CBA Regulatory Compliance Auditing Questions and Answers 1 — Questions and Answers
Question 1: An auditor reviewing a bank's daily cash transaction logs notices a commercial customer, who owns a chain of convenience stores, has multiple employees making separate cash deposits of $9,500 at different branches on the same day. This pattern is a significant red flag for which potential regulatory violation?
- Inadequate segregation of duties in cash handling.
- Structuring transactions to evade Currency Transaction Report (CTR) filing requirements. (Correct answer)
- A violation of the Expedited Funds Availability Act (Regulation CC).
- Failure to perform adequate OFAC screening on new employees.
Correct answer: Structuring transactions to evade Currency Transaction Report (CTR) filing requirements.
The Bank Secrecy Act (BSA) requires banks to file a Currency Transaction Report (CTR) for cash transactions exceeding $10,000. Structuring is the illegal practice of breaking down a single large transaction into multiple smaller ones to avoid triggering this reporting threshold. The described pattern is a classic example of structuring.
Question 2: When performing a compliance audit of a bank's Office of Foreign Assets Control (OFAC) program, what is the auditor's primary objective?
- To verify that the bank's lending practices are fair and non-discriminatory across all demographics.
- To ensure the accuracy of consumer disclosures for mortgage and loan products.
- To assess the effectiveness of the bank's system for identifying and blocking transactions with sanctioned individuals, entities, and countries. (Correct answer)
- To confirm the bank is sufficiently meeting the credit needs of low- and moderate-income neighborhoods.
Correct answer: To assess the effectiveness of the bank's system for identifying and blocking transactions with sanctioned individuals, entities, and countries.
The core purpose of OFAC regulations is to enforce U.S. economic sanctions and foreign policy goals. A bank's OFAC compliance program must have effective internal controls to identify and block transactions involving parties on the Specially Designated Nationals (SDN) list. An audit's primary goal is to test the adequacy and effectiveness of these controls.
Question 3: During an audit of closed-end mortgage loans, an auditor notes that a borrower's final Closing Disclosure showed an Annual Percentage Rate (APR) that was 0.15% higher than the APR on the initial Loan Estimate. The loan was closed without issuing a revised disclosure and providing a new three-day waiting period. This practice is most likely a violation of which consumer protection regulation?
- Regulation B (Equal Credit Opportunity Act)
- Regulation E (Electronic Fund Transfer Act)
- The Community Reinvestment Act (CRA)
- Regulation Z (Truth in Lending Act) (Correct answer)
Correct answer: Regulation Z (Truth in Lending Act)
Regulation Z, which implements the Truth in Lending Act (TILA), has strict rules regarding the accuracy of the APR. For most fixed-rate mortgage transactions, if the APR at closing varies from the most recent disclosure by more than 1/8 of 1 percent (0.125%), the lender must provide a corrected disclosure and a new three-day waiting period before consummation.
Question 4: Which of the following activities is a primary focus for an auditor when evaluating a bank's compliance with the Community Reinvestment Act (CRA)?
- Assessing the bank's performance in meeting the credit needs of its entire community, including low- and moderate-income (LMI) neighborhoods. (Correct answer)
- Evaluating the adequacy of the bank's capital reserves in relation to its risk-weighted assets.
- Testing the effectiveness of the bank's cybersecurity controls for its online and mobile banking platforms.
- Confirming the accuracy and timeliness of Suspicious Activity Report (SAR) filings.
Correct answer: Assessing the bank's performance in meeting the credit needs of its entire community, including low- and moderate-income (LMI) neighborhoods.
The Community Reinvestment Act (CRA) was enacted to encourage financial institutions to help meet the credit needs of the communities in which they operate, with a particular emphasis on low- and moderate-income (LMI) neighborhoods. A CRA compliance audit, therefore, centers on evaluating the bank's lending, investment, and service performance within its designated assessment areas.
Question 5: A compliance auditor's data analysis of a bank's underwriting decisions reveals that a minimum loan amount policy, while applied consistently to all applicants, results in a statistically significant higher rate of denials for applicants in a protected class. This scenario is an example of what type of potential discrimination?
- Overt discrimination
- Redlining
- Disparate impact (Correct answer)
- Disparate treatment
Correct answer: Disparate impact
Disparate impact occurs when a lender applies a neutral policy or practice (e.g., a minimum loan amount) to all applicants, but that policy disproportionately has a negative effect on a protected group. Unlike disparate treatment, disparate impact does not require proof of intent to discriminate.
Question 6: According to regulatory guidance, an effective Compliance Management System (CMS) is built upon several key pillars. Which of the following is considered the foundational component that establishes the 'tone at the top' for compliance?
- Board and management oversight. (Correct answer)
- Comprehensive consumer complaint response procedures.
- A detailed schedule for compliance training.
- The selection of third-party compliance software.
Correct answer: Board and management oversight.
Regulators consistently identify active and engaged board and management oversight as the cornerstone of an effective CMS. This includes demonstrating a clear commitment to compliance, adopting relevant policies, appointing a qualified compliance officer, and allocating sufficient resources to the compliance function.
CBA Regulatory Compliance Auditing Questions and Answers 1
An auditor reviewing a bank's daily cash transaction logs notices a commercial customer, who owns a chain of convenience stores, has multiple employees making separate cash deposits of $9,500 at different branches on the same day.
This pattern is a significant red flag for which potential regulatory violation?