Could There Be a Light at the End of the Constant Tunnel of Audits and Exams?

Yesterday the House of Representatives Financial Services Committee held a hearing to markup H.R. 3626 (among several other Bills), the “Bank Service Company Examination Coordination Act of 2017.” Sponsored by Rep. Roger Williams (R-TX) and five others (two Democrats, three Republicans), the Bill would amend the Bank Service Company Act in ways intended to reduce the burden on both regulators and those they examine. The Bill was passed out of committee by a vote of 56-0.

The Bank Service Company Act (12 U.S. Code § 1867) concerns regulation and examination of bank service companies. It states,

“the depository institution shall notify each such agency of the existence of the service relationship within 30 days after the making of such service contract or the performance of the service, whichever occurs first."

As defined in the Act, these services include "check and deposit sorting and posting, computation and posting of interest and other credits and charges, preparation and mailing of checks, statements, notices, and similar items, or any other clerical, bookkeeping, accounting, statistical, or similar functions performed for a depository institution."

As outsourcing has increased and technology has evolved, management and coordination of third party exams has become unmanageable. 

A spokesperson for the Conference of State Bank Supervisors (CSBS), which strongly supports the Bill, told insideARM that states have encountered roadblocks when trying to coordinate efforts with federal agencies – even when the federal agencies want to do so. In the end, she said, “federal agency lawyers say the Bank Service Company Act doesn’t talk about states, so it’s not even clear we can share the information.” And so ends the coordination.

H.R. 3626 would remedy this by making information obtained during a service provider exam available to all federal and state agencies, and would, “to the fullest extent possible, coordinate and avoid duplication of examination activities, reporting requirements, and requests for information.”

insideARM Perspective

Okay, three things.

One, I had to do some digging to understand whether the Bank Service Company Act applies to debt collection agencies. It seems that it doesn't, unless the collection agency is owned by the bank. Although, I'm not 100% sure about that. I got in touch with the FDIC to confirm. They sent me this definition, saying it was responsive to my question. The first sentence is quite straight forward. The part in bold italics is... not so straightforward to me. So far the FDIC has not responded to my follow up.

A bank service corporation is defined in the Bank Service Corporation Act (BSC Act) as a corporation, whose capital stock is all owned by one or more insured banks, organized to perform "authorized services." The BSC Act limits the investment of a bank in a bank service corporation and specifies prior regulatory approval requirements. Authorized services are defined to include services such as: check and deposit sorting and posting, computation and posting of interest and other credits and charges, preparation and mailing of checks, statements, notices, and similar items, or any other clerical, bookkeeping, accounting, statistical, or similar function performed for a bank. In addition, a bank service corporation may perform any services permitted by FR regulation for a bank holding company under Section 4(c) (8) of the BHC Act.

Due to the nature of services performed by these corporations, the importance of analyzing their financial condition is obvious. In addition to authority to examine affiliates the BSC Act provides that for any bank regularly examined by a Federal supervisory agency or any subsidiary or affiliate of such bank subject to examination by that agency, which causes to be performed by contract or otherwise, any bank services for itself, whether on or off premises, such performance shall be subject to regulation and examination by such agency to the same extent as if the services were being performed by the bank itself on its own premises. The bank is also required to notify the appropriate agency of the existence of such a service relationship within 30 days after the making of the service contract or the performance of the service, whichever comes first. (emphasis added)

Two, the Bill has only been voted out of committee; it's a long way from becoming law.

Three, whether or not the Bill relates directly to debt collectors, it could serve as an interesting legislative/regulatory model. Collection agencies and technology providers in the ARM space have had to become accustomed to a never ending stream of auditors requiring time and attention from key resources to produce the same information over and over again... except, just a little bit differently each time. If state and federal regulators, and even - gasp - clients could coordinate examination efforts, this could be a game-changer. 

The CSBS Vision 2020 statement says,

“Through Vision 2020, state regulators will transform the licensing process, harmonize supervision, engage fintech companies, assist state banking departments, make it easier for banks to provide services to non-banks, and make supervision more efficient for third parties."

These are terrific goals for any industry facing a complex web of rules and regulations. So, the initiative is worth watching.