Insights: Article

Getting the Grade – A New Consumer Compliance Rating System

By   Linda Albrecht

May 21, 2017

You can look forward to a new compliance rating system with your next consumer compliance exam. In November 2016, the Federal Financial Institutions Examination Council (FFIEC) issued an updated Uniform Interagency Consumer Compliance Rating System (CC Rating System). The new rating system was developed to better align with changes that have occurred since the release of the original rating system established in 1980 and takes into consideration the new tailored, risk-based exam approach.

The FFIEC member agencies (CFPB, FDIC, Federal Reserve, NCUA, OCC, and SLC) will apply the new rating system to consumer compliance exams beginning March 31, 2017. The new rating system promises not to generate new examiner expectations or increase the regulatory burden for financial institutions.

Details of the New System

The new system is designed with an emphasis on evaluating a financial institution’s Compliance Management System (CMS). It creates a comprehensive, consistent framework for all member agencies to apply, focusing on consumer protection, self-identification and proactively addressing compliance issues.

The rating system is based on a five-point scale, with “1” being the highest/best rating and “5” reflecting a critically deficient program. The new exam rating system will focus less on transactional testing and more on the financial institution’s CMS, paying particular attention to practices that may cause consumer harm. The new rating system will be applied to all institutions regardless of size, allowing examiners to tailor their activities based on the size, complexity, and risk profile of the institution.

Guiding Principles
The new CC Rating System was designed based on four key principles:

  • Risk-Based – Emphasize that a financial institution’s CMS will vary based on the size, complexity and risk profile of the organization. Even though the same framework will be applied to all financial institutions, it is not meant to be a one-size fits all.
  • Transparent – Create uniform rating categories to promote consistency across member agencies.
  • Actionable – Communicate areas of strength and appropriately emphasize areas for improvement.
  • Incent Compliance – Encourage institutions to establish a strong CMS that focuses on preventing consumer harm, prompt identification and correction of weaknesses.

The CC Rating System is split into three categories and includes specifically assessment factors within each category:

  • Board and Management Oversight - This should include oversight and commitment to the CMS, effectively support change management, driven both internally and externally, identify and manage risks, and detect and correct weaknesses. Along with this, your board should periodically evaluate your fi institution’s needs to ensure sufficient resources are allocated to the compliance program. If third parties are used to supplement your bank’s compliance program, there should be on-going due diligence of these vendors.
  • Compliance Program – This should contain policies and procedures designed for your organization, a training program tailored to staff responsibilities, effective monitoring aimed at identifying potential violations or weaknesses, and a process for addressing consumer complaints.
  • Violations of Law and Consumer Harm – These are rated based on the root cause, severity and impact of consumer harm created, the duration of the violation, and the pervasiveness of the violation. Identifying violations and correcting them is key, but more important is ensuring prior exam recommendations have been addressed.

There seems to be some common themes throughout the foundation of the new CC Rating System—consumer harm, self-identification and corrective action. It goes without saying that if you have a strong CMS that includes board and management oversight, policies and procedures, training, and monitoring with effective corrective action, your next compliance exam should go well.

Latest Insights

July 13, 2018
Here are some idea for giving your new hire a smooth start into your business and alleviating stress for you.
July 13, 2018
The impact of the recent SCOTUS Wayfair decision will continue to have a ripple effect on businesses and state sales tax compliance.
July 9, 2018
The revenue cycle is a complex system and we have historically given much attention to the front-end and back-end while oftentimes leaving the middle functions of the cycle neglected.
July 3, 2018
FASB Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, provides a 5-step framework for determining revenue recognition.
July 2, 2018
As part of the Tax Reform Act of 1986, the “Kiddie tax,” a taxing regime designed to make the transfer of income items by wealthy parents to lower tax paying children less attractive, was implemented.
July 2, 2018
When it comes to your employees, you likely conducted interviews on them when you first hired them.
July 2, 2018
Nearly ten years after the release of the initial exposure draft, FASB issued ASU 2016-02, Leases - The standard may have been issued, but the conversation about this re-write of legacy guidance has not slowed.
June 29, 2018
Banks look at three broad categories when considering small business financing: business cash flow, personal financial strength, and collateral value.
June 28, 2018
You need to be cautious when entering into a bartering relationship and remember to track everything and the key to accounting for bartering is making sure you still record the income earned and expenses incurred.