbord for your community bank’s bond portfolio. NEBRASKA INDEPENDENT BANKER 11
IT COMPLIANCE & SECURITY FOR COMMUNITY BANKS Watch our video! www.resultstechnology.com/bank-solutions/ Managed IT Cybersecurity Backup & Business Continuity Audit & Exam Support IT Planning & Budgeting Security Awareness Training RESULTS Technology is a family-owned, award-winning provider of managed IT compliance, infrastructure & cybersecurity services for banks. We have been helping banks reduce risks and achieve operational efficiency for more than 20 years. RESULTS Technology | 12022 Blue Valley Parkway, # 524, Overland Park, Kansas 913.928.8300 | info@resultstechnology.com www.resultstechnology.com
2024 IT BUDGETING GUIDE Where to Allocate Your Bank’s Resources By Mike Gilmore, Chief Compliance Officer,RESULTS Technology Technology changes so quickly — what will be worth investing in just a year from now? Rather than trying to predict the future, we’ll focus on what’s relevant and important today. By allocating your bank’s resources efficiently, you can better protect against cyber threats and ensure your operations run smoothly. In this guide, our banking security experts break down the key areas where your IT budget should be directed in 2024. What Should Get Your Attention This Year? 4 Areas of Your IT Budget That Will Give You a Return on Investment A few small changes in your IT budget for 2024 can save you from a much larger headache and financial loss down the line. 1. Multi-Factor Authentication (MFA): Enhancing Security Without Compromising Experience MFA — everyone’s (least) favorite security topic. But, contrary to common misconceptions, MFA doesn’t have to be a cumbersome process; it can be seamlessly integrated into user experiences. For instance, adopting biometric authentication — like fingerprint, facial recognition or iris scans — augments security while enhancing user convenience. Banks can implement MFA across various touchpoints, such as online banking platforms and mobile apps, fortifying security without impeding customer usability. Furthermore, MFA isn’t solely limited to user-facing interfaces. Implementing MFA across internal systems, privileged access and administrative controls strengthens the overall security posture of the bank. Combining password-based authentication with hardware tokens or one-time passcodes ensures multifaceted protection against unauthorized access. We know that people don’t like entering a code or confirming through an app. But in the few seconds it takes for you to confirm your identity, you stop attacks that could cost you thousands, even millions. 2. Cybersecurity: Leveraging XDR and EDR for Comprehensive Threat Management Cybersecurity continues to evolve, demanding proactive measures to combat sophisticated threats. Extended Detection and Response (XDR) and Endpoint Detection and Response (EDR) solutions redefine threat detection and mitigation within banking IT infrastructure. Unlike traditional Security Information and Event Management (SIEM) tools, XDR and EDR amalgamate data from diverse sources. For banks, the real-time monitoring capabilities of XDR and EDR are crucial. These solutions not only detect anomalies but carry out automated responses, such as isolating compromised endpoints to prevent ransomware from spreading. Their capability to interconnect data spanning various networks, endpoints and cloud infrastructures empowers banks with a holistic view of potential threats. NEBRASKA INDEPENDENT BANKER 13
This comprehensive insight enables proactive measures against emerging cyber risks specifically targeting the financial sector. These risks include phishing attempts aimed at compromising customer data or sophisticated malware designed to breach transactional security protocols. 3. Cloud Integration: Driving Scalability and Resilience Investing in cloud technology revolutionizes how banks operate behind the scenes. Imagine it like upgrading your toolbox to adapt to changing needs and unforeseen challenges. By using cloud services, banks can adjust their resources easily, like adding more staff during busy times and reducing numbers when things quiet down. This helps save money and keeps operations running smoothly. Besides, the cloud acts as a safety net. If something goes wrong, like a power outage or a glitch, having important banking services stored in the cloud ensures they stay available. It’s a vital part of your business continuity plans — without your physical servers, you can’t help customers. The cloud lets you do work from anywhere and at any time. 4. Data Analytics: Unveiling Insights for Informed Decision-Making Strategic investment in data analytics empowers banks to uncover valuable insights hidden within their vast reservoirs of data. Utilizing sophisticated analytics tools like predictive modeling, machine learning algorithms and natural language processing (NLP) equips banks to extract actionable intelligence. For example, by scrutinizing customer transaction patterns, banks proactively identify irregularities that could signal fraudulent activities. This proactive approach not only safeguards against financial losses but also nurtures and upholds customer trust, reinforcing the integrity of the banking relationship. Build a Future-Proof IT Budget With RESULTS Technology Budgeting for IT security can be overwhelming, but not doing so will leave your bank exposed to cyber threats and vulnerable to operational disruptions. At RESULTS Technology, we understand the unique challenges of balancing budgets in the banking industry. Our team of experts is here to help you make informed decisions and allocate resources strategically, ensuring that your bank stays secure and meets compliance requirements. Schedule a consultation with us today at www.resultstechnology.com/free-assessment/ to build a future-proof IT budget that supports your bank’s growth and resilience. Budgeting for IT security can be overwhelming, but not doing so will leave your bank exposed to cyber threats and vulnerable to operational disruptions. 14 NEBRASKA INDEPENDENT BANKER
WHERE COMMUNITY BANKS BANK Member FDIC Scan to call now Traci Oliver Eric Hallman Tara Koester As a bankers’ bank we strive to help with every level of service and expertise, covering anything from loan participations, merchant services, ATM/debit and much more. We aim to answer your questions with, “…yes, we can do that too!” www.bbwest.com Bankers’ Bank of the West Mike Gilmore is the Chief Compliance Officer of RESULTS Technology and a Certified Information Systems Auditor (CISA) with more than 30 years of experience in the banking industry. RESULTS Technology provides IT services to community banks across the Midwest. In his role as CCO, Mike provides compliance and risk assessments, audit and exam support and policy documentation. He can be reached at mgilmore@resultstechnology.com TOP 100 NEBRASKA INDEPENDENT BANKER 15
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We have all heard the old maxim, “How can you expect them to do things right in the first place if you don’t tell them how to do it?” That is particularly true in the area of compliance. You cannot expect employees to comply with the plethora of laws and regulations that impact banking today if you have not given them appropriate instruction on what is required of them. This is accomplished through compliance training. Training is the foundation or bedrock on which you can build a compliance program that should flourish in the current compliance environment. Regulators expect financial institutions to manage their compliance function and any risk area effectively. In addition, within the past 20-plus years, the industry moved into a new age for compliance management — one calling for a new management model or paradigm where more responsibility and involvement are pushed down to the front lines rather than being retained centrally by a single compliance officer or department. For this paradigm to work, those on the front lines must be well-versed in the compliance responsibilities that their jobs entail. What is effective and works will vary from one institution to another, but we will try in this article to point you in the right direction to set up a successful compliance training program. We will help you ferret out how to approach this process and give you ideas on how to tackle such training and end up with a positive experience for both the trainer and the trainees. Reasons To Train The reason you want to train your staff in compliance matters is to move toward the ideal of having them do the compliance-related aspects of their jobs right the first time, every time. Making your compliance function work this way will take you a long way toward good risk management — reducing the risk of noncompliance. Education of the bank’s board of directors, management, and staff is essential to maintaining an effective compliance program. Board members should receive sufficient information to enable them to understand the bank’s compliance responsibilities and the need for adequate resources (staff, technology, software, etc.) to meet those obligations. The federal banking supervisors have identified a number of risk categories they expect financial institutions to monitor and manage. Compliance is an important factor in at least a few of the following recognized classifications: • Compliance risk: Identified first by the Office of the Comptroller of the Currency (OCC) as a separate risk category, this is the risk to earnings or capital from violations of the requirements of laws, regulations, prescribed practices, ethical standards or other rules. This risk can also arise in areas of uncertainty where laws or regulations are ambiguous or untested. Compliance risk is one part of the “legal risk” identified by the Federal Reserve Board (FRB) in its risk rating system. • Transaction or operational risk: This classification of risk is recognized by regulators in their published standards. It is the risk to By William J. Showalter, CRCM, CRP, Senior Consultant; Young & Associates, Inc.; Kent, Ohio TRAINING: The Foundation of Effective Compliance NEBRASKA INDEPENDENT BANKER 17
earnings or capital from problems with service or product delivery and can arise from inadequate information systems, operational problems, breakdowns in internal controls, fraud or unforeseen disasters. • Reputation risk: Negative public opinion or publicity can lead to risk to earnings or capital through litigation, decline in customer base, revenue reductions, reduced ability to offer competitive products, other financial loss or reputation damage. The prudent financial institution will strive to avoid problems in these areas (and other risk categories identified by the banking supervisors). An important component of this risk-avoidance process is training for all employees that is appropriate to their particular jobs, and it must include compliance issues that affect them. Effective compliance training also supports another ideal of compliance management in the current era — decentralizing and fixing accountability for compliance performance standards. It is most effective and efficient for a financial institution to “push down” responsibility for compliance performance as close to the front line as possible. This has to involve a buy-in by line managers and staff. But you cannot expect them to see the importance of these issues if you do not provide them with adequate information. Neither can you expect them to perform well if you have not given them the tools and knowledge needed to succeed. Good training furnishes the information necessary for the accomplishment of that goal. Who and What To Train The first order of business in structuring a compliance training program is to assess the needs of the institution. Among the questions you should ask in this exercise are: • What types of products and services are offered? • What regulations impact these processes? • What is the current knowledge level of the staff involved in these various areas? • How much turnover or migration within the institution occurs? • Where have problems been identified in the past by compliance monitoring, audits and examinations? • What is the pace of new product development and introduction? • What are the areas where regulatory change is occurring (and expected)? • Where are the risks to the institution? • Which risks are higher priorities? These are at least some of the questions that must be answered in this initial assessment phase. Actually, the needs assessment should be an ongoing, dynamic process since neither the institution nor the regulatory environment is stagnant. One result of the needs assessment will be a list of laws and regulations that must receive particular emphasis in the compliance training to come. This list will likely include Truth in Lending (Regulation Z), Fair Lending (Regulation B and the Fair Housing Act), Real Estate Settlement Procedures Act (Regulation X), flood insurance and other laws and regulations for lending training. Deposit and operations topics likely will include Truth in Savings (Regulation DD), Expedited Funds Availability (Regulation CC), Electronic Fund Transfers (Regulation E) and the Bank Secrecy Act (BSA), among others. Another product of the needs evaluation will be a listing of departments, functional areas and job positions that should be targeted by compliance training. This list should include loan officers, underwriters, originators and other customer-contact and loan documentation staff in the lending area. Deposit personnel who need to receive compliance training, include customer service representatives, tellers, new accounts staff, bookkeeping personnel and all other customer-contact staff. Choosing Format and Media Once the what and who have been ascertained, then you can move on to how you will do it. Here you have a wide variety of choices and decisions. • Will you handle the training internally, or will you use outside trainers or events (seminars, schools, etc.)? • Will you use online programs, classroom-style sessions or individual consultations? • Will compliance training be presented separately or integrated into other job-related instruction? The teaching method selected will depend a lot on the culture of your institution. Is individualized, on-the-job type training the norm? Or are online training programs widely utilized? Or are training sessions often presented in larger, classroom-style settings? Or is there a mixture of these and other methodologies (memoranda, manuals, etc.)? Another factor in the methodology decision is the wide availability of online training programs, many at low or no cost. Various national and state bankers associations make many online training programs available to their members at no additional cost. Beyond these offerings, a number of vendors provide online programs available to bankers covering all areas of banking, including compliance issues. A successful training program likely will encompass some variety in teaching Training is the foundation or bedrock on which you can build a compliance program that should flourish in the current compliance environment. 18 NEBRASKA INDEPENDENT BANKER
media. Different ways of teaching work better in different situations, and some are chosen by the necessity of the moment’s needs or the pressure of immediate problems. Also, some methods work better for some subjects and in some situations than others. One element that should be included in any training process is some type of testing. You need to have some way of measuring the success of any training, and you should keep records of these results. The testing outcomes can point to issues that need further attention or to particular staff members who need more help to understand the rules that they must master. Many online training programs blur the distinction between training systems and reference/performance support systems. These systems will be easy to update, contain the tests and permit both initial self-paced training and ongoing just-in-time learning and support. Organizing Information Besides the choices in teaching media and methodology, there are alternatives to how compliance information can be organized for presentation. In some situations, instruction organized by regulation makes sense, particularly when a new regulation is released, when major changes are made in an existing one, or when compliance reviews or examinations reveal problems in a particular area. However, many times it is easier for the students to learn to apply regulatory requirements if a more transactional approach is taken or if compliance issues are woven into other job-related training. The level of instruction needs to be geared to the breadth of compliance knowledge and understanding among the target audience. You do not want to bore the knowledgeable by dwelling too long on basic information, nor do you want to go over the heads of the novices by speeding past the basics right to detailed, high-level issues. Another potential problem area is in gearing the content to the audience. Credit card personnel are not likely to be very interested in (or in need of) information about the right of rescission and mortgage servicing transfer notices. Similarly, mortgagelending staff will not be drawn into instruction on tabular credit card application disclosures and openend periodic statements (unless they are also involved in home equity line lending). Teaching Style A crucial issue for instructor-presented (as opposed to computer-based or similar format) training is the selection of the instructor. You want to have someone comfortable with presenting to and teaching others and, preferably, someone with experience in training. In larger institutions, the training department can help in this effort, perhaps with the compliance officer attending to handle questions that probe deeper into a rule’s requirements or into more complicated situations. 100 South Phillips Avenue, Sioux Falls (605) 335-5112 advantage-network.com BE THERE FOR YOUR CARDHOLDERS Your cardholders are always on the go — which is exactly why you need to be there for them 24/7.With Instant Issuance, Checkcard Alerts, and Mobile Wallet capabilities, you can take care of your cardholders anytime, anywhere. And while you’re there for your cardholders, we’ll be here for you. Reach out to learn more about our products and experience our local, high-touch customer service! NEBRASKA INDEPENDENT BANKER 19
If no such experienced training resources are available, the institution should consider turning to outside consultants to provide this crucial instruction to its employees. In fact, outside vendors can handle most of the preparation as well as the presentation. Your involvement is cut back to one of coordinating facilities and handout materials and in helping set the subject matter and scope of the training. The professional trainer tackles most of the other jobs, including the one of actually teaching the intricacies of the particular rule(s). When To Train All employees need to receive at least some basic compliance training as part of their initial job training. As with any training, the level of detail depends on the particular position and job grade. Periodic refresher training must also be given to all employees. Some rules require this, such as the Bank Secrecy Act and Expedited Funds Availability regulations. However, even when not required explicitly, the financial institution supervisors expect that the expertise of all employees will be maintained by an appropriate amount of ongoing training. Such regular retraining is also in the institution’s best interest to help minimize the risk of noncompliance and can be an integral part of your risk management program. Beyond the routine refresher training, any time a new rule is issued or an existing one is changed, all affected personnel need to be updated on the new requirements and expectations and how they must implement them. Keeping Records Part of any training program should be an appropriate method of keeping records. At its most basic level, this will provide documentation of who received what compliance training and when. Records that can be kept might include sign-up sheets for in-person training, completion and testing results for online programs, sample training materials and so forth. Maintaining appropriate records allows the bank to make sure it is keeping up with compliance training needs throughout the bank and that all affected personnel are receiving (and completing) appropriate training. A side benefit of good records is that the bank can demonstrate to examiners how it is meeting their expectations in this area. The Bottom Line As we have discussed, appropriate training is crucial to success in managing the risks associated with the profusion of consumer protection laws and regulations. The elements we have reviewed can also be applied to training in other areas or aspects of employees’ jobs, not just to compliance. William J. Showalter, CRCM, CRP is a Senior Consultant with Young & Associates, Inc. (www.younginc.com), with over 35 years of experience in compliance consulting, advising and assisting financial institutions on consumer compliance and compliance management issues. He also develops and conducts compliance training programs for individual banks and their trade associations and has authored or co-authored numerous compliance publications and articles. Bill can be reached at (330) 678-0524 or wshowalter@younginc.com. vCISO for audit coordination and more…. Penetration tests Vulnerability scans Cybersecurity tailored to community banks, because it was created by community bankers! Effective training is a good preventative measure to avoid or reduce noncompliance and its associated risks. It also can contribute to better levels of customer service as staff members become familiar with what is expected of them and why particular disclosures must be given, or information must be collected. Not least among the benefits, knowledgeable employees performing their jobs right the first time can significantly reduce the operating costs of the institution, slashing expenditures for correcting errors or oversights and preventing costs associated with litigation or regulatory enforcement actions. 20 NEBRASKA INDEPENDENT BANKER
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With the advancements in artificial intelligence (AI) technology, businesses around the world are considering how they can use AI to improve efficiency and advance business goals. Financial institutions are no exception. While AI can bring many efficiencies and advancements to the way business is conducted, in the highly regulated financial services industry, there are many considerations that need to be addressed by financial institutions seeking to use AI. In the context of lending, there are many credit decisioning technology platforms advertised to improve, automate and eliminate bias in credit decisioning. However, the issue of bias is not so straightforward and regulatory agencies are not backing away from this issue. The Consumer Financial Protection Bureau (CFPB) stated, “Tech marked as ‘artificial intelligence’ and as taking bias out of decision-making has the potential to produce outcomes that result in unlawful discrimination.”1 On April 25, the CFPB and other federal agencies released a joint statement regarding the use of advanced technologies, including AI. 2 CFPB Director Rohit Chopra stated, “Today’s joint statement makes it clear that the CFPB will work with its partner enforcement agencies to root out discrimination caused by any tool or system that enables unlawful decision-making.” AI IN LENDING DECISIONING AND UNINTENDED DISCRIMINATION By Shelli J. Clarkston, Spencer Fane, LLP Shelli J. Clarkston is an Of Counsel attorney in the Kansas City, Missouri office of Spencer Fane LLP. She can be reached at (816) 292-8893 and sclarkston@spencerfane.com. 22 NEBRASKA INDEPENDENT BANKER
The Equal Credit Opportunity Act (ECOA) of 1974, which is implemented by Regulation B, applies to all lenders. The statute prohibits financial institutions and other firms engaged in the extension of credit from discriminating against a borrower on the basis of sex, marital status, race, color, religion, national origin, age (provided the applicant has the capacity to contract), because all or part of the applicant’s income derives from any public assistance program, or because the applicant has, in good faith, exercised any right under the Consumer Credit Protection Act. So how could AI, which is designed to create efficiencies and fairness and improve the lending process, run afoul of the ECOA? To answer this question, we must consider the data being used to make lending decisions. These technology platforms rely on voluminous datasets to power their algorithmic decision-making. We have all heard the adage “bad data in, bad data out.” In other words, incorrect data input creates bad results. Algorithmic bias describes errors in a technology system that create unintentional unfair outcomes. As applied to lending, algorithmic bias could result in one group of applicants receiving some advantage or disadvantage when compared to other applicants, even where there is no relevant difference between the two groups. This bias is created because of erroneous assumptions in the machine-learning process. When the algorithmic bias results in different treatments or impacts disfavoring applicants based on characteristics prohibited by the ECOA, the result is algorithmic discrimination, which, even if generated by a technology platform, still violates the ECOA. As a financial institution utilizing these technologies, it will be crucial for your institution to conduct appropriate due diligence on the technology service provider … If your financial institution wants to take advantage of the latest innovations in AI, what steps need to be taken to ensure there are no ECOA violations? The federal government has provided instruction to designers, developers and deployers of these technologies to protect against algorithmic discrimination. “Designers, developers, and deployers of automated systems should take proactive and continuous measures to protect individuals and communities from algorithmic discrimination and to use and design systems in an equitable way. This protection should include proactive equity assessments as part of the system design, use of representative data and protection against proxies for demographic features, ensuring accessibility for people with disabilities in design and development, pre-deployment and ongoing disparity testing and mitigation, and clear organizational oversight. Independent evaluation and plain language reporting in the form of an algorithmic impact assessment, including disparity testing results and mitigation information, should be performed and made public whenever possible to confirm these protections.”3 As a financial institution utilizing these technologies, it will be crucial for your institution to conduct appropriate due diligence on the technology service provider, which should include a review of the third party’s algorithmic impact assessments, which should include disparity testing results and mitigation information. The federal regulatory agencies made it clear in their June 9 Interagency Guidance on Third-Party Relationships: Risk Management publication that, especially when using new technologies, financial institutions have heightened responsibilities, given the increased risk of such technologies and third-party relationships, to ensure the technologies being provided comply with applicable laws and regulations. Failure to complete a thorough due diligence review will very likely result in serious negative consequences, especially if it is discovered that the technology results in algorithmic discrimination. 1Consumer Financial Protection Bureau, CFPB and Federal Partners Confirm Automated Systems and Advanced Technology Not an Excuse for Lawbreaking Behavior, April 25, 2023. 2See Joint Statement on Enforcement Efforts Against Discrimination and Bias in Automated Systems. 3The White House, Algorithmic Discrimination Protections, Blueprint for an AI Bill of Rights, August 22, 2023. NEBRASKA INDEPENDENT BANKER 23
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