Bank Compliance Risk 'Elevated' Due To COVID-19, OCC Says

By Al Barbarino
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Law360 (June 29, 2020, 6:40 PM EDT) -- The negative economic impacts of COVID-19 and the government relief programs meant to mitigate them have resulted in "elevated" compliance and other operational risks for banks, the Office of the Comptroller of the Currency said in a report issued Monday.

Modified business operations, remote work and government programs that sought to aid consumers — including the Coronavirus Aid, Relief, and Economic Security Act and the Paycheck Protection Program — have only exacerbated those risks as banks face economic woes tied to low interest rates and high loan volumes, according to the report.

"Compliance risk is elevated due to a combination of altered operations, employees working remotely, and the requirement to operationalize new federal, state, and propriety programs designed to support consumers ... in a weakened economy," the OCC said.

While banks went into the pandemic in a strong position, recent conditions are weighing on them, the report suggested. The OCC pointed to historically low interest rates coinciding with rapidly increasing loan volumes that have inflated balance sheets as among the factors that will "broadly affect bank earnings, credit quality, operations, and capital," adding that "the outlook is uncertain."

Banks have served an essential role in the deployment of the $2 trillion CARES Act relief package, such as doling out hundreds of billions in small business loans under the PPP program. But while that supplied much-needed relief to consumers, it strained bank operations during "high levels of employees working at home and absenteeism," the OCC added.

"The volume of change and short timelines for implementing changes placed additional strains on banks already operating in a stressed environment," according to the report. "This could cause breakdowns in controls related to account management, servicing management, flood insurance coverage, credit bureau reporting, and complying with applicable laws and regulations."

Despite the added pressure, banks must "remain diligent" to ensure compliance departments continue to monitor consumer protections, fair lending, and Bank Secrecy Act and anti-money laundering laws.

In April, the Financial Crimes Enforcement Network issued relief on BSA requirements stressing a risk-based approach, which the OCC has reiterated in its own statements. But the report reminded banks that any deferred actions should be "tracked and managed so that banks can appropriately readjust their systems after the operating environment has returned to normal."

The OCC said it will employ its own risk-based approach in "determining any new supervisory response" in its oversight of banks in its BSA examinations.

The office also touched on increased cybersecurity risks, noting that criminals are targeting banks through phishing, "destructive malware" and ransomware with increased frequency and sophistication.

"The trend of increased criminal activity is expected to continue for the foreseeable future and may increase further as banks navigate through the economic disruption," the report said, adding that banks should consider measures to bolster protections, including system backups and recoveries.

--Editing by Adam LoBelia.

For a reprint of this article, please contact reprints@law360.com.

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