June 2020 Newsletters

How Has This Pandemic Changed the Way We Do Business?

by C/A Staff

Doing business in the uncertainties of 2020 has forced industries across the world to reassess their day-to-day. While we as a nation work through things like working from home and sheltering in place, we are adapting to a new way of life. This has come in the form of new communication channels, new ways to socialize and yes, even new ways to make our everyday business practices happen.

From changing the business processes to the products offered, business as a whole will most likely never be the same. Every crisis we go through tends to make subtle changes in the way we live our lives and do our jobs, so even though life’s essentials don’t change, the way we provide for them sometimes has to, forcing us to adapt.  And while change is inevitable, it is important to understand what has and hasn’t changed from the financial industry standpoint.

History has proven that we will always need a monetary system and access to financial institutions.  On both the federal and state levels, governments have acknowledged this need, and given guidance through regulation. The federal government has placed regulations on the way we conduct business to make sure we have a fair and unbiased access to financial services. Changing technology, innovative ways of communicating, and the ability to conduct financial transactions without being physically present had an impact on the financial industry well before the current pandemic.

For example, even before the coronavirus pandemic, consumer and small business banking were facing challenges that ranged from threats of digital attacks, changes in the way our customers do business, their ever-increasing expectations, and changes in the economy. 

On top of that, today we as an industry are faced with changing workplace dynamics, changes in the corporate governance, changes in our entire bank culture, as well as changes in our customers routines.  These are all reasons the consumer and small-business bank of tomorrow is likely to look very different than it did yesterday.

Change can be a great thing when approached in a measured manner. We know that having separation from customers will increase the complexity of products and programs offered; they will become more dependent on external communication methods. Many financial institutions have adopted electronic processes to bridge prior gaps. With the increase in competition and the growing need to retain customers, the industry has already started making the necessary changes to adapt.

Many of these changes have allowed for the financial institutions to even incentivize consumers who are spending money at establishments that could be at risk of going under. We have seen bonus plans implemented to give back to those consumers supporting local restaurants, grocery stores, and other essential businesses. These innovative approaches allow consumers to continue operating in the new world of social distancing without having to limit spending or avoid supporting other businesses also being affected by the pandemic.

While the industry is working to adapt, there is one constant: all institutions have to stay compliant with regulations. Even though some regulations have been delayed or suspended during this time, it is imperative that we as an industry do not take this for granted and let our internal processes get loose. We have seen many financial institutions closing due to fears of the spread of COVID-19, and then we have others who have taken steps to still provide services with limited interaction. No matter the method, it is essential to be able to support our customers and equally important to ensure all aspects of the regulatory requirements are addressed and followed.

Remember, as an essential business structure, it is the financial industry’s responsibility to continue to innovate and maintain compliance in the process. This too shall pass, but will leave us with a new normal. Be sure to embrace the lessons learned and use this as a learning experience to continue to offer solutions as we always have.

Always Required Except When It’s Not

They say there is an exception to every rule, and the Appraisal rules are no exception.  Because appraisals can take weeks to complete, can delay closings, and are often expensive, it is important for the prudent lender to be familiar with the regulatory exceptions from the appraisal requirements in order to save borrowers time and money.

The appraisal regulations enumerate fourteen different exceptions. It is key to note at the outset that for some of these exceptions, even though an appraisal is not required, the bank still needs to obtain an evaluation.  While it’s beneficial to know all of the exceptions, we are questioned about a certain few exceptions much more frequently than the others.  The popular exceptions include transaction thresholds, subsequent transactions, and abundance of caution.

The two common transaction value thresholds are $400,000 for residential real estate transactions and $500,000 for commercial real estate transactions.  The key distinction between these two types of transactions is whether or not they are secured by a single 1-to-4 family residential property.  If the transaction is secured by only a single 1-to-4 family residential property, it is a residential real estate transaction, and if it is not, then it is a commercial real estate transaction.

For example, if you have a real estate-related transaction secured by multiple 1-4 family residential properties, you have a commercial real estate transaction on your hands. Even though a transaction may fall under a threshold, the Bank is still required to obtain an evaluation under this exception.  

For the subsequent transaction exception, the transaction must meet one of two circumstances:

  1. if the transaction involves the advancement of new money, it is required that there has been no obvious and material changes in the market conditions or physical aspects of the property that would threaten the bank’s collateral protection, or
  2. the transaction does not include the advancement of new money other than reasonable closing costs.

If relying on this exception, an evaluation is required, however an existing appraisal can satisfy this requirement provided that the Bank revalidates the appraisal.

The abundance of caution exception has a very limited application and should be relied on by banks carefully. Generally, the abundance of caution exception only applies when the bank did not consider or look towards the market value of the property in making the credit determination whatsoever. For example, a business loan must be well supported by the borrower's cash flow or collateral other than real property and requires verification of and documentation the primary and secondary repayment sources.

Because of safety and soundness concerns, it’s not always advisable to rely on an exception, and there are instances in which it would be prudent to require an appraisal even though the appraisal rules do not ask for one.  However, in appropriate circumstances the appraisal exceptions provide a way for the bank to be more competitive by saving borrowers both time and money.

We have a very helpful appraisal toolkit, which includes policies, checklists, flowcharts and more: https://compliancealliance.com/find-a-tool/by-toolkit/appraisal

E-Meetings For National Banks and Federal Savings Associations

Banks have been using telephone or internet-based conferencing since the disruption and social distancing guidelines from COVID-19. The OCC issues an Interim Final Rule (IFR) which became effective on May 28, 2020 clarifying that national banks and Federal Savings Associations would be able to continue using remote communication tools to comply with internal and regulatory meeting requirements. This would help reduce the burden and costs of meeting in person for the Banks and the meeting participants.

Both Federal Savings Associations and national banks would be permitted to follow the procedures for telephone or electronic participation of:

(1) The State corporate governance procedures it is permitted to elect pursuant to § 5.21(j)(3)(iii), if those State corporate governance procedures include telephonic or electronic participation procedures; (2) the Delaware General Corporation Law (with ‘‘member’’ substituting for ‘‘stockholder’’); or (3) the Model Business Corporation Act (with ‘‘member’’ substituting for ‘‘shareholder’’), provided that such procedures are not inconsistent with applicable Federal statutes and regulations and safety and soundness.

With certain exceptions, Federal Savings Associations are also permitted to follow the corporate governance procedures of the State where the home office of the Association is located.

Currently, 12 CFR §5.21 and §5.22 provide that for Federal Savings Associations, annual meetings must take place in a convenient place that the board of directors may designate. The recent IFR amends these sections to permit an association’s bylaws to provide for participation in these meetings via telephone or other electronic means. They are also deemed to be present in person for purposes of the quorum requirements.

These sections of the CFR also require Federal mutual savings associations to publish a notice of their annual or special meetings in a newspaper or general circulation in the city or county of their principal place of business. It also requires posting notices in each of its offices during the 14 days preceding the date of the meetings. To modernize this rule, the OCC is considering allowing electronic delivery of these notices and allow for posting this notice on the banks’ websites instead of the offices.

Similar to the rule for Federal Savings Associations, the OCC is changing the appropriate sections in 12 CFR § 7.2001 and § 7.2003 to allow national banks to provide for participating in meetings using telephone or other electronic measures.

These amendments would allow Banks and Federal Savings Associations much more flexibility in their meeting procedures. It would also be able to reduce costs associated with having shareholders, directors and members. However, there could always be security risks associated, including cybersecurity risks, with allowing this kind of flexibility which our member Banks should think about as well.

Although this IFR has been effective as of May 28, 2020, the OCC is still requesting comments regarding the changes it implemented and the potential risks associated in allowing participation in these meetings via telephone and electronic means. The comment period is still open until July 13, 2020, so if the Bank has any concerns regarding this IFR, the Bank could provide its insight.

Hurricane Season Flood Refresher

By C/A Staff

Hurricane Season is upon us once again, and as we settle in for another six months of watching the tropics it’s a good time to be reminded of the flood insurance requirements.

Flood insurance is required when there is a MIRE event (when a loan is made, increased, extended or renewed) 1) secured by improved real estate 2) that is located within a Special Flood Hazard Area and 3) the community participates in the National Flood Insurance Program (NFIP).

Flood insurance is generally required on all eligible structures.  Eligible structures include residential, industrial, commercial and agricultural buildings that are walled and roofed structures that are principally above ground.  The requirement further includes condominiums, co-operative buildings and mobile homes that are affixed to a permanent foundation, including mobile homes that are part of a dealer’s inventory and affixed to permanent foundations.  Flood insurance is also required on eligible properties taken out of an abundance of caution.

The minimum amount of flood insurance required must be at least equal to the lesser amount of 1) the outstanding principal balance of the loan, 2) the insurable value of the property, or 3) the maximum amount available under the NFIP for the type of structure.  The NFIP maximum amounts available are: $250,000 for residential ($100,000 contents), $500,000 non-residential ($500,000 contents) and $500,000 for non-condominium residential buildings of five units or more ($100,000 contents).

The bank is also required to escrow flood insurance premiums if flood insurance is obtained in connection with a MIRE event, unless an exemption applies. Business purpose loans, HELOCs, non-performing loans and loans with a term of 12 months or less are but a few examples of loans that are exempt from the flood-insurance escrow requirements.  There is also a small lender exemption from escrow which is described in detail in the regulation at 12 CFR 339.5(c).  The flood insurance escrow requirements are separate and distinct from any requirements to escrow for taxes and hazard insurance, and escrowing for flood insurance does not require the bank to escrow for taxes, hazard insurance or anything else.

Although lenders are not required to monitor for flood map changes, if at any point during the life of the loan the lender becomes aware that there is insufficient flood insurance coverage on the property the lender should begin their force placement procedures.  These procedures generally begin with the sending of the 45-day notice.  Giving notice to the borrower that they must obtain the required amount of flood insurance within 45 days or else the bank will purchase insurance on their behalf is the only notice required prior to force placing insurance. 

The bank is free to send other notices in addition to the 45-day notice, but at a minimum, the bank must send the 45-day notice before being able to charge the borrower for force-placed insurance.  Insurance may be force-placed by the bank on the day coverage is determined to be insufficient, but the bank is not required to force place at that time.  Force placement is optional for the 45-day period described by the notice, but is required after the 45-day period, and the bank may charge the borrower for all force-placed insurance after the 45-day period runs.

For more information on the flood insurance requirements check out our Flood toolkit or our recent Flood Insurance webinar.