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2. personal finance
3. insurance

Memo To:
From:
Date:
Re:
Compliance Officers and Representatives
Jennifer Cliber Smith, CRCM
March-April, 2014
Compliance Update
BSA/AML/OFAC Issues
The Marijuana Changes
Decisions need to be made at your institution. When state law and federal law conflict, there is
increased risk. As a federally insured institution, FinCEN’s directives and federal law prevail.
Each institution must address the following in light of this dilemma:
 Decide whether your institution will bank (legal) marijuana businesses and amend the
BSA/AML/OFAC Policy to reflect that decision. The ABA strongly recommends (and
the safest practice is) not to bank these businesses at this time. “Congress and the
President may reconsider marijuana’s legality, but until federal law is changed, selling marijuana,
laundering marijuana proceeds, and aiding and abetting those activities all remain illegal.” This is
an excerpt of a letter to FinCEN from U.S. Senators.
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If the risky decision is made to bank these marijuana businesses, there is a long CIP list
that must be implemented (Call or email for that list). The CIP portion of the Policy will
need to be amended.
Risk Profile Questionnaires will need to be revised (even if these businesses will not be
banked) – the fact that this is a marijuana business will need to be determined up front so
the informed decision can be made whether to bank this entity and how to proceed. A
SAR will have to be filed if it is determined that this is a marijuana business.
There are new SAR instructions and notations that need to be made when filing on one of
these businesses. They differ depending on the type of activity – but SARs will have to
be filed because marijuana is a federal crime. The SAR rules apply whether or not they
are a customer – if there is knowledge. If an account is closed because it is discovered
that it is a marijuana business (or for any other reason – and it is a marijuana business),
this requires a SAR. (Call or email for more details. . .)
Monitoring and training for this type of business needs to be implemented.
Elder Abuse Hits Home
Beware! Grandparents that are normally wise to scams can succumb to conniving callers
claiming to be a grandchild in need. Educate your customers, employees, and everyone you
know. It is happening all around. Life savings can be lost.
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IRS Scams Abound
Callers are told that it is the IRS calling and if they don’t wire money within a very limited time,
they will be at their home to arrest them. Seniors panic and send the money. Warn all you
know.
LOAN ISSUES
Keeping Your Head Above the Flood Insurance Changes
There is much afloat regarding flood insurance changes. Read on. . .
*Remember the Biggert Waters Act and the premium increases that have been taking place as a
result? (The BW Act attempted to eliminate the subsidized flood insurance premiums in an
attempt to make the NFIP solvent again. Since Katrina, the NFIP has had to borrow millions to
pay claims.) Some of the increases in flood insurance premiums have been substantial (with the
potential for homeowners to lose their homes and for entire areas to be “tanked” because the
resale value would be affected due to the high flood premiums).
*There has been such an outcry that The Consolidated Appropriations Act of 2014 (Omnibus)/
FY 2014 Budget Bill prohibits FEMA from implementing part of the BW Act. This delays
FEMA’s ability to re-map and phase-in full risk premiums and cease offering certain subsidized
rates.
*Then, the Homeowners Flood Insurance Affordability Act was passed (just signed by the
President on March 21st). This Act repeals many of the flood insurance premium increases. It
also makes several other changes to the BW Act.
*Also, in mid-December, 2014 FEMA issued a memo outlining NFIP Program Changes that will
be effective June 1, 2014. This memo was written in accordance with Biggert Waters but was
prior to the Homeowners Flood Insurance Affordability Act.
Following are the upcoming changes that affect loan operations and origination (and effective
dates, if known) that remain:
1. The maximum flood insurance for non-condominium multifamily residential structures
(5 family or more) increases from $250,000 to $500,000 effective June 1, 2014.
Identify all loans/lines in amount greater than $250,000 secured by non-condo
multifamily residential structures in SFHA. If any of these are increased, extended, or
modified on or after June 1, 2014 this new maximum will have to be considered in the
flood insurance determination calculation. And, lenders must require increased
coverage on these properties as of June 1, 2014 for existing loans – even if there is no
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increase, extension, modification, etc. if the maximum limit is the determining factor of
the minimum flood insurance required. For example: there is a loan on the books for
$1,000,000 secured by a non-condo multifamily structure that has a replacement cost of
$1,200,000. Currently, flood insurance of $250,000 is in place and required because that
was the maximum. As of June 1, 2014, $500,000 will be required. Send your notice
now. Force placement will be required if the borrower doesn’t get the additional
insurance. Insurance Companies should be sending letters that FEMA provided
informing these multifamily structure owners of the increased insurance available. The
Lenders must determine if additional insurance is required and obtain that insurance if, as
of June 1, 2014, they will be underinsured. Watch for Guidance regarding this from each
agency. Call to discuss.
2. Structures that are not attached to the primary residential structure shall not require flood
insurance coverage or be included in the rating for premiums. This is part of the new
HFIAA that just passed. The regulatory agencies and FEMA will be issuing updates and
guidance. Identify all loans with multiple structures in SFHA on the books where
additional insurance was required due to the additional structures and then wait. It
will need to be clarified whether notices will need to be sent informing the borrowers that
they can reduce their coverage for the structures. It will also need to be clarified whether
this will be applicable only for primary residence properties or principal residence
properties, etc. It doesn’t appear that this reduction in insurance requirements will be
applicable to business properties. It will also need to be determined whether business
loans secured by primary/principal residences will be affected. “Although the NFIP will
no longer require coverage, mortgage lenders may still require coverage.” Make this
decision and apply it consistently.
3. Declaration Page Requirements
For all policies effective on or after 6-1-2014, the Dec Page must display:
-Pre-FIRM Subsidized (if applicable)
-“Y” in the “Primary Residence” field when the policy covers a structure that will be
lived in by the insured or the insured’s spouse for more than 50% of the 365 days
following the policy effective date.
4. Many of the rate increases are repealed, the grandfathered rates have been restored, there
is a lower cap on annual rate increases, newly mapped properties will be rated as a
Preferred Risk Policy for the first year and will increase at 15% annually – all of which
makes flood insurance more affordable. This will assist in QM/ATR calculations and
cash flow analysis.
*Primary residence subsidies will continue with “primary residence” meaning that
Insured or Insured’s Spouse lives there more than 50% of the time and they will have to
submit certain documentation to their insurance company to verify this. (From Jan., 2013
to June 1, 2014 “primary residence” meant 80% of the time so more persons will be
permitted to retain this subsidy if they furnish the required documentation.) FYI –
Principal Residence means 80% of the time or more and is required for full replacement
cost under the Standard Flood Insurance Policy.
*There will be some refunds of the increased premiums but it will take months
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months for those to be received.
*High-deductible policy options of up to $10,000 are permitted in the hopes of
lowering premiums
*Flood insurance policies will have an annual premium surcharge of $25 (most
cases) and $250 (non-residential and non-primary residence) that will go into a Reserve
Fund. This is collected as long as the premium is subsidized.
5. When force-placing for flood insurance and providing the required 45-day notice, the
forced-placed insurance and charge for this force-placed insurance may be effective as of
the date the insurance lapsed. When a borrower provides proper proof (Dec Page with
policy #, contact info for the agent/company, sufficient and accurate coverage, correct
zone, indication if subsidized, indication if primary residence), the borrower must be
reimbursed for any overlapping period within 30 days of the confirmation of coverage.
(This has been in effect.) It may streamline procedures to provide flood insurance notices
following the same new RESPA timing requirements for hazard insurance forceplacement.
6. The civil money penalty for flood violations is $2,000 per violation with no cap. (This
has been in effect.)
7. FYI – only one flood policy on a building is permitted. Duplicate policies must be
cancelled or endorsed to remove the building that is insured by another policy. If there
are multiple buildings on the same property, each building must be uniquely identified.
8. Flood Insurance premiums will be able to paid monthly –in approximately 18 months.
9. Escrow for flood insurance premiums is not mandated unless otherwise required by
RESPA/Reg Z. This only affected financial institutions with assets over $1Billion.
10. There is much more happening in this area. The Agencies will be issuing further
guidance and interpretations. FEMA has issued a memo summarizing the Homeowner
Flood Insurance Affordability Act but FEMA’s website still states “Materials will be
updated to reflect the Homeowner Flood Insurance Affordability Act of 2014. More
information on the new law and its impacts on the NFIP will be forthcoming.” Stay
tuned. The items listed should be on your radar. Also, be aware that all of this can be
tweaked and changed.
Handling Delinquency, Foreclosure, Loan Loss Mitigation
*Hands down: The best practice is to refer all communication relating to any delinquency to a
foreclosure attorney (other than the computer-generated late notices that have been reviewed and
contain the Counseling notice and HUD phone # when required, the notice of reporting to CRAs
when required, etc.).
*Hands down: A well-thought-out Loan Loss Mitigation Policy is more than just that. It is a fair
lending tool. It can be a HMDA tool regarding modifications vs. reportable applications for
refinancing. It can be a Call Report, TDR, and credit risk cross-reference. It can be a clear
reference for what is referred to the attorney specialist. The attorney can/should write “the rest
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of the story” to ensure they are complying with all requirements when the loan is referred to
them.
*For FHA loans: The new brochure entitled “Save Your Home: Tips to Avoid Foreclosure” (HUD2008-5-FHA) must be sent to delinquent borrowers no earlier than the 32nd day of a delinquency, but no
later than the 60th day. This brochure includes information on the revised loss mitigation tools available
for delinquent homeowners with FHA-insured loans. This brochure must be sent with a cover letter that
has specific content requirements. There are many more requirements. Make sure this letter and
brochure are being sent timely for all FHA loans originated that may not be sold right away . . . and for
any FHA loans that are being serviced.
Can an ARM be a QM?
Yes!
When calculating the monthly payment (and debt‐to‐income ratio) on ARM loans, use the
maximum rate that will apply during the 1st 5 years after the 1st regular payment (so, make sure
that your 5 year ARM loans go at least 61 months before a rate change). Do not offer anything
less than a 5-year ARM. Verify that the TIL reflects that no payment will change during the first
5 years.
CRA – News from the Roundtable
An Interagency Bankers CRA Roundtable was held recently to discuss certain county
demographic updates and to hear what community based organizations had to say to the
Regulators in their “Listening Sessions”. Copies of the slides and the presentations are attached.
Here are some excerpts:
o There have been some surprising demographic changes in certain areas between 2000 and
2010. Look at the counties and areas that comprise your market area on the attached
slides. If there are counties you would like information on that are not included, let me
know and they will be provided.
o The location of some racial and ethnic groups is outside the cities in many cases.
o The child population is not increasing in some areas – and, in fact, is decreasing.
o The types of occupations that are growing vs. declining may surprise you. More jobs are
requiring higher skill levels and more education. There seems to be more jobs at both
extremes – less of middle income jobs. . . More affordable education options are
needed – how can your institution assist with this need?
o How will these changes impact product development and delivery?
o Comparisons were made between the increase in extremely low income persons per
county vs. the # of affordable housing units in that county. In many cases the supply of
this housing did not keep up with the number of persons needing this housing. The
regulators have these statistics.
o These trends are expected to continue.
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o Certain areas withstood the recession better than others and are coming out of the lowpriced real estate market more quickly – if there are lots of government jobs and stability.
Consider offering the following for CRA Credit:
o Better perception of involvement in the community and with low income – it is never
known who the examiners will meet with (Serve on the Boards of these organizations, be
in “the know”); Hold Listening Sessions with these organizations and invite Regulators to
attend, provide a handout of bank regulations so there is a realistic understanding of the
limitations and requirements. One astute Banker was praised by the Regulators for
meeting with these community groups and explaining what the banking environment is,
what the limitations are, and that there is not just a pot of money to be handed out. Many
organizations stated to the Regulators that they didn’t know how to get a banker on their
Board.
o Identify Community Development opportunities and Best Practices:
o Financial Education – consider where the class would be offered and how to reach the
target market; offer in schools and for adults in LMI areas
o Foreclosure Mitigation is a must
o Better accessibility to Bank services (lower fees, reaching the “unbankable”)
o Offer more applicable products and services in low income areas
o Protect your elderly customers – they are NOT into mobile banking
o Establish a relationship with other organizations or experts to offer services such as:
-Jointly offer tax preparation for low income
-Job training
-Small Business Assistance
-SBA training
-Help with technology issues
-Immigration and Refugee Assistance (cost to become a citizen is high; classes needed to
walk through process)
REG B WARNING:
This is echoing from many mountains: “It takes a long time to get a decision from a bank
on a project or funding proposal or application”. The Regulators reiterated this complaint
at the Roundtable. You have 30 days – for every type of request. The clock starts when
the request is received – NOT from when there is a completed application. Call to
discuss. Reiterate this to all loan personnel. Training is needed.
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