SARBANES-OXLEY MAY DRIVE SMALL PUBLICLY-TRADED RETAIL BANKS TO GO PRIVATE OR SELL

TowerGroup Research Explores Evolving Impact of Sarbox Compliance and How Consumer Lending Sector Should Respond

NEEDHAM, MA, April 20, 2005 - While regulation is a fact of life in the financial services industry, compliance with the Sarbanes-Oxley Act is having a disproportionate impact on smaller financial institutions.

New research from TowerGroup finds that meeting new regulatory rigors is becoming increasingly difficult for smaller institutions that can ill-afford to increase both compliance and overall technology budgets. This is particularly challenging for small or community banks that offer mortgage, home equity or other consumer loan products, given that compliance in the consumer lending arena has tended to be a hodgepodge of semi-automated business processes, paper documents and numerous manual steps.

"For certain smaller financial institutions, compliance may ultimately affect their overall business model," said Craig Focardi, research director in the Consumer Lending research service at TowerGroup and author of the research. "Sarbanes-Oxley increases concerns about risk within publicly-traded community banks. Compliance costs and process improvements can quickly absorb a large percentage of corporate profits within these types of institutions."

Focardi noted that some institutions will need to consider selling their firms to larger, more "compliance-efficient" competitors if they cannot keep pace with new standards. "Another alternative for smaller publicly-traded financial institutions may be to go private, in order to reduce regulatory burdens," he said.

Other highlights of the research include:

- Diversified financial services institutions and their retail lending divisions have been struggling to create compliance processes for the Sarbanes-Oxley Act. To date, they have been relying heavily on external auditors / consultants and have not shifted compliance processes, costs and IT spending away from quick-fix maintenance toward permanent, replicable business processes.

- Compounding this challenge is the fact that lenders often develop compliance processes and IT for individual laws and lines of business. To better manage costs and improve compliance, financial institutions must identify compliance systems and process that they can reuse across individual retail lending lines of business - as well as across the entire enterprise.

- Within the consumer lending divisions of retail financial institutions, the biggest regulatory priority must be to integrate similar compliance functions for loan origination and servicing. Institutions have the opportunity to improve consumer disclosure and other compliance management across the home equity, mortgage and automobile credit product lines.

- Larger financial institutions with resources to invest in enterprise compliance have the opportunity to leverage compliance IT spending as a strategic investment in improved efficiency - not just a means to meet short-term requirements of new or revised legislation.

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