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Banks should have an effective change management process to ensure that they properly analyze and respond to the compliance implications of regulatory or product changes. Changes to evaluate may come from an external source, such as new compliance rules and regulations, or internally, such as a new product or service or changes to existing products or services. Recent examinations identified violations that occurred because of regulatory or product changes. An effective change management process can reduce the risk that such violations occur. In this update, we provide guidance on the elements of an effective change management process and discuss some examples from recent examinations related to new compliance rules and internal bank changes.
Compliance rules and bank processes and practices change frequently. An effective change management process detects new or amended rules and regulations, evaluates those rules, understands how the new requirements affect the bank’s processes and makes modifications as appropriate. A similar process should apply to changes in bank processes and practices as well. The formality of the change management process will vary based on the size and needs of the institution, however. The table below identifies the primary elements of an effective change management process.
Examples of Why a Change Management Process Can Help
In this section, we provide a few examples where a change management process could have helped prevent violations.
Example 1: We identified a recent violation because a regulatory change triggered additional disclosure requirements. Specifically, recent Regulation B amendments now require lenders to provide a copy of the appraisal or written valuation to the borrower within a certain time frame.1
In addition, lenders that provide the appraisal or valuation by email must now also follow the requirements of the Electronic Signatures in Global and National Commerce Act (E-SIGN Act) because the appraisal is a required disclosure.2
In this example, an effective change management process would ensure that the compliance officer or another employee
- reviews the regulatory change,
- identifies changes in the way the bank provides appraisals (including electronically),
- determines the impact on any other regulatory requirements,
- updates all applicable procedures, and
- provides training to the lending staff on the change.
In addition, conducting an audit or internal review a few months after implementing the change could help identify any need to enhance training or procedures further.
Example 2: We see situations where a bank’s business decision has unintended compliance implications. Adding or changing a loan fee could lead to an examination finding or restitution if the loan disclosures do not treat the fee properly as a finance charge.3 Fees that meet the definition of a finance charge under Regulation Z have specific disclosure requirements, depending on loan type.4
This is important for banks that offer consumer-purpose loans with fees, including home equity lines of credit (HELOC) where borrowers may finance loan fees through the first draw. Regulation Z requires banks to individually itemize and identify finance charges on the first HELOC periodic statement in such cases.5
In this example, an effective change management program would ensure that a knowledgeable staff member, most likely the bank’s compliance officer, reviews any fee changes to determine if they meet the definition of a finance charge. The compliance officer or management would then ensure that appropriate bank staff updates parameters in the loan-processing and disclosure software systems to reflect this fee change. Someone would also review the disclosures to ensure that the system accurately reflects the change. A similar process should be followed for other types of changes as well.
Change Management Process Elements
| Identify changes |
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| Create action items |
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| Establish responsible parties |
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| Track due dates |
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| Evaluate effectiveness of changes post-implementation |
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| Establish a repeatable process |
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Endnotes
1 1002.14(a)(1)
2 1002.14(a)(5)
3 Joint Policy Statement on Administrative Enforcement of the Truth in Lending Act Effective July 21, 1980; revised September 8, 1998.
4 Section 1026.4(a) defines the term finance charge and 1026.4(b) provides examples
5 See the commentary to 1026.7(a)(6)(i).
