When a lender begins to tackle the question of how to get in compliance, one of the first issues is where should they start? Remember, the Consumer Financial Protection Bureau’s overreaching concern is to examine a lender’s “commitment to compliance.” Thus, before even tackling the questions of pertaining to the formation of a management structure and hiring a compliance officer, a lender should look to the very basics. For instance, are the corporate formation documents in order? If there are multiple companies owned by the same person(s) are separate corporate formalities followed in terms of records, accounts, employees, locations, bills, etc.? Another starting item is contracts: Do key employees and loan officers have written agreements? Is all compensation traceable back to a written compensation formula, etc.?
These are the little things that often get overlooked when a company begins to formalize its compliance systems. Yet, if a lender has overlooked elements that are critical and basic to general business compliance (let alone banking compliance) it will certainly set the wrong tone to any full scale audit. Indeed, an entity that does not and has never properly structured itself and its relationships with other entities is unlikely to have taken the time to truly establish appropriate compliance. More than ever, auditors are beginning to evaluate the propriety of business formation and general “best practices” to ensure themselves that a company functions as a true business enterprise following all corporate formalities. Failure to do so reflects poorly on an entity’s commitment generally to doing things the “right way.”
Of course, these structural components are important separate and apart from compliance. Corporate formalities are critical to protecting the assets of one related corporation from the liabilities of another and are essential to protecting the personal assets of ownership. Beyond setting the right tone for a banking examiner, lenders should ensure proper corporate formalities are in place to protect their assets and livelihood from potential liabilities in a world that is increasingly holding lenders to higher legal standards and imposing new liabilities on lenders every day.