What Is a Compliance Examination?

The term compliance examination refers to the periodic examination of banks to make sure they operate according to consumer protection laws, fair lending statutes, and the Community Reinvestment Act. Compliance examinations are typically focused on operational areas that pose the biggest compliance risks. They specifically focus on management processes and other procedures the institutions have in place to ensure compliance with regulations.

Key Takeaways

  • A compliance examination is a periodic review of banks to make sure they operate according to laws and guidelines.
  • The exams focus on operational areas that pose the biggest compliance risks, including management processes and other procedures in place to ensure banks are compliant with regulations.
  • Exams generally take place every 12 to 18 months.
  • There are normally three stages in the exam process, including the pre-planning, review and analysis, and communication stage.

How Compliance Examinations Work

Banks are financial institutions that take deposits and make loans to their customers. While they are in business to make profits, they are also responsible to meet the best interests of their clients. As such, they are regulated to make sure they act in a fair manner, do not take advantage of customers, and don't take excessive risks. One way that the government keeps these institutions in check is through oversight activities, such as compliance examinations.

These exams are administered by government agencies, such as the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). As noted above, these exams ensure that Americans have access to a fair and sound banking system.

Examinations generally take place during a supervisory period every 12 to 18 months. They are meant to determine bank management competence, the quality of the bank's assets, and whether banks are compliant with federal regulations. The process can also make sure that banks are following laws and guidelines regarding asset management, electronic recordkeeping, reporting requirements, and meeting the credit needs of their communities.

Examination Stages

Exams conducted by the FDIC generally take place in three distinct stages:

  • The first is the pre-examination planning stage. It requires compliance examiners to collect information from FDIC databases and records and to contact institutions to request updated documents and information. The examiner will request additional documents and information in writing, to review and identify any areas of potential risk.
  • The review and analysis phase allows the examiner to assess and evaluate a bank's compliance management system. They document any legal and regulatory violations regulations (if any) and also document weaknesses in the compliance management system. They do this by analyzing the type, complexity, and level of the institution’s financial operations, which allows the examiner to determine the scope of the examination and deploy resources where they are most needed. It also allows them to identify the risk of potential consumer harm.
  • The final step involves communication between the examiner and the bank's leadership team. This includes making any recommendations and getting management to commit to taking corrective action. The findings are normally communicated during an exit meeting.

The FDIC publishes regular updates to its examination processes. According to the agency, roughly 98% of banks met their goals between the time fieldwork for examinations begin and the time that reports are disseminated to management in a 12-month period for the consumer compliance category as of Jan. 31, 2021.

38

The number of days for an exam turnaround in the consumer compliance category in a 12-month period as of Jan. 31, 2021.

Special Considerations

The compliance examination is one of three types of oversight activities carried out by the FDIC. Other activities include visitations and investigations. Visitations are usually conducted to review compliance for newly-chartered institutions and to review the progress on actions taken to correct previous infractions. Investigations, on the other hand, can be launched if problems are brought to the attention of the FDIC, such as consumer complaints.