Community Banks Order Signals Fintech Partnership Scrutiny

On May 21, the Office of the Comptroller of the Currency made public an April consent order against Community Federal Savings Bank, a federal savings association based in Woodhaven, New York, for deficiencies in its Bank Secrecy Act and anti-money laundering, or BSA/AML, compliance program.

The order is the latest in a growing line of enforcement actions signaling that regulators are paying close attention to smaller institutions - particularly those that have rapidly expanded into payment processing and fintech-adjacent business lines without proportionally scaling their compliance infrastructure.

For community banks pursuing revenue growth through fintech partnerships and payments services, the lessons are both clear and urgent.

What Happened at Community Federal Savings Bank

The OCC found that since 2020, Community Federal Savings Bank has significantly expanded its payment processing capabilities relative to its size, resulting in substantial annual wire and automated clearing house activity, including cross-border activity involving foreign financial institutions.

Despite this rapid growth in transaction volume and attendant risk, the bank failed to develop and maintain controls and risk management processes commensurate with that risk and growth. The OCC's findings detail a cascade of interconnected failures.

The bank's suspicious activity monitoring processes were deficient for identifying, investigating and reporting potentially suspicious activity. Its automated alerting system used filtering criteria and thresholds that were not adequately tuned to the risk profile of its payment processing line.

Its automated alert triage system had deficiencies in logic, data and methodology that caused a very high percentage of ingested alerts to auto-close rather than escalate for review.

The bank's customer due diligence program was also found to be ineffective, leaving it unable to understand the nature of certain customers' businesses or the purpose of transactions flowing through the payment processing line, including the risks associated with foreign financial institutions.

In several instances, the bank could not determine whether it maintained correspondent accounts for foreign financial institutions, undermining its ability to comply with the enhanced due diligence requirements of Section 312 of the Patriot Act.

Adding to these systemic breakdowns, the bank's independent testing for BSA/AML was weak. Its internal auditor failed to identify program weaknesses and failed to scope in high-risk areas.

Notably, the deficient internal controls, weak independent testing and inadequate BSA staffing each correspond to a separate required pillar of an effective BSA/AML program, underscoring that the bank's failures were structural rather than isolated.

The OCC ultimately concluded that the bank had not established and maintained a reasonably designed BSA/AML compliance program, citing systemic breakdowns in internal controls, weak independent testing and weak BSA staffing.

These deficiencies resulted in violations of Title 12 of the Code of Federal Regulations, Sections 21.21 (BSA/AML program violation) and 163.180(d) (suspicious activity reporting violation), and Title 31, Section 1010.520(b)(3) (violation of information sharing requirements under Section 314(a) of the Patriot Act).

The order requires Community Federal Savings Bank to:
· Appoint a compliance committee;
· Submit a comprehensive action plan within 90 days;
· Engage an independent third-party consultant to conduct a full BSA program assessment;
· Overhaul its internal controls and customer due diligence programs;
· Implement a risk-based suspicious activity review program;
· Conduct a suspicious activity report look-back to identify previously unreported suspicious activity; and
· Ensure adequate BSA/AML staffing.

Notably, the OCC signed the order through the assistant deputy comptroller for novel bank supervision - the office responsible for institutions with significant fintech and payments-oriented business models - signaling how closely the agency now tracks this category of bank.

Why This Matters: The Risk Landscape for Community Banks in Payments and Fintech

Community Federal Savings Bank is not an anomaly. It joins Clear Fork Bank, an Albany, Texas, community bank that received a BSA/AML consent order from the OCC in October 2024 for similar failures in overseeing payment processor accounts.

Together, these actions confirm that regulators are focused not only on the largest financial institutions with high-risk, cross-border business models, but also on local community banks that fail to meet their BSA/AML obligations.

The pattern is instructive. Community banks seeking to diversify revenue through fintech partnerships and payment processing services are inherently taking on disproportionate risk relative to their traditional business profiles.

Payment processing introduces high transaction volumes, cross-border exposure, relationships with nonbank financial technology companies and their end customers, and rapid scaling dynamics - all of which demand sophisticated monitoring systems, robust customer identification and due diligence programs, and staffing levels capable of managing that complexity.

When a bank's compliance infrastructure does not keep pace with its business growth, the regulatory consequences can be swift and severe. The OCC has been explicit about these expectations.

Examiners scrutinize compliance budgets relative to business growth and demand, and continually reassess program adequacy as risk evolves. Financial institutions cannot take a "set it and forget it" approach to AML compliance.

Although articulated most forcefully in connection with TD Bank's $3.1 billion resolution in 2024, this principle applies equally to community banks operating at a fraction of that scale.

Practical Compliance Guidance for Community Banks

For community banks that are currently engaged in, or contemplating, fintech partnerships and payments business lines, the following recommendations emerge directly from the lessons of Community Federal Savings Bank.

First, scale your BSA/AML compliance program in lockstep with business growth. The central failure at Community Federal Savings Bank was expanding its payment processing operations without commensurate controls.

Before onboarding a new payments partner or expanding transaction volumes, conduct and document a risk assessment, and ensure your compliance budget, technology and staffing can absorb the added risk.

As the order makes clear, your BSA/AML risk assessment must evaluate the impact of new product lines, third-party relationships, transaction types and volumes, and geographies served.

Second, invest in transaction monitoring systems that are properly calibrated to your risk profile. Community Federal Savings Bank's automated alert system had filtering thresholds that were not tuned to its payment processing business, and its triage logic auto-closed alerts that warranted human review.

Institutions should conduct regular model validation and threshold testing - particularly when adding new products or customers - to ensure that monitoring systems apply appropriate rules, thresholds and filters commensurate with the bank's risk profile.

Data analytics and AML software solutions that align transaction monitoring and suspicious activity reporting with your risk model can significantly reduce compliance costs while improving detection rates.

Third, build a customer due diligence program that genuinely understands your payment customers' businesses. The OCC found that Community Federal Savings Bank did not understand the nature of certain of its customers' businesses or the purpose of their transactions.

For banks serving fintech companies and payment processors, this means conducting enhanced due diligence at onboarding and on an ongoing basis, including understanding the fintech's end-user customer base, transaction flows, geographic exposure and business model.

Design your know-your-customer programs to reflect the risk within your customer base - time-consuming enhanced due diligence should be reserved for your highest-risk customers. At the same time, procedures for lower-risk relationships can be simplified.

Fourth, ensure your independent testing function has the scope, competence and independence to identify weaknesses. Community Federal Savings Bank's internal auditor failed to identify weaknesses in the BSA/AML program and scope in high-risk areas.

Whether conducted internally or by a third party, an audit must encompass your highest-risk business lines - including any payments or fintech activities - and test whether controls function as designed.

Fifth, staff your BSA/AML function with qualified professionals who have sufficient independence, authority and resources. Weak BSA staffing was explicitly cited as a contributing factor in the OCC's order.

Community banks need not match the compliance head count of multinational institutions. Still, they must ensure that their BSA officers and support staff have the expertise to manage the institution's actual risk profile, not just its historical one.

The Takeaway

The OCC's order against Community Federal Savings Bank sends a clear signal that regulators expect community banks to match their ambition with proportionate compliance investment. The revenue opportunity in fintech partnerships and payments processing is real, but so are the risks - and the consequences of failing to manage them.

Community banks contemplating growth in this space should view the order not as a cautionary tale about a single institution, but as a regulatory road map for what any bank with an evolving risk profile is expected to do.

Institutions that thrive in the fintech partnership ecosystem will be those that build compliance as a strategic capability, not an afterthought, and that invest continuously in the people, technology and processes needed to keep pace with their own growth.

Republished with permission. This article, "Community Bank Order Signals Fintech Partnership Scrutiny," was published in Law360 on August 3, 2026. (login required)