Hidden Effects of New FDIC Compliance Exam Cycle

Basics:

The FDIC has announced that their Consumer Compliance Examination Manual has been revised to show a new examination frequency schedule.

Most banks with assets over $3 billion generally will see no regulatory relief from this change.

However, banks in good standing with assets under $350 million will see relief. Their compliance only examinations are being replaced by a Mid-Point Risk Analysis and their joint Compliance Examination and CRA Evaluations had their schedule range moved back 6 months, which now occur every 5.5 – 6.5 years.

Banks in good standing with assets between $350 million and $3 billion will likely notice the biggest difference. Notably, this category includes all intermediate-small banks (ISBs) for CRA evaluations. This group was receiving joint Compliance Examination and CRA Evaluations every 2 – 3 years. Now this group has a similar structure as banks under $350 million in assets but with a slightly more frequent schedule. This group will now receive joint Compliance Examination and CRA Evaluations every 4.5 – 5.5 years, with a Mid-Point Risk Analysis in between.

Upsides:

This is relatively straight forward. The more examiners are on site, the more they find, so those banks with assets under $3 billion are going to see great relief in that regard. The less time you must spend responding to examiners, the more time you may dedicate to your compliance management system.

Downsides:

Unfortunately, when these things happen, Boards and senior management like to cut compliance resources. This can cause resources to spread thin and weakness to develop and not be found. These can accumulate and suddenly once the examiners come back on site, they have a lengthy list of issues, which increases the likelihood of a ratings downgrade.

To compound this issue, banks that are getting relief from this new schedule will be examined under the next administration. The pendulum has been swinging violently, and if the pendulum swings back the other direction under a new administration when these smaller banks will be examined next, this could lead to an influx of rating downgrades.

According to my estimates, FDIC examination workload for 2026 and at least the first half of 2027 just became about 30 or 40 percent of what it was previously. Even after considering recent reductions in force of about 10 percent, those banks that are set to still be examined in 2026 and 2027 should be prepared for examiners with extra time on their hands to poke and prod where they may not have normally. I would not want to be in this group, but if you are, there isn’t anything you can do but start preparing.

Complications:

Fair banking issues will get more complicated from these changes. For fair lending where there is generally a 5-year lookback period, the new examination cycle for smaller banks is now longer than the lookback period. In situations where the lookback period matters, the bureaucratic processes that must be followed can add a year or more before the lookback period starts. This can lead to about 2.5 years where if a bank was discriminating that no enforcement can be brought to correct consumer harm for that lost period. I suspect community groups will notice this and complain. I also suspect that fair lending concerns will likely be one of the few items that will trigger “targeted visitations” during Mid-Point Risk Analyses because of this.

For ISBs and community development, the comparables become skewed as well once we hit the next round of ISBs to be evaluated. The first problem comes that there will be about a 2-year period where no ISBs have been reviewed because they all got extended evaluation timelines. So, the next ones that get reviewed will be compared to ISBs that are 2-years stale. The ratios used for comparing will also be skewed because they are calculated for the evaluation period, not year by year. The evaluation periods will be much longer, so the ratios should be much higher than the old comparables. Does that mean all the banks that get reviewed first should suddenly get Outstanding ratings?

Finding good comparables for large banks, which are typically few and far between, is already hard enough. Now it will get harder as you either must only compare large banks under $3 billion in assets and over $3 billion in assets separately, or you must compare large banks that have different evaluation frequencies, and the comparison is skewed again.

First-Time ISBs

CRA also gets more complicated, especially for ISBs. As we continue to see more consolidation in the industry through mergers, acquisitions, and organic growth, this triggers more first-time ISBs. In my 11 years of examiner experience, first-time ISBs struggle with CRA the most because they are not familiar with complicated community development rules. It does not help that the CRA rules are a moving target these days and regulators are very inconsistent in what is given credit. One thing that first-time ISBs also don’t realize is that, if you don’t pass community development, you don’t pass CRA, which in turn hinders your bank’s expansion plans.

The problem is far worse if a bank triggered ISB status a year or two ago, and their CRA evaluation is suddenly pushed back 3 more years. Now you have a 5-year window that the bank likely has not done a decent job documenting community development activities. It is hard enough helping a bank go back 2 years to document community development to get them to pass, it is basically impossible to do it over a 5-year period. I HIGHLY RECOMMEND any bank facing this situation to be collaborating with a qualified consultant or joining a group like the CRA Hub. Otherwise, your next evaluation is going to be painful and disappointing.

Unknowns:

One thing that most might not realize is that the frequency schedule was always based on when the report was transmitted. This means that if there was a complex issue during an examination that caused an extended consultation or got stuck in the bureaucracy, that the bank’s next examination really got delayed the same amount of time as that delay. As part of the FDIC manual update, they have removed the language, “report was transmitted” in that section, so it is unclear if this practice has changed and if they are using the “on-site” date or another internally documented date.

We also don’t know what will trigger a Mid-Point Risk Analysis to end up in a targeted visitation. The manual now says, “Examiners will conduct an intervening supervisory activity only when there is sufficient, articulable reason why such review cannot wait until the next regularly scheduled joint examination.” I suspect fair lending concerns and credible complaints will be among the list of items that could trigger these visitations. However, I believe they will decide those on a case-by-case basis causing more uncertainty.

Important Takeaways:

Getting less consistent feedback from the regulators means your program needs to hold up for a longer stretch on its own. Having good auditors and a consistent audit schedule will be critical going forward to fill in the external feedback void. If your bank is a first-time ISB or just generally struggles with community development, you should start working with a qualified consultant or joining groups like the CRA Hub before it’s too late; nobody can save an ISB if they drop the ball for a 5-year period.

If you would like to discuss any of these issues or how they will affect you, reach out to me at Nate@FairCommunityCreditSolutions.com and we can set up a time for a free 30 – 60 minute discussion on the topic.

By Nate Price, President of Fair Community Credit Solutions LLC