Dealing with Pandemic Disruption

By: Bill Elliot, CRCM, Director of Compliance Education, and William J. Showalter, CRCM, CRP, Senior Consultant, Young & Associates, Inc., Kent, Ohio

For years banks have had pandemic policies, and have done some level of testing, but never really thought the day would come when it would represent more than another examiner-required policy. Then came COVID-19, and in a matter of days, our world changed.

Managing Bank Policies and Procedures
When we teach in live seminars, we always ask, “How many of you believe that your policies are up to date?” That always gets some hands, but not 100 percent of attendees. Then we ask, “How many of you believe that your procedures are up to date?” Seldom does anyone raise their hand. These two situations are revealing.

Keeping policies current is the easier of the two. But many banks rubber stamp policies that could be much more effective. If it is a Regulation B policy, it usually follows the regulation and indicates that the bank intends to comply. But other policies, notably operations and loan policies, need to do more than restate a regulation – they need to be a document that can be read and used. And, a pandemic policy needs to cover a wide range of subjects and issues.

Given the current situation, it might be time to review these types of policies and add significant language as to how you will address situations such as we have now – lobbies closed or restricted, limited staff, staff working from home, and the same job to be completed. At a minimum, these policies should address:

  • How jobs are done in an off-site world
  • How electronic solutions are to be used
  • Safeguards that must be used to protect customer data
  • What types of paper documents can be used “at home” by staff working off site
  • Proper disposal and the safekeeping of any documents that are off site, and
  • Other protections, such as how the computers being used at home are protected from intrusion

With a little brainstorming, we are sure that you can add to this list.

Procedures are more difficult to maintain. A consultant from our company was recently in a bank and was examining procedures. Most of the procedures could be summed up as “Bill takes care of that.” As long as Bill is there, things probably work well. But if Bill is out sick, on vacation, or no longer there, how does someone accomplish the task?

Procedures are always changing. It is far too easy to tell the three people that need to know about the change and then make a mental note to “update the procedures someday.” That elusive “someday” often never materializes. We believe that each bank should have a formal procedures review at least annually, and for some areas, maybe more often. For many banks, the inadequate procedure manuals that they have will not offer sufficient information for anyone to complete a task correctly.

Many banks have switched to imaging all files. The banks that have made that decision generally are in a little better shape for off-site work, as it is easier to send employees home and still get the work done in a timely manner. If your bank has not made the transition to electronic files, this may be your cue to consider the advantages of this technology.

As the world becomes more electronic, and the cost of maintaining offices and buildings continues to increase, this may also be a time to reconsider the locations from which employees work. This may be especially critical if your brick and mortar buildings are getting close to capacity. Many tasks, with the right equipment and software, can easily be done from home, saving wear and tear on your building, perhaps reducing occupancy costs, and maybe, as a side benefit, resulting in happier and more productive employees.

Regulators and COVID-19 Loan Modifications
On March 22, 2020, all of the prudential banking regulators, along with other agencies, released the
Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The full text can be found on many websites, however, the Federal Deposit Insurance Corporation (FDIC) has it at:

https://www.fdic.gov/news/news/press/2020/pr20038a.pdf

The document states, “The agencies understand that this unique and evolving situation could pose temporary business disruptions and challenges that affect banks…businesses, borrowers, and the economy. The agencies encourage financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. The agencies view loan modification programs as positive actions that can mitigate adverse effects on borrowers due to COVID-19. The agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs).”

The agencies also offered comments on the issue of TDRs. They state that, “Modifications of loan terms do not automatically result in TDRs…The agencies have confirmed with staff of the Financial Accounting Standards Board (FASB) that short-term modifications made on a good faith basis in response to COVID- 19 to borrowers who were current prior to any relief, are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.”

Many banks have in place or are considering modifications to meet the needs of their customer base. It would appear that the regulators are going to react positively, provided the actions of the bank are reasonable and logical. The pronouncement states, “The agencies’ examiners will exercise judgment in reviewing loan modifications, including TDRs, and will not automatically adversely risk rate credits that are affected by COVID-19, including those considered TDRs. Regardless of whether modifications result in loans that are considered TDRs or are adversely classified, agency examiners will not criticize prudent efforts to modify the terms on existing loans to affected customers.”

The pronouncement also discusses Past Due Reporting, Nonaccrual Status and Charge-offs, and Discount Window Eligibility. You should consult the Interagency Statement for details.

When implementing your program to deal with this crisis, compliance cannot be ignored. Regulations that need to be considered include:

  • Regulation B (Equal Credit Opportunity Act) – This applies to both consumer and commercial loans.
  • Flood insurance regulations – If you extend maturity dates, a new determination may be required. This also applies to both consumer and commercial loans.
  • Regulation O (Loans to Insiders) – If anyone who is an “insider” is requesting payment or other forms of relief.
  • Regulation X (Real Estate Settlement Procedures Act) – You need to consider the impact of non-payment into required escrow accounts.

CRA Credit Possible
The Community Reinvestment Act (CRA), in part, requires banks to take good care of the credit needs in their communities. Keeping good records of exactly what you did during this crisis could certainly be shared with your CRA examiners at your next CRA examination. While it may not directly impact the examination, remember that the CRA rating is at least partly based on their opinion of your bank.

The FDIC, Federal Reserve Board (FRB), and Office of the Comptroller of the Currency (OCC) issued a Joint Statement on March 19 stating that the agencies will favorably consider retail banking services and retail lending activities in a financial institution’s assessment area(s) that are responsive to the needs of low- and moderate-income (LMI) individuals, small businesses, and small farms affected by COVID-19 and that are consistent with safe and sound banking practices. The agencies emphasize that prudent efforts to modify the terms on new or existing loans for affected LMI customers, small businesses, and small farms will receive CRA consideration and not be subject to examiner criticism.

Impact of Accommodating Distressed Customers
There will be long-term consequences for any decision you make to alter a contract. For instance, if you allow a customer to skip a payment completely and do not change the maturity date, you will have a balloon at maturity. And since interest continues to accrue for that extra month(s), the principal/interest calculation will likely not be quite correct. So even if you do extend a maturity date, you may have a balloon simply because of the principal and interest calculation.

Having that discussion with your customer now seems preferable to fighting about it in a few years. The only real solution to assure that the loan amortizes correctly is to do the analysis to determine what payment amount will be required to avoid a balloon. And even then, things may still go awry at maturity.

Future Developments
As with many things today, this whole issue continues to evolve. The agencies had planned to present a webinar on this interagency statement on March 27, but have postponed it as of this writing. Keep on the lookout for further word from the agencies on when this will be available.

There is also a Frequently Asked Questions (FAQ) document available at https://www.fdic.gov/coronavirus/faq-fi.pdf, to provide some clarification regarding the interagency statement.

Conclusion
We hope that this article helps you to address these issues. We encourage you to consider what your situation will be post-crisis, as it will likely have lasting impacts on your bank. Try to assure that the lasting impacts are positive, as we all learn from the experience how to handle future disruptions (should they occur) with even more professionalism.

Dealing with Pandemic Disruption

By: Bill Elliott, CRCM, Director of Compliance Education, and William J. Showalter, CRCM, CRP, Senior
Consultant, Young & Associates, Inc.

For years banks have had pandemic policies, and have done some level of testing, but never really thought the day would come when it would represent more than another examiner-required policy. Then came COVID-19, and in a matter of days, our world changed.

Managing Bank Policies and Procedures
When we teach in live seminars, we always ask, “How many of you believe that your policies are up to date?” That always gets some hands, but not 100 percent of attendees. Then we ask, “How many of you believe that your procedures are up to date?” Seldom does anyone raise their hand. These two situations are revealing.

Keeping policies current is the easier of the two. But many banks rubber stamp policies that could be much more effective. If it is a Regulation B policy, it usually follows the regulation and indicates that the bank intends to comply. But other policies, notably operations and loan policies, need to do more than restate a regulation – they need to be a document that can be read and used. And, a pandemic policy needs to cover a wide range of subjects and issues.

Given the current situation, it might be time to review these types of policies and add significant language as to how you will address situations such as we have now – lobbies closed or restricted, limited staff, staff working from home, with the same job to be completed. At a minimum, these policies should address:

  • How jobs are done in an off-site world
  • How electronic solutions are to be used
  • Safeguards that must be used to protect customer data
  • What types of paper documents can be used “at home” by staff working off site
  • Proper disposal and the safekeeping of any documents that are off site
  • Other protections, such as how the computers being used at home are protected from intrusion

With a little brainstorming, we are sure that you can add to this list.

Procedures are more difficult to maintain. A consultant from our company was recently in a bank and was examining procedures. Most of the procedures could be summed up as “Bill takes care of that.” As long as Bill is there, things probably work well. But if Bill is out sick, on vacation, or no longer there, how does someone accomplish the task?

Procedures are always changing. It is far too easy to tell the three people that need to know about the change and then make a mental note to “update the procedures someday.” That elusive “someday” often never materializes. We believe that each bank should have a formal procedures review at least
annually, and for some areas, maybe more often. For many banks, the inadequate procedure manuals that they have will not offer sufficient information for anyone to complete a task correctly.

Many banks have switched to imaging all files. The banks that have made that decision generally are in a little better shape for off-site work, as it is easier to send employees home and still get the work done in a timely manner. If your bank has not made the transition to electronic files, this may be your cue to consider the advantages of this technology.

As the world becomes more electronic, and the cost of maintaining offices and buildings continues to increase, this may also be a time to reconsider the locations from which employees work. This may be especially critical if your brick and mortar buildings are getting close to capacity. Many tasks, with the right equipment and software, can easily be done from home, saving wear and tear on your building, perhaps reducing occupancy costs, and maybe, as a side benefit, resulting in happier and more productive employees.

Regulators and COVID-19 Loan Modifications
On March 22, 2020, all of the prudential banking regulators, along with other agencies, released the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The full text can be found on many websites; however, the Federal Deposit Insurance Corporation (FDIC) has it at:

https://www.fdic.gov/news/news/press/2020/pr20038a.pdf

The document states, “The agencies understand that this unique and evolving situation could pose temporary business disruptions and challenges that affect banks…businesses, borrowers, and the economy. The agencies encourage financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. The
agencies view loan modification programs as positive actions that can mitigate adverse effects on borrowers due to COVID-19. The agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs).”

The agencies also offered comments on the issue of TDRs. They state that, “Modifications of loan terms do not automatically result in TDRs…The agencies have confirmed with staff of the Financial Accounting Standards Board (FASB) that short-term modifications made on a good faith basis in response to COVID-
19 to borrowers who were current prior to any relief, are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.”

Many banks have in place or are considering modifications to meet the needs of their customer base. It would appear that the regulators are going to react positively, provided the actions of the bank are reasonable and logical. The pronouncement states, “The agencies’ examiners will exercise judgment in
reviewing loan modifications, including TDRs, and will not automatically adversely risk rate credits that are affected by COVID-19, including those considered TDRs. Regardless of whether modifications result in loans that are considered TDRs or are adversely classified, agency examiners will not criticize prudent efforts to modify the terms on existing loans to affected customers.”

The pronouncement also discusses Past Due Reporting, Nonaccrual Status and Charge-offs, and Discount Window Eligibility. You should consult the Interagency Statement for details.

When implementing your program to deal with this crisis, compliance cannot be ignored. Regulations that need to be considered include:

  • Regulation B (Equal Credit Opportunity Act) – This applies to both consumer and commercial loans.
  • Flood insurance regulations – If you extend maturity dates, a new determination may be required.
  • This also applies to both consumer and commercial loans.
  • Regulation O (Loans to Insiders) – If anyone who is an “insider” is requesting payment or other forms of relief.
  • Regulation X (Real Estate Settlement Procedures Act) – You need to consider the impact of nonpayment into required escrow accounts.

CRA Credit Possible
The Community Reinvestment Act (CRA), in part, requires banks to take good care of the credit needs in their communities. Keeping good records of exactly what you did during this crisis could certainly be shared with your CRA examiners at your next CRA examination. While it may not directly impact the examination, remember that the CRA rating is at least partly based on their opinion of your bank.

The FDIC, Federal Reserve Board (FRB), and Office of the Comptroller of the Currency (OCC) issued a Joint Statement on March 19 stating that the agencies will favorably consider retail banking services and retail lending activities in a financial institution’s assessment area(s) that are responsive to the needs of low- and moderate-income (LMI) individuals, small businesses, and small farms affected by COVID-19
and that are consistent with safe and sound banking practices. The agencies emphasize that prudent efforts to modify the terms on new or existing loans for affected LMI customers, small businesses, and small farms will receive CRA consideration and not be subject to examiner criticism.

Impact of Accommodating Distressed Customers
There will be long-term consequences for any decision you make to alter a contract. For instance, if you allow a customer to skip a payment completely and do not change the maturity date, you will have a balloon at maturity. And since interest continues to accrue for that extra month(s), the principal/interest calculation will likely not be quite correct. So even if you do extend a maturity date, you may have a balloon simply because of the principal and interest calculation.

Having that discussion with your customer now seems preferable to fighting about it in a few years. The only real solution to assure that the loan amortizes correctly is to do the analysis to determine what payment amount will be required to avoid a balloon. And even then, things may still go awry at maturity.

Conclusion
We hope that this article helps you to address these issues. We encourage you to consider what your situation will be post-crisis, as it will likely have lasting impacts on your bank. Try to assure that the lasting impacts are positive, as we all learn from the experience how to handle future disruptions (should they occur) with even more professionalism.

Assessing your Compliance Training

By: Bill Elliott, CRCM, Director of Compliance Education

Last fall, the Consumer Financial Protection Bureau (CFPB) updated their Regulatory Agenda for the next few months. As has been the reality for a while, there does not seem to be any particular rush to accomplish many final rules. The Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCP Act) was signed into law in May 2018. In that law, there are a number of required changes that should be fairly easy to implement – if the CFPB would just do so. But in the short term, there appears little likelihood that the changes dictated by the law (or many other changes) will be placed into regulation. But change is still in our future – it is just a question of the timing.

Part of the problem is the regulatory process. Although all banks are not subject to the Home Mortgage Disclosure Act, it is an excellent example. The “new version” of Regulation C was published as a final rule, effective January 2018. Before the 2018 date, the CFPB changed the regulation. With the passage of the EFRRCP Act, many of the new required fields were eliminated for smaller reporters. Although a fairly simple series of changes were necessary, many months passed before the regulation was updated (October 2019). And when those changes were made final, there were still some outstanding issues in HMDA that needed to be addressed, and remain open at this writing. So even with all the changes, it is not “final” yet. The latest Small Entity Guide for HMDA (which will have to be modified again) is Version 4.

This complicates the life of any bank, regardless of size. When the regulatory process is poor and disjointed, it makes training and implementation more difficult. But the reality is that regardless of how confusing the regulatory process is, banks still have to comply.
Training is a necessary expense, as a failure to train, especially when things are in flux, opens the bank to regulatory scrutiny and/or fines for non-compliance. And keeping your policies and procedures current with the latest changes is always a challenge.

Banks should assess how information is disseminated throughout the bank as these changes occur to assure that training dollars are spent effectively. And the time to assess is now, while things are relatively “calm.” Many banks have delegated training to electronic or web-based systems, and there are many good choices available. But, because of the nature of this type of training, they focus on the facts and requirements, but usually do not include information on what to expect of your employees, or the implementation strategies of your bank. Be wary of buying a training system and then assuming all your training needs are met.

We do not market electronic or web-based systems. But Young & Associates, Inc. offers a wide variety of personalized training opportunities, including:

  • Live seminars with some of our state association partners
  • Live in-bank training
  • Conference calls
  • Private webinars
  • Virtual Compliance Consultant program, which includes a monthly telephone call that can be used for compliance support and/or training sessions as well as policy support, and any other personalized training that you may need

In this period of relative quiet, take this time to assess your training methods and your training needs for the future. Eventually the regulators will begin to issue more regulation, and Young & Associates, Inc. stands ready to assist. To discuss how we can help, please contact Karen Clower at 330.422.3444 or kclower@younginc.com.

Liquidity Risk Management

By: Martina Dowidchuk, Director of Management Services and Senior Consultant

Does your liquidity management meet the standards of increased regulatory scrutiny?
What was once deemed acceptable is gradually coming under a more rigid review, and financial institutions need to be prepared to show that their liquidity risk oversight complies with both supervisory guidance and sound industry practices.

The liquidity risk may not be among the areas of community banks’ immediate concern given the abundance of liquidity in the banking industry today. However, the history shows that liquidity reserves can change quickly and the changes may occur outside of management’s control. A bank’s liquidity position may be adequate under certain operating environments, yet be insufficient under adverse environments. Adequate liquidity governance is considered as important as the bank’s liquidity position. While the sophistication of the liquidity measurement tools varies with the bank’s complexity and risk profiles, all institutions are expected to have a formal liquidity policy and contingency funding plan that are supported by liquidity cash flow forecast, projected liquidity position analysis, stress testing, and dynamic liquidity metrics customized to match the bank’s balance sheets.

Some of the common liquidity risk management pitfalls found during annual independent reviews include:

Cash Flow Plan:

  • Lack of projected cash flow analysis
  • Inconsistencies between liquidity cash flow assumptions and the strategic plan/budget
  • Lack of documentation supporting liquidity plan assumptions
  • Overdependence on outdated, static liquidity ratios and lack of forward-looking metrics
  • Lack of back-testing of the model

Stress Scenarios:

  • Stress-testing of projected cash flows not performed
  • Stress tests focusing on a single stress event rather than a combination of stress factors
  • Stress tests lacking the assessment of a liquidity crisis impact on contingent funding sources
  • Insufficient severity of stress tests

Contingency Funding Plan Document:

  • Contingency funding plan failing to address certain key components, such as the identification of early warning indicators, alternative funding sources, crisis management team, and action plan details
  • Lack of metrics defined to assess the adequacy of primary and contingent funding sources in the baseline and stressed scenarios

Liquidity Policy:

  • Inadequate risk limits or lack of acceptable levels of funding concentrations defined in the liquidity policy
  • Liquidity policy failing to address responsibilities for maintenance of the cash flow model, model documentation, periodic assumption review, and model validation

Management Oversight:

  • ALCO discussions related to liquidity management not containing sufficient detail and not reflected appropriately in the ALCO meeting minutes
  • Lack of periodic testing of the stand-by funding lines
  • Lack of liquidity model assumption review or documentation of such review
  • Lack of periodic independent reviews of the liquidity risk management process

If you are interested in an independent review of your existing liquidity program and a model validation, or are looking for an assistance with developing a contingency funding plan, liquidity cash flow plan, and liquidity stress testing, please contact me at 330.422.3449 or mdowidchuk@younginc.com. Young & Associates, Inc. offers an array of liquidity products and services that can help you to ensure compliance with the latest regulatory expectations.

Banks as Federal Contractors, A Brief History

By: Mike Lehr, HR Consultant

Unless legal counsel says otherwise, if FDIC covers a bank’s deposits, it’s best to assume it’s a federal contractor. That not only means the bank likely needs an affirmative action plan if it issues fifty or more different W2s in a year, but the federal government holds the bank to higher employment standards.

Still, as human resources professionals know, bank CEOs, presidents, and other senior executives often want to know, “What law says so?” After all, when we think of a “federal contractor,” we often think huge employers with thousands of employees.

For banks with only a few hundred (if that) employees, this all seems very unnecessary. Yet, the short answer is that a reinterpretation of existing law after the 2008 financial crisis made most banks federal contractors if they obtained federal deposit insurance.

Reviewing the way our government works and the history of banks as federal contractors can clarify this answer. After all, the law is not clear. It hasn’t changed much in over twenty years.

This review begins by reminding others that federal laws change in three main ways:

    1. Congress passes or revises laws.
    2. Executive branch reinterprets existing laws.
    3. Courts rule on and clarify regulations causing disagreements among parties.

While Congress neither passed nor revised any law specifically stating banks are federal contractors, the Department of Labor (DOL) reinterpreted the law. Until the 2008 financial crisis, the Office of Federal Contract Compliance Programs (OFCCP), an agency of the DOL, mainly interpreted the law to say FDIC made banks contractors. The DOL, its boss so to speak, never accepted this however.

So, until 2008, unless a bank clearly acted as “an issuing and paying agent for U.S. savings bonds and notes” or “a federal fund depository,” in a substantial manner, the DOL likely didn’t consider it a federal contractor.

Until 2008, FDIC payouts to banks were rare, almost non-existent. This crisis though saw many sizeable payouts. As a result, the DOL accepted OFCCP’s interpretation of the law. The crisis forced the DOL to see FDIC coverage as doing business with the federal government. So now, by its “boss” agreeing, the OFCCP has more authority to enforce its regulations such as affirmative action plans on banks.

Again, a reinterpretation of existing law after the 2008 financial crisis increased dramatically the likelihood that a bank is a federal contractor. This brief history has helped human resources professionals answer questions related to “what law says so?”

For more guidance and support on complying as a federal contractor, you can reach Mike Lehr at mlehr@younginc.com. Mike Lehr is not an attorney. As such, the content in this article should not be construed as providing legal advice. For specific decisions on compliance with OFCCP regulations, readers should consult with their legal counsel.

Private Flood Insurance Update

By: Bill Elliott, CRCM, Senior Consultant and Manager of Compliance

As you are no doubt aware, the issue of flood insurance has been unsettled for the last 18 months, and the formal FEMA flood program is only approved until the fall. But, after a long wait, the regulators have published additional regulation for private flood insurance – which does not rely on Congress to do anything, and makes the presence or absence of the FEMA program less problematic for lenders.

Background

The Biggert-Waters Act (2012) amended federal flood insurance legislation to require the agencies to issue a rule directing regulated lending institutions to accept “private flood insurance,” as defined by the act. In response to subsequent legislation and comments received regarding the private flood insurance provisions of the first proposed rule (2013), and the second proposed rule (November 2016), all prudential regulatory agencies finally issued the rule, effective July 1, 2019.

It remains to be seen how effective and efficient this will be, as it is a “work in process.” But some have told me that some of their customers have found lower flood insurance rates privately (meaning these policies may become more popular). Others have told me that they have had customers declined for private flood insurance based on the riskiness of the property location.

Summary of the Rule

The rule requires regulated lending institutions to accept “private flood insurance” defined in accordance with the Biggert-Waters Act. There are essentially three categories of private flood insurance.

Category One – Private Flood Insurance with “Compliance Aid” Language

If the following language appears on the flood policy, the lender may accept the policy without any further review:
“This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”

Although it remains to be seen how well this will work, we hope that most insurance companies will include this language, which will make it quite easy for lenders, as no additional effort will be required.

Category Two – Private Flood Insurance without “Compliance Aid” Language

The rule permits regulated lending institutions to exercise discretion to accept flood insurance policies issued by private insurers that do not meet the statutory and regulatory definition of private flood insurance. The conditions for acceptance include a requirement that the policy must provide sufficient protection of a designated loan, consistent with general safety and soundness principles, and the regulated lending institution must document its conclusion regarding sufficiency of the protection of the loan in writing.

The difficulty for lenders will be to determine whether these policies really meet these (and other) requirements. And although the regulation says “discretionary,” it does not appear that the regulators will just allow lenders to summarily reject these policies.

Category Three – Mutual Aid Societies

The agencies will now allow the acceptance of plans providing flood coverage issued by mutual aid societies. The rule defines “mutual aid society” as an organization:
(1) whose members share a common religious, charitable, educational, or fraternal bond;
(2) that covers losses caused by damage to members’ property pursuant to an agreement, including damage caused by flooding, in accordance with this common bond; and
(3) that has a demonstrated history of fulfilling the terms of agreements to cover losses to members’ property caused by flooding.

A regulated lending institution may accept a plan issued by a mutual aid society, as defined above, if the regulated lending institution’s primary federal supervisory agency has determined that such plans qualify as flood insurance for purposes of the act.

Requirement to Purchase Flood Insurance

There is nothing in the rule that changes the amounts of insurance required, or anything else. This simply allows more options and hopefully, over time, will make everyone’s life – lenders and borrowers – easier.

If you need any assistance in this area, especially private flood policies without the “compliance aid” language, please give us a call at 330.422.3450 or send an email to bille@younginc.com. We are always happy to help.

Avoid Getting Swept Away in the Flood of Enforcement Actions

By: William J. Showalter, CRCM, CRP, Senior Consultant

We seem to be in a bit of a lull in flood insurance rule enforcement by the financial institution regulators. There were only 15 enforcement actions with civil money penalties (CMP) totaling $523,961 in 2018. So far this year, we have had only two such enforcement actions, with total CMPs of $10,550. But, we probably should not expect this trend to continue, especially with all the flooding events we have seen recently, including our unfortunate neighbors along the Missouri River. These events tend to get the attention of Congress and the supervisory agencies.

Keep in mind that enforcement of many rules, including those involving flood insurance, seem to run in cycles. After another apparent lull in flood insurance enforcement actions a couple years ago, the Federal Reserve Board (FRB) issued an Order for a Civil Money Penalty in late May 2017 against SunTrust Bank for $1,501,000 to enforce requirements of the regulations implementing the National Flood Insurance Act. This is thought to be the largest CMP for flood insurance shortcomings. Coupled with 11 other much smaller enforcement actions by the FRB, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC), the total civil money penalties assessed for flood insurance rule violations by mid-year 2017 totaled nearly $1.8 million – and by the end of that year, we had seen 29 enforcement actions with a total of nearly $2.8 million in CMPs.

Background
The original National Flood Insurance Act was passed in 1968, and established the National Flood Insurance Program (NFIP). The Flood Disaster Protection Act of 1974 (FDPA) was enacted to strengthen the NFIP by involving lending institutions in the insurance process.

The NFIP was developed as a way to reduce federal expenditures related to disasters caused by flooding. The program consists of floodplain management plans that affected communities must implement and a flood insurance program to protect properties in flood hazard areas. The intent of the NFIP is to reduce federal outlays for disaster assistance by making those who choose to develop properties in flood-prone areas bear some cost to protect against the flood risks involved, rather than allowing them to rely solely on federal aid.

Part of the NFIP is a system of requirements and restrictions on federal assistance of all kinds to flood-prone areas. This assistance ranges from direct federal lending to loan guarantees, to insurance for deposit accounts. The latter is the connection for many mortgage lenders with the NFIP.

The National Flood Insurance Reform Act of 1994 (NFIRA) comprehensively revised the two federal flood statutes – the NFIA and FDPA – and required federal supervisory agencies to revise their flood insurance regulations. The objective of the changes was to increase compliance with flood insurance requirements and participation in the NFIP, and to decrease the financial burden on the federal government, taxpayers, and flood victims.

The NFIRA authorizes the regulators to impose civil money penalties when a pattern or practice of violations under the NFIA is found. The act requires that civil money penalties be imposed of up to $350 for each violation in such cases. The civil money penalty cap was increased significantly by the Biggert-Waters Flood Insurance Reform Act of 2012, enacted July 6, 2012. The former $350 per violation maximum was raised to $2,000 per violation. Lenders should remember that there can be multiple violations for each covered loan.

Consent Orders
The regulators charged that the financial institutions targeted by the 15 enforcement actions last year were engaged in patterns or practices of violations of various provisions of the flood insurance regulations. Most of the orders give us at least some picture of the violations found by regulatory personnel. These violations of flood insurance rules include failures to:

  • Provide notice about availability of and requirement for flood insurance
  • Provide timely notice about availability of and requirement for flood insurance
  • Require flood insurance coverage
  • Require adequate flood insurance coverage
  • Maintain flood insurance (allowing it to lapse)
  • Escrow premiums (when other property costs are escrowed)
  • Comply with force placement requirements
  • Provide notice regarding lapse and force-placed coverage
  • Provide timely notice regarding lapse and force-placed coverage
  • Obtain force-placed coverage

Avoiding Problems
What can you do to keep your bank or thrift off the ever-growing list of financial institutions being hit with flood insurance enforcement actions? One important way is to establish an effective flood insurance compliance program and make sure that lending staff follows it. Hold them accountable for failures.

At a minimum, your flood insurance compliance program should:

  • Ensure that there is an effective process in place for determining the flood hazard status for improved real property or mobile homes securing any loans, both consumer and commercial, whether the process be one of in-house readings of up-to-date flood maps or outsourced determinations by a professional firm that guarantees its results.
  • Ensure that your institution has performed appropriate due diligence in selecting its flood hazard determination vendor and monitors its performance, and that the vendor guarantees its results and uses the current Special Flood Hazard Determination Forms (SFHDF) to document its determinations.
  • Order or perform flood determinations early in the loan process. This can be done soon after the lender decides to approve the loan.
    Ensure that loan files contain complete and current SFHDF and acknowledged customer flood notices, where applicable.
  • Ensure that collateral properties are insured in the proper amount before loan closing, including appropriate coverage for any senior mortgagees.
  • Remain current on flood map and hazard determination changes, and stay insured throughout the life of the loan.
  • Ensure that coverage is maintained for subsequent financings (increase, extension, renewal, refinancing) of the subject properties.
  • Train all affected staff in their responsibilities under the bank’s flood insurance compliance program, assign appropriate accountability, and enforce staff responsibilities.

This last point is especially important. Training is the foundation for implementing and maintaining a strong flood program. Ensure that all appropriate staff is trained in the requirements of the flood insurance laws and rules that impact their jobs and provide them with refreshers periodically.

Establishing and maintaining a strong flood insurance compliance program can help your bank or thrift stay afloat during any flood of enforcement actions. For more information on this article and/or how Young & Associates, Inc. can assist you in this area, contact Bill Showalter at 330.678.0524 or wshowalter@younginc.com.

The CFPB in the Future

By: Bill Elliott, CRCM, Senior Consultant and Manager of Compliance 

With the change in management of the CFPB, we are seeing changes in how they operate. When they published their Regulatory Agenda for Fall 2017 (late as usual – it appeared in January 2018), they restated what Section 1021 of the Dodd-Frank Act specified as the objectives of the Bureau, including:

  • Providing consumers with timely and understandable information to make responsible decisions about financial transactions
  • Protecting consumers from unfair, deceptive, or abusive acts and practices and from discrimination
  • Addressing outdated, unnecessary, or unduly burdensome regulations
  • Enforcing federal consumer financial law consistently in order to promote fair competition, without regard to the status of a covered person as a depository institution
  • Promoting the transparent and efficient operation of markets for consumer financial products and services to facilitate access and innovation

They stated that their work in pursuit of those objectives can be grouped into three main categories:

  1. Implementating statutory directives
  2. Other efforts to address market failures, facilitate fair competition among financial services providers, and improve consumer understanding
  3. Modernizing, clarifying, and streamlining consumer financial regulations to reduce unwarranted regulatory burdens

Implementing Statutory Directives

In this area, the CFPB is continuing efforts to facilitate implementation of critical consumer protections under the Dodd-Frank Act. They listed three efforts under way. They include:

  • Regulation C (Home Mortgage Disclosure Act)
  • Mortgage servicing changes
  • Continuing to improve the TRID portion of Regulation Z

The CFPB also listed other projects that are “in the works,” but probably nowhere near completion.

Other Efforts To Address Market Failures, Facilitate Fair Competition among Financial Services Providers, and Improve Consumer Understanding

In this area, the CFPB said they were considering rules, such as:

  • Payday loans, auto title loans, and other similar credit products
  • Debt collection
  • Overdraft programs on checking accounts
  • Prepaid financial products
  • Modernizing, streamlining, and clarifying consumer financial regulations

Many of the regulations are approaching 50 years old and are out of date with the current world. For instance, Regulation B allows you to turn down a customer for not having a land line phone in the home. That was fine in the 1970s, but probably not relevant now. Updating this and many other regulations is overdue, including looking at the effectiveness of some of the more recent changes, which they say they will be doing.

Conclusion

We will have to wait and see what happens. As with all bureaucracies, and based on their past performance, changes are likely to appear slowly. In general, it appears that “new regulations” may slow down a bit, giving us in the industry a chance to catch up.

Young & Associates, Inc. offers a wide variety of compliance services to help your bank satisfy these compliance requirements. If we can help you “catch up” or improve your response to any of the regulations, we stand ready to assist. Please contact Karen Clower, Compliance Operations Manager, at kclower@younginc.com or 330.422.3444 and she will be happy to discuss our services with you.

A Look to the Future

By: Jerry Sutherin, President & CEO, Young & Associates, Inc.

On January 31, 2018, I was fortunate to have the opportunity to purchase Young & Associates, Inc. from Mr. Gary Young, the company’s founder and current Chairman. Nearly 40 years ago, Gary created this organization with a vision of providing community banks with consulting services that were typically cost-prohibitive to perform internally. Since its inception in 1978, Young & Associates has evolved from a small start-up organization offering select outsourcing and educational services to one of the premier bank consulting firms with clients nationwide and overseas. We now offer consulting, education, and outsourcing services for nearly every aspect of banking.

From the outset of our acquisition discussions, Gary and I agreed that the greatest asset of the company is its employees. Over the years, not only has Gary developed unique servicing platforms for the industry but more importantly, he has assembled an employee base that is second to none. These employees provide a level of expertise and service to our clients that remains unparalleled in the community banking industry.

To quote Gary, “I founded Young & Associates with the goal of assisting community banks while maintaining a family atmosphere that valued and respected the people that I work with.” Going forward, it is my primary objective to carry on this legacy that Gary has created. I look forward to making this a seamless transition building on the solid foundation that Gary has built over the years. With the work of our employees and support of our clients, there is no doubt that Gary’s legacy will continue for years to come.

Although the ownership of Young & Associates, Inc. has changed, the company’s name, mission, personnel, quality of service, and structure will not change in any way. Gary now serves as Chairman of the Board and will remain actively involved with the business through January 2019, providing the same high-quality service while also assisting me with the transition. In addition to ensuring a smooth internal transition, Gary and I remain focused on making sure that the relationship with our clients remains strong. Existing and new clients are encouraged to contact me, Gary, or any of our consultants to discuss this transition and how we might be able to earn your business.

Compliance Outlook: 2018

By: Bill Elliott, CRCM, Manager of Compliance Services

For those of us who are news junkies, the current environment is interesting. Unfortunately, the environment is also so toxic that it is difficult to determine what actually may or may not happen during 2018.

We do know that some items that are being considered. For instance, bills are pending regarding issues like HMDA, flood, qualified mortgages, and call reports for smaller institutions. It remains to be seen whether any of these bills (or any of the other bills pending) actually will become law, or whether Congress will continue the infighting that has resulted in a haphazard and uncertain regulatory and law environment.

Home Mortgage Disclosure Act (HMDA)
Based on the questions we have received at Young and Associates, Inc., it would appear that that the 2018 HMDA implementation (so far) is going fairly well. However, we have received numerous questions regarding issues that were not addressed directly in the “HMDA Instructions.” This is not new or surprising, as not every situation can be covered in a rule as massive as HMDA.

For HMDA, as with every other new/updated regulation, preparation was the key. The regulatory world is getting so complicated that it is necessary for banks to really consider all processes and procedures to avoid either duplication of work or unnecessary work.

Customer Due Diligence
Speaking of duplication and unnecessary work, one of the items that must be addressed quickly is the new Customer Due Diligence rule under the Bank Secrecy Act, effective May 11, 2018. While many regulations can be handled by only one division of the bank, this regulation will impact almost everyone, as it requires updates regarding the ownership of a business every time a new account is opened. Accounts can be loans, deposits, safe deposit boxes, or any other kind of account that you may offer. It will require the customer to inform you of all individuals who own at least 25% of the business, as well as indicating a control person for the business.

For new loans, this will most likely be an inconvenience, although driver’s licenses and/or other methods of identification will be required every time a new commercial loan to a business with at least one 25% or more owner (LLC, partnership, corporation, etc.) is opened.

For deposits or other account types, this may mean what is now a 30-minute procedure to open a new account will become a multi-day ordeal, as the person opening the account may well not be the only owner, and certainly will not have identification information for all 25% owners and control persons with them (including identification). The only saving grace is that every financial institution will have to deal with this issue, so there will be no competitive advantage or disadvantage. With a May time limit, if your institution has not started the implementation process, time is running short.

Consumer Protection
As you well know, there has been a change in the administration of the Consumer Financial Protection Bureau (CFPB). With Mr. Cordray’s recent exit from the agency, it is likely that’s the CFPB will consider new approaches to the issue of consumer protection. To this end, the CFPB has announced steps to request information from the public and review how things are done, how they actually impact or help the consumer, and how they impact and create costs for the industry.

Some of the requests will be more useful than others. The first request to be issued by the CFPB will seek public comment on Civil Investigative Demands (CIDs), which are issued during an enforcement investigation. Comments received in response to this RFI and all others that follow will help the Bureau evaluate the existing framework and determine whether any changes are warranted. Make sure you are part of the process by commenting or otherwise making your voice heard.

Conclusion
If we can offer you training, implementation assistance, or any other compliance related service, please contact Karen Clower, Compliance Operations Manager, at kclower@younginc.com or 330.422.3444.