March 2023 Newsletters

Recent Bank Failures: What Happened & What Can We Do?

As you have no doubt heard, for the first time since 2020 there was a bank failure in the U.S. on Friday March 10, 2023. Then there was another two days later, on Sunday March 12. The two banks involved are Silicon Valley Bank(SVB) of Santa Clara, California, which failed Friday, and Signature Bank of New York City, which failed Sunday. At the end of 2022, SVB had approximately $209 billion in total assets and about $175.4 billion in total deposits. SVB was the first bank to fail since October 2020. Meanwhile, at the end of 2022, Signature Bank had assets of $110.4 billion and deposits of $88.6 billion.

In both cases, the FDIC was appointed as receiver, creating temporary “bridge” banks to hold all the deposits, uninsured and insured, and substantially all the assets. As explained by the FDIC in a press release, a bridge bank is a chartered national bank that operates under an FDIC-appointed board to assume the deposits and other liabilities and purchase certain assets of a failed bank. The bridge bank structure is designed to bridge the gap between the time of failure and the time when the FDIC can implement an orderly resolution.

On Sunday March 12 a joint statement was issued by the Treasury, Fed, and FDIC announcing the two bank failures, indicating that taxpayers will not bear the losses associated with the resolution of either bank, and reiterating that the Fed will make additional funds available to eligible institutions to prevent bank runs that contributed to closures of SVB and Signature Bank. All depositors will be fully protected at both institutions, but shareholders and certain unsecured debtholders will not be protected.

While our member banks are generally not going to be subject to the specific risk factors that brought down SVB and Signature Bank, such as large deposit base concentrations in technology, bad investment decisions, and poor communication, there could be more scrutiny in the area of liquidity management going forward. These failures seemingly happened overnight without warning, but downfalls like these are years in the making, and now is a good time to look into asset and liability management, liquidity management, and funds management.

Compliance Alliance has tools to help in these areas:

C/A Asset & Liability Management Toolkit:

Assets Liability and Liquidity Management Policy:

Liquidity Risk Management Audit Worksheet:

FDIC Liquidity and Funds Management:

For further information, the Federal Reserve has put out FAQs for both SVB and Signature Bank. These could also be helpful in anticipating how other bank failures would be handled. As always, if you have any questions about what’s going on, any of the published guidance or about what your institution can do  proactively to avoid any future concerns in these areas, feel free to reach out to us on the hotline in addition to using the Compliance Alliance resources linked above.

Supplemental Consumer Information Form: Required or Not?

Last summer Fannie Mae (Federal National Mortgage Association) announced in Lender Letter LL-2022-03 the mandatory use of the Supplemental Consumer Information Form (SCIF). This requirement applies to loans sold to either Fannie Mae or Freddie Mac (Federal Home Loan Mortgage Corporation) with application dates of March 1, 2023 or later.

Referred to as Form 1103, the Supplemental Consumer Information Form captures information about homeownership education or housing counseling programs completed by the borrower along with the borrower’s language preference.

Homeownership Education and Housing Counseling

Quality homeownership education and housing counseling can provide borrowers with the information and resources to make informed decisions, which should in turn lead to sustained long-term homeownership. The bank or borrower should complete the education and counseling sections of the form if required by B2-2-06 of the Selling Guide, the section on Homeownership Education and Housing Counseling. The top section of Form 1103 can also be completed if the borrower obtained education or counseling even if not required for the specific transaction.

Language Preference

The bank must present the form to the borrower to provide a preferred language preference. The borrower is given eight choices from which to choose: English, Chinese, Korean, Spanish, Tagalog, Vietnamese, Other, and “I do not wish to respond.” The borrower is not required to select any of the options in the language preference section and may leave this section blank. As a result, there may be instances where the Form 1103 in the loan file only includes only the lender loan number/universal loan identifier and the borrower’s name. This section of Form 1103 informs the borrower that their answer to “language preference” will NOT negatively affect the mortgage application and the bank may choose to explain the instructions and other information provided.

Various mortgage resources, including the Form 1003 Uniform Residential Loan Application and Form 1103 Supplemental Consumer Information Form are available through Fannie Mae in English, Chinese, Korean, Spanish, Tagalog, and Vietnamese.

The use of Form 1103 is a requirement of the GSEs (collectively Fannie Mae & Freddie Mac) but is not a regulatory requirement. So, if you’re selling a loan to the GSEs you’d be required to use Form 1103 to capture information about homeownership education or housing counseling as well as language preference, but if this loan is being kept in-house as a portfolio loan, then you would not need to use Form 1103 or capture the information sought by Form 1103. If you’re selling the loan to an investor other than the GSEs, then you’d need to review that specific investor’s requirements to see if they also require the use of Form 1103.

Undoubtedly questions will arise about Form 1103, such as if you’re required to use it in a particular situation, and you can always reach out to our hotline advisors for guidance. We’re available to help you understand the requirements and best practices for your situation.

FinCEN Alert on Mail Theft & Check Fraud

If it seems like you’ve been seeing more and more instances of check fraud, you’re not alone. According to FinCEN, since the start of the COVID-19 pandemic fraudsters have stepped up their activity in check fraud. Approximately 350,000 SARs were filed related to check fraud in 2021, which was a 23% increase over check fraud SAR filings in 2020. The numbers in 2022 were even worse, with more than 680,000 check fraud SARs being filed, nearly double the number of 2021. Combined with these troubling statistics, during this period the United States Postal Service (USPS) received nearly 300,000 complaints of stolen mail, an increase of 161% from pre-pandemic times. In response to these increasing check fraud numbers, FinCEN has issued an alert to help financial institutions take action.

FinCEN issued the alert in collaboration with the USPS Inspection Service to ensure that SARs filed by financial institutions appropriately identify and report suspected check fraud schemes that may be linked to mail theft in the U.S. FinCEN indicates that financial institutions should reference the related alert in SAR field 2 (Filing Institution Note to FinCEN) and the narrative by including the key term “FIN-2023-MAILTHEFT.” Institutions should also mark the check box for check fraud (SAR Field 34(d)).

FinCEN advises that those committing mail theft-related check fraud generally target personal checks, business checks, tax refund checks, and government assistance checks, such as those for unemployment benefits. Although several types of checks are at risk, business checks may be more valuable to fraudsters because business accounts are often well-funded, and it often take much longer for the fraud to be discovered.

After stealing checks from the mail, fraudsters may alter the checks by 1) replacing the payee information with fraudulent information or with business accounts that the fraudsters control, or 2) increasing the dollar amount on the check. Altered checks may also be sold to other fraudsters, often in exchange for virtual currency.

Altered checks may also be counterfeited using routing and account numbers from the original check. Altered checks may show up anywhere at any time. They might be presented to be cashed, deposited checks in person, deposited at ATMs, or deposited via remote deposit into accounts controlled by fraudsters. Normally, once these altered checks are deposited, the funds are often quickly withdrawn through ATMs or wire transfers. Fraudsters may even further exploit the victims by using stolen personal information to engage in other fraud schemes.

The FinCEN alert has a list of ten red flags to help financial institutions detect, prevent, and report suspicious activity connected to mail theft-related check fraud:

  1. Uncharacteristic large withdrawals on a customer’s account via check to a new payee.
  2. Customer complains of a check stolen from the mail and then deposited into an unknown account.
  3. Customer complains that a check they mailed was never received by the intended recipient.
  4. Checks used to withdraw funds from a customer’s account appear to be of a noticeably different check stock than check stock used by the issuing bank and check stock used for known, legitimate transactions.
  5. Existing customer with no history of check deposits suddenly has check deposits and withdrawal or transfer of funds.
  6. Uncharacteristic, sudden, abnormal deposit of checks followed by rapid withdrawal or transfer of funds.
  7. Suspect checks determined to have faded handwriting underneath darker handwriting, giving the appearance that the original handwriting has been overwritten.
  8. Suspect accounts may have indicators of other suspicious activity, such as pandemic-related fraud.
  9. A new customer opens an account that seems to only be used for depositing checks followed by frequent withdrawals and transfer of funds.
  10. A non-customer that is attempting to cash a large check or multiple large checks in-person and, when questioned, provides an explanation that is suspicious.

No single red flag is determinative, but the facts and circumstances surrounding the transaction can help determine whether to suspect fraud. As always, if you have any questions about check fraud, red flags, or suspicious activity you can always reach out to us on the hotline for help.

Trusts and Beneficial Ownership

One of the more often asked about quirks related to Beneficial Ownership is the requirements for trusts. We know that the beneficial ownership requirements will be changing in the future, as FinCEN is in the process of publishing rules on proposed changes to the process, but until all of that is issued and becomes effective, we’re still required to follow the existing Beneficial Ownership rules, which are not as straightforward as they may seem.

What is the purpose of beneficial ownership? To identify and verify “beneficial owners” of legal entity customers. Who are beneficial owners? There are two categories of beneficial owners: a) “ownership” – any individual who owns directly or indirectly 25% or more of a legal entity customer, and b) “control” – a single individual with managerial authority over a legal entity customer (such as CEO or President of a corporation, Managing Member of an LLC, or General Partner of a Partnership). If there are no individuals who own 25% of the legal entity customer, then you wouldn’t collect any information for the “ownership” category of beneficial ownership, but you’ll always have exactly one individual reported for the “control” category of beneficial ownership.

The beneficial ownership requirements apply to “legal entity customers,” meaning those entities that are registered with the Secretary of State’s office such as a corporation or limited liability company, as well as general partnerships, which are generally not required to register with any state offices to do business. If your customer is a legal entity, such as those just named, they’ll likely be subject to beneficial ownership.

Although the regulation contains sixteen exceptions to the rule for banks, publicly traded companies, governments, and other regulated entities, most non-public companies will be subject to beneficial ownership. Individuals (natural persons) and sole proprietorships are not subject to beneficial ownership, as there is no legal distinction between individuals and sole proprietorships that would necessitate the collection of information. Trusts that are your customers are also not subject to beneficial ownership, unless the trust is registered with the Secretary of State’s office, which is not very common for trusts.

However, a much more common scenario is dealing with a legal entity customer that is not a trust itself but is owned by a trust or multiple trusts. Is beneficial ownership required, and if so, who are the beneficial owners? In a situation in which a trust owns 25% or more of a legal entity customer, then the beneficial owner for these purposes will be one trustee of the trust. If there is only one trustee of the trust, then that individual is the beneficial owner in his or her capacity as trustee (31 CFR § 1010.230(d)).

If there are multiple trustees, only one trustee’s information is required to satisfy the regulatory requirements. Banks may choose to collect beneficial ownership on more than one trustee in accordance with the bank’s own assessment of risk, but only one trustee is required to satisfy the requirements (FinCEN FAQs).

What about a scenario in which a bank, law firm or other entity is the trustee of the trust which is 25% owner of a legal entity customer? In such a case you wouldn’t be required to collect information for the “ownership” category of beneficial ownership, although you’d still collect information for the “control” category of beneficial ownership. Additionally, banks should collect information on entities as trustees as part of their CIP, in accordance with the bank’s risk assessment and customer risk profile.

There are many other possibilities and scenarios that arise related to beneficial ownership, and I think we’ve heard them all on the hotline, so reach out to us on our hotline (chat, e-mail, telephone) with any beneficial ownership-related questions you may have.