Top 5 Regulatory Priorities for 2010

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If you thought 2009 was a tough year in terms of regulatory scrutiny, wait until 2010.

With regulatory reform and consumer protection high on the agenda, financial institutions should face new pressures on several fronts, say industry observers.

Here are the top five regulatory issues for banking institutions to consider in 2010:

1. Real Regulatory Reform
The House passed the Wall Street Reform and Consumer Protection Act of 2009 on December 11. The bill's many provisions affect securities and banking regulation. The sweeping reforms include the Financial Stability Improvement Act, creating a systemic risk regulator; strengthening regulation of depository institutions and bank holding companies; improving the asset-backed securitization process; and providing for an enhanced dissolution authority. The legislation also would create a Consumer Financial Protection Agency (CFPA), reform the over-the-counter derivatives market, subject hedge funds to stricter scrutiny, impose new corporate governance mandates, adopt heightened requirements for credit rating agencies and expand regulatory enforcement powers. Among other measures, the legislation features expansive consumer mortgage protections and creates a Federal Insurance Office. "If enacted, this legislation would provide a sweeping overhaul of U.S. financial services and markets," says CCH Principal Securities Analyst Jim Hamilton. "It addresses a wide range of securities and corporate governance issues, realigns regulatory agencies and would subject entities such as credit rating agencies and hedge funds to a level of scrutiny they have never known before."

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But if the proposed regulatory reform doesn't happen early in 2010, says Christie Sciacca, a former regulator at the FDIC and an executive at consultancy LECG, it may not happen at all. "I think history shows that the longer it takes for something to happen, the harder it will be to get it done," Sciacca says. "Large banks are showing recovery in profits, even though there are still large loan loss provisions and perhaps more to come. That said, at some point, Congress and the Administration will get on to something else."

2. BSA/AML Enforcement to Rebound
While 2009 was primarily focused on safety and soundness by banking regulators, the pendulum is poised to swing back to core compliance issues including Bank Secrecy Act/Anti-Money Laundering (BSA/AML) issues, says Sai Huda, CEO of Compliance Coach, a California-based industry risk management firm. "Nearly 70 percent of all enforcement actions year to date in 2009 against banks were related to safety and soundness," Huda notes. The questions regulators wanted to know included "is the bank well capitalized, is its loan loss allowance adequate, does it have sufficient liquidity to survive the economic downturn, is it making safe and sound loans?"

BSA/AML issues will increase in 2010. predicts Huda, "since banks had taken their eye off this risk issue in 2009, and the money launderers know it." The pendulum will swing to consumer protection risk issues. and this topic will dominate. "Once Congress completes passage of the Consumer Financial Protection Agency (CFPA), it will be focused exclusively on consumer protection risk issues," he says.

3. 2010: The Year of Consumer Protection
When it is up and running, the CFPA will examine banks and non-banks for consumer protection compliance. The intensity will increase on consumer risk issues such as compliance with ECOA (Equal Credit Opportunity Act), FHA (Federal Housing Administration) HMDA (Home Mortgage Disclosure Act), RESPA (Real Estate Settlement Procedures Act), FCRA (Fair Credit Reporting Act), FDPA (Flood Disaster Protection Act), SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act), TILA (Truth In Lending Act) and UDAP (Unfair and Deceptive Practices Act).

The CFPA will be powerful regulator, predicts Huda. "They will exclusively examine banks over $10 billion for consumer compliance. The primary regulator will examine banks with $10 billion or less in assets for consumer compliance, however, the CFPA can monitor these exams, participate in exams or completely remove a bank's primary regulator and take over consumer compliance exams," he adds. The CFPA will also have full enforcement powers.

The CFPA will create a consumer complaint system and use it to trigger examinations or prosecutions. "Is the bank discriminating in its lending? Or is the bank lending unfairly or deceptively?" Huda says. "There will be several fair and responsible lending enforcement actions and lawsuits." He also recommends institutions begin now to clean up their lending practices in advance of this agency's scrutiny, or be ready for some enforcement actions.