Embrace Full-Population Compliance Testing to Better Serve Members

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By Rohin Tagra

4 minutes

Most credit unions still use sample-based testing, and they should switch.

Credit unions have a long-standing reputation for their commitment to members—a key differentiator among other financial institutions. But like most others, credit unions today still rely on sample-based manual compliance testing. 

Is this really the best approach? More importantly, does this ensure a fair and equitable experience for all members? 

No. Here’s why. 

Let’s take a portfolio of a million loans. To get a 95% confidence interval with a 5% error rate, you would only need to test 383 loans. That means you have 999,617 unknowns that could leave you open to risk. 

What happens when that sample isn’t a true representation of your portfolio or your sample is different than the regulator’s? This could be problematic for any institution, resulting in lofty fines or worse. 

But for credit unions that pride themselves on supporting their communities and prioritizing the member experience, what happens if they have problems they’re unaware of? 

Why CUs Still Rely on Sample-Based Manual Compliance Testing

Sample-based testing leaves room for unknowns that can significantly impact members, yet it’s still the preferred method. 

First, many credit unions today lack the technology to quickly and accurately test entire portfolios. They instead rely on manual, labor-intensive processes and Excel spreadsheets to manage compliance efforts. Testing a few hundred items is less daunting than testing a million. But a manual process is prone to errors and exposes credit unions to greater risks that can ultimately impact members.

Technology and automation exist today to allow credit unions to eliminate manual processes and improve accuracy while reducing costs and regulatory risk. Credit unions can efficiently expand coverage and better protect members without breaking the bank. 

This also frees up teams to handle other tasks. Credit unions can reallocate resources to manage high-impact activities and better support member experiences. This is especially important for credit unions, which have leaner teams and an average of 20 employees. Technology can help fill in the gaps. 

Another factor for why credit unions rely on sample-based manual compliance testing is that they’re afraid of what they’ll uncover. After all, it is much more manageable to correct a handful of issues versus hundreds. 

With greater transparency into an entire loan portfolio, credit unions gain a full understanding of potential issues. They can review and prioritize based on severity and remediate member issues quickly. 

Full-Population Compliance Testing Is Responsible and Inevitable

As the cost to maintain compliance rises and regulatory expectations increase, a new approach to compliance management is needed.

With full-population testing, credit unions can test entire portfolios in just minutes to quickly determine if they are compliant with all laws and regulations. Not only can this method prevent regulatory issues, but it can address member issues through early detection and remediation, providing a fair and equitable experience for all members. 

Not only is it responsible, full-population testing is also inevitable. Many credit unions may think that compliance is more of a “bank problem” and doesn’t apply to them. But according to National Credit Union Administration Board Chairman Todd M. Harper, credit unions must do better when it comes to compliance management. 

In his address last year, Harper noted that 15% of federal credit unions have consumer compliance violations. The most common violations related to credit reporting, truth in lending, electronic fund transfers and equal credit opportunity rules.

Harper pointed out that while NCUA only completed 29 fair lending examinations (less than 1% of all federal credit unions), the agency “resolved violations involving 64,000 credit union members subjected to unfair practices, leading to approximately $185,000 in restitution and remediation.” 

Harper went on to say that “all individuals, regardless of their financial services provider, are entitled by law to have the same level of consumer financial protection. There cannot be one standard for bank customers and a different one for credit union members.” 

He urged that a strengthened consumer compliance program is in the long-term best interest of the system and its members and ensures that credit unions fulfill their commitment to exceptional member service.

Greater regulatory scrutiny is on the horizon to ensure members are protected. As technology and automation make full-population compliance testing possible, regulators may soon test entire portfolios as well rather than samples. Credit unions must stay ahead of this. 

Credit Unions Must Revolutionize Compliance Management

As the regulatory environment evolves and becomes more complex, credit unions must eliminate manual, error-prone processes and embrace automated full-population testing. 

By leveraging modern technology, credit unions can reduce regulatory risk at a fraction of the cost and ensure a safer and better experience for members. 

Ultimately, this will become the standard of care, and credit unions are positioned to take the lead. 

Rohin Tagra is founder/CEO of Azimuth GRC.

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