The Cost of Dodd-Frank Compliance

The more that is learned about the Dodd-Frank Wall Street Reform and Protection Act, the more unanswered questions seem to arise. For community banks, there are many areas of concern, including limits on capital, restraints on activities that may force some institutions out of the mortgage business, increased risk and uncertainty, and a greatly increased cost to comply with all the new rules.

Dodd-Frank was signed into law on July 21, 2010, yet many unknowns remain and some provisions of the law that are clear have small banks nervous, in spite of assurances that there will be some exemptions for community banks.

At most lending institutions, compliance officers are already burning the midnight oil, trying to keep up with their existing workload. As more provisions of Dodd-Frank kick in, bank executives are weighing the pros and cons of the various solutions they have at their disposal to ensure compliance with the law.

Should they divide up the additional work among existing bank employees? Hire new staff to create a dedicated compliance department? Invest in more sophisticated software or just outsource the work? Whichever solution is chosen, it is likely to be both time consuming and expensive.

Some industry insiders believe the cost to comply with every new regulation detailed in the law will literally “break the bank.” In response, many bank officials are taking the position that they will figure out what regulations they absolutely must follow and what they can put on the back burner.

What factors should a bank consider when attempting to solve their compliance related issues?

Among other things, banks need to conduct an assessment that considers the existing compliance challenges facing the bank, the strategic direction the bank plans to pursue in the next three to five years, and whether or not the bank can realistically attract, retain and develop talented compliance personnel to meet its needs.

Here is a closer look at some of the options that community banks can pursue.

The Challenges of In-House Compliance

Developing an adequate in-house compliance department has many pros and cons. On the plus side, hiring new staff creates local jobs (as opposed to outsourcing the work). But finding and hiring the right people can be a tough task for community banks, especially when many of them operate in rural or sparsely populated areas where experienced bank compliance professionals are hard to come by.

Not surprisingly, the pending “doom” associated with the Dodd-Frank Act has resulted in a significant increase in demand for qualified compliance personnel, which in turn has driven up salaries. That, in turn, creates two additional problems. It’s hard for small banks to compete for talent with their bigger counterparts since they are able to pay more for new staff. And, the big banks are now tapping the talent that already exists at small banks, luring them away with the promise of more money, better benefits and a lighter workload.

Some community banks have decided to promote from within and grow their own crop of compliance experts. That creates a wonderful opportunity for bright employees, especially those who have prior experience dealing with compliance issues. But the learning curve is steep. It’s not enough to know the new regulations and requirements brought about by Dodd-Frank. Compliance personnel have to understand the new rules in the context of existing laws and those laws run deep. In the meantime, while newly promoted employees are learning on the job, banks are forced to accept the increased risk that mistakes will be made during the learning process.

Some banks are seeking to hire former FDIC examiners to serve as their key compliance officers. If such individuals can be found and hired, they could be a great asset not only in heading the department, but in training other personnel to do the job. However, hiring former FDIC examiners is not cheap as there is a premium associated with the knowledge they acquired while conducting numerous bank examinations.

Is Outsourcing the Answer?

Given the pressures to find suitably qualified compliance personnel, does it make sense to take a different approach to compliance? Can outsourcing a bank’s compliance efforts “pass muster” with regulators and allow the bank to stay up-to-date and consequently comply with the ever-shifting regulatory landscape?

Instead of a newly hired or promoted employee climbing a steep curve, outsourced compliance professionals already have considerable compliance expertise. What is left is the task of learning the unique aspects of each bank’s operations.

Depending on the third-party firm selected to provide consulting services, outsourcing is generally less expensive than finding and hiring suitably qualified full-time employees. And, professional compliance officers who work for many banks have the opportunity to see best practices employed at other institutions and share them. They essentially function as the “canary in the mine” regarding the compliance risks that other banks are addressing, and more specifically, government auditor reactions to deficiencies uncovered during audits.

Important: Despite what may be your bank’s plans to the contrary, you can never fully outsource compliance to a third party. Regardless of whether the bank outsources certain aspects of its compliance burden, the responsibility remains with the bank’s management to ensure that the institution complies with regulations. Abdicating responsibility entirely to a third-party professional services firm can result in objections from regulators. The bank must have:

  • Staff in place that serves as the primary point of contact with the outsourced compliance function.
  • A robust system in place that is effective in flagging issues.
  • A process that rectifies each issue in a timely manner.

Critics of using outsourcing as a solution point out a few of the cons.

  • Loss of control. Using an outsourcing firm means you’ll be trusting critical tasks to people who are serving many clients, rather than an internal compliance officer who is dedicated to the success of the bank.
  • Loss of continuity. By relying on an outside firm, you may have no choice but to work with different compliance officers on every engagement.

Whatever path your bank pursues to address the increased compliance demands that it faces, several industry analysts believe that the increased workload may not last too long. The burden will be heavy, at least initially, as banks invest the time to correctly decipher and apply the new regulations peppered throughout the Dodd-Frank Act. If that prediction is accurate, community banks may just need to hold on tight for now and weather the storm.

For more information on how we can help your community bank, please contact Sonny MacArthur at or 404-420-5631.