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Floor Plan audits

The importance of floor plan audits for lending institutions

Written by admin on . Posted in Blog, Lending & Loan Review.

By Wendy Dancer; consultant, Young & Associates

Auditing your institution’s Floor Plan borrowers can seem like a tedious and time-consuming task. Workload is already heavy, weather is bad and frankly, who has the time to go out and touch hundreds of cars, motorcycles and boats? Your borrower is doing fine… until they are not.

As an example of a cautionary tale, I was personally involved in a Floor Plan audit that “seemed off”. The used car lot dealer was paying off vehicles on the line as expected, when it was discovered that the subject automobiles were still physically on the lot. Then mysteriously, the same autos would get added back to the line a month later. Long story short, the dealer had taken out a 2nd floor plan line with a private finance company. Vehicles were not getting sold; rather, the Floor Plan lines were being treated as a shell game to hide business decline.

This was the red flag that tipped us off on much larger business issues, which sadly ended in the dealership closure and a work-out loan situation for our institution. Below is an overview of why skipping Floor Plan audits is not in your institution’s best interest and a way to avoid the above scenario.

What are floor plan audits?

A Floor Plan audit is a physical verification of financed inventory. Auditors confirm that units pledged as collateral exist, are located where reported, and match lender records in terms of serial numbers, condition, and status (new, used, sold, or in transit). These audits may also include reviews of sales documentation, titles, and payoff activity.

Risk mitigation and collateral protection

Floor Plan lending is essentially asset-based lending. If inventory disappears, is sold out of trust, or is inaccurately reported, the lender’s collateral position is immediately compromised.

Regular audits help:

• Detect missing, sold-out-of-trust, or misrepresented units early
• Verify that financed inventory aligns with borrowing base reports
• Reduce the likelihood of large, undiscovered losses

Early detection is critical. Identifying discrepancies after weeks or months can significantly increase loss severity.

Fraud detection and deterrence

Floor Plan audits act as both a detection mechanism and a deterrent. The knowledge that audits are conducted regularly discourages intentional misreporting, double flooring, or concealment of sales proceeds. Auditors can uncover red flags such as altered VINs, falsified documentation, or repeated delays in payoff—often before fraud escalates.

Portfolio monitoring and credit quality

Audits provide lenders with real-time insight into dealer operations and financial health. Patterns observed during audits—such as chronic shortages, poor recordkeeping, or inventory aging—can signal deeper issues like cash flow stress or operational weakness.

This information allows lenders to:

  • Adjust credit limits or terms proactively
  • Increase monitoring on higher-risk accounts
  • Make informed renewal or exit decisions

In this way, Floor Plan audits serve as an early warning system rather than just a compliance exercise.

Regulatory and policy compliance

Many lending institutions are subject to internal policies, investor requirements, and regulatory expectations related to collateral verification and risk management.

Consistent Floor Plan audits help demonstrate:

  • Sound underwriting and ongoing credit administration
  • Adherence to internal risk management standards
  • Responsible stewardship of depositor or investor funds

Well-documented audits also provide defensible support in the event of disputes, charge-offs, or regulatory reviews.

Strengthening dealer relationships

While audits are often viewed as intrusive, when handled professionally they can strengthen lender-dealer relationships. Clear expectations, consistent audit schedules, and transparent communication help reinforce accountability on both sides. Audits can also surface operational inefficiencies at the dealer level, creating opportunities for corrective action before problems become critical.

Adapting to a changing lending environment

As floorplan portfolios grow more complex—with multi-location dealers, mixed inventory types, and rapid turnover—audits remain one of the few ways to independently validate data. Hybrid and technology-assisted audits now allow lenders to balance thorough oversight with efficiency, making regular verification more practical than ever.

Conclusion

Floor Plan audits are not merely a back-office function. They are a cornerstone of prudent Floor Plan lending. By verifying collateral, deterring fraud, monitoring credit quality, and supporting compliance, audits protect both lenders and their dealer partners. In an environment where inventory values are high and margins can shift quickly, consistent and well-executed floorplan audits are essential to sustainable, profitable lending.

Consistent, independent audits are key to protecting collateral and ensuring sound portfolio management. Young & Associates provides lending process review services to help institutions strengthen oversight and maintain credit confidence. Additionally, Y&A Credit Services provides ABL field exams that give lenders a clear, objective view of collateral strength.

ABL financing

The benefits of asset-based lines of credit for contractors and lenders

Written by admin on . Posted in Advice, Blog, Lending & Loan Review.

By Patrick Lilly; senior consultant, Young & Associates

Asset-Based Loans (ABL)

Asset-Based Loans (ABLs) are usually structured as revolving lines of credit that are secured by the borrower’s current assets. The amount of credit made available is determined by the quality and value of the collateral. Usually accounts receivable, inventory and sometimes equipment and real estate, depending on industry risk.

In this article, we will focus on General Building and Engineering Contractors, Trades Sub-Contractors, and construction-related services providers having current asset concentrations in accounts receivable. These types of businesses typically experience large swings in cash flow while awaiting progress payments or final payments on contracts, goods supplied, and services rendered. The ABL line of credit provides interim working capital to these companies. This helps to smooth out the peaks and valleys of payments received from their customers.

How it Works

Working with a pre-determined loan limit based on actual and projected needs, borrowers can access a percentage of the value of their pledged assets, depending on the current certified value of those pledged assets.

These loans require a close level of monitoring. The frequency is determined by the size of the loan and industry risk. This usually entails monthly or quarterly reporting requirements on the company’s financial status. This usually consists of a financial statement, accounts receivable, and accounts payable agings of even date, a certification from the company’s responsible financial officer and a borrowing base certificate (BBC), which sums up the amount of credit available based on the asset values.

Prudent Underwriting Guidelines

Loan Amount:

  • Starting with the requested amount of loan, a thorough analysis of the projected cash flow needs of the borrower should be undertaken. An improper loan limit can spell problems for both the contractor and the financial institution. If too little of a limit is approved, the contractor can run short of necessary working capital. This can create a negative effect on performance. Too much of a limit approved invites spending on fixed assets due to the relative ease in access to the loan proceeds and a sizable unused commitment impairs the financial institution’s overall lending and earnings capacity.
  • Accounts receivable aging reports are an absolute necessity for this type of financing. Carve-outs based on the age and/or nature of a receivable are predetermined as conditions of the eligibility of any particular account receivable. Typical carveouts are the exclusion of any AR over 90 days aged, the elimination of any intra-company or employee receivable and the elimination of receivables that are concentrated with one customer which total more than 15-20 percent of the total amount of receivables.

Reporting Requirements:

  • The borrower is typically required to report on a monthly or quarterly basis. The nature of the reporting should consist of:
    • A current (less than 30 days aged) monthly or quarterly financial statement
    • Accounts receivable detailed aging of even date and balance as indicated on the financial statement.
    • Accounts payable detailed aging of even date and balance as indicated on the financial statement.
    • A BBC supplied on a form approved by the lender that mirrors the information on the agings, subtracts ineligible ARs and taxing authority payables, states the balance on the loan and the amount available to draw on the loan. This form should be completed, signed and dated by the authorized borrower representative.

Audit requirements:

  • On larger and more complex borrowings, the lender needs to impose strict reporting requirements to protect the interests of the lender. This usually consists of:
    • Reviewed quality or better financial statements from the borrower due bank on an annual basis. (Usually no more than 90 days after the prior YE period)
    • Internally prepared and attested financial statement from the borrower on a monthly or quarterly basis. (Due lender no more than 30 days from the prior month or quarter ending period)
    • Depending upon the size, complexity and nature of the borrower, the lender may require a periodic field audit conducted by a qualified third party inspection firm as outlined in the Asset Based Loan Agreement. This audit reconciles the financial statement with the schedule of accounts receivable and payable, inventory activities and the most recent BBC. Such audits are integral to maintaining the integrity of the borrower relationship. They also protect the bank’s investment in the credit and its collateral position.

Other conditions:

  • The lender should consider CAPEX usage restrictions on proceeds of the line.
  • While ABL RLOCs rely on the cash conversion cycle for repayment, minimum pre and post distribution EBITDA DSCR covenants in combination with other standard C&I lending covenants such as minimum working capital or current ratio are prudent.
  • The borrower’s key suppliers should be contacted for credit reference.
  • Governmental contracting can result in extended terms. That may impair the bank’s ability to exercise assignment rights to receive direct payment in a collection action.

ABL financing can lead to a fuller relationship with a borrower. This can be beneficial to both the borrower and the lender. If managed and monitored properly, these types of loans can be valuable and profitable assets to the lender. It can then result in long term and expanding relationships.

How recent CFPB guidance changes affect financial institutions

Written by admin on . Posted in Blog, Compliance & Regulations.

By Bill Elliott, CRCM; director of compliance education, Young & Associates

Since its inception in 2011, the Consumer Financial Protection Bureau (CFPB) has responded to a wide range of issues — even without an act of Congress, such as with the Truth in Lending Act. The agency has relied on compliance bulletins, advisory opinions, interpretive rules and circulars to provide information regarding priorities and interpretations of federal consumer financial laws.

With a new administration in Washington, the CFPB has gone through a long and difficult transition that (as of this writing) is still not complete. Pending lawsuits and uncertainties created by the administration may cause additional changes, so changes in the agency may continue.

The original plan for the agency was to have a measure of independence from the natural changes from administration to administration. Over the last 14 years, mostly through court cases, the agency’s independence has eroded. The actions discussed below are, at least at some level, the direct result of that erosion.

Latest CFPB guidance changes

CFPB Acting Director Russell Vought
CFPB Acting Director Russell Vought

On May 12, 2025, CFPB Acting Director Russell Vought announced the withdrawal of 67 guidance documents, consisting of:

  • Eight policy statements
  • Seven interpretive rules
  • 13 advisory opinions
  • 39 other guidance documents such as circulars and bulletins

The reasoning behind this action was that policies implemented by guidance represent an unfair regulatory burden and might be contrary to federal law.

“In many instances, this guidance has adopted interpretations that are inconsistent with the statutory text and impose compliance burdens on regulated parties outside of the strictures of notice-and-comment rulemaking,” Vought said. “But even where the guidance might advance a permissible interpretation of the relevant statute or regulation, or afforded the public an opportunity to weigh in, it is the Bureau’s current policy to avoid issuing guidance except where necessary and where compliance burdens would be reduced rather than increased.”

Vought further outlined the new policy and the reasons for it:

  • The CFPB commits to issuing guidance only when that guidance is necessary and would reduce compliance burdens rather than increase them. “Historically, the Bureau has released guidance without adequate regard for whether it would increase or decrease compliance burdens and costs,” he wrote. “Our policy has changed.”
  • The CFPB commits to reducing its enforcement activities in conformance with President Trump’s directive to deregulate and streamline bureaucracy. He noted that many of the CFPB’s enforcement responsibilities overlap or duplicate other state and federal regulatory efforts.
  • “Finally, to the extent guidance materials or portions thereof go beyond the relevant statute or regulation, they are unlawful, undermining any reliance interest in retaining that guidance,” he said.

This may not signal the demise of all 67 items. The CFPB stated it intends to continue reviewing these guidance documents. Some may ultimately be reinstated, at least in part. Until that happens, the CFPB and presumably all other banking regulators will not enforce or otherwise rely upon the guidance documents.

A closer look at the CFPB withdrawals

Many of these withdrawn guidance documents received justified criticism. For example, the Bureau withdrew the 2024 circular titled Improper Overdraft Opt-In Practices. This document imposed additional requirements, well beyond what the regulation requires, on institutions’ record-keeping practices. This occurred without going through formal notice-and-comment rulemaking under the Administrative Procedure Act.

Two other notable withdrawals:

The first involves Unfair, Deceptive or Abusive Acts or Practices (UDAAP) concerns with digital platforms involving non-mortgage consumer financial products and services.

Although the CFPB removed this document, it kept an advisory opinion that addresses similar UDAAP concerns and Real Estate Settlement Procedures Act (RESPA) Section 8 issues for digital platforms offering mortgage products.

The second rescission involved the issue of sexual preference under Regulation B. Sexual preference should never be a reason for denying a loan, but some may interpret rescission of that document as removing some protections for that segment of the lending public.

In spite of these removals, the CFPB continues to pursue cases involving consumer reporting, online installment lending, mortgage lending and debt collection.

CFPB priorities

In April 2025, Mark Paoletta, chief legal officer of the CFPB, sent a memorandum to all staff setting forth the priorities of the new leadership.

Key aspects of the priorities include the following:

  • A shift back to prioritizing banks over nonbanks and enlisting the states to conduct supervision and enforcement over nonbanks.
  • A focus on mortgages (highest priority), consumer reporting, debt collection, fraudulent overcharges and fees.
  • A deprioritization of peer-to-peer platforms and lending, consumer data, remittances and digital payments, among other areas.

If you would like to review the entire CFPB document, you can find it here.

Contact Young & Associates today at consultants@younginc.com if we can assist in any way with these or any other regulatory compliance issues.

The importance of appraisal reviews in protecting financial institutions

Written by admin on . Posted in Blog, Risk Management.

By Casey Simpson; consultant and manager of appraisal review services, Young & Associates

In the real estate industry, accurate and unbiased property appraisals are critical. These influence lending decisions, investment strategies, tax assessments and legal outcomes. Appraisal reviews are a safeguard for financial institutions, investors and the public. Additionally, the regulators outlined this process as a requirement.

Accurate and unbiased property appraisals drive critical decisions in lending, investment strategies, tax assessments and legal outcomes. Appraisal reviews provide safeguards for financial institutions, investors and the public, and regulators mandate the process.

Although appraisal value thresholds have changed over time, the obligation to review appraisals has not. Financial institutions must still conduct a review whenever an appraisal supports a transaction.

The Interagency Appraisal and Evaluation Guidelines from 2010 specifically states, “As part of the credit approval process and prior to a final credit decision, an institution should review appraisals and evaluations to ensure that they comply with the Agencies’ appraisal regulations and are consistent with supervisory guidance and its own internal policies. This review also should ensure that an appraisal or evaluation contains sufficient information and analysis to support the decision to engage in the transaction.”

Appraisal Disciplinary Actions chart
Disciplinary cases show that nearly all appraisal deficiencies could have been remediated or prevented through proper reviews. Data: Ohio Appraiser Disciplinary Actions 2020-2025

What are real estate appraisal reviews?

A real estate appraisal review evaluates an appraisal report for completeness, accuracy, consistency and compliance with applicable standards.

Qualified professionals who are independent from the subject transaction and have experience in the relevant property type should perform appraisal reviews to maximize the benefits. Use consistent review checklists with a clear understanding of the client’s scope of work. Align with client-specific requirements and regulatory compliance. Provide a detailed narrative of the transaction appraisal that documents findings and highlights deficiencies or recommendations.

Key benefits of real estate appraisal reviews

  • Enhances accuracy and reliability: Errors, omissions, or flawed assumptions in an appraisal can result in inaccurate valuations. A review identifies discrepancies and unsupported conclusions to ensure the final report is accurate and defensible.
  • Mitigates financial risk: For lenders and investors, misvalued properties carry significant risks. Reviews serve as a risk.
  • Ensures regulatory and standards compliance: Financial institutions are subject to strict regulatory requirements, including the Uniform Standards of Professional Appraisal Practice (USPAP), the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Appraisal reviews help ensure compliance with these requirements, protecting the institution from legal or regulatory penalties.
  • Improves consistency across valuations: For organizations managing multiple appraisals, reviews promote consistency in methodology, terminology and value conclusions. This supports transparency and establishes quality standards.
  • Cost limitations: Financial institutions with qualified in-house reviewers can use them as a resource to reduce risk. However, third-party providers can provide review services, with costs passed on to the customer as a line item on the closing settlement sheet.

Regulatory compliance explained

Uniform Standards of Professional Appraisal Practice (USPAP)

The purpose of USPAP is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers. It sets forth standards for all types of appraisal services, including real property, personal property, business, appraisal review and mass appraisal. It is essential that appraisers develop and communicate their analyses, opinions and conclusions to intended users in a manner that is meaningful and not misleading. (source: www.appraisalfoundation.org and www.appraisers.org)

The Dodd-Frank Wall Street Reform and Consumer Protection Act

Commonly known as Dodd-Frank, it is legislation that was passed by the U.S. Congress in response to financial industry behavior that led to the financial crisis of 2007–2008. It sought to make the U.S. financial system safer for consumers and taxpayers. It established a number of new government agencies tasked with overseeing the various components of the law and, by extension, various aspects of the financial system. The Dodd Frank Act aimed to protect the independence of appraisers, reasonable and customary appraisal fees, appraiser certification and education standards, requirements for Appraisal Management Companies (AMC’s), standards for Automated Valuation Models (AVMs) and Broker Price Opinions (BPOs), additional provisions for high-risk mortgages, among other issues. (source: www.investopedia.com by Adam Hayes updated February 01,2025 and Regulatory Issues Facing the Real Estate Appraisal Profession)

Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)

FIRREA has reshaped lending practices, particularly in real estate and mortgage financing. Lenders must adopt rigorous underwriting standards to ensure loans are extended to creditworthy borrowers, reducing the risk of defaults and enhancing financial system stability. Certified appraisals are now required to ensure accurate property valuations, critical for mitigating systemic risk in mortgage-backed securities. (source: www.accountinginsights.org Published Feb 13, 2025 and Regulatory Issues Facing the Real Estate Appraisal Profession)

Financial institutions face heightened risk if appraisals are not thoroughly reviewed. Independent reviews reduce risk, ensure adherence to standards and save valuable staff time. At Young & Associates, we provide independent appraisal reviews that give your team confidence in lending decisions while reducing compliance burdens. Let Young & Associates help you navigate appraisal compliance with confidence and efficiency. Reach out for a consultation.

Intel’s Ohio investment creates opportunity for economic growth and lending

Written by admin on . Posted in Blog, Lending & Loan Review.

Digital render of Intel's new facility
Digital render of Intel’s new facility located in Central Ohio. Photo courtesy of Intel

By Alex Heavner; Credit Analyst, Young & Associates

Intel is transforming nearly 1,000 acres in New Albany, Ohio, with a $28 billion investment in two advanced chip factories. The site will produce some of the industry’s most advanced semiconductor processors. Ground broke on the project in 2022, with completion anticipated by 2027.

The benefits of a tech giant like Intel establishing a presence in Central Ohio are vast. The direct economic impact begins with the creation of more than 7,000 construction jobs. Once operational, Intel expects to employ at least 3,000 individuals on-site or remotely. Beyond these, more than 10,000 directly impacted workers in the surrounding communities will experience significant growth in the years to come.

Intel intends to onboard more than 350 Ohio-based companies into its supply chain. Small businesses, franchises and startups are expected to flock to the area to capitalize on the expanding ecosystem. Intel’s investment may create tens of thousands of new jobs in industries beyond its own.

Intel has also committed $100 million to support educational initiatives in Ohio, aimed at developing a skilled talent pipeline and strengthening local research institutions. As of May 2025, $17.7 million of that commitment has been allocated. This funding has awarded more than 2,300 scholarships and helped educate over 9,000 students through partnerships with more than 80 colleges and universities. In addition, Intel is rolling out Khanmigo, an AI-powered tutor and teaching assistant, to select middle and high schools.

How Intel helps construct opportunity

According to comprehensive economic models, Intel’s presence is expected to increase Ohio’s GDP by $2.3 billion annually. A significant portion of this growth will stem from the rise in local business development — creating a surge in demand for commercial construction and property development financing.

New Albany is uniquely positioned for this expansion. It is the only Columbus suburb where commercial land use outpaces residential, with 43 percent allocated to business and 31 percent to housing. The city actively seeks to reduce the residential tax burden by increasing commercial revenue, which currently comprises more than 80 percent of the city’s general fund — largely derived from income taxes collected in the business park. This commercial focus directly contributes to enhanced infrastructure, services and quality of life for residents.

Lending: The backbone of community growth

None of this economic potential is realized without one critical component: access to capital. Lending is the engine that turns opportunity into action.

Contractors, electricians, HVAC technicians and landscapers will need financing to purchase or lease vehicles and equipment essential for their trades. Many will also rely on financing for payroll and up-front material costs during lengthy projects.

Restaurants, retailers and healthcare providers require funding to secure land, finance construction, purchase equipment and obtain the necessary licenses to open and operate. In short, every facet of the economy will be touched by lending.

Construction lending, however, carries unique risks. Delays caused by weather, labor shortages or supply chain disruptions are common. Rain could halt progress for a week and time lost is money lost. These interruptions can jeopardize loan repayment and force lenders to make difficult decisions — continue funding, renegotiate terms or sell the loan to mitigate losses.

Additionally, fluctuating material costs and unforeseen expenses can lead to budget overruns. Mismanagement could prevent borrowers from repaying loans, increasing the risk of default. While the unfinished structure typically serves as collateral, its incomplete status may significantly reduce its resale value, leaving lenders exposed.

To manage these risks, financial institutions employ construction inspectors who monitor progress and confirm that funds are being used appropriately. Construction loans are structured with draw schedules — funds are released only after specific milestones are verified. Borrowers often self-fund the initial project phase or may apply for a mobilization draw, a smaller, closely monitored loan intended to cover startup expenses.

Fueling small business growth

Not all small businesses will qualify for traditional loans. That’s where Small Business Administration (SBA) programs come into play.

SBA 7(a) loans provide up to 85 percent loan guarantees, significantly reducing the lender’s risk and encouraging lending to small and growing businesses. These guarantees are not a safety net for default. Borrowers are still held accountable and collateral is pursued before the SBA covers any shortfall.

SBA 504 loans offer another avenue, providing long-term, fixed-rate financing for purchasing real estate, buildings and large equipment. These options are crucial for entrepreneurs looking to seize the opportunities Intel’s investment is creating.

Intel’s investment prepares Central Ohio for progress

Financial institutions are proactively expanding their operations in Central Ohio to meet the demands of this unprecedented economic growth. Many are opening regional hubs, hiring local talent and leveraging advanced technologies to streamline services and improve responsiveness.

For instance, Wells Fargo has established a new technology center in the Easton area of Columbus, expected to generate up to 500 jobs with average annual salaries of $125,000. Regional and community banks are also taking strategic steps, such as partnering with colleges and universities to strengthen talent pipelines and improve workforce readiness.

Institutions are embracing fintech and artificial intelligence (AI) to enhance efficiency, accuracy and scalability. AI tools now support underwriting decisions, smart contract development through blockchain improvements and embedded finance integration — all essential for staying competitive in a fast-evolving market.

Intel creates strategic positioning for financial institutions

To fully capitalize on the economic momentum generated by Intel’s investment, financial institutions must act strategically, proactively positioning themselves to serve both the direct and peripheral financial needs arising in the region. This includes preparing for a substantial increase in commercial lending activity, establishing competitive advantages and reinforcing operational infrastructure.

  1. Expand commercial lending capabilities: Assess commercial lending teams and workflows. Strengthen underwriting capacity and approval efficiency to handle increased loan volume.
  2. Build industry expertise: Develop knowledge of construction, SBA and commercial real estate lending. Partner with experts like Young & Associates for guidance and training.
  3. Strengthen risk management and compliance: Update credit policies, perform stress testing and enhance compliance programs. Ensure regulatory readiness in areas like CRA, fair lending and BSA/AML.
  4. Invest in scalable technology: Modernize systems to improve loan origination, analytics and customer experience. Utilize AI and data tools to increase capacity without sacrificing quality.
  5. Forge local and regional partnerships: Build relationships with developers, contractors and municipalities for early insight and lending opportunities.
  6. Prepare for talent demands: Plan for increased hiring needs. Launch internship programs and partnerships with universities to attract future talent.

Opportunity meets expertise

At Young & Associates and Y&A Credit Services, we support financial institutions navigating increased demands brought on by the Intel development and broader regional growth. Our decades of experience allow us to provide highly specialized consulting in areas such as underwriting, risk management, regulatory compliance and operational scalability.

Our consultants are well-versed in both national regulations and Ohio’s unique financial environment. We remain committed to helping community financial institutions capitalize on opportunity while remaining compliant, competitive and resilient.

Federal Crop and Livestock Insurance programs and what’s changing in 2025

Written by admin on . Posted in Advice, Blog, Commercial Underwriting, Consultation, Lending & Loan Review, Management & Planning, Risk Management, Strategic Planning.

By Craig Horsch, Consultant, Young & Associates

Overview of Federal Crop and Livestock Insurance programs

Federal Crop Insurance and Federal Livestock Insurance are supplemental insurances that cover losses which are unavoidable and caused by naturally occurring events. They do not cover losses resulting from negligence or failure to follow good farming practices related to crops and/or livestock.

Federal Crop Insurance Programs include three main programs—Price Loss Coverage (PLC), Agriculture Risk Coverage (ARC), and the Marketing Assistance Loan Program (MALP)—as well as the Whole-Farm Revenue Protection Plan 2025 (WFRP), per the USDA Risk Management Agency.

  • PLC overview:

    PLC program payments are issued when the effective price of a covered commodity is less than the effective reference price for that commodity. The effective price is defined as the higher of the market year average price (MYA) or the national average loan rate for the covered commodity. PLC payments are made to owners of historical base acres and are not tied to the current production of covered commodities. Covered commodities include wheat, corn, sorghum, barley, oats, seed cotton, long- and medium-grain rice, certain pulses, soybeans/other oilseeds, and peanuts.

  • ARC overview:

    There are two types of Agriculture Risk Coverage: Agriculture Risk Coverage–County (ARC-CO) and Agriculture Risk Coverage–Individual (ARC-IC).

    • The ARC-CO program provides income support tied to the same historical base acres—not current production—of covered commodities. ARC-CO payments are issued when the actual county crop revenue of a covered commodity is less than the county ARC-CO guarantee for that commodity.
    • ARC-IC provides income support based on a farm’s revenue from current production of covered commodities, compared with a benchmark average of that farm’s production of those commodities. However, payments are limited to a portion of the farm’s historical base acres. This page focuses on ARC-CO; the ARC-IC program has not been widely adopted.

  • MALP overview:

    The MALP allows producers to use eligible commodities they have produced as collateral for government-issued loans. Eligible commodities include wheat, corn, sorghum, barley, oats, upland and extra-long-staple cotton, long- and medium-grain rice, soybeans and other oilseeds, certain pulses, peanuts, sugar, honey, wool, and mohair.

  • WFRP overview:

    WFRP insurance provides coverage against the loss of revenue that you expect to earn or obtain from commodities you produce or purchase for resale during the insurance period, all under a single insurance policy. WFRP offers benefits such as:

    • A range of coverage levels from 50% to 85% to fit the needs of more farming and ranching operations;
    • Replant coverage for annual crops, except Industrial Hemp;
    • The ability to consider market readiness costs as part of the insured revenue;
    • Provisions to adjust the insurance guarantee to better fit expanding operations;
    • An improved timeline for farming operations that operate as fiscal year filers; and
    • Streamlined underwriting procedures based on the forms used for WFRP.WFRP is designed to meet the needs of highly diverse farms that grow a wide range of commodities and sell to wholesale markets. The WFRP policy was specifically developed for farms that market directly to local or regional buyers, sell through identity-preserved channels, and produce specialty crops, animals, and animal products. The amount of farm revenue you can protect with WFRP insurance is the lower of the revenue expected on your current year’s farm plan or your five-year average historic income, adjusted for growth. This represents an insurable revenue amount that can reasonably be expected to be produced on your farm during the insurance period. All commodities produced by the farm are covered under WFRP, except timber, forest and forest products, and animals used for sport, show, or as pets.It is important to understand that WFRP covers revenue produced during the insurance period. For example, if a calf weighs 800 pounds at the beginning of the insurance period and is sold at 1,200 pounds during the insurance period, the value of production will be the additional 400 pounds gained. Inventory adjustments are used to remove production from previous years and to add revenue for production that has not yet been harvested or sold.

Understanding USDA Livestock Insurance programs

Per the USDA Risk Management Agency website, the Federal Livestock Insurance Programs are as follows:

  • Livestock gross margin – Cattle:

    The LGM for Cattle Insurance Policy provides protection against the loss of gross margin (market value of livestock minus feeder cattle and feed costs) on cattle. The indemnity at the end of the 11-month insurance period is the difference, if positive, between the gross margin guarantee and the actual gross margin. The LGM for Cattle Insurance Policy uses futures prices to determine both the expected and actual gross margins. Adjustments to futures prices are based on state- and month-specific basis levels. The price the producer receives at the local market is not used in these calculations.

    Eligible producers are those who own cattle in the states of Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, South Dakota, Texas, Utah, West Virginia, Wisconsin, and Wyoming. Only cattle sold for commercial or private slaughter — primarily intended for human consumption—and fed in one of the eligible states are covered under the LGM for Cattle Insurance Policy.

  • Livestock gross margin – Dairy Cattle:

    The LGM for Dairy Cattle Insurance Policy provides protection against the loss of gross margin (market value of milk minus feed costs) on milk produced from dairy cows. The indemnity at the end of the eleven-month insurance period is the difference, if positive, between the gross margin guarantee and the actual gross margin. The LGM for Dairy Cattle Insurance Policy uses futures prices for corn, soybean meal, and milk to determine the expected and actual gross margins. The price the producer receives at the local market is not used in these calculations.

    Any producer who owns dairy cattle in the contiguous 48 states is eligible for LGM for Dairy Cattle Insurance Policy coverage. Only milk sold for commercial or private sale—primarily intended for final human consumption—from dairy cattle fed in any of the eligible states is covered under this policy.

  • Livestock gross margin – Swine:

    The LGM for Swine Insurance Policy provides protection against the loss of gross margin (market value of livestock minus feed costs) on swine. The indemnity at the end of the 6-month insurance period is the difference, if positive, between the gross margin guarantee and the actual gross margin. The LGM for Swine Insurance Policy uses futures prices to determine both the expected and actual gross margins. The price the producer receives at the local market is not used in these calculations.

    Any producer who owns swine in the 48 contiguous states is eligible for LGM for Swine insurance coverage. Only swine sold for commercial or private slaughter—primarily intended for human consumption—and fed in the 48 contiguous states are eligible for coverage under the LGM for Swine Insurance Policy.

 

Policy outlook: Projected spending impacts of proposed PLC and ARC-CO changes

In light of potential 2025 farm policy changes, the article “Spending Impacts of PLC and ARC-CO in the House Agriculture Reconciliation Bill” by Schnitkey, Paulson, Coppess (University of Illinois), and Zulauf (Ohio State University), published in farmdoc daily, offers valuable insight into the budgetary and structural implications of proposed revisions to two cornerstone commodity programs: Price Loss Coverage (PLC) and Agricultural Risk Coverage at the County Level (ARC-CO).

Key proposed changes

Under the House Agriculture Reconciliation Bill, four primary changes to PLC and ARC-CO are proposed:

1. Statutory reference price increases:

From 2025 to 2030, statutory reference prices for major program crops would increase—for example, from $3.70 to $4.10 per bushel for corn (an 11% increase), from $8.40 to $10.00 for soybeans (19%), and from $5.50 to $6.35 for wheat (15%). Similar increases are also proposed for seed cotton, rice, and peanuts (Schnitkey et al., 2025, Table 1).

2. PLC payment floor adjustments:

The bill proposes new price floors for PLC payments—$3.30 for corn and $0.30 per pound for seed cotton—to limit downside price risk. These new thresholds would reduce outlays in low-price environments by capping PLC payment escalation.

3. ARC-CO enhancements:

Changes to ARC-CO include increasing the coverage level from 86% to 90% and the maximum payment rate from 10% to 12.5% of benchmark revenue, making the program more responsive during periods of reduced revenue.

4. Loan rate increases:

The bill also proposes a 10% increase in the loan rates for the six largest program crops, further enhancing the income safety net (Schnitkey et al., 2025).

Budgetary and distributional impacts

The authors estimate that these program changes would raise federal outlays for PLC, ARC-CO, and marketing loan programs from $46.5 billion to $76.4 billion between 2025 and 2035—a 64% increase (Schnitkey et al., 2025, Table 2). However, this increase is not evenly distributed across commodities or regions:

  • Southern crops—notably peanuts, rice, and seed cotton—would see the largest increases in payments per base acre. In contrast, traditional Midwestern crops such as corn and soybeans would receive more modest increases.
  • For farms with 500 base acres, estimated average annual payments under the proposed changes would be:

This disparity stems from differences in statutory reference prices across crops. Southern crops historically have higher relative reference prices, leading to larger government payments — an imbalance that would be widened under the proposed bill (Schnitkey et al., 2025).

Political and policy implications

To fund these increased outlays, the House Agriculture Committee is proposing spending reductions from the Nutrition Title, particularly the Supplemental Nutrition Assistance Program (SNAP). This cost-shifting pits agricultural and nutrition interests against each other and introduces politically sensitive trade-offs that could impact the outcome of future Farm Bill negotiations (Schnitkey et al., 2025).

Why this matters

For agricultural lenders and risk managers, particularly those serving Midwestern crop producers, the proposed updates could affect the farm income landscape, collateral valuations, and overall credit risk. Although support increases are significant for crops like rice and peanuts, the more moderate gains for corn and soybeans mean Midwest producers may see less benefit from the bill in its current form. Understanding the potential outcomes of these policy shifts can help financial institutions refine their risk assessments and prepare clients for what lies ahead.

Staying ahead in a changing agricultural risk landscape

As federal crop and livestock insurance programs evolve — and legislative proposals like those in the 2025 House Agriculture Reconciliation Bill signal substantial shifts in farm subsidy distribution — lenders must be prepared to navigate increased complexity in agricultural credit risk. From changes in PLC and ARC to adjustments in federal loan programs and WFRP, these developments have direct implications for borrower cash flow, collateral valuation, and overall lending strategy.

For financial institutions serving agricultural clients, now is the time to reassess risk management frameworks, update lending practices, and evaluate credit exposures in light of these changes.

Young & Associates has deep expertise in agricultural lending and credit risk analysis. Our team can help your institution proactively adapt, with services that include portfolio review, credit risk management consulting, and tailored support for ag-specific lending challenges. Whether you’re seeking to strengthen underwriting processes or prepare for policy-driven shifts in borrower performance, we’re here to help you respond with confidence.

Explore our lending and credit risk consulting services to learn how we can support your institution’s success in this evolving environment.

References

Coppess, J., C. Zulauf, G. Schnitkey, N. Paulson and B. Sherrick. “Reviewing the House Agriculture Committee’s Reconciliation Bill.” farmdoc daily (15):89, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, May 14, 2025. Permalink

Kalaitzandonakes, M., B. Ellison, T. Malone and J. Coppess. “Consumers’ Expectations about GLP-1 Drugs Economic Impact on Food System Players.” farmdoc daily (15):49, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 14, 2025. Permalink

Schnitkey, G., N. Paulson, C. Zulauf and J. Coppess. “Price Loss Coverage: Evaluation of Proportional Increase in Statutory Reference Price and a Proposal.” farmdoc daily (13):203, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, November 7, 2023. Permalink

Schnitkey, G., C. Zulauf, K. Swanson, J. Coppess and N. Paulson. “The Price Loss Coverage (PLC) Option in the 2018 Farm Bill.” farmdoc daily (9):178, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, September 24, 2019. Permalink

Schnitkey, G., N. Paulson, C. Zulauf and J. Coppess. “Spending Impacts of PLC and ARC-CO in House Agriculture Reconciliation Bill.” farmdoc daily (15):93, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, May 20, 2025. Permalink

The importance of field examinations in asset-based lending

Written by admin on . Posted in Advice, Blog, Commercial Underwriting, Lending & Loan Review, Management & Planning, Risk Management, Strategic Planning.

By Ollie Sutherin, chief financial officer, Young & Associates

Asset-based lending is a creative financing alternative that will unlock additional working capital for businesses. While it appears more complex than traditional commercial real estate transactions, the appropriate training and education eliminate intimidation. Many community financial institutions tend to avoid asset-based lending opportunities due to the perceived burden of ongoing monitoring. However, with the appropriate due diligence at the outset of a lending relationship, the process becomes significantly more manageable and efficient.

The reality of ongoing monitoring in asset-based lending

Having worked at a small regional bank, I experienced firsthand the detail-oriented process of handling asset-based lending monitoring. Line of credit renewals often relied heavily on borrowing base certificates (BBCs) — many of which lacked accuracy and detail. Field examinations were seldom part of the equation, and decisions were often based on whether the BBC appeared “sufficient” to support the requested loan amount, whether payments were current, and whether principal was being retired in a frequent manner. What was consistently overlooked were several critical elements:

  • Early detection of fraud or irregularities.
  • Evaluation of internal operational controls.
  • Comprehensive and consistent collateral eligibility testing.
  • Longitudinal trend analysis and risk monitoring.

Field exams: A vital tool for risk mitigation

In today’s competitive lending environment, speed and efficiency are crucial. However, it’s imperative not to sacrifice thorough due diligence for the sake of expediency. Relying solely on BBCs without incorporating periodic field examinations introduces significant risk — risk that could far outweigh the relatively modest cost of performing a field exam. The reality is clear: a field exam provides the lender with a deeper understanding of the borrower’s financial health, operational integrity, and collateral quality. The field exam also provides information that can be used to set appropriate advance rates for the various collateral types.

You don’t know what you don’t know

One illustrative example comes from a colleague who shared her first field examination experience shortly after completing her training and certification. She was tasked with examining receivables for a large borrower. Drawing on the tools and methodology she had just mastered, she uncovered a serious case of fraud whereby the borrower was systematically crediting and rebilling invoices once they aged past 90 days. This practice inflated the eligible receivables reported in the BBC and granted the borrower significantly more borrowing availability than permitted… Without the field exam, this fraud would likely have continued undetected — exposing the financial institution to considerable, non-avoidable risk.

While instances like these may not occur every day, they underscore an essential truth: you don’t know what you don’t know. Field examinations offer lenders a proactive mechanism to confirm the integrity of a borrower’s financial reporting and ensure continued creditworthiness. In asset-based lending, that peace of mind over your relationships far outweighs the small investment.

How Y&A can support your lending program

Asset-based lending can open new avenues for community financial institutions, but it also introduces unique risks that require careful, ongoing oversight — particularly through field exams and detailed collateral monitoring. As illustrated, relying solely on surface-level reporting leaves institutions vulnerable to inaccuracies and potential fraud.

Our Y&A Credit Services team provides a wide range of solutions that support strong credit risk management, including credit underwriting, underwriting reviews and credit administration. These services can help your institution build a solid foundation for managing more complex lending relationships like asset-based lending.

If your team is looking to enhance credit processes, improve documentation quality or strengthen internal controls, Young & Associates is here to help you prepare — strategically and confidently — for what’s ahead. Reach out to us today for a free consultation.

The future of mortgage loan buybacks

Written by admin on . Posted in Advice, Blog, Compliance & Regulations, Consultation, Internal Audit, Mortgage Quality Control, News.

By Donald Stimpert, manager of secondary market QC, Young & Associates

Understanding the rising risk of loan buybacks

The secondary mortgage market is evolving rapidly, and with it, lenders face increasing pressure to maintain strict quality control (QC) standards. Loan buybacks — once considered an occasional risk — have become a growing concern as investors, government-sponsored enterprises (GSEs) and regulatory bodies scrutinize loan origination and underwriting processes more closely.

Recent economic uncertainty, fluctuating interest rates and regulatory changes have only amplified repurchase risks, making it imperative for financial institutions to adopt proactive strategies to mitigate potential buybacks before they impact profitability.

Why are mortgage loan buybacks increasing?

Several factors contribute to the rise in loan repurchase demands, including:

1. Heightened investor scrutiny

With a more volatile lending environment, investors and GSEs such as Fannie Mae and Freddie Mac are intensifying post-closing reviews to identify underwriting errors, miscalculations, and misrepresentations.

2. Rising interest rates and loan performance issues

As interest rates climb, borrowers with recent mortgages may be at a higher risk of delinquency. A worsening performance trend in loans increases investor caution, leading them to revisit underwriting quality and enforce buybacks when defects are found.

3. Evolving regulatory standards

The Consumer Financial Protection Bureau (CFPB) and other regulators continue to refine lending requirements, particularly around fair lending, borrower income verification, and compliance with TRID (TILA-RESPA Integrated Disclosure) rules. Lenders who fail to maintain strict adherence to these standards may see increased buyback requests.

4. Defect trends in loan underwriting

Recent QC reports indicate a surge in defects related to:

  • Income calculation errors
  • Debt-to-income (DTI) miscalculations
  • Missing documentation
  • Undisclosed liabilities
  • Misrepresentation of borrower information

Even minor discrepancies can trigger a repurchase demand, highlighting the need for enhanced QC measures.

Strategies to minimize repurchase risk

To reduce exposure to loan buybacks, lenders must strengthen their QC frameworks and proactively address risk areas before loans reach the secondary market.

1. Strengthen pre-funding and post-closing QC reviews

Implementing a robust pre-funding QC process helps catch potential defects before loans are sold, significantly reducing repurchase risk. Post-closing audits should be conducted consistently, ensuring that any issues are corrected before investor scrutiny.

2. Enhance data validation and borrower verification

Investors are increasingly focused on data integrity. Lenders must adopt advanced verification tools to cross-check borrower information, income, employment history, and undisclosed debts, minimizing the risk of fraud and errors.

3. Implement targeted sampling for QC reviews

Rather than relying solely on random sampling, lenders should integrate risk-based QC sampling that focuses on high-risk loan categories, such as self-employed borrowers, non-traditional income sources, or jumbo loans.

4. Maintain open communication with investors and GSEs

Establishing proactive dialogue with investors, servicers, and GSEs can help lenders identify evolving QC expectations and regulatory shifts, allowing them to adjust policies before issues escalate into buyback requests.

5. Conduct regular staff training and compliance refreshers

Underwriting and QC staff should receive continuous training on updated investor guidelines, industry best practices, and regulatory changes. Well-informed teams are less likely to overlook critical details that lead to defects.

A more proactive approach to mortgage QC

The risk of loan buybacks is unlikely to disappear, but financial institutions that take a proactive approach to mortgage quality control will be better positioned to minimize losses, maintain strong investor relationships, and protect their bottom line.

By integrating technology-driven audits, enhanced borrower validation, and risk-based QC sampling, lenders can significantly reduce repurchase exposure and navigate the evolving secondary market with confidence.

Is your institution prepared to mitigate repurchase risk? Young & Associates offers customized Mortgage QC solutions designed to enhance your quality control processes and protect your loan portfolio. Contact us today to learn how we can help safeguard your secondary market loan sales.

Key insights from CFPB Supervisory Highlights, winter 2024

Written by admin on . Posted in Advice, Blog, Compliance & Regulations, Consultation, News.

As the regulatory environment continues to evolve, the latest CFPB Supervisory Highlights offer crucial insights for financial institutions navigating an increasingly complex landscape. Issue 37 shines a spotlight on deposit operations, credit furnishing practices, and the burgeoning short-term lending market, while also addressing significant enforcement actions and new rules. Here’s what community banks need to learn — and act on.

Overdraft fees: A continuing challenge

For years, overdraft and non-sufficient funds (NSF) fees have drawn regulatory scrutiny. This issue of Supervisory Highlights confirms that some practices—such as re-presentment NSF fees and Authorize-Positive Settle-Negative (APSN) overdraft fees — remain problematic. Despite progress, core processors often set fee structures to charge these fees by default unless institutions actively intervene.

Takeaway for community banks
It’s time to re-evaluate fee structures. Ensure that your core processor’s systems are configured to align with updated regulatory expectations. Educate staff and consumers about these changes to build trust and avoid regulatory pitfalls.

Furnishing data: Accuracy matters

Banks that furnish data to credit reporting agencies are under the microscope. The CFPB found widespread failures to maintain procedures for identity theft notifications, conduct thorough investigations of disputes, and ensure data accuracy. This isn’t just about compliance—it’s about your reputation.

Actionable Insight
Community banks should strengthen internal controls and train employees on handling credit disputes. Investing in accurate, consumer-friendly data practices not only mitigates risk but also reinforces your institution’s credibility.

Short-term lending: Transparency is key

The Supervisory Highlights also scrutinize the exploding popularity of Buy Now, Pay Later (BNPL) programs and paycheck advance products. Findings revealed deceptive marketing practices, delayed dispute resolutions, and loan denials tied to trivial payment processing errors.

Why it matters
Even if your bank doesn’t offer these products, they’re reshaping consumer expectations. Transparency in terms and processes isn’t optional—it’s a competitive necessity.

Technology pitfalls: Lessons from enforcement actions

This issue features notable enforcement actions, including a $1.5 million penalty against VyStar Credit Union for botching the launch of an online banking platform. Consumers faced months of restricted access to their accounts, incurring fees and frustration.

A word of caution
Digital transformation is critical for community banks to stay relevant, but poorly executed rollouts can damage trust. Rigorous testing and a solid contingency plan can safeguard against consumer harm and regulatory penalties.

New rules to watch

The CFPB issued a final rule governing overdraft practices at large institutions, capping fees unless they are minimal. Additionally, supervisory authority now extends to digital payment platforms processing over 50 million transactions annually.

What’s next for community banks?
Stay proactive in monitoring new rules and adapting processes. Even if you’re not directly impacted by these changes, they signal the regulatory trends shaping the future.

Final thoughts: Protecting your institution

The themes in this issue of Supervisory Highlights boil down to a central lesson: consumer protection is non-negotiable. Whether it’s ensuring accurate reporting, transparent lending, or seamless technology implementation, community banks must prioritize their customers’ experience.

By addressing these areas, you’re not just avoiding penalties — you’re fortifying your role as a trusted partner in your community. For tailored guidance, connect with Young & Associates, your partner in navigating the ever-changing regulatory landscape. Contact us for tailored solutions to support your institution’s goals.

U.S. industrial transition: Insights for metro areas and community banks

Written by admin on . Posted in Advice, Blog, Compliance & Regulations, Consultation, News.

The FDIC’s analysis of U.S. industrial transitions between 1970 and 2019 reveals the profound effects of economic shifts on metro areas and the community banks serving them. These transitions, driven by the decline of manufacturing and the rise of service-based economies, created challenges and opportunities for local economies and financial institutions. Below, we explore the key findings from this study and their implications for community banks.

The decline of manufacturing and economic shifts

Over five decades, the national economy moved away from manufacturing, with industries like steel, textiles, and machinery experiencing steep employment declines. Metro areas heavily reliant on these sectors, particularly in the Northeast and Midwest, faced significant economic stagnation. For example, cities like Youngstown, Ohio, and Flint, Mich., struggled to replace lost industries, leading to slower population growth, aging demographics, and economic contraction. Meanwhile, metro areas in the South and West benefited from population inflows and economic diversification, fostering stronger economic growth.

Challenges for community banks in high-transition metros

Community banks in metros with high levels of industrial transition faced significant challenges. These banks experienced weaker deposit and branch growth compared to their counterparts in other regions. Their loan portfolios were heavily concentrated in single-family residential loans, with less exposure to business-related lending, which limited their growth potential. Despite these challenges, community banks in high-transition metros showed resilience during periods of economic stress, such as the Savings and Loan Crisis and the Great Financial Crisis, with lower failure rates than banks in other regions.

Strategies for success: High-performing banks

Amid these challenges, a subset of high-performing community banks in high-transition metros found success through strategic adaptability. These banks diversified their loan portfolios, expanded operations beyond their local metro areas, and emphasized commercial lending. By focusing on growth opportunities outside their immediate regions and strengthening their balance sheets, these banks outperformed both their local peers and many banks in more stable metros. Their success underscores the importance of innovation and diversification in navigating economic transitions.

The role of metro diversification

Larger, more industrially diversified metros, such as San Jose, Calif., demonstrated the benefits of economic adaptability. San Jose successfully transitioned from computer manufacturing to a broader technology-driven economy, supported by high-paying jobs in professional, scientific and technical services. This highlights the critical role of industrial diversity in building resilience during times of economic change. Smaller, less diversified metros struggled to recover, illustrating the importance of proactive economic planning and investment in diverse industries.

Lessons for future transitions

The FDIC study offers valuable lessons for navigating future economic shifts. These include those driven by climate change and clean energy transitions. Metro areas and community banks that prioritize diversification, invest in high-growth industries and adapt to changing market demands will be better equipped to manage these transitions. By learning from past challenges, financial institutions can position themselves as resilient and innovative partners in their communities.

Supporting community banks through transition

As community banks navigate the challenges of economic shifts, Young & Associates is here to help. Our expert guidance can assist financial institutions in diversifying portfolios, expanding operations, and developing strategies for resilience. Contact us today to learn more about our tailored services. Also, subscribe to our newsletter for the latest insights and updates.

The OCC 2024 Annual Report: A summary for financial institutions

Written by admin on . Posted in Advice, Blog, Compliance & Regulations, Consultation, News.

The OCC 2024 Annual Report provides a comprehensive overview of the federal banking system, highlighting stability, strategic priorities and regulatory advancements. This report underscores the importance of proactive risk management, fairness in banking practices and adapting to evolving technology and environmental challenges.

The report reaffirms the strength of the federal banking system and notes that 99 percent of banks hold strong capital positions, while 92 percent maintain strong capital adequacy, asset quality and management. These metrics reflect the resilience of financial institutions in the face of economic uncertainties.

Strategic priorities for the Federal Banking System

The OCC’s strategic priorities for 2024 focus on four critical areas:

  • Guarding against complacency: Banks are encouraged to remain vigilant and manage both traditional and emerging risks effectively.
  • Promoting fairness: Efforts to reduce lending inequities and biases in financial practices continue to be a priority.
  • Adapting to digitalization: The integration of financial technologies and artificial intelligence must be managed responsibly to ensure security and trust.
  • Addressing climate risks: Large banks are expected to develop frameworks to mitigate climate-related risks, both physical and transitional.

Key focus areas for financial institutions

  1. Fraud prevention and cybersecurity:
    • Rising threats, including AI-driven fraud, call for advanced detection systems and secure authentication processes.
    • The increasing reliance on fintech partnerships highlights the need for robust third-party risk management frameworks.
  2. Operational resilience:
    • Operational resilience, including robust recovery planning, is critical to maintaining financial stability.
    • Recent regulatory updates require banks with over $100 billion in assets to expand recovery planning and testing.
  3. Regulatory modernization:
    • Enhanced transparency in bank mergers aims to foster competition and benefit underserved communities.
    • Updates to the Community Reinvestment Act (CRA) strengthen fair lending practices and promote financial inclusion.
  4. Digital innovation:
    • Artificial intelligence and automation are reshaping the banking landscape. The OCC emphasizes fairness, accountability, and transparency in AI applications.
    • Open banking and real-time payment systems offer growth opportunities, but financial institutions must implement them with customer trust and regulatory compliance in mind.

Financial System Resilience

The federal banking system demonstrated financial resilience in 2024, but challenges persist:

  • Revenue growth: The OCC’s revenue increased by 2.8% in FY 2024, totaling $1.22 billion, driven by higher interest earnings and bank assessments.
  • Profitability pressures: Declines in net interest margins and rising credit costs affected profitability, particularly for community banks.

Operational resilience remains a cornerstone of financial stability. The OCC highlights the importance of maintaining adequate liquidity, robust capital levels, and strategic recovery planning to mitigate risks.

The OCC’s 2024 Annual Report emphasizes the importance of adaptability, fairness, and resilience in navigating an increasingly complex financial landscape. Financial institutions must align their strategies with these priorities to ensure compliance, enhance customer trust and foster long-term stability.

Learn More:
Young & Associates offers expert guidance in compliance, risk management, and operational resilience. Contact us for tailored solutions to support your institution’s goals. Sign up for our newsletter to stay informed about the latest industry trends and insights.

Key insights from the OCC Semiannual Risk Perspective (fall 2024)

Written by admin on . Posted in Advice, Blog, Compliance & Regulations, Consultation, Lending & Loan Review, News.

Top trends in banking risk

The OCC’s report emphasizes maintaining sound risk management practices to address growing challenges.

  • Fraud activity: External fraud schemes targeting consumers and banks are rising. Sophisticated tactics, including AI-driven fraud, demand enhanced detection and prevention measures.
  • Credit risks: Commercial real estate (CRE) remains a focal point, with stress in office and luxury multifamily segments. Retail credit risks are stable but show signs of increased delinquencies in auto loans and credit cards.
  • Operational risks: Cybersecurity and third-party risks are elevated, reflecting the increasing complexity of the banking environment.
  • Compliance pressures: Adapting to dynamic regulatory changes and addressing data governance gaps are critical to ensuring compliance.

Fraud and cybersecurity: A call for action

Fraudulent activities targeting the banking system have surged, driven by innovative schemes such as:

  • Wire transfer fraud: Fraudsters impersonate trusted entities to steal funds.
  • Check fraud: Criminals manipulate stolen checks or sell them on dark web platforms.
  • AI-driven attacks: Deepfakes and AI-enhanced social engineering pose new threats.

What banks can do:

  • Implement advanced fraud detection systems.
  • Educate customers about fraud prevention.
  • Strengthen authentication and transaction monitoring systems.

Credit risk: Stabilizing but uneven

The report identifies pockets of credit risk:

  • Commercial Real Estate (CRE): Stress is evident in the office sector, with rising costs and valuation declines. Multifamily CRE faces challenges from oversupply and increased regulatory expenses.
  • Retail credit: Stable overall but experiencing increased delinquencies in credit cards and auto loans.

What banks can do:

  • Conduct regular stress testing for CRE portfolios.
  • Enhance monitoring and adjust allowances for credit losses based on emerging risks.

Operational resilience and technology adoption

The banking sector is rapidly digitizing, adopting new technologies to meet evolving customer needs.

However, these advancements come with heightened risks:

  • Third-party risks: Increased reliance on fintech partnerships expands the cyberattack surface.
  • Legacy system challenges: Aging infrastructure complicates modernization efforts.
  • AI adoption: Compliance risks are significant as banks explore advanced AI applications.

What banks can do:

  • Strengthen third-party risk management frameworks.
  • Invest in post-quantum encryption and legacy system upgrades.
  • Implement comprehensive governance for AI-based tools.

Market and climate-related financial risks

Banks face dual pressures from market dynamics and climate-related risks:

  • Net Interest Margins (NIM): Higher funding costs are compressing margins, requiring strategic adjustments.
  • Climate impact: Increased natural disasters highlight the importance of climate risk management frameworks.

What banks can do:

  • Focus on liquidity stress testing and modeling depositor behavior.
  • Engage with clients to manage climate-related transition risks effectively.

Economic outlook: Challenges ahead

The U.S. economy remains resilient but shows signs of slowing:

  • Housing market: Affordability issues and “rate lock-in” effects are dampening demand.
  • Consumer spending: Despite strong spending in 2024, rising costs and a cooling labor market could create headwinds.

Preparation tips:

  • Monitor consumer credit health closely.
  • Adapt lending standards to evolving economic conditions.

Staying ahead in a dynamic environment

The OCC’s Fall 2024 Semiannual Risk Perspective outlines a roadmap for navigating complex risks in the federal banking system. Financial institutions should prioritize robust fraud prevention, proactive credit risk management and strategic technology adoption. By addressing these challenges, banks can safeguard their operations and thrive in an ever-changing economic landscape.

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Discover how Young & Associates can help your institution mitigate risks, strengthen compliance and enhance operational resilience. Contact us today for tailored solutions to navigate these challenges effectively. Sign up for our newsletter to stay informed about industry insights and updates.

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