8 of the biggest issues facing the banking industry

April 27, 2022 4:00 PM

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Cyberattacks continue to increase across the banking industry, while fraud related to the Paycheck Protection Program also remains a key issue. At the same time, discriminatory lending practices are still prevalent and improper uses of new technology are grounds for caution.

For these reasons and more, senior executives need to pay close attention to a wide range of significant challenges and critical developments.

Here are eight of the biggest issues banks need to manage.

REGULATION AND COMPLIANCE

USAA Federal Saving Bank was hit with yet more fines in March, this time for violations of the Bank Secrecy Act for a combined $140 million. This comes after earlier regulatory infractions in 2020 for $85 million and in 2019 for another $15 million.

The fines from the Financial Crimes Enforcement Network (Fincen) for $80 million and the Office of the Comptroller of the Currency (OCC) for $60 million were for violations of anti-money laundering rules.

These problems are not new. Fincen’s consent order stated, “USAA FSB authored 2018 commitments and pledged to make improvements, yet it … remains out of compliance.” Similarly, the OCC’s consent order said the bank was told “by at least 2017” that its anti-money-laundering program had major problems.

Read more:

USAA fined $140 million over ‘willful’ Bank Secrecy Act lapses

CYBER SECURITY

New legislation on cyber incident and ransom payment reporting passed through Congress in March with the aim of improving cybersecurity for infrastructure providers in 16 key sectors, including financial services and information technology.

The two main provisions of the Cyber Incident Reporting for Critical Infrastructure Act are that incident reports must be filed within 72 hours and that payments for ransomware attacks should be filed within 24 hours.

But while the well-supported legislation is likely to have a positive impact, timely incident and payment reports are just the first steps that companies will need to take in the fight against cyberattacks.

Read more:

Congress passes 72-hour cyberattack reporting requirement

FRAUD

Prosecutors charged MBE Capital CEO Rafael Martinez last month with one count of bank fraud, two counts of wire fraud and one count of making false statements to a bank for allegedly netting $71.3 million in lending fees on $823 million in PPP loans to more than 36,000 businesses.

According to the allegations, Martinez falsified financial documents and lied about his firm’s payroll and number of employees in an application for a PPE loan, documentation which he used four days later to apply to become a PPP lender.

U.S. Attorney Damian Williams claims, “Rafael Martinez faked his way into building his company into an almost $1 billion PPP lender.” However, Telemachus Kasulis of Morvillo Abramowitz Grand Iason & Anello, representing Martinez, counters that the “charges are false.”

Read more:

CEO of nonbank lender arrested for PPP-related fraud

COMPLIANCE

Speculation is rife in the industry after the FDIC reported that the volume of assets managed by firms on its problem bank list went up by about $120 billion, however the number of banks went down by two.

The implications of this are that one of the larger banks is in trouble, but due to strict confidentiality the quarterly update on the state of the banking industry for Q4 2021 does not reveal specific information about any individual banks.

“Does it make sense that this whole thing is anonymous?” asked Jeremy Kress, an assistant professor of business law at the University of Michigan. “If you identify the banks, that bank will get pummeled in the market, but if you don’t then it leads to speculation that will hurt a broader swath of firms.”

Read more:

A big bank is in trouble, and no one knows which one or why

POLITICS AND POLICY

The economic sanctions imposed on the Russian Federation for invading Ukraine have already resulted in a sharp decline in the value of the Russian currency. With little sign of an end to hostilities, U.S. banks face economic uncertainty for the foreseeable future.

“This aggression cannot go unanswered,” President Biden said. “If it did, the consequences for America would be much worse.”

The first wave of sanctions targeted Russia’s central bank, its sovereign wealth fund and several of the country’s largest private financial institutions. As the sanctions regime continues to evolve, U.S. institutions with direct exposure to the Russian economy are preparing for dark days ahead.

Read more:

Harsher sanctions against Russia could hurt U.S. banks

DISCRIMINATION

The latest in a series of lawsuits claiming discrimination and racial bias against African American and minority borrowers by Wells Fargo comes to court for mediation in April and its first hearing in federal court in May.

The suit for unspecified damages by Christopher Williams claims that Wells Fargo denied him a prime interest rate citing a “unique scoring mode,” even though his FICO score was more than 750 when he applied.

While previous cases of discrimination against Wells Fargo have ended in million-dollar settlements for the plaintiffs, discriminatory practices continue to dog the industry, with a Fannie Mae report in January finding that Black borrowers received slightly undervalued appraisals when looking to refinance.

Read more:

Wells Fargo sued for discrimination against Black borrowers

REGULATION AND COMPLIANCE

The impact of the potential misuse of artificial intelligence and algorithms in lending decisions remains under the microscope after Rohit Chopra, director of the CFPB, put the banking industry on notice earlier this year.

While banks and fintechs see the opportunity to use AI and machine-learning tools to expand credit to more consumers, the CFPB is more cautious and putting on the brakes.

“Because of the perceived effectiveness of AI, at times businesses have used this technology in ways that have gotten out ahead of legal and compliance folks,” said Stephen Hayes, a partner at Relman Colfax and a former CFPB senior counsel.

Read more:

CFPB warnings of bias in AI could spook lenders

FINTECH

A lawsuit alleging the theft of a revolutionary business idea to provide credit to immigrants is causing unwanted headaches for the senior leaders at credit card startup Petal, which announced $140 million of new funding in January with a valuation of $800 million.

Entrepreneur Cassandra Shih claims she brought the idea for a firm to facilitate credit for immigrants with scant or no credit history to Andrew Endicott in 2015, who later sought other partners without her knowledge and squeezed her out of the fledgling company.

“Like so many entrepreneurs, they bounced ideas around, failed to nail down anything concrete, and parted ways,” Petal’s lawyers wrote in a 2019 filing. “Shih’s assertion that this short-lived exchange entitles her to millions of dollars and half a company is baseless.”

Read more:

Card startup Petal embroiled in suit alleging theft of business idea