Community Banks and Credit Unions: Regulators Could Take Additional Steps to Address Compliance Burdens
Highlights
What GAO Found
Interviews and focus groups GAO conducted with representatives of over 60 community banks and credit unions indicated regulations for reporting mortgage characteristics, reviewing transactions for potentially illicit activity, and disclosing mortgage terms and costs to consumers were the most burdensome. Institution representatives said these regulations were time-consuming and costly to comply with, in part because the requirements were complex, required individual reports that had to be reviewed for accuracy, or mandated actions within specific timeframes. However, regulators and others noted that the regulations were essential to preventing lending discrimination and use of the banking system for illicit activity, and they were acting to reduce compliance burdens. Institution representatives also said that the new mortgage disclosure regulations increased compliance costs, added significant time to loan closings, and resulted in institutions absorbing costs when others, such as appraisers and inspectors, changed disclosed fees. The Consumer Financial Protection Bureau (CFPB) issued guidance and conducted other outreach to educate institutions after issuing these regulations in 2013. But GAO found that some compliance burdens arose from misunderstanding the disclosure regulations—which in turn may have led institutions to take actions not actually required. Assessing the effectiveness of the guidance for the disclosure regulations could help mitigate the misunderstandings and thus also reduce compliance burdens.
Regulators of community banks and credit unions—the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration—conduct decennial reviews to obtain industry comments on regulatory burden. But the reviews, conducted under the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA), had the following limitations:
CFPB and the consumer financial regulations for which it is responsible were not included.
Unlike executive branch agencies, the depository institution regulators are not required to analyze and report quantitative-based rationales for their responses to comments.
Regulators do not assess the cumulative burden of the regulations they administer.
CFPB has formed an internal group that will be tasked with reviewing regulations it administers, but the agency has not publicly announced the scope of regulations included, the timing and frequency of the reviews, and the extent to which they will be coordinated with the other federal banking and credit union regulators as part of their periodic EGRPRA reviews. Congressional intent in mandating that these regulators review their regulations was that the cumulative effect of all federal financial regulations be considered. In addition, sound practices required of other federal agencies require them to analyze and report their assessments when reviewing regulations. Documenting in plans how the depository institution regulators would address these EGRPRA limitations would better ensure that all regulations relevant to community banks and credit unions were reviewed, likely improve the analyses the regulators perform, and potentially result in additional burden reduction.
Why GAO Did This Study
In recent decades, many new regulations intended to strengthen financial soundness, improve consumer protections, and aid anti-money laundering efforts were implemented for financial institutions. Smaller community banks and credit unions must comply with some of the regulations, but compliance can be more challenging and costly for these institutions. GAO examined (1) the regulations community banks and credit unions viewed as most burdensome and why, and (2) efforts by depository institution regulators to reduce any regulatory burden. GAO analyzed regulations and interviewed more than 60 community banks and credit unions (selected based on asset size and financial activities), regulators, and industry associations and consumer groups. GAO also analyzed letters and transcripts commenting on regulatory burden that regulators prepared responding to the comments.
Recommendations
GAO makes a total of 10 recommendations to CFPB and the depository institution regulators. CFPB should assess the effectiveness of guidance on mortgage disclosure regulations and publicly issue its plans for the scope and timing of its regulation reviews and coordinate these with the other regulators' review process. As part of their burden reviews, the depository institution regulators should develop plans to report quantitative rationales for their actions and addressing the cumulative burden of regulations. In written comments, CFPB and the four depository institution regulators generally agreed with the recommendations.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Consumer Financial Protection Bureau | The Director of CFPB should assess the effectiveness of Truth-in-Lending Act - Real Estate Settlement Procedures Act Integrated Disclosure (TRID) guidance to determine the extent to which TRID's requirements are accurately understood and take steps to address any issues as necessary. (Recommendation 1) |
In May 2019, CFPB sent to GAO a Corrective Action Plan that outlined actions CFPB developed to implement the recommendation. The Plan states that on March 28, 2018, the CFPB issued a Request for Information (RFI) regarding CFPB Guidance and Implementation Support. The RFI requested comment from the general public, including community banks on the overall effectiveness and accessibility of the CFPB's guidance material and activities, including implementation support. In addition the Corrective Plan stated, to address any misunderstanding regarding TRID, CFPB developed a process around tracking and managing issues identified by industry as requiring further clarification and determining whether and what types of deliverables are needed to assist industry to better understand CFPB's rules, including TRID. CFPB provided GAO with a copy of their new Guidance Process Playbook. According to the document, the process was designed to streamline the methods by which CFPB identifies external stakeholders issues and challenges and provides timely and complete guidance in a structured and coordinated way. The document included a guidance issues checklist. Also, CFPB staff provided GAO with a CFPB website link to external stakeholder questions and answers pertaining to compliance with the TRID rule.
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| Consumer Financial Protection Bureau | The Director of CFPB should issue public information on its plans for reviewing regulations applicable to banks and credit unions, including information describing the scope of regulations the timing and frequency of the reviews, and the extent to which the reviews will be coordinated with the federal depository institution regulators as part of their periodic EGRPRA reviews. (Recommendation 2) |
CFPB staff noted in a letter in April 2018 that CFPB had issued requests for information (RFI) on the regulations their agency had adopted and inherited from other agencies. These requests seek public comment on the need to amend the regulations. Staff noted that they included in their spring and fall 2017 Semiannual Regulatory Agenda descriptions of two initiatives intended to review their regulations to identify opportunities to modernize and streamline provisions. In addition, they noted creation of an internal task force to coordinate and bolster efforts to relieve regulatory burdens. Staff stated that they would continue to publish information on their plans as appropriate. As of May 2020, CFPB's implementation was still in progress. At that time, the agency intended to create a coordinated plan of reviews as a supplement to the assessments of significant rules (Dodd-Frank Act Section 1022(d)) and Regulatory Flexibility Act (RFA) Section 610). In September 2020 and most recently in March 2023, staff advised us that they did not have any update on the implementation of the recommendation.
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| Federal Deposit Insurance Corporation | The Chairman, FDIC, should, as part of the EGRPRA process, develop plans for their regulatory analyses describing how they will conduct and report on quantitative analysis whenever feasible to strengthen the rigor and transparency of the EGRPRA process. (Recommendation 3) |
FDIC staff agreed, in a meeting held in March 2018 with staff from the Federal Reserve Board and Office of the Comptroller of the Currency, that the agencies could seek to identify those regulations for which it would be feasible to conduct additional quantitative analysis as part of the next EGRPRA review. The FDIC staff also noted that the agencies may review and rely upon publicly-available information. In addition, they indicated that their agency and the others plan to solicit quantitative data on the impact of regulation from commenters during the next EGRPRA review, and to the extent industry participants are able to provide reliable data, they plan to consider it.
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| Federal Deposit Insurance Corporation | The Chairman, FDIC, should, as part of the EGRPRA process, develop plans for conducting evaluations that would identify opportunities for streamlining bodies of regulation. (Recommendation 4) |
In a meeting held March 23, 2018, FDIC staff agreed, along with staff from the Federal Reserve Board and Office of the Comptroller of the Currency, that the agencies would seek comment about bodies of regulations, in addition to attempting to identify related regulations that could be evaluated. FDIC staff said they, along with the other agencies, plan to seek comments on all their rules, as they have done before, but also will ask specifically whether certain rules should be considered as a single body of regulations for purposes of the next EGRPRA review.
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| Federal Reserve System | The Chair, Board of Governors of the Federal Reserve System, should, as part of the EGRPRA process develop plans for their regulatory analyses describing how they will conduct and report on quantitative analysis whenever feasible to strengthen the rigor and transparency of the EGRPRA process. (Recommendation 5) |
Federal Reserve staff noted in a letter in April 2018 that they, along with FDIC and OCC, plan to coordinate and identify interagency regulations for which quantitative analysis may be feasible and develop plans, such as a common methodology, to conduct such analyses. In this regard, the agencies may review and rely upon publicly-available information, such as FDIC's Quarterly Banking Profile, to assess compliance costs. The agencies also plan to solicit quantitative data from commenters during the next EGRPRA review on the impact of regulations on insured depository institutions and holding companies. On December 18, 2018, Federal Reserve staff reported to us that they plan to recommend that the Board invite public comment on the quantitative and cumulative effect of the Board's rules on institutions when they are published for comment as part of the next EGRPRA review.
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| Federal Reserve System | The Chair, Board of Governors of the Federal Reserve System, should, as part of the EGRPRA process, develop plans for conducting evaluations that would identify opportunities to streamline bodies of regulation. (Recommendation 6) |
Federal Reserve staff noted in a April 2018 letter that they agree that the cumulative impact of their agency's regulations on depository institutions and holding companies merits further review. They also noted that they have begun discussions with FDIC and OCC on ways to identify bodies of regulations that could be evaluated for streamlining as a group. In addition, they indicated that they plan to invite public comment during the next EGRPRA review on approaches to streamline bodies of regulations. On December 18, 2018, Federal Reserve staff reported to us that in furtherance of these efforts, during the next EGRPRA review, they plan to recommend that the Board seek public comment on whether their efforts to streamline regulations have reduced burden and what regulations or bodies of regulations the Board or the agencies should consider for further streamlining.
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| Office of the Comptroller of the Currency | The Comptroller of the Currency should, as part of the EGRPRA process, develop plans for their regulatory analyses describing how they will conduct and report on quantitative analysis whenever feasible to strengthen the rigor and transparency of the EGRPRA process. (Recommendation 7) |
A July 2018 memo from OCC staff indicated that they would supplement the EGRPRA review process by better integrating the ongoing work done by their Economics Department to help inform their senior management of the near-term and long-term effects of changes in their regulations. In addition, they plan to add an additional element to the EGRPRA review process by also reviewing internal and external quantitative studies that assess the cumulative effects of regulations included in the EGRPRA review.
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| Office of the Comptroller of the Currency | The Comptroller of the Currency should, as part of the EGRPRA process, develop plans for conducting evaluations that would identify opportunities to streamline bodies of regulation. (Recommendation 8) |
In a July 2018 memo, OCC staff indicated that they planned to add an additional element to the EGRPRA review process by also reviewing internal and external quantitative studies that assess the cumulative effects of regulations included in the EGRPRA review. In addition, as part of the next EGRPRA public notice process, they indicated that they plan to specifically ask the public to comment on the quantitative and cumulative effects of regulations
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| National Credit Union Administration | The Chair of the National Credit Union Administration (NCUA) should, as part of the EGRPRA process, develop plans for their regulatory analyses describing how they will conduct and report on quantitative analysis whenever feasible to strengthen the rigor and transparency of the EGRPRA process. (Recommendation 9) |
NCUA advised various Congressional committees in a May 2018 letter that the agency intends to increase its efforts to conduct greater quantitative analyses of its regulations. On April 27, 2018, NCUA adopted an instruction to its staff that provides that the agency will carefully assess the need for regulations and consider whether the intended objectives can be achieved through non-regulatory alternatives, such as guidance or the supervisory process. The instruction also states that the agency will analyze the impact that a regulation may have and will evaluate the measureable costs and benefits of the regulation based on the best available information. In November 2018, NCUA staff confirmed that the rulemaking and regulation reviews under this instruction will be used as part of NCUA's voluntary participation in EGRPRA.
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| National Credit Union Administration | The Chair of NCUA should, as part of the EGRPRA process, develop plans for conducting evaluations that would identify opportunities to streamline bodies of regulation. (Recommendation 10) |
NCUA staff advised various Congressional committees in a May 2018 letter that the agency had appointed a regulatory review task force in 2017 to review and develop a four-year plan for revising regulations. The first step in this project entailed the grouping of the entire body of regulations into categories, sorted by significance and impact. NCUA noted that this grouping involved a judgmental, committee-wide assessment of the cumulative impact of the regulations, as a whole as well as within the pertinent categories. In April 2018, NCUA adopted an instruction to its staff that indicates that it will obtain public comment on one-third of its regulations every year to identify regulations that should be revised or rescinded. The instruction also notes that the agency will continually review the effectiveness of regulations as changes in the industry, relevant technology, federal laws, or the economic environment occur. In November 2018, NCUA staff noted that an internal regulatory task force reviewed all of the agency's regulations to identify those that could be eliminated, streamlined, or amended to reduce regulatory burden, resulting in a plan to streamline regulations over a four-year period. The agency's staff also confirmed that the rulemaking and regulation reviews under this instruction will be used as part of NCUA's voluntary participation in EGRPRA.
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