Young & Associates, Inc. and the Ohio Bankers League (OBL) recently announced an agreement to merge OBL Compliance Services with the Compliance Division of Young & Associates, Inc. This new joint venture will provide OBL member banks with the exceptional compliance consulting expertise of Young & Associates’ consultants and has been established in an effort to respond to the many upcoming rule changes that will come with the passage of Dodd-Frank. We are happy to welcome William (Bill) Showalter back to the Young & Associates, Inc. family with this change. Bill is a nationally-known and highly-regarded senior compliance consultant and his return brings even more depth to our expert compliance consulting capabilities.
Also part of this joint venture is the creation of the new and enhanced Community Bankers for Compliance Plus program. This tailored, multi-level compliance training program builds on the tried and tested Community Bankers for Compliance platform and offers bankers the opportunity to build their own custom-made consumer compliance suite. "We are very excited about this new partnership," reported OBL BankServices Executive Director Mike Baker. "It will offer bankers a wider range of compliance services to battle the wave of new regulations and rules brought in by Dodd-Frank."
"The combined resources of the OBL and Young & Associates will allow us to respond much more quickly and effectively as new rules go into effect and new examination procedures raise new challenges," he added.
Says Jim Kleinfelter, President of Young & Associates, Inc., "We are excited and pleased to forge this new and enhanced compliance partnership with the OBL. The CBC Plus, with the addition of Young & Associates' high-quality consulting products and services, will provide OBL members with access to practical and timely compliance information and training, as well as the flexibility to tailor the program to fit the bank's unique needs, a benefit that is near and dear to our company's heart.”
For more information, on the Community Bankers for Compliance Plus program, contact the Ohio Bankers League at 614.340.7600. For information on Young & Associates, Inc.’s compliance consulting services, contact Young & Associates, Inc. at 1.800.525.9775.
Tamara Simms Bolin, CRCM, Consultant
Regulatory compliance is maintaining a standard that is in accordance with the laws and regulations of the regulatory agencies. As we know, these rules change with some regularity and are in place for consumer protection, fairness and equal treatment, law enforcement needs, or routine reporting of vital bank-specific or industry-related information.
Regulations that Require Training
Fair Lending and Equal Treatment:
The Federal Financial Institutions Examination Council (FFIEC) has issued and subscribes to a general policy statement of what is expected of banks and other financial institutions relating to fair lending practices. Among these expectations are fair and equal treatment of all prospective customers and the avoidance of unequal or disparate treatment. Also called for are expectations of equal outcomes or results of lending practices and polices, including but not limited to:
- Underwriting policies
- Targeted advertising and promotions
- Lender/Underwriter hiring practices
Guarding against even subtle forms of illegial discrimination, such as inadvertently discouraging applicants or developing products or services that may have the unintended effect of discriminating on an illegal basis
Regulations and laws associated with fair lending include:
Bank Secrecy Act and Anti-Money Laundering Program (BSA/AML):
- Regulation BB/Community Reinvestment Act
- Regulation B/Equal Credit Opportunity Act
- Regulation C/Home Mortgage Disclosure Act (HMDA)
- Fair Housing Act
- Americans with Disabilities Act (ADA)
The BSA program should have four fundamental components:
- Effective controls to ensure full compliance, including timely and accurate reporting and record keeping of information required by law.
- The continuing support of adequate resources to achieve and ensure a satisfactory level of compliance. This extends to the appointment of an officer to oversee the BSA compliance function, including the maintenance of the BSA program, vigilance as to money laundering dangers, and oversight over relevant policy/procedure issues.
- Training of appropriate staff as to Bank Secrecy impact points and awareness of money laundering deterrence opportunities. The training curriculum should be developed and implemented by bank management, and be sensitive to the demands of both compliance as well as risk management. BSA training schedules should be developed in concert with other training needs, and be focused on both the technical as well as substantive aspects of BSA/AML efforts.
- Independent, periodic testing should be conducted of the bank’s BSA program and the integrity of its related systems and controls.
Banks are considered to be the key to deterring this type of criminal activity, since access to the financial system generally starts with a bank transaction. Banks are expected to recognize this responsibility and to develop practices to identify and respond to possible money laundering and/or anti-laundering activities. The process usually breaks down into three general areas or processes (High-Risk):
- Placement – Money is placed into the banking system.
- Layering – Funds are moved via a series of transactions.
- Integration – Money takes on the appearance of legality through additional transactions.
The bank should provide regular training opportunities for all staff affected by BSA/AML laws and regulations. This training extends to each staff member of affected departments or functions, and covers the various reporting and recordkeeping rules, updates, recent cases or schemes – and any related changes to policy, procedures, controls or practices. It is expected that all appropriate staff attend all sessions, and that periodic testing or reviews will be conducted.
In addition to staff training, all staff members should be encouraged to review and consider the issues discussed in the BSA/AML policies/procedures, Office of Foreign Assets Control (OFAC) policy/procedures, and the Customer Identification (CIP) policy/procedures. A thorough understanding of the bank’s procedures and practices is necessary to ensure an effective Bank Secrecy posture and to minimize the risks of unnecessary exposure.
Bank Protection Act and Bank Security/Regulation H and Regulation P:
Today’s bank security program should take into account a variety of risks to the bank, extending beyond the traditional robberies, burglaries, and larcenies. Risks from physical as well as information security threats are equally important in today’s security program.
Privacy of Consumer Financial Information/Regulation P:
With the increasing popularity of the internet and e-commerce, the protection of consumers’ financial information has become an important issue. Restrictions were enacted on the way financial institutions disclose information on customers to third parties. The law also requires financial institutions to provide disclosures, both at the time of establishing the customer relationship and annually thereafter.
In addition, banks must protect customers’ information, and the Right to Financial Privacy Act restricts the federal government’s access to a bank customer’s financial records and activities. Under no circumstances is any customer information to be volunteered or provided (verbally, in writing, or electronically) without following the proper internal procedures; unless approved by management, staff is also prohibited from using customer data for marketing or similar purposes outside the bank. The integrity of customer financial data must be protected as an asset of the bank.
Regulation CC/Expedited Funds Availability Act:
Regulation CC covers all deposit accounts considered as having unlimited transaction capability, and establishes availability schedules, under which depository institutions must make funds deposited into transactions accounts available for withdrawal. Additionally, the Funds Availability Disclosure should be provided to all new and prospective customers. Although not a required annual training (training should be conducted “as needed”), we chose to include this regulation, as bank personnel routinely make Regulation CC errors.
We thought it would be helpful to summarize the regulatory training requirements as a tool for establishing and updating your training schedule for 2012. For more information on this article or on how Young & Associates, Inc. can assist your bank with its regulatory compliance training needs, contact Tamara Bolin at 1.800.525.9775 or click here
to send Tamara an Email.
Ted Ginsberg, Skoda Minotti, CPAs, Business & Financial Advisors
We are all aware that the public and the regulators are focusing on executive and incentive compensation at financial institutions. The Dodd-Frank Act (the “Act”), which was signed into law on July 21, 2010, covered a wide range of topics that impacted financial institutions, including executive and incentive pay – with the overall concept that incentive compensation programs should not encourage employees to take unjustified risk. On April 14, 2011, proposed rules were issued to implement the Act’s provisions related to incentive compensation. These rules are now being applied and are having a tremendous impact on the design of executive and incentive compensation programs.
Why Should a Community Bank be Concerned With This Issue?
There are many reasons for all financial institutions (large and small) to be concerned with the incentive compensation guidelines contained in the Act and the proposed rules.
What Actions Should Community Banks Take Now?
- Our clients inform us that the regulators are actively seeking information on this area from institutions with assets of less than $1 billion; this is clearly on the regulatory agenda for institutions of all sizes. We feel that regulators would take a hard look at an institution which said, “We don’t worry about the area of incentive pay because we are too small.”
- Incentive compensation is more than a commission for closing a loan or opening a new account; it impacts executives who receive a bonus based on the institution’s overall performance, no matter what the goal is. It has a very broad impact.
- Community banks that cross the $1 billion threshold through growth or consolidation will need to comply with these provisions.
- Monitoring incentive compensation for risk is good business practice. The argument that oversight of these programs is not needed until an asset threshold is passed does not make sense. An institution that has made a decision to pay no incentive compensation will have a difficult time attracting and retaining talent in a market in which these types of programs are typical.
The first step would be to review all compensation programs maintained by the institution that do not involve base salary. Those programs must then be reviewed, on an annual basis, in light of Sound Incentive Compensation Policies (SICP), which are contained in regulations that were finalized in June 2010. SICP applies to all institutions, regardless of size. SICP forces the institutions to review incentive compensation arrangements in light of the following:
- Every incentive compensation program has to balance risk and financial rewards by using some mechanism that makes sure that payments are not being made until it is clear that the “risk” has passed – perhaps by deferring payments or making awards based on longer-term actions (more than one year).
- Incentive programs need to be tailored to each participant to reflect that person’s activities and the impact of that person on the financial institution. The institution should be aware of other compensation program restrictions that exist in the industry, such as those relating to employees involved in mortgage-related transactions.
- These programs must be compatible with effective controls and risk management. Appropriate policies and procedures to promote compliance and accountability with these rules must be established. Risk management personnel should be involved in the design and administration of the programs and should be independent (from an internal reporting standpoint) of the employees who benefit under the program.
A second step would be to make sure that this review process has strong corporate support and governance. The board of directors must be involved, monitoring and reporting of program results needs to be conducted on a regular basis, and procedures and reports should be documented. Having this type of documentation available for review will be helpful during the examination.
We would also suggest that the institution’s commitment to this process be communicated to employees, investors, and the general public. This practice should instill greater confidence in the management and stability of the institution, as well as demonstrate to the regulators that the institution is paying attention to this important issue.
All financial institutions need to be concerned with this issue. For more information on how Young & Associates, Inc. can assist your bank regarding its incentive compensation program, click here
to send an Email to Mike Lehr, HR Consultant or call 1.800.525.9775. We would be pleased to meet with you to discuss your institution’s progress in this area compared to what is occurring in the marketplace.
Bill Elliott, Senior Consultant and Manager of Compliance
One of the many Dodd-Frank compliance challenges will be the speed at which bankers will have to react to regulatory changes. This article provides two examples of regulatory requirements in which a quick response will be required. These regulations were issued about July 6, 2011, with a legal start date of July 21, 2011 (courtesy of Dodd Frank), and a regulatory start date of August 14, 2011. Full compliance was virtually impossible for banks, due to the timing of the final rules. Everyone hopes that regulators allow bankers a little room regarding these compliance deadlines.
Fair Credit Reporting Risk-Based Pricing Regulations
The Board of Governors of the Federal Reserve System (Board) and Federal Trade Commission (Commission) published final rules to implement the risk-based pricing provisions in section 311 of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which amended the Fair Credit Reporting Act (FCRA). The rules require a creditor to provide a risk-based pricing notice to a consumer when the creditor uses a consumer report to grant or extend credit to the consumer on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that creditor.
The Board and the Commission amended their respective risk-based pricing rules to require disclosure of credit scores and information relating to credit scores in risk-based pricing notices if a credit score of the consumer is used in setting the material terms of credit.
Effect on Banks
If your bank has been giving all customers their credit scores using H-3 (notice to home loan applicant /real estate), H-4 (notice to all applicants for non-real estate loans), or H-5 (notice to applicants with no credit scores), then this pronouncement did not have any measurable impact upon your bank.
This rule essentially amends Appendix Examples H-1 and H-2 of the risk-based pricing rule. Most banks are not using H-2, as that is only used if the bank is reevaluating a credit card interest rate based on the customer’s current credit scores. However, many banks are using H-1, which is the document that is used whenever the bank employs the risk-based pricing methods of the 40%/60% splits methods.
If you use a credit score to set material terms, the customer will need to receive H-6 rather than H-1. H-6 has all of the information that is on H-1, plus additional credit score information.
FCRA/Regulation B: Adverse Action Notice
On July 6, 2011, the Board of Governors of the Federal Reserve System (Board) issued a final rule regarding adverse action notices.
Section 615(a) of the Fair Credit Reporting Act (FCRA) requires a creditor to provide a notice when the creditor takes an adverse action against a consumer based in whole or in part on information in a consumer report. Certain model notices in Regulation B include the content required by both the ECOA and the FCRA adverse action provisions, so that creditors can use the model notices to comply with the adverse action requirements of both statutes. The Board amended these model notices in Regulation B to include the disclosure of credit scores and related information if a credit score is used in taking adverse action. The revised model notices reflect the new content requirements in section 615(a) of the FCRA as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Effect on Banks
The final rule included almost no changes from the proposal. Many forms companies had already published new adverse action notices based on the proposal, and will have to make almost no modifications.
If your bank uses electronic-based forms, your forms companies should have been able to quickly respond. If your bank uses paper-based forms, you need to order new adverse action notices immediately. Be prepared (regardless of the format) for these documents to be much longer.
The adverse action notice will now provide information almost identical to the risk-based pricing notices. However, the bank will not be able to use the risk- based pricing notice to provide the new information to the denied applicant.
While these changes were not extensive, many banks struggled due to the timetables for implementation. While other portions of the changes are likely to allow more time for implementation, banks will discover that the time for implementation will seem very short. Banks will have to work on methods to implement changes more quickly, or face being buried by the regulatory avalanche.
If Young & Associates, Inc. can be of any assistance in this process, please feel free to contact us at 1.800.525.9775 or click here
to send Bill an Email.
Jamey Lawrence, Director, Client Services Lawrence Victoria
Recent regulations, in conjunction with a spike in natural disasters, have placed a renewed emphasis on banks’ force placed insurance procedures. This is prompting most banks to perform a thorough evaluation of their current force placed insurance program. The primary purpose of the review is to ensure compliance with the new regulatory changes underway. An overview follows.
Dodd-Frank Act and Consumer Financial Protection Bureau (CFPB)
Significant changes were made to force placed insurance practices included under Dodd-Frank and the CFPB. Standard procedures historically utilized by most banks will need to be changed in order to comply with the mandatory requirements. The CFPB will have enforcement authority with the ability to impose civil money penalties ranging from $5,000 per day for minor infractions to $25,000 per day for more careless violations and $1 million per day for knowing violations.
Attorneys Generals' Settlement of Mortgage Servicing Practices
Restrictions in the proposed attorneys generals' settlement of mortgage servicing practices stipulates several common force placed insurance practices currently utilized by many banks are prohibited. Furthermore, it would require the bank to take specific additional and cumbersome steps prior to force placing any borrower.
National Association of Insurance Commissioners (NAIC Model Act)
The National Association of Insurance Commissioners Model Act is very specific in many areas related to how force placed insurance is handled. Some practices required by the Act are frequently overlooked by banks and there are also some practices the Act prohibits that are often utilized.
With recent flooding, and the past temporary suspension of the NFIP, examiners and regulators from all agencies have been "targeting" the flood insurance area during compliance exams. Flood zone determinations, ongoing monitoring of flood zone properties, and force placed flood insurance procedures have come under increased scrutiny. In many cases, penalties have been imposed. The concern is not directed so much at proof of insurance at loan closing, but rather making sure the bank has a system in place to identify exposure at any point after loan closing.
Force Placed Insurance Litigation
Recently, lawsuits against banks have been filed on behalf of force placed insurance borrowers. Typically, banks may avoid such litigation by utilizing a well-planned, disciplined, and professionally monitored program.
Most force placed insurance programs currently utilized by community banks that have been considered compliant and disciplined in the past will not pass scrutiny in today’s environment.
With so much at stake, banks can no longer rely solely on an in-house insurance clerk and local general insurance agent for their force placed insurance protection. It has become vital to partner with a trusted specialty provider who will provide guidance through uncertainty and deliver a turn-key system that allows the bank to concentrate on their core business.
In addition to insulation from regulatory violations and uninsured losses, there are other significant enhancements available as a result of utilizing the most current technology to reduce administration and improve customer service.
To evaluate the different solutions available and to acquire an analysis of your current force placed insurance program, please contact Jamey Lawrence at email@example.com or by phone at 1.440.349.0775, ext. 105.
As a result of section 343 of the Dodd-Frank Act, banks (or “insured depository institutions”) will need to make a few posted notice changes and possibly mail notice to certain deposit customers. In short, the unlimited FDIC insurance coverage currently afforded to noninterest-bearing transaction accounts expires under the Transaction Account Guarantee (TAG) Program as of December 31, 2010
. However, the unlimited coverage will continue for two more years through December 31, 2012, but under the guise of section 343 of the Dodd-Frank Act. That is, with a slight twist.
This article is intended to provide a quick “heads up” to bankers on how to meet the December 31, 2010
deadline. If you prefer to read the entire rule visit the following link:
In short, the FDIC’s recent final rule will impose three notice and disclosure requirements on insured depository institutions (IDIs). The underlying objective is to help depositors understand the types of accounts that will be covered by the temporary deposit insurance coverage for noninterest-bearing transaction accounts. IDIs will need to do the following:
- Post the prescribed notice in their main office, each branch and, if applicable, their Web site by December 31, 2010.
- If an IDI is currently participating (i.e., through 12/31/10) in the TAG 2. Program, it must notify NOW account depositors and Interest on Lawyers Trust Account (IOLTA) depositors that their accounts will no longer qualify for unlimited FDIC insurance beginning January 1, 2011. (Note: This assumes that the IDI was paying no more than the permitted interest rate on NOW accounts, as prescribed by the FDIC, to classify them as “noninterest-bearing.”)
- Recognize an ongoing obligation to notify customers of any action taken that will affect the deposit insurance coverage of funds held in noninterest-bearing transaction accounts, such as converting a noninterest-bearing business checking account to an interest-bearing business checking account once permitted by the Dodd-Frank Act in July 2011.
Bill Elliott, Senior Consultant, Manager of Compliance Services
In the compliance department here at Young & Associates, Inc., we have recently been teaching a seminar to assist banks in coping with the regulatory overload. Every bank and financial institution is facing severe stress trying to keep up with the changes, and the seminar is an attempt to put the changes in chronological order. This allows bankers to assure that they have not missed anything for changes already in place, and helps them prepare for future changes. We knew that the list of issues would be fairly long, but were surprised when our final list of “compliance” issues from January 1, 2009 through 2010 (including proposed changes) resulted in 31 items.
Truth in Lending and RESPA
Clearly, the Truth in Lending and Real Estate Settlement Procedure Act changes are the most confusing to banks and will be confusing to customers. While we applaud the intent of the changes – that is, no one gets to the closing table and is “surprised” at the amount of the check that they have to write – the execution requires that the bank, in some cases, give RESPA-related disclosures that are inaccurate. You will know that they are inaccurate, but they will be legal.
At the time of this writing, the U.S. Department of Housing and Urban Development has issued at least 3 versions of “frequently asked questions” regarding the new Good Faith Estimate and HUD-1 forms and rules. In making the decisions that lie ahead, we recommend that management consider these questions and answers, knowing full well that much more regulation is sure to follow.
As your bank tries to cope with this nightmare, we strongly recommend that management review the requirements of all changes, and make sure that there are sufficient resources allocated to assure appropriate and timely implementation. In making decisions regarding the allocation of resources, management should consider not only human resources, but also technological resources. The changes that are on the way (especially the proposed Regulation Z changes that will likely come out in 2010) will require that the bank consider purchasing new software or paying for a major upgrade to current software.
Impact on Customers
In seminars of late, I have been suggesting that we are heading toward regulatory Nirvana. We reach this regulatory Nirvana when financial institutions will no longer actually be able to close a loan. While that is an attempt at humor, banks will need to consider the requirements of these new regulations not only in resolving internal issues, but also when considering the impact on the bank’s customer base. The reality is that the time between application and closing for real estate related loans will continue to increase, and educating your customer base regarding this may reduce customer dissatisfaction. The only “good news” is that all of your competitors are facing the same dilemma, and there will be no legal way for them to shorten the delay timing.
Compliance is always an area of the bank that taxes bank resources without appearing to provide much reward. However, one of the facets of many of these new regulations is that the non-compliance penalties are increasing and, therefore, risk increases as well. The U.S. Congress and regulators appear to be on a track to make the punitive damages for non-compliance strong enough that bankers and others in the financial services industry take notice.
If we can be of any assistance with these transitions, please feel free to telephone us at 1.800.525.9775, or click here
to send an Email. We wish you all the best of luck as you cope with these challenges.
Fair Lending issues were at the top of everyone’s agenda earlier this decade, but the Department of Justice’s (DOJ) last major consent order was in 2007 and did not involve real estate loan products. Who knows where the banking regulatory agencies will concentrate their 2009 efforts with a new administration in Washington and public angst over the subprime meltdown?
Could the next focus be in areas like loan modifications or collection efforts on troubled loans? It’s conceivable as the banking regulatory agencies realize that many such programs were likely cobbled together at the last moment and have yet to face any regulatory scrutiny. Are you absolutely sure that your bank offers loan modifications to minority borrowers as frequently as to non-minorities, or to female borrowers as regularly as to male borrowers? Are your foreclosure rates higher for whites or minorities? For females or males? Your friendly federal banking examiner likely will expect you to have this knowledge at your fingertips, and if you don’t have it, they likely will dissect your files and provide it to you along with a request that you explain any discrepancies.
Remember that the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B state that “a creditor shall not discriminate …” regarding ANY part of a credit transaction. The “ANY” covers the applicant from the time the bank first advertises for a loan product to the time that they have paid off the loan 30 years later. This is the “cradle to grave approach.” Collection efforts, loan modifications, payment extension on consumer loans – it’s all covered by Regulation B and your bank had better be gender and race neutral in all functions that impact your applicants, as well as your loan borrowers.
What Are The Regulators Looking For?
Your federal banking regulatory agency has general regulatory authority over your bank and monitors you for compliance with the ECOA as well as the Fair Housing Act (FHA). The ECOA requires these banking regulatory agencies to refer matters to the Justice Department (DOJ) when there is reason to believe that a creditor is engaged in a pattern or practice of discrimination which appears to violate the ECOA. My guess is that every bank ever referred to the DOJ did not think they were engaged in any of these patterns or practices.
These regulatory agencies also may refer to the DOJ matters involving an individual incident of discrimination. Setting the threshold at one seems to be harsh, but it’s up to your regulator and the DOJ, not the bank, to decide. The bad news is that the banking regulatory agencies must refer evidence of discrimination they may uncover to the DOJ or HUD even when discovered through a lender’s self-testing effort. However, the good news is that voluntary identification and correction of violations disclosed through a self-testing program will be a substantial mitigating factor in considering what further actions might be taken by the DOJ or your banking regulatory agency. The latter is absolutely the lower risk alternative in that the DOJ never loses a case and the best a bank can hope for is a consent judgment or a referral back to the banking regulatory agency.
Fair Lending Risk Assessment
It is important to ensure that your bank has an effective fair lending risk assessment program that is integrated into your bank’s overall risk management process. Your fair lending program should examine all of your bank lending products and document how the institution identifies, measures, controls, and monitors lending activities. Remember the examiner’s mantra – “if is isn’t documented, it wasn’t done.” This program will help evaluate how well your bank complies with fair lending laws and regulations, supervisory expectations, and your bank’s own policies and procedures. The banking regulatory agencies are as concerned about whether your actual practices conform to your own written loan policies and procedures as they are that you are meeting the letter of the law from the ECOA and the FHA.
Don’t simply concentrate on race or gender, even though these are obviously important. Marital status, age, national origin, ethnicity, familial status, etc., are also on the examiners radar, so risk rate the 11 protected classes listed either in the ECOA or the FHA given your bank’s demographics and start your assessment. Guidance distributed by the banking regulatory agencies has discussed alternative means that an institution may use to discover uneven customer service or inconsistent lending practices that may be considered discriminatory. Regulators expect financial institutions to have a system in place to periodically compare the treatment of loan applicants and borrowers to identify differences and correct potential problems. Remember – if it’s broken, they do expect you to fix it.
Having trouble getting started with your fair lending self assessment or worried about the lack of independence in this assessment because the only people in your bank qualified to do such an assessment are also involved in either the lending, underwriting, or second review process? Give us a call. Young and Associates, Inc. offers a fair lending assessment that is modeled after the Interagency Fair Lending Examiner Guidelines, and you know how much the examiners appreciate it when you use the guidelines they have shared with you. Our assessment includes the following:
Review of your written ln policies
Determination of whether your bank’s actual practices are coucted in accordance with these written loan policies
Comparative file analysis of marginal applicants (this alysis will also show that your bank may be denying some otherwise creditworthy loan prospects and the extra credit business may pay for the assessment)
Technical review of any and all of the requirements in Regulati B
For more information on this article or how Young & Associates, Inc. can assist your bank with a Fair Lending Assessment, give us a call at 1.800.525.9775 or click here
to send an Email.
Jim Lawrence of Lawrence Victoria Insurance
Ten Percent of mortgage loans are uninsured
As current marketplace conditions continue to increase the risk in lenders mortgage real estate portfolio, more and more lenders are deciding to partner with a professional insurance tracking firm to manage their flood and hazard insurance monitoring functions. It is estimated that currently as many as 10% of all mortgage loans do not have insurance. That compares with an historical average of between 2% and 3%.
Many banks recognize managing the process of insurance monitoring/renewal might be managed more efficiently by a professional insurance servicing firm. The reasons for this are simple:
Professional service firms have designed systems that manage the insurance monitoring and warning letter cycles more efficiently than a bank. Lender systems were not designed to monitor insurance and as a result may not be able to match insurance documents to loans by anything other than name. For the community based lender with a robust commercial portfolio containing multiple collateral and cross collateralized loans, this usually means that the servicing area is spending a great deal of time attempting to match flood and hazard insurance documents to the correct loan. On average, each piece of collateral generates six pieces of paper insurance correspondence each year the loan is on the books. Professional service firms have designed systems that provide superior tracking and response at a fraction of the cost of bank in-house systems.
Banks Not Made Aware-
Increasingly, lenders are not made aware when borrower’s insurance lapses. More and more homeowner’s insurance companies are utilizing third party mail clearing houses to process and mail policy information, including cancellation notices. Even though the lender is unaware of an exposure it is not protected from a loss. The number of situations where lenders have incurred a significant financial loss because a borrower’s flood or hazard coverage was cancelled or had lapsed and the lender was never notified is increasing
As the cost of a Full Time Employee (FTE) increases, employee training and staffing remains a concern. Staffing employees to manually monitor insurance correspondence is expensive and a task most employees do not volunteer for. Turnover, vacations and “special projects” reduce the amount of time that is available for monitoring, corresponding and following up on the insurance requirements for each borrower. A community banker once told me that even with a full staff monitoring insurance manually, there will always be exposure simply due to the fact that lenders are not always notified when a borrowers insurance lapses.
Reducing Charge Off’s-
When a borrower lets insurance on the real estate securing the loan cancel or expire, the lender experiences substantial exposure in the form of uninsured mortgaged real estate. In most cases, if the real estate securing the loan experiences a physical damage loss and is not insured, the borrower will stop making payments and foreclosure usually results. The lender then engages the expensive, difficult and undesirable process of foreclosure on a property that, due to uninsured physical damage, is worth much less than the loan balance. The result is a large charge-off for the lender which will decrease shareholder value.
Safety & Soundness/Compliance-
Bank examiners have been instructed to closely scrutinize all procedures lenders have in place to guarantee that adequate proof of flood and hazard insurance exists for all mortgaged real estate. Their concern is not directed so much at proof of insurance requirements at loan closing, but rather making sure the lender has a comprehensive system in place to determine if the loan is exposed at any point after the loan closing.
Borrower Good Will -
Force placed insurance is important not only for protecting the lender, but also the borrower. Although the responsibility to maintain insurance ultimately belongs to the borrower, most lenders understand the importance of securing insurance on behalf of their borrowers who neglect to do so themselves. This is especially the case with community and regional lenders who strive to provide exceptional service to their borrowers. When a borrower forgets to pay their insurance bill, has their insurance cancelled or non-renewed and experiences physical damage to their dwelling, they will appreciate that the lender secured insurance for them. Avoiding civil money penalties is of the utmost concern.
Consider a Tracking Partner-
With this difficult environment; lenders should evaluate a third party insurance tracking system to monitor their loan portfolios. There are significant advantages that can be provided, including the transfer of risk away from the lender while maintaining administrative control.
Benefits of a Tracking Partner-
when considering an insurance tracking partner, lenders should expect the plan to:
Individual hazard, flood, auto and equipment insurance policies; Minimum coverage requirements; Residential, Commercial and HELOCS; Escrowed, Foreclosed and Bankruptcy
Automatic Coverage to protect all loans (E&O); Reduce administrative costs; Increase lender control and flexibility; Compliance peace of mind; Seamless Integration of flood zone determinations into a tracking system
Warning letters to borrowers; Insurance documents when necessary; Management reports both weekly and monthly; Specialty reports on demand
Cost benefit analysis:
Reduce administrative expenses; Little direct cost to lender (low per loan tracking fee); No portfolio size or system restrictions; Compliance advantages, consistent approach to monitoring; Integrated flood zone determinations; Transfer the risk yet retain administrative control; Little or no programming.
For more information on insurance tracking, please contact Jamey Lawrence at firstname.lastname@example.org
or 440-349-0775 Ext. 205
Bill Elliott, Senior Consultant and Manager of Compliance
The Identity Theft / Red Flag requirements were issued by the regulators late last fall. These requirements have caused a lot of consternation in many banks over the last few months, as banks attempt to implement these rules.
At the basic level, the regulation requires banks to do just a few things:
- Risk rate all products in the areas of account opening and account access
- Determine if policies or procedures need to be updated based on the risk ratings assigned
- Write an identity theft policy
- Get board approval of the identity theft policy
- Train staff on any new changes or identity theft items
- Assign responsibility for ongoing policy or procedure changes
- Prepare an annual report to the board regarding identity theft
We find banks struggling with several of these items. This article will discuss some of the difficulties that banks are experiencing.
Determining the risk level for many banks that are in relatively rural or small town settings would appear to be easy; banks in this category assume that their risk level is always “low.” While “low” is
often the appropriate rating, banks in this category need to take all opening and access methods into account. Once accounts are being opened electronically or accessed through electronic means (Internet or debit/ATM card), the bank begins to lose the once-tight control on accounts, and the risk level increases. Banks in urban markets need to be even more vigilant as they prepare their risk ratings.
Each account type needs to be reviewed and risk levels established for account opening and access. The bank needs to take an honest look at its approaches to these two items to assure that realistic risk levels are established.
Evaluating Identity Theft Procedures
The bank must examine procedures for any access or opening method. Special care must be given to those methods that are identified as higher than a “low” risk. Many banks are discovering that, while they perhaps have good procedures for many items on their moderate- or high-risk list, there are significant holes. The following is a simple example: A customer comes into the bank and announces that his/her checks were stolen. The bank response would be to close the account and open a new one. This would be identity theft prevention. Is it in your teller or CSR manual? It may not be, even though you have been using the same approach for many years.
It is important to make sure that your bank has all of your identity theft mitigation techniques written down and included in the procedures manuals for the job function that needs this information.
Choosing Red Flags
Another mistake that banks are making involves the 26 red flags themselves. There are a few red flags that need to be on almost every bank’s list. For instance, receiving a fraud or active duty credit bureau alert is likely for any bank that routinely uses credit bureaus. While any of the 26 red flags are possible, many are unlikely for most banks. If you choose to include all 26 red flags on the off chance that they might happen, your job increases exponentially. Each red flag that you choose means that you will need policies and procedures to address the red flag, as well as training for each employee who needs to know the new policies and procedures.
For red flags that are likely to occur, this activity has value. For those on the fringe, it may well translate into a waste of time. While we want to protect all customers and the bank from identity theft, it is important that the bank focuses on the more likely issues, rather than creating policies and procedures that are “over the top.”
When you are ready to present your policy and program to the board, we strongly recommend that the board assign a member of senior management to be responsible for the program. The regulation permits a senior management individual to change the policy, etc. regarding identity theft without board approval, in part to assure that changes are made promptly when the bank is faced with a new identity theft issue.
If the board chooses to retain control, then the board may have periods of time when the policy is often back in their pockets for re-approval. Unless the bank is experiencing an explosion of new identity theft issues that have significant safety and soundness impacts, the continual board re-approval process is likely to be a waste of time.
As a practical matter, most banks are not discovering significant changes in the way that they do business. For many, this is an exercise to please the regulators – but it is an important exercise. Every identity theft policy and procedure deficiency that is corrected through this process means more safety for each bank customer and for the bank itself. Therefore, this is a worthwhile undertaking, even if the law and regulators had not mandated it.
All banks will choose to address the procedure portion of identity theft differently. However, Young & Associates, Inc. can help with the most difficult portions of this process – risk assessment, policy, and training. We have developed The Red Flag Identity Theft Toolkit to help you develop and implement a comprehensive identity theft program for your bank. (See page 8 for detailed information.)
For more information on identity theft and how it applies to your bank, contact Bill Elliott at 1.800.525.9775 or click here
to send an Email.