Surviving the CFPB’s Transitional Era

0:04 Hi, Welcome to Leaders and Lending. This is Lynd Souderbil. We're joining you today from CBA live in Orlando, and I have Aaron Rakowski and Mike Reynolds here joining us on the panel. So Aaron, Mike, would you take a minute to introduce yourselves and tell our listeners what you do? Sure? Hi, I'm Eron Kkowsky. I'm the Chief Compliance Officer for West Banco, headquart in Wheeling, West Virginia. We're about a twenty eight billion asset bank at the current time, with offices in nine different states, and I'm responsible for all of our regulatory compliance programs. You, Mike you Reynolds, I'm Director of Compliance for Science Bank Corporation. We're based in Salt Lake City, Utah, and we're almost about one hundred billion in assets.

0:47 And Aaron and I realized leading up to this that we live probably a couple hours apart in Ohio and have met each other for the first time in Orlando, Florida, which is always fine. And both of you are on this CFPB committee for Sumer Bankers Association. So can you kind provide our listeners with kind. Of an overview and of how CBA and then its members engaged with the CFPV. Well, this was a lot clearer answer a couple of months ago. Right now the jury's out. We really don't know how we're engaging with the CFPV at present, you know, given some of the some of the goings on in Washington. But you know, ways that we have in the past is by having dialogue between the membership of CBA and the CFPB, you know, interacting with that agency. And it's really unique that we have a committee that is dedicated to relationships between the banking industry and a particular regulator.

1:39 And I think that's what makes this committee unique. You know this, the regulator has direct supervision authority over banks with ten billion assets and larger and has it's a unique structure. So having a committee that is able to take the concerns of the association's memberships and have that dialogue at times directly with the agency, see to provide thoughts, feedbacks, concerns, you know, where we think that you know, some of their their rulemaking or some of their their activities can help benefit consumers and benefit our customers, and you know, the membership and communities at largely, I think that that's one of the ways we really try to engage, and you know, we'd also get feedback from our membership to provide input to the Consumer Bankers Association that they use when they draft comment letters or when they have discussions directly with the regulators as well. So in normal circumstances, that's really how we have historically engaged. Right now, Jerry's.

2:37 Out, I would say for us, I mean there's still that ongoing or up until maybe two months ago, you know, the touch points that we would have with the CPP. I'm kind of focusing on what Aaron said to coming together in our committee to then you know, discuss kind of current trends, things that are going on with exams, you know, or hotspots up until about two months ago. But still you know, trying to abide by the law for what it is right now. Sure, and I think you know, we a lot of us have talked about that recently, just the uncertainty and it's much more straightforward and easy to build a compliance organization and a period of clear roles and clear oversight. But you know, given the changes in the administration, uh, this is probably it's a hard one to forecast. But you know, if you had to say what you know, what do you think is going to happen, And with CFPB regulations in the year ahead, how do you think that those may change and ways that impact the CBA members.

3:32 I think a lot of that depends on the time frame and confirmation of a new director. So you know, obviously there's an arum director and now there's been a couple of them since the new administration has taken office. But you're really understanding the thought process and priorities of the administration and the new director and what that's going to look like. So right now it's hard to forecast. I know the current nominee for the director has experience on the FDIC board, so he knows what it's like to be a bank regulator, to be part of an agency, to lead an agency, to manage through that. So what we're hoping for as members is we kind of get back into common sense regulation. You know, enforcement. I believe in enforcement, I believe in supervision. But enforce the regulations as they are as they're written, examine based on the exam manuals as they are and as they're written, and have that transparent dialogue with your banks when you're in there.

4:34 You know, part of my background, I'm an next examiner. I was an FDIC examiner years ago, and that was always the mentality that I took. You know, here's the exam manual, here's the rule. How are you complying with this? So when we're talking about supervision regulation, you know, I would look for and expect the agency to adhere to the rules as they're written and follow their exam manuels. At least that would be the whole Yeah. That's squat point. I mean, we still have to apply with rules that are codified you know currently, and all of these pending rules that are still under the Congressional Review Act, you know, and we have some time still to go for some of those. I mean, it's still status quo for us. It's nothing normal. And I would say even since twenty twenty when COVID hit and we had a bunch of regulatory reform because of consumer harm and whatnot, you know, I mean, it's just, you know, business is usual for us right now.

5:21 So sure, sure, yeah, And we you know, we work within a number of banks and credit unions on our platform, some banking as a service providers, some traditional banks that originate and retain as well as credit unions. And so while we're not directly regulated by the prudential regulators, you know, we do get state examines examinations, and we support a variety of examinations, and we you know, had a partnership with the CFPP for a period of time. And I think that's the one thing I was talking to some other folks earlier, that the banks don't want to do consumer harm, right, like you can't harm your customer, you still need will do those things even in the absence of CFPV may be coming in. So, you know, if the CFPP, if some of the trends towards defunding and decreasing the size of the CFPB and even some of the other regulatory agencies continue or accelerate, even anything that you can see on like broader implications for what that means for the banking industry as a whole.

6:19 Well, if they see kind of a shrinking of the exam workforce, I think that that'll depending on how they go about that. I think you could see a lot of broad implications. They're both for consumers and consumer protection regulation, but also safety and soundness of risk management examinations. You know, the way Typically these things happen is they look at seasoned examiners at the top of the pay scale and offer them, you know, early retirement options, or you look at people that are coming up through the ranks and maybe going through various schools and training and onboarding that have not earned their commission yet to write exams, and they maybe let go. They may be probationary employees or ones that have not fully gone through the education and onboarding process, so the exams have to happen, right, you know.

7:02 From the credential regulatory side, you know there's rules that you have to come in every so often to look at consumer compliance, to look at community reinvestment, to look at fair lended compunts with fair lending laws. And you know, a reduced examination workforce is going to leave less resources to examine banks, but you also lose that relationship that you've built with your regulators. You know, the end goal is a safe and sound banking system, a safe and sound bank, and nobody wants to do harmon consumers. You have been in banking over twenty years and never once have I been in a room where somebody said, well, let's how much in fees can we get on this or how can we really you know, do something other than what's in the best interest of our customers. But you know, you still have you know, the regulatory side, and people need to come in, and a lack of experienced examiners that don't have the institutional knowledge, that don't have that relationship with management, can't have those sometimes hard conversations how did you think this through? Why are you doing this this way? It could lead to things that don't get caught, or it could lead to questions that don't get asked or issues that don't get resolved. So you know, when I would look at this, like you know, anybody would listen to me anyway, But I would say, you know, just kind of proceed with caution when you look at right sizing, if that's the right term, an examination workforce, to make sure you still have the right people looking at the right things on the right frequency.

8:30 And I would say that even though there's a roll right now, you know, from that perspective, I mean, we're still gearing up for potential state regulation then to kind of come in and swing. We've got you know, the midterms coming up. I would say in about a year and a half and so that may be another pendulum swing that we have to then prepare for, or a moot house where you know, there's a lot to be unexpected I think right now. So yeah, and I think that the impact of a patchwork of state regulations that may be very strong would be very difficult to deal with. You know, even for a fintech like ours that lends nationally or works with banks to lend nationally, those state regulations can be very difficult for us to manage our business and understand volume and and ensure that we're we're applying them, like the Colorado UH law, if we had to put that into effects, you know, and spending time and money and and certainly a time and money expends on banks for for especially with uncertainty and less clear I really liked it you said, though, Aaron, about less experienced examiners and kind of the team where you know, they really maybe knew the bank partnership and and had insight there, particularly as it relates to say, you know, use of AI partnerships with FinTechs UH or or new technologies.

9:43 You know, what would. You you know, one with some of the changes in the regulatory bodies right now, like what do you think the risks are there in their ability to oversee those? And I guess I would say too, like, you know, how how can the cb I members think about working with them to maybe help educate them on the new technologies or partnerships that they have. It's a very broad question. So I think here AI is becoming more prevalent. General of AI is becoming more prevalent, and I think that banks and through that through just using it directly, developing it directly, or partnering with FinTechs offering it directly. You know, they're looking to find ways to go to market and work with their customers in the most efficient way possible, and this is kind of a way to do that. Really, looking at the risks of AI, it's to me, you know, starting with your third party management or risk management program and being sure you understand what the what the service is, what the AI can do, what the variables are, because again, the the compliance risk is always there and it's still there, ends Mikey mentioned earlier, the codified rules and regulations are still there. We still have an you know, upstarting the lending space and looking at AI and Algareth algorithms used in lending for automated decision and approval. You still have to ensure that those models that you're using, the AI you're using is operating fairly. You know those rules and those laws. Equal credit opportunity does not go away. You

11:16 know you're still going to be examined for it. You still have your prudential regulators that can look at fair housing if you're in the mortgage space and using some AI to help with your decision making. So you know, the basic blocking and tackling of your compliance program does not change regardless of you know, the political environment or the regulatory environment. And just be honest, because things ebb and flow. You know, we've seen a lot of ebb and flow over the last ten years as far as which administration is currently sitting in the White House or which administration or which party is currently controlling Congress. You see swings back and forth. So the rules are still the same. And making sure that you're doing your own due diligence and understanding how these things are working. It's central to what we're trying to do from a compliance perspective in how we govern the use of AI in our banks and in our shops.

12:07 That's a great point. I mean it's specifically talking about AI and you know, focusing on operational effectiveness kind of in this lull from a regulatory perspective that we're in. I mean, you still think that, you know, these fraudsters out there are using fourth generation bots as we move into fifth generation technology and things like that where they're starting to dart smell or outsmart the banks. As Aaron mentioned, you know, we have to be very up on these different models or things that you know, then AI is coming out with and then being able to kind of defraud the fraudsters. So also focusing on you know that operational effectiveness and reducing operational or you know, losses. And I certainly think with the technology, you know, becoming more sophisticated in the growth of and use of AI in various forms, whether it's the way that we use it or generative AI. Getting field examiners up to speed and trained, or people at the regulatory bodies, especially if they're they're shrinking and and and more experienced examinators are rolling off IS is only going to be more of a challenge.

13:07 Absolutely, you know, when we're having these discussions and what we've been having for the last several years with our regulators. Is our use of AI and is how our governance processes work? And what does our oversight look like? And how does that integrate? You know, like Mike you mentioned you have to outfraud the fraudsters. You know, the fraudsters are out there, they're using AI to counter our AI. So how do those interplay? And you know, our examiners have been with us as we've gone down this journey understanding how we're making these decisions. We're making the due diligence, we're doing the testing, we're doing the evaluation of the results, and you know, the loss of that experience and the loss of the folks that have gone on that journey with us, I think that would be a blow for us and how we serve our customers and how we protect our customers because you know a lot of AI too.

13:54 It's not just granting loans and giving credit. We use a lot of AI on the back end to monitor for fraud and different different things there. So you know, the examiners that have kind of grown up with us in this space, them not being there could really be detrimental with some of our efforts and having to bring newer ones up to speed on what we're doing. It could be time consuming and really put a damp on some of our efforts. Yeah, you know, we've certainly spent you know, despite not being a bank or having a bank as part of our organization, We've spent a lot of time with the regulators over the years, and I've met with the FDAC, along with our head of government Affairs and our chief risk officer and the OCC and so we've taken the stands as a fintech to be very proactive in our regulatory outreach and to kind of open our doors and try to help drive that education forward. And knowing that then we're working with all of our bank and credit union partners to support their exams. And it is a it is a constant. There's the I think volume and velocity of information right now and changes is very high compared to, uh, you know where it may have been several years ago. How do you think about on your committee through the CBA, staying up to speed with what's happening with the CFPB and then using that to help put of educate your members or drive your agendas internally.

15:20 Yeah, I can go for it. First, I would say specifically. I mean as we even share these secrets, you know, across the committee members and whatnot, we try to focus more on sharing what I think are best practices and still building up maybe are our CSA you know, cosa framework CMS, you know, frameworks and things like that. To then better be able to attack these types of things. You know, you have to have a skilled staff. And as we talk about, you know, potentially you know, lead examiners that have many years of service and many years of experience kind of going off. I mean, we have a new generation I think that will eventually come in where they have a little bit more of these heightened skill sets too. So yeah, and I think you're engaging with through our committee. You know, obviously there's some things we can talk about, there's some things we can can't talk about. But what I think is unique about the compliance and risk community is there's no competition in compliance, right. You know, everybody has to comply with the rules they apply across the board to all of us. And you know, when you look at the discussions we have, what is working, what is not working? How do we risk assess certain practices?

16:19 What are the things you consider in your risk assessment? That I might not consider in mind and vice versa. So you know, these are things where we're talking about the framework of our compliance management programs and getting best practices from each other and how we navigate through you know, anytime really, but really through uncertain times like this. What this is the time you might use term law. I think it's that you know, right now, we're not hearing as much from our regulators, so it's a time to pause, breathe after what we've seen the past several years with the volume and pace of change, and shore up our compliance programs, not that they were you know, substantids to start with, but take the take the time to you kind of go through and you know, button up things that you know may not have gotten as much attention because we're focusing on other issues, or better document some of our processes and some of our methodologies and different things.

17:19 So this is a good time for us to collaborate and kind of talk through what we're what we're seeing, and where we want to go from here. I would even say that it's still you know, an emphasis for us to focus on our other regulatory bodies that really aren't having a lot of fluctuation right now many of us are larger institutions that are regulated by the OCC the FDIC, so there's still that oversight lunction there. True. True, it's we're kind of focused on the c FPB in this conversation that there's certainly the rest and then all the states as well. I really like that that idea of like that's you know, if you if you are having a little bit of a lull or a little bit of quietness, like taking the time to you know, kind of revisit your you know, make sure your house is in order to make sure you're doing anything else. I guess any maybe kind of bold predictions for you know, what you expect to see from the CFPB over the next I'll just say a few months or even quarter. We'll make it short, because I think even trying to do a year is probably unreasonable at this point.

18:17 I think it's really hard to tell. I mean, I think that we're my personal prediction. I think, you know, there's the rules that they've put out. You know, some of the final rules they're subjects of congressional review, but some of them aren't right, So maybe we focus on the known at this point. So I think the ten seventy one small business rule that's out there. There's litigation around that, but I think the CFPB has to finalize that. You know, it's something that there is a consent order, and I think a lot of people forget, well maybe they can just go away. No they can't. I mean court is forcing them. You have to do this. But I think a prediction from me on that side might be we see a new proposal that subsequently changes what the requirement are going to be, because I think that's been where the industry and the Bureau have but heads a little bit. Is Dodd Frank says thou shalt collect this cefpb's rules, So thou shalt collect this plus all of these other things as well. So I think that we may see a proposal that shifts more towards what's in the Dodd Frank Act itself there, and I do think we'll see continued movement on ten thirty three. You know, the open banking rule. I don't think that's going to go anywhere, because I think that that's something where it's going to open up information flow between between banks, between banks and FinTechs, between FinTechs and fintexts. And that aggregators and different things. So that has the potential to really change how we do business. And I think that that's not something that this administration will likely touch. So I think that that's going to be, you know, something that

19:48 is going to move on status quo. So I think that's going to stay status quo. But I think we'll see a new proposal. In ten seventy one. Aaron hilarious or hilariously pulled out a magic eight ball in one of the sessions that he moderated earlier in them, and I would say that that's exactly. An actual magic eb all. Again in liter I brought a literal magic that's great. Yeah, And I mean that really is kind of the environment that we're in. And I'll just emphasize maybe on what Aaron said is that, you know, ten thirty three, I think that's one of the bigger ones that we're still going to see an emphasis and focus on. And it's more about the potential for future acquisitions of customers. You know, it's not just about you know, creating less barriers for customers to be able to then see their data across multiple institutions. It's also to then be able to create, you know, some competition within the market and then kind of start to you know, really pull into folks the fact that you want to increase your volumes for both deposits, loans, et cetera, you know, within your institution.

20:37 So well, thank you, Aaron, Mike. Appreciate you joining us today and taking the time out of your schedules to chat with this a leader's blending. It's been a pleasure. Thank you.