Written by: McGregor K. Johnson
In early July, federal bank regulators and the Conference of State Bank Supervisors issued guidance regarding home equity lines of credit (“HELOC”) that are nearing the end of their draw periods. Typically, a HELOC consists of two periods: a draw period during which the borrower has access to unused amounts under the line of credit and interest only payments are made, followed by a repayment period during which a balloon payment or increased monthly payments are made.
The regulatory guidance reminded banks of key risk management principles when the end of the draw period is approaching for HELOCs. For example, banks should:
• not extend draw periods, modify loans, or establish amortization terms without conducting thorough due diligence on the borrower;
• use loan workout programs when feasible, but only if tailored to the borrower’s financial situation, and identify appropriate troubled debt restructurings;
• in estimating their allowance for loan and lease losses, consider the risks associated with the end of the draw period, such as “payment shock” of the borrower resulting from the increased payments due during the repayment period.
In addition, the guidance delineated specific policies that banks should follow in implementing such principles, including:
• proper identification of the risks associated with the end of the draw period and of the higher risk segments of the portfolio;
• analysis of expected payoffs, delinquencies and other factors that change risk levels;
• complete understanding of the contractual provisions of the HELOCs (such as notifications, payment amounts, interest rates, and amortization terms) and ensuring that the payment processing and servicing systems are controlled and programmed correctly;
• communication by well-trained customer account representatives with the borrowers well in advance of the end of the draw periods, including descriptions of options available for modifications to high risk borrowers;
• tracking of actions taken by type at the end of the draw periods and subsequent account performance and the distribution of such reports to all involved personnel on a frequent basis;
• sufficient staffing and resources to handle all activities within the HELOC portfolio.
This guidance may be found at Interagency Guidance on Home Equity Lines of Credit Nearing Their End-of-Draw Periods.
Kansas Governor Sam Brownback recently signed into law a bill phasing out the mortgage registration tax that requires anyone taking out a mortgage to buy property in Kansas to pay a tax of 0.26% on the principal debt or obligation secured by the mortgage. As summarized in the table below, this phase out will reduce the mortgage registration tax over a five-year period until the tax is completely eliminated in 2019.
Mortgage Registration Tax
0.00% (Totally Repealed)
Click here to view the full text of the amendment.
The Western Independent Bankers’ 2014 M&A Conference to Feature Stinson Leonard Street Partner Ernie Panasci
Ernie Pansasci, a Partner at Stinson Leonard Street LLP, will be a featured speaker at the Western Independent Bankers’ 2014 M&A Conference held June 11-12 in Newport Beach, Calif.
Panasci will be participating in an interactive, hands-on case study exercise, “Getting the Deal Done Right: A ‘Live’ M&A Deal.” In this session, attendees will gain a practical perspective on the mechanics and decisions leading up to an actual M&A deal. From setting the business case, to conducting appropriate due diligence, to following good legal process, to financially analyzing the merger from a shareholder perspective, to uncovering potential compensation surprises, this session is designed to help attendees become well-versed in critical M&A considerations without the pressure of an actual M&A event.
Panasci, who works from the firm’s Denver office, focuses his practice in the areas of financial institutions, mergers and acquisitions, corporate law and counsels financial institutions about federal and state banking matters and related securities law and financing issues. He has been directly involved in more than 100 transactions as counsel for buyers or sellers and the merger and acquisition of businesses in a diverse range of other industries. Panasci focuses his practice throughout the Western United States, including the States of Colorado, New Mexico, Wyoming, Montana, Arizona, Idaho and Washington.
Register to attend the Western Independent Bankers’ 2014 M&A Conference. Save $100 off the conference fees when you register by May 16.
Written by: Tanner Weigel
Increased regulatory scrutiny over the offering, marketing and billing practices used for add-on products has led to a marked increase in the number of regulatory enforcement actions and consent orders imposed on credit card issuers. Add-on products are credit card products that are ancillary to the actual extension of credit; some examples of these products include debt protection products, identity theft protection products and credit score monitoring products. Notably, regulatory scrutiny has increased for all credit card issuers, regardless of size and regardless of the primary regulator for the issuer. Indeed, the CFPB and other regulators are making good on the CFPB’s October 2013 promise to increase scrutiny over the marketing and sale of add-on products.
For example, on April 7, 2014, a large credit card issuer agreed to pay approximately $772 million to settle OCC and CFPB claims that the issuer violated section 5 of the FTC Act, 15 U.S.C. §45(a) (“Section 5″), by using deceptive marketing and billing practices relating to certain add-on products. In the Order, the regulators allege that, among other violations, the issuer 1) billed customers for the full cost of the add-on product even though the customers were not receiving all of the product’s advertised benefits, and 2) enrolled customers in products without obtaining their affirmative consent.
Similarly, the FDIC determined that a small bank issuer engaged in deceptive and unfair acts and practices in violation of Section 5. Some of the criticized practices included add-on products. The FDIC recently imposed a $1 million civil money penalty and ordered the issuer to 1) refund all interest charged by the issuer during a “zero percent interest for 12 month” promotional offer, and 2) clearly and accurately disclose to credit card customers that enrollment in a particular add-on product was not required to obtain or maintain a bank issued credit card.
Card issuers must act now to ensure their practices fully comply with applicable statutes, regulations and regulatory expectations. The following set of considerations is adapted from a CFPB Bulletin and provides an analytical framework for issuers to consult when conducting a compliance review. To ensure the issuer is marketing and selling credit card add-on products in a manner that limits the potential for statutory or regulatory violations, the issuer should take the following actions:
• Adequately disclose important product terms and conditions and always avoid deceptive acts, practices or tactics. Marketing materials, including direct mail materials, telemarketing scripts and electronic and print advertisements, must fully and accurately reflect the terms and conditions of the product and not be deceptive or misleading. Banks are encouraged to evaluate the following factors:
1) Is the statement prominent enough for a reasonable consumer to notice?
2) Is the information presented in an easy-to-understand format that does not contradict other information relating to the product?
3) Is the information in a location where a reasonable consumer can be expected to look?
4) Is the information in close proximity to the claim it qualifies?
• Obtain affirmative consent before enrolling consumers in the add-on product. Banks must not enroll customers in add-on products without clear affirmative consent, which should be obtained only after the consumer has been informed of the terms and conditions of the add-on product.
• Disclose the voluntary nature of the enrollment process. The purchase of add-on products cannot be required as a condition of obtaining credit. Therefore, banks should evaluate their current practices to ensure oral and written statements to consumers do not require enrollment in an add-on product prior to the extension of credit.
• Only bill customers for services that are actually performed. Issuers should only bill for services actually performed and should ensure that customers receive all advertised product benefits when they are charged the full amount of the product’s cost. The failure to provide all advertised benefits without a corresponding reduction in fees will lead to adverse consequences.
• Appropriately design and monitor employee incentive or compensation programs. Employee incentive programs tied to the sale and marketing of add-on products must be designed to ensure that the programs do not create incentives for employees to provide inaccurate information about the products. Issuers must frequently analyze sales tactics, including all scripts and manuals used by the issuer’s customer service centers, to ensure the following obligations are met:
1) The customer service representatives accurately state the terms and conditions of the various products;
2) Attempts to rebut the customer’s attempt to decline the product are made in accordance with established and clearly defined bank guidance. Ideally, such guidance will include the appropriate rebuttal language that may be used, clearly define when such language is appropriate, and limit the number of times rebuttal attempts may be made;
3) Customer service representatives are not regularly deviating from approved scripts;
4) Cancellation requests are handled in an appropriate manner.
• Design and employ effective compliance management programs. Programs should be designed to ensure compliance with prohibitions against deceptive acts and practices, as well as all other Federal and state consumer financial protection laws and regulations, including the Truth in Lending Act and the Equal Credit Opportunity Act. Issuers should:
1) Conduct periodic quality assurance reviews;
2) Engage an independent auditor to objectively evaluate the add-on program;
3) Monitor any affiliates or third-party service providers that perform marketing or other functions related to the add-on products to ensure they are complying with applicable law;
4) Implement an appropriate channel for resolving consumer complaints; and
5) Design and implement a comprehensive training program for employees involved in the marketing, sale and operation of add-on products.
Stinson Leonard Street Partner, Kristin Godfrey, has been chosen to speak at the Independent Bankers of Colorado’s 2nd Annual Commercial Lenders Conference on May 8th and 9th in Golden Colorado. Join Kristin and a host of other great presenters as they provide valuable insight on current hot topics in commercial lending. Click here for more information about the conference and to view the conference brochure.
Written by: Scott Smalley
I heard it from a friend who, who heard it from a friend who, heard it from another that the site is being taken down. The popular website, which was established to help banks market REO (real estate owned) inventory, has been taken offline due to declining REO inventories. The website provided valuable assistance to bankers who were “Ridin’ the Storm Out” and helped them to “Keep Pushin’” REO off of their balance sheets. With that task nearly complete, the website has acknowledged that it’s “Time for Me to Fly.” To help banker’s “Roll with the Changes,” properties advertised on REOdeedwagon.com will be migrated, free of charge, to Promontory Interfinancial Network’s Bank Assetpoint®, which serves as a marketplace for banks and brokers to view listing of loans, commercial real estate and other assets.
Here’s the official statement from REOdeedwagon.com:
REOdeedwagon.com has been taken offline as of February 28, 2014.
This website was established to help bankers advertise their REO inventories beyond local markets and was successful in accomplishing that goal. After researching this extensively, we feel that the REO inventories are returning to near normal levels for the majority of institutions in the country This is a positive sign for the industry. Should there ever be a need for a service like REOdeedwagon.com, we are confident that we will be able to act swiftly to answer the call from the lessons we have learned. It has been an honor to serve bankers and consumers over the past two years.
If you would like further information, please call 800-662-7044.
If you “Can’t Fight this Feeling” to discuss your bank’s strategy to market and sell REO property, please contact a member of our Commercial Lending team or your usual Stinson Leonard Street LLP attorney.
Written by: Nicole Strong
On February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) and the U.S. Department of Justice (“DOJ”) issued guidance seeking to clarify expectations and requirements for financial institutions that are looking to provide services to marijuana businesses (the “Guidance”). The Guidance allows financial institutions to provide services to marijuana businesses while still maintaining their obligations to “know their customer” and to report possible criminal activity.
“Know Your Customer”
Financial institutions must complete the following additional due diligence when assessing the risk of providing services to a marijuana business: (i) verifying with the state authorities whether the business is duly licensed and registered; (ii) reviewing the license application submitted by the marijuana business for obtaining a state license; (iii) requesting from state licensing and enforcement authorities available information about the marijuana business; (iv) developing an understanding of the normal and expected activity for the marijuana business; (v) ongoing monitoring of publicly available sources for adverse information about the marijuana business; (vi) ongoing monitoring for suspicious activity; and (vii) refreshing information obtained as part of customer due diligence. In addition, a financial institution should consider whether a marijuana business implicates one of the “Cole Memo priorities.” The Cole Memo was issued to all United States Attorneys to provide guidance to focus enforcement resources on persons or organizations whose conduct interferes with listed enforcement priorities. A copy of the Cole Memo including a listing of the Cole Memo priorities can be found here.
Reporting Criminal Activity
Because the sale of marijuana is still illegal under federal law, the obligation to file a suspicious activity report (“SAR”) is unaffected by any state law that legalizes marijuana-related activity. The Guidance was issued to assist financial institutions in determining how to file a SAR that best facilitates federal law enforcement’s access to pertinent information.
A financial institution providing services to a marijuana business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law should file a “Marijuana Limited” SAR. A “Marijuana Limited” SAR is limited to the following information: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) the fact that the financial institution is filing the SAR solely because the subject is engaged in a marijuana business; (iv) the fact that no additional suspicious activity has been identified; and (v) the term “MARIJUANA LIMITED” in the narrative section. Any continuing activity report required under FinCEN’s existing guidance may contain the same limited content as the initial SAR.
If, in the course of conducting ongoing customer due diligence, the financial institution detects changes in activity that potentially implicate one of the Cole Memo priorities or violate state law, the financial institution should file a “Marijuana Priority” SAR. A “Marijuana Priority” SAR should include the following information: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) details regarding the enforcement priorities the financial institution believes have been implicated; (iv) dates, amounts, and other relevant details of financial transactions involved in the suspicious activity; and (v) the term “MARIJUANA PRIORITY” in the narrative section.
If a financial institution determines it is necessary to terminate a relationship with a marijuana business in order to maintain an effective anti-money laundering program, the financial institution should file a SAR and note in the narrative section the basis for the termination, including the term “MARIJUANA TERMINATION.”
What This Means for You
The decision to open, close, or refuse any account or relationship lies with the bank. Before making the decision to provide services to any marijuana business, it is recommended that you familiarize yourself with the red flags described in the Guidance that indicate a marijuana business may be engaged in activity that implicates one of the Cole Memo priorities or violates state law. A copy of the Guidance can be found here. We look forward to hearing from you and answering any questions you may have with respect to this ever-expanding area of law, particularly as it relates to the varying laws of each state.