The compliance connection. (Regulatory Compliance).

Compliance is too important to take a back seat to other loan officer responsibilities. For a variety of reasons, however, this may be the case, especially in smaller banks, and improper documentation can have painful results. Loan operations and compliance officers can help steer the course for the lenders. This article offers a few ideas for loan managers to consider and share with their lending groups: training, internal review, record keeping of problems (as similar problems may appear in the future), developing sample documents for each loan type, matching each deal with documents, and tracking progress.

Boredom is not a problem faced by lending management teams. Profitability, return on shareholder value, safety and soundness, and customer service all clamor for attention. Lending management appreciates the importance of regulatory compliance, but feels less comfortable with something that's not as easily measured or seen as a daily ledger and past due report. Compliance weaknesses, therefore, often are not detected internally. Rather, external compliance auditors or, worse, the bank's regulators discover them.

This article is written primarily for those banks whose loan officers and loan operations personnel wear several hats and handle commercial, construction, and consumer loans alike. A banker in a smaller institution typically is assigned to handling a customer's various banking needs. If a loan officer seldom deals with real-estate-secured consumer loans, it is likely that he or she has not "nailed down" consumer loan documentation. If documents are missing, the bank can be "nailed" with violations of regulations and, in turn, be instructed to refund money to the borrower.

What regulations are typically involved?

* RESPA (Real Estate Settlement Procedures).

* Regulation Z (Truth in Lending).

* Regulation C (HMDA) Home Mortgage Disclosure Act.

* Regulation B (Equal Credit Opportunity Act).

* Fair Credit Reporting Act.

* Community Reinvestment Act (CRA) as regards data gathering on small businesses.

The Cost of Inattention to Compliance

Any bank can make a mistake once or twice. There are costs attached to "repeat violations," however, and the first can be in hard cash. Inadequate procedures or lack of action to correct problems not only embarrasses the audit committee, senior management, and the board, but the resulting repeat violations also invite civil money penalties.

Another cost is the effect on employee relationships. …