KENTUCKY BANKER
INSIDE
KBA Poised For More Success p. 4 Q&A: Congressman Andy Barr p. 6 Bankers on the Move p. 28
July 2015
Your KBA OFFICERS
BOARD OF DIRECTORS
CHAIRMAN Mr. H. Lytle Thomas Heritage Bank, Inc.
Mr. Bill Allen Bank of the Bluegrass and Trust Company
VICE CHAIRMAN Mr. Louis Prichard Kentucky Bank
Mr. William Alverson Traditional Bank, Inc.
Mr. Glenn Meyers Kentucky Federal Savings & Loan Association
Mr. James W. Beach Peoples Bank & Trust Company
Mr. Michael Mineer Citizens Deposit Bank & Trust
Mr. J. Wade Berry Farmers Bank & Trust
Mr. Thomas J. Smith, III American Bank & Trust Company, Inc.
TREASURER Mr. Michael H. Mercer First Security Bank of Kentucky PAST CHAIRMAN Mr. Neil S. Bryan The Farmers Bank of Milton
Mr. William F. Brashear, II Hyden Citizens Bank Ms. Lanie W. Gardner First National Bank of Muhlenberg County Ms. Elizabeth Griffin McCoy Planters Bank, Inc.
Mr. Gordon Kidd United Cumberland Bank
cover photo by
Jaclyn St. Clair “Corn Field”
Mr. Ryan Steger Town Square Bank Mr. Frank B. Wilson Wilson & Muir Bank & Trust Company Mr. Greg A. Wilson The First Commonwealth Bank
from scenes of kentucky photo contest
KBA STAFF Ballard W. Cassady Jr. bcassady@kybanks.com President & CEO Debra K. Stamper dstamper@kybanks.com EVP / General Counsel / Director of Compliance
Michelle Madison mmadison@kybanks.com Information Technology Manager Lanie Minton lminton@kybanks.com Administrative Assistant
Paula B. Cravens Sturgeon Katie Rajchel krajchel@kybanks.com pcravens@kybanks.com Staff Accountant Director of Education Solutions Yvonne Savage ysavage@kybanks.com Selina O. Parrish PAC Services Coordinator sparrish@kybanks.com Director of Vendor Angie White Solutions awhite@kybanks.com Manager, Communications Matthew E. Vance Solutions / KBM Editor mvance@kybanks.com Chief Financial Officer Steve Whitlow swhitlow@kybanks.com Miriam Cole Systems Engineer mcole@kybanks.com Executive Assistant Paula Cross pcross@kybanks.com Education Services Coordinator Jamie Hampton jhampton@kybanks.com Education Services Coordinator
CONSULTANT
John P. Cooper jcooper@kybanks.com Legislative Solutions
HOPE OF KENTUCKY Billie Wade bwade@kybanks.com Executive Director
Tammy Nichols Natalie Kaelin tnichols@kybanks.com nkaelin@kybanks.com Finance Officer & Asset Assistant General Counsel Manager
KBA INSURANCE SOLUTIONS Chuck Maggard cmaggard@kybanks.com President & CEO Brandon Maggard bmaggard@kybanks.com Account Representative Audrey Whitaker awhitaker@kybanks.com Insurance Services Coodinator Tim Abbott tabbott@kybanks.com Account Representative Lisa Mattingly lmattingly@kybanks.com Director of Sales & Service Donna McCartin dmccartin@kybanks.com Benefit Support Specialist
CONTACT KENTUCY BANKER MAGAZINE Angie White, Editor awhite@kybanks.com
CONTACT THE KBA
600 W. Main St., Suite 400 Louisville, KY 40202 Phone: 502-582-2453 Fax: 502-584-6390
One Voice, unifying Banking in the Bluegrass Welcome to the KBA, a nonprofit trade association that has been providing legislative, legal, compliance and educational services to its member institutions since 1891. KBA’s directors and staff work together with its members to make the financial services industry a more effective and successful place to work. The strength of the KBA is bankers unifying as an industry to speak as one voice.
Mission Statement The purpose of the Kentucky Bankers Association is to provide effective advocacy for the financial services industry both in Kentucky and on a national level; to serve as a reliable and responsive source of information and education about areas of interest to the industry; and to provide a catalyst and forum for collective industry action. The KBA does this in four ways: 1. Government relations and industry advocacy 2. Information interchange 3. Education 4. Products and services
CHAIRMAN’S CORNER
KBA Poised For More Success
T
he year is 1891…Benjamin Harrison is President; John Young Brown of Henderson is Governor of Kentucky; United States Congress creates the Court of Appeals; Thomas Edison patents the motion picture camera and radio; the first gasoline-powered car debuts; traveler’s checks are patented; James Naismith creates the game of basketball; and most importantly…the Kentucky Bankers Association is founded. We enjoy a long and rich history. July 1st represents the new fiscal year for the Kentucky Bankers Association. The KBA starts this 125th year in service to our Kentucky banks. It is hard to imagine all that has occurred in our industry since 1891…the Industrial Revolution, World Wars I and II, repeal of the gold standard, the Great Depression, the Great Recession, implementation of Glass-Steagall, repeal of GlassSteagall, implementation of Dodd-Frank…well let’s hope some things in history repeat! I am pleased to report that our association has completed its 124th year with a strong performance report on all fronts. As bankers, we most often look at the financial condition of those with whom we do business. The KBA continues to post a strong balance sheet itself. In addition, our association finished on budget for earnings! Most impressive are the strong earnings with very low reliance on member dues for operational funding. The business model for the KBA has continued to drive service for members with revenue from many sources, keeping dues very low. In fact, the KBA is arguably the best association value in the country for return on member dues.
health care management providing outstanding options for health care coverage. All of the insurance programs continue to expand and grow market share including blanket bond, officers and directors liability and collateral coverage. Not only is this market a great value to our members, it also is a source of revenue to the KBA. We have strong banks in Kentucky supported by vendors that provide necessary services. The KBA currently has 36 endorsed vendors available for members to access. KBA-endorsed companies must be “as good as or better than what a member will find in the marketplace”. If a member has a need, the KBA will find a solution to address it. Advocacy is one of the most important, yet under celebrated, areas of focus for the association. In the 2015 Kentucky General Assembly “short” session there were almost 1100 bills and resolutions introduced. Of that number, 10 had some direct or indirect effect on our banking industry. We all take notice when a new piece of legislation is passed, but often our best but unnoticed victories are the bills that are stopped! The advocacy team vigilantly monitors our interests on a state and federal level every day. They rally support to move legislation in our favor and lead the charge to protect the interests of our banks.
The KBA is arguably the best association value in the country for return on member dues.
The success of the KBA is driven by its staff. Ballard has assembled a group of outstanding professionals who work diligently every day to make our Kentucky banks stronger. The quality of their work is unparalleled in the industry. As a result, the KBA is recognized as an industry leader on a national level. Other states’ banking associations often call the KBA for best practices and advice on issues. Education services continue to be very strong as an earning asset for the association, while proving to be an outstanding resource for our bankers. This past fiscal year they hosted 28 seminars, 4 banking schools, 370 webinars, 50 compliance training seminars and over 100 other education partnership programs. In total, over 4200 registrants participated in furthering their knowledge through these programs. Insurance services have worked through the changes in July 2015 | 4
1891 would prove to be a great year for Kentucky. One hundred and twenty-five years later the state has become a basketball powerhouse recognized around the country as the best year after year. The KBA has the same reputation in the banking industry. Success comes from hard work, focused attention, and a well-coordinated team of players. I am pleased to report that as the KBA enters its 125th year of operations we continue to be poised for success! Thank you for your support and membership!
H. Lytle Thomas KBA Chairman
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KBA CONVERSATION
Q&A: Congressman Andy Barr Community banks are the source of relationship banking. Community banks are the heart of their communities in that they establish relationships built on mutual trust. Community banks know better about the credit-worthiness of their customers than regulators from Washington or somewhere else outside of the state ever will. - Congressman Barr Congressman Andy Barr has served as the United States Representative for Kentucky’s 6th Congressional District since 2013. In that short period of time Congressman Barr has served on the Committee on Financial Services and has continuously proven himself to be a true friend and supporter of Kentucky, its communities and citizens, its businesses and its traditional banking industry. Congressman Barr is currently co-sponsoring the TAILOR Act (H.R. 2896) that would require regulators to consider bank risk profiles and business models when taking regulatory action. KBA President and CEO Ballard Cassady recently spoke with Congressman Barr to discuss surprises and general impressions regarding serving in Congress since he arrived in 2013, the public stigma concerning banking, the consequences of the Dodd-Frank Act and, finally, any message he would like to share with the members of the Kentucky Bankers Association. The following is a summary of that discussion: KBA: What has been your biggest challenge or surprise since you first went to Congress? CONGRESSMAN BARR: I think the biggest surprise, and disappointment, is that the Congress has less influence over the policy-making process than the American people understand and that’s principally because Congress has delegated much of its law-making authority to the un-elected regulators in the executive branch. So whether it’s the Consumer Financial Protection Bureau, the Fed, the FDIC, the OCC, or others, regulators have been granted unprecedented rule-making authority and that’s where a lot of the problems materialize—in the administrative law space. So one of the central features of our work in Congress has been to provide oversight and more accountability to the executive branch to not just rein in the regulations, but make sure the implementations
are fair and not overly intrusive or costly for regulated parties - banks and others. KBA: Are you saying that the biggest hurdle to providing community banks with any type of regulatory relief is the regulators themselves? CONGRESSMAN BARR: Certainly that is true. Also, we’ve had a challenge in sending regulatory relief bills to the President’s desk because of the rules of the Senate. There are many Senators who are interested in and share our interest in regulatory relief, but the rules of the Senate are different. The Senate requires 60 votes to end debate, which can make movement more difficult. KBA: After the 2008 financial crisis, there was a stigma against banking in DC. Is that stigma still there? CONGRESSMAN BARR: There is still some big bank stigma, largely because of counterproductive rhetoric from some politicians, regulators and watchdog organizations. Often, community banks and credit unions and other smaller financial institutions get lumped in with globally important megabanks. The stigma is still there. There are a lot of legislators who understand the difference between those and community banks - but, I think there is a larger problem. There is an erroneous narrative about the cause of the financial crisis that has been circulating in the public - that banks are inherently greedy and that they caused the financial crisis. That is not correct. The correct historical analysis of what caused the financial crisis was bad government policy. It was a monetary policy that inflated the money supply that created the bubble, and a federal housing policy that induced the kind of subprime mortgage lending practices, that really caused the financial crisis. I think we need to be careful when looking at history to identify more corcontinued on next page
July 2015 | 6
KBA CONVERSATION rectly the primary cause. It’s a complicated set of circumstances that caused it, you can’t over generalize, but the central problem in the run-up to the financial crisis was government policy, federal housing policy, Fannie Mae, Freddie Mac, the GSE’s, the Community Reinvestment Act, and monetary policy.
Frank would do. Do you or Congress still think that these results were unintended consequences?
CONGRESSMAN BARR: I think some of the consequences were intended. But, I think one of the worst consequences, whether intended or unintended, of the DoddFrank law, and you actually see this in non-bank lending KBA: What message would you like to convey to KBA more than in community banks, it’s the politicization of the members? allocation of credit. There is a dangerous kind of political correctness that has infiltrated the regulation of our fiCONGRESSMAN BARR: My message is that comnancial services industry that goes beyond issues of safety munity banks in Central and Eastern Kentucky, and all and soundness. Unpopular products or services are seen around the Commonwealth, and across this nation, are the lifeblood of the local economy. Community banks are based on a particular ideology. I think that is very dangerous—when the regulators are no longer focused on safety the source of relationship banking. and soundness issues and more Community banks are the heart of There is an erroneous focused on taking away choices their communities in that they esfinancial services and products tablish relationships built on munarrative about the cause of away from the American people. tual trust. Community banks know of the financial crisis that That is incompatible with our free better about the credit-worthiness of their customers than regulators has been circulating in the enterprise system. Whether it’s indirect auto lending, short term from Washington, or somewhere public that banks are credit or overregulation of overelse outside of the state, ever will. What I’ve learned is that the more inherently greedy and that draft fees, however unsavory in the eyes of some bureaucrats and regucompliance costs and regulatory they caused the financial lators they may be, to the borrower burdens you impose on community crisis. That is not correct. who is in a financial pinch trying banks, the less equipped those into get to one paycheck to another, stitutions to serve their communiThe correct historical ties, both in terms of the business it’s a lifeline, a very valuable seranalysis of what caused of banking, which is lending, and vice that is being offered in a free in terms of the charitable work economy. And it’s those financial the financial crisis was that banks do. When compliance products and services which really bad government policy. costs increase, community banks’ provide the kind of liquidity and capacity to do the charity work agility that our financial system is - Congressman Barr supporting local causes and needs supposed to provide to ensure a is significantly diminished. It also healthy economy. impacts lending; 80 percent of respondents to a recent American Bankers Association survey said that the Dodd- KBA: When you were first elected, an assignment to Frank law and the associated regulations are compromis- the Financial Services Committee was top on your priing credit availability. We will never see full employment ority list, is it still? and robust growth in this country again until we recogCONGRESSMAN BARR: It is. The Financial Services nize the centrality of community banks to our economy. Committee remains a top priority to me. I would be honKBA: A lot of people, me included, would say that if ored to continue to serve on the Financial Services Comyou can predict the consequences of an action, then mittee. the consequences, regardless of what they are, aren’t unintended, and that our industry knew what DoddTweet Congressman Barr @RepAndyBarr
Let me know what you think: bcassady@kybanks.com
Ballard Cassady KBA President & CEO
July 2015 | 7
MY TWO CENTS, PLUS SOME
Notes: KBA Regulator Forum June 19, 2015 The Forum started with lunch at noon. During lunch, we had a special guest speaker, Morgan Pierstorff, Project Manager for the Kentucky Cabinet for Economic Development. Morgan works on the Kentucky Export Initiative. Morgan discussed the vibrant and growing exports from the Commonwealth. Specifically, she was identifying programs available to assist your small business customers in starting an export initiative.
10 Reasons Your Small Business Customers Should Consider Exporting: 1. 95% of all consumers are outside the US 2. Free trade agreements exist with 20 countries 3. US products are highly desirable because of reputation for quality 4. Economy of scale 5. Spurs innovation 6. Mitigates risk of market economies by diversifying 7. May assist in evening out seasonal gaps 8. Extends product life cycle 9. Increases productivity 10. Allows faster growth
Information is a bank’s most valuable asset now, not cash. It should be treated as such. A $150M bank reported that they had more than 16,000 hack attempts in one weekend. All departments, management and directors must be involved in cybersecurity. In October, the KDFI, the WVDFI and the CFPB will host a cybersecurity high level conference in Ashland, KY. This will not be a technology seminar—it will focus on risk profile and solutions. Information will come. Banks should join FI-ISAC in order to receive specialized IT and hacker information. Look at FFIEC’s self-assessment tool which should be re-released in 3rd quarter. More scrutiny on bank directors. Their roles have expanded and they are expected to have general training and knowledge in all areas of the bank. FRB indicated that board members should be encouraged to rise to the occasion of overseeing bank policies and procedures to ensure that the proper effort to comply is in place and to ensure that the proper level of activity occurs within or beyond the board’s responsibility as appropriate. When replacing board members look for information gaps—does someone know IT, community, financial rules, etc.
Kentucky offers small business financing and tax credit incentives for small businesses, regardless of whether they export. These could help your customers and your communities succeed.
The next speaker was FDIC Chicago Regional Director, Anthony Lowe. Anthony’s presentation focused on concerns seen by the FDIC. His report included the following:
After lunch, the panel program was moderated by Christian Gonzales with Dinsmore & Shohl.
Number of problem banks and deposits at risk has significantly decreased since 2009. The FDIC expects problem banks to reduce below 200 in 2016.
The first speaker was Holly Ross, Branch Manager in the Depositary Division, KDFI. Holly presented information regarding Kentucky’s economy and the state of banking, including the following: KY had a 9 percent increase in exports in 2014/National growth was 3 percent KY has high ratings, by national groups, for inviting business and retaining jobs KY is an automotive state—$1 in every $13 in our economy is tied to auto manufacturing. 1 in every 18 jobs is tied to auto manufacturing KY businesses continue to invest in growth KY banks beat the National statistics in NIM, ROAA and CAP Banks should carefully review extended maturities, in order to mitigate risk against rising interest rates. July 2015 | 8
There were 5 bank failures in 2015 and 18 failures in 2014. Illinois continues to have the most problems. There are 500 bank charters in Illinois and 62 have failed. Bank failures in the last 10 years have been directly tied to over-concentration in CRE. KY did not have that problem. There are no “limitations” on loan concentrations, but the higher the concentration, the riskier the business. Search “material loss reviews” on the FDIC website. In 2009, 12 percent of KY banks were unprofitable. That was the peak. That rate was better than any other state in the Chicago Region. Muni holdings are at record highs. This could result in problems as local governments struggle to find sufficient revenue to service debt. The FDIC is very concerned about banks looking beyond their customary borders and areas of experience when investing in bonds, loans etc. continued on next page
MY TWO CENTS, PLUS SOME Banks should comment on EGRPRA about situations unique to their bank. Chicago Region will be hosting an EGRPRA event on October 19, 2015. FDIC also needs comments on the new FDIC insurance pricing proposal. The intent was to place more weight on riskier activities. Banks were again encouraged to join FI-ISAC. FDIC suggested regular practices responding to a cyber event. Talk to staff and, more importantly, to customers about cyber security. Know in advance which law enforcement authorities must be contacted after a cyber event. Follow and participate in the FDIC’s Community Bank Cyber Challenge. Chicago FDIC will host a cyber event in August. Look at both sides of the balance sheet when evaluating IRR. Prepare scenarios on deposit decay rates. The next speaker was Tim Bosch with the Federal Reserve of St. Louis. Tim covered the following: C&I (commercial and industrial) lending is very different than CRE. Banks forget this - C&I collateral can move. This results in added risk. The Fed is seeing errors in the BASEL III calculations. Make sure definitions, formulas and exemptions are understood and calculated properly. Exam reports and call reports are the only ways additional capital can be required. Make sure it is done correctly. Exemption on consolidated filings on small bank holding companies has been raised to $1B. Big community bank risk is succession planning. There is not a clear pool of talent from which to select the next leaders. Banks must start investing in management training. Keeping up with the regulatory burden is another huge risk to community banks. The next speaker was Victor Osorio with the Office of the Comptroller of the Currency, Louisville Office. Victor’s information included the following:
Training programs in banks have been dramatically restricted and must ramp back up. MRA’s in OCC show only two significant changes from 2013 to 2014. Credit issues reduced and IT issues increased. Examiners must report to supervisors on potential MRA’s before they can be finalized. If an issue does not rise to the level of an MRA, but the examiner still expresses changes needed, that is counsel only. The board can decide whether or not they want to follow it and document the decision and why. Third party vendor management hit the list for the first time. Bank boards must understand that the bank still owns the risk even if a vendor performs the entire transaction. Vendor management must include: policy; inventory of vendors; risk assessment; monitoring; auditing; and board reports. Risk assessment should include distinction between vendors in “critical activities” and vendors in consumer disruption. Make sure that there is true independence in third party due diligence—it should not be conducted SOLELY by the department that will benefit from the vendor services. Inventory is important because most banks have hundreds of third party vendors. Show board members high level summaries on vendor spends, accomplishments, annual reviews, etc. The last speaker was Steve Williams with the CFPB. Issues addressed include: ECOA issues have trended around consideration of public assistance income. This should be properly considered in underwriting and in marketing materials. Each borrower’s public assistance income must be reviewed individually. Look at underwriting requirements of loan programs such as HUD, VA, FNMA, etc. All of the regulatory panelists agreed with the examination and regulatory burden based upon complexity of operations rather than size, although they indicated that it would be complicated to implement bright lines. OCC indicated that a 3 cycle exam review is being considered where everything is covered over a period of 3 exams, but not everything will be considered at every exam.
More banks are looking to acquire right now—32% of OCC banks are looking. Prices are running 1.1 – 1.5 times book. Loan participations by banks out of their area which need quick turnaround are causing OCC concerns.
DEBRA STAMPER KBA EVP & General Counsel
“I don’t have a bank account, because I don’t know my mother’s maiden name.” - Paula Poundstone July 2015 | 9
BANK HAPPENINGS
Paducah Bank Presents Check to 4-H Backpack Program, Wins Worksite Wellness Award 4-H Food Backpack Program
KY Worksite Wellness Award
Paducah Bank presented a check today to the 4-H Food Backpack Program for $7,850 to support the work of the organization in feeding hungry students in Paducah-McCracken County.
Paducah Bank’s honor was presented at the seventh annual Mayor’s Healthy Hometown Worksite Wellness Conference and Awards in Louisville. The annual recognition is a program of the Louisville Mayor’s Healthy Hometown Worksite Wellness Initiative, and this year, through a partnership with The Kentucky Department for Public Health, the program was expanded from Louisville to include the rest of the state.
“Last year, we created a special initiative that works in a partnership with our customers and our commitment to the needs of the community,” said Mardie Herndon, Paducah Bank President. “Our Swipe and Serve project allows our customers to help us help those who are hungry in our city and county. Every time our customers use their debit cards as a signature-based transaction, the bank is putting aside a contribution to one of four local organizations that help the hungry. This is our first quarter contribution of 2015 and the second time we have chosen the 4-H backpack program as a beneficiary. In total, we have given over $15,000 to feed hungry students in Paducah and McCracken County through the 4-H.” “We are extremely appreciative of the continued support from Paducah Bank,” said Robert Tashjian, the McCracken County 4-H Youth Development Agent for the University of Kentucky. “360 youth each week are able to receive food for this entire school year thanks to our generous donors, including Paducah Bank. Not only did they provide monetary help, they also provided much needed manual labor to fill backpacks since the beginning of the new school year.” “Our next cycle begins now,” said Susan Guess, Senior Vice President of Marketing. “Next quarter, we plan to make a contribution to the Paducah-McCracken County Senior Center Meals on Wheels program. Our goal is to be able to provide at least $7,500. We hope everyone will keep up the good work so that we can surpass that goal for this deserving organization.”
July 2015 | 10
Recognition was given at the levels of platinum, gold, silver, and bronze. The criteria for the recognition were based on the Centers for Disease Control (CDC) Worksite Health ScoreCard. The CDC Worksite Health ScoreCard (HSC) is a validated tool designed to help employers assess the extent to which they have implemented evidence-based health promotion interventions in their worksites. Paducah Bank has partnered with HealthWorks Medical, LLC to provide a comprehensive wellness program for employees. The plan includes health and wellness classes, an annual personal health assessment and a personal health coach, regular weight loss challenges, access to a registered dietician, free unlimited visits to primary and urgent care clinic, tobacco cessation and other wellness initiatives. Paducah Bank is a smoke-free facility that rewards employees for healthy choices by offering financial incentives through the bank’s health insurance plan. They also provide an online wellness platform that is specifically designed for each participant. “At Paducah Bank, we believe our employees are our most valuable resource,” said Paducah Bank President Mardie Herndon. “To that end, we have made a significant commitment to the health and wellbeing of each and every one of them.”
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Individual Liability in CFPB Enforcement Proceedings by Jon Eisenberg, Partner K&L Gates To date, the CFPB has brought 12 cases — out of more than three dozen total CFPB enforcement cases — in which it named individuals as defendants or respondents liable for violations of consumer protection statutes. Below, we consider the standards for individual liability in CFPB cases, the actual cases that have been brought, and 10 lessons that can be drawn from these cases.
principles of vicarious liability, and the concept of piercing the corporate veil. These determinations must be handled in a measured manner, but if treated properly they can achieve just and effective results in more fully redressing legal violations. The issues should not devolve into mere technical arguments about corporate form and structure; instead they must represent the more straightforward concept of accountability.
1. CFPB Director Cordray’s Recent Statements
In other words, there are legitimate occasions where it is appropriate to pursue not only the company that was a party to the consumer’s transaction, but also individuals who were decision-makers or actors relevant to that transaction. And so the Consumer Bureau has sued not only companies but also their executives in cases where we are authorized to do so. Under the law, this includes not only a provider of consumer financial products or services, but also, in certain cases, anyone with “managerial responsibility” or who “materially participates in conduct of [its] affairs.” We have named such individuals as parties in a variety of cases, and they have been required to finance restitution to consumers and submit to injunctive relief. Individuals have also been barred, sometimes permanently, from offering certain kinds of financial products or services. And they have been referred to the Justice Department for criminal prosecution in appropriate instances. The right response depends on the circumstances, and different thresholds may apply to each of these accountability measures, which are important supplements to simply imposing all legal responsibility on the corporate entity itself.
A. The Current Regulatory Environment Individual accountability is the regulatory catchphrase of the moment. In imposing a $10 million fine on a bank executive and a $7.5 million fine on a CFO for a bank’s alleged disclosure violations, the New York Attorney General said, “This settlement is one more step in our effort to hold top financial executives accountable for their actions.” In a March 2014 speech to the Exchequer Club, New York State’s Superintendent of Financial Services focused almost exclusively on his intent to punish Wall Street executives and stated that there was an “accountability gap” on Wall Street because “no single senior executive has really been held to account” and that “real deterrence…means a focus not just on corporate accountability, but on individual accountability.” The Chair of the SEC has made targeting individuals a “core principle” of the SEC’s enforcement program on the theory that “when people fear for their own reputations, careers or pocketbooks, they tend to stay in line.” Indeed, the SEC highlights the fact that, as of the end of 2013, it had filed enforcement actions against 70 CEOs, CFOs, and other senior officers in connection with its financial crisis enforcement actions. The U.S. Treasury Department’s Undersecretary for Terrorism and Financial Intelligence testified before Congress that the agency was focused on “employing all the tools at the agency’s disposal to hold accountable those institutions and individuals who allow our financial institutions to be vulnerable to terrorist financing, money laundering, proliferation finance, and other illicit financial activity.” (emphasis added). B. Director Cordray’s Statements CFPB Director Richard Cordray recently became the latest regulator to weigh in on the issue of individual accountability in his May 9, 2014, Remarks at the Federal Reserve Bank of Chicago. Because these are, by far, his most detailed remarks on the issue of individual accountability, we quote them at length below. Cordray stated: [W]e have also reflected in various settings that a company only acts through individuals—both decision-makers and those who carry out decisions. This is nothing new. It accords with timehonored principles of law, including those governing relationships between the corporation and its employees and agents, July 2015 | 12
2. The CFPB’s Authority to Name Individuals Who Engage in Knowing or Reckless Misconduct The Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB, provides in Section 1036(a)(3) that: “any person” who “knowingly or recklessly” provides “substantial assistance” to a covered person or service provider in violation of Section 1031 shall be “deemed to be in violation of that section to the same extent as the person to whom such assistance is provided.” We can think of this as the CFPB’s authority to sue aiders and abettors of Section 1031 violations. Section 1031, in turn, is the catch-all provision authorizing the CFPB to prevent “covered persons” and service providers from engaging in an “unfair, deceptive, or abusive” act or practice in connection with consumer financial products or services. Most CFPB enforcement proceedings allege violations of Section 1031 even when the CFPB also sues for violations of other consumer statutes. Thus, there is almost always a statutory basis for bringing aiding and abetting claims if the CFPB is able to allege and prove knowing or reckless misconduct.
KENTUCKY BANKER 3. The CFPB’s Authority to Name Individuals Who Engage in Non-Culpable Misconduct The CFPB, however, rarely wants to take on the burden of alleging and proving “knowing” or “reckless” misconduct. Instead of relying on the aiding and abetting provision, it usually alleges that individuals are themselves “covered” persons and, as covered persons, are directly liable for violations of the relevant consumer statutes. Next, we discuss representative cases in which the CFPB has brought actions against individuals.
4. Suing the CEO and Vice President for Unlawful Bonus Payments In July 2013, the CFPB sued a mortgage loan company, its president, and its vice president for capital markets. The company had approximately 330 employees and originated over a billion dollars of mortgage loans a year. The CFPB alleged that the defendants violated consumer financial protection laws by paying quarterly bonuses to loan officers in amounts that varied based on the interest rates of the loans they originated, with higher interest rates resulting in higher quarterly bonuses. The complaint alleged that both the company and individual defendants developed and implemented a scheme by which the company would pay quarterly bonuses to loan officers in amounts that varied based on the interest rates of the loans they originated; that the president allegedly sanctioned and decided to implement the bonus program; and that the vice president of capital markets allegedly calculated the amount of quarterly bonuses to be paid each quarter. The CFPB charged that, because they “had managerial responsibility for the Company and [have] materially participated in the conduct of its affairs,” the two individuals were “related persons” and, thus, were liable for the violations to the same extent as the company.
5. Suing the Owner/CEO for Collecting on Loans that Failed to Comply With State Usury Laws In December 2013, the CFPB sued an online loan servicer, its individual owner/CEO, its subsidiary, and its affiliate. The CFPB alleged that the defendants attempted to collect on hundreds of thousands of small loans that violated state usury laws, and it rejected the defense that those laws did not apply to its business because it was based on an Indian reservation and owned by a member of an Indian tribe. The complaint alleged that the owner/CEO had managerial responsibility and was thus a “related person,” and that he “knew or should have known” about the allegedly violative practices. The complaint seeks an injunction as well as restitution, disgorgement, and civil money penalties against the defendants.
6. Suing the Owner/CEO for Violating RESPA Anti-Kickback Provisions In January 2014, the CFPB sued a mortgage loan originator and its owner/president for allegedly violating the anti-kickback provisions in RESPA by paying above-market rental fees in exchange for mortgage referrals. The complaint alleged that
the individual defendant was a “related person” because he had managerial responsibility and materially participated in the company’s affairs; that he had insisted on the arrangement; and that he had signed the lease agreement. The CFPB issued a cease and desist order against both the corporate entity and the individual, issued a disgorgement order against the corporate entity alone, and issued a civil money penalty against both respondents “jointly and severally.”
7. Suing Owners/Officers for Offering Deceptive Debt-Relief Services The CFPB has named individuals as defendants in a number of cases against companies marketing debt-relief services in an allegedly deceptive manner. In fact, most of the CFPB’s debt relief services cases involve claims against individuals (as well as against entities). The individuals were often both the owner and the CEO (or the primary lawyer in the case of a law firm defendant), they were involved in day-to-day operations and developed the business model, and they often directly engaged in the debt-relief sales efforts on the company’s behalf.
8. Cases in Which Individuals Are Not Named As important as the cases in which the CFPB has named individuals are the cases in which it has not. In just over twothirds of its enforcement cases, the CFPB has not named any individual defendants or respondents. None of the CFPB’s 10 largest settlements name individuals. None of the CFPB’s cases against public companies name individuals. None of the CFPB’s cases name non-officer directors. None of the CFPB’s cases name low-level officers or employees as individual defendants or respondents.
9. Practice Pointers The fact that the CFPB focuses on individuals means that practitioners also have to be alert to making sure that individuals are vigorously represented before the CFPB. When the staff gives any indication that it contemplates potentially recommending an action against an individual (or when the facts otherwise suggest that as a realistic possibility), careful consideration should be given to retaining separate counsel for the individual and making a separate NORA submission. An individual submission will often focus less on whether there were violations of consumer protection laws and more on the individual’s background, good faith, and relative absence of involvement in the alleged violations.
10. Insurance and Indemnification Defending against CFPB investigations and proceedings can be expensive. Individuals should review and pursue their rights to advancement of legal fees, indemnification, and insurance coverage. The CFPB often takes the position that defendants may not seek reimbursement from insurance carriers or others for any penalties imposed, but has not taken the same position with respect to advancement and reimbursement of legal fees or the payment of monetary relief other than penalties, such as consumer restitution. July 2015 | 13
KBA VENDOR SOLUTIONS
AMERICA’S FIRST ONLINE MARKETPLACE FOR CREDIT Now a KBA Vendor Solution, Prosper is America’s first online marketplace for credit, with more than 2 million members and over $3,000,000,000 in funded loans. Prosper provides borrowers with access to fixed rate, unsecured personal loans for debt consolidation, home improvement, autos, small business investment, etc. If you would like to recommend personal loans to your customers, recommend Prosper.
Prosper Basics • Low fixed rate personal loans from $2,000 to $35,000 • Minimum FICO 640+ • No impact to customer credit score for checking their rate • APRs from 6.68% • No prepayment penalties or hidden fees • Loan terms between 3 years and 5 years
Opportunity • Refer a customer to Prosper and receive an incentive fee • Utilize the bank’s balance sheet to invest in high quality low-duration assets
For more information, contact Amir Friedman: afriedman@prosper.com or 917-238-7748
Who do you think should be on the $10 bill? In 2013 the Treasury Department selected the $10 bill to be redesigned. Thematically the new note will celebrate democracy. Recently the Treasury Department announced that a woman will be featured as part of the new $10 design. “We expect to unveil the new ten in 2020, the 100th anniversary of the passage of the nineteenth amendment, which gave wom-
July 2015 | 14
en the right to vote. The passage of the nineteenth amendment granted women their right to fully participate in the system our country was founded on—a government by the people, a democracy,” U.S. Treasury Department. Join the discussion Twitter: #TheNew10 Web: thenew10.treasury.gov
EXCESS DEPOSIT BOND
For more information contact: Chuck Maggard cmaggard@kybanks.com 502.736.2671
www.kenbanc.com
BANK HAPPENINGS
First United Bank Pledges $100,000 to Build Plaza in Downtown Madisonville First United Bank has pledged up to $100,000 to the city of Madisonville for use in the construction of the First United Bank Plaza (pictured at right) in downtown Madisonville. The Plaza will be used as an event site, offering a stage, lighting and sound system, but will also serve as a park for the Madisonville community.
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KENTUCKY BANKER
Success Story! Historic Goodall Building in Danville to be Transformed Once the home of the Palm Beach Suits Factory, Danville, Kentucky’s historic Goodall Building will be converted into a 30unit apartment complex. Chris Byrd, development associate with Oracle Design Group, Inc., told Danville’s The Advocate Messenger, that the two and three-bedroom apartments will be beautiful and affordable. “The exterior will not change much at all,” Byrd told The Advocate Messenger reporter Pam Wright. “We intend to protect the look of the building as much as possible. “We are working closely with the state historic people and the National Park Service to be sure the historic aspects of the building are preserved and protected. But, this also helps us receive tax credits for the project.”
ism that was part of the Modernist movement in the Thirties. The Goodall-Stanford Company began in Maine in the 1850s and gained distinction during the Civil War as a maker of horse blankets for the Union Army. The company expanded and moved the Palm Beach Suit operation to Kentucky. With its move into Danville, more than 500 jobs were created. Palm Beach Suits was a premier clothing and apparel line in its day.
Groundbreaking Local dignitaries joined representatives of several organizations in April for a groundbreaking ceremony, including Billie Wade, Executive Director of HOPE of Kentucky (pictured below fourth from the left).
The apartments will feature 15-foot vaulted ceilings in parts of each unit, as well as wood-inspired Konecto flooring.
Wayne Koehler, President of the National Housing Associates, told The Advocate Messenger that he was thrilled to see work get under way on the $5 million project.
NHA of Columbus, Ohio, and Oracle Design Group of Louisville, along with Winterwood Property Management, Kentucky Housing Corp., HOPE of Kentucky, Dinsmore and RBC Capital Markets have been collaborating for nearly two years to see the project get off the ground.
“We are very excited to be a part of Danville,” Koehler told The Advocate Messenger. “The more we’ve gotten to know this community, we’ve just become more excited about it. Adding 32 great units to this community will be a huge success for everybody.”
The Goodall Building was built in 1937 on land once owned by the Kentucky School for the Deaf. Its architect was E.C Landberg. It was built during the period of Architectural Minimal-
The project is expected to take 13-14 months to complete. Applications to rent apartments at the Goodall Building will become available 90 days after the construction is completed.
July 2015 | 17
KBA EMERGING LEADERS
When Gold Stars Are “More Precious than Diamonds” And “So Much More” by Joel Brashear, Hydens Citizens Bank
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hen the CEO of my bank, who also happens to be my father, approached me about participating in the KBA’s Emerging Leader’s program, I was both excited and anxious. Having only worked in banking for two years, I knew that this would be an invaluable learning experience for me. And as a result, I have been fully engrossed in the KBA experience for the past month. Beginning with the Annual Spring Conference and continuing through the Group Meetings, I have been fortunate enough to meet several bankers from across the state who have graciously offered their advice and expertise to a novice such as myself.
diamonds! My team, Stratton Oakmont, named for the infamous “Wolf of Wall Street” Bank, did come away with one gold star. However, when the week was at an end, we really came away with so much more. While there were some great lectures during the week, including Don Mullineaux’s look at governing the bank and his wife Susan’s take on pricing strategies, the real learning came from the hands on experience of BankExec. Working in teams of four, the 60 students in our class analyzed, strategized, calculated and did everything but consult Voo-Doo Witch Doctors to maximize profits and grow our simulated banks across the six quarters of the game. Interest Rates, Marketing Budgets, Securities and FHLB Loans all played a part in who received those coveted gold stars. But while we were fighting to beat out our competition, something else was happening; we were seeing how one aspect of banking affects all the others. Deposit demand decreases, which forced us to raise our rates, which leads to decrease in NIM and so on and so on. Seeing the bank as a reactive organism, and not just a place folks stick their cash, or come get a loan, was a revelation to many of us at the school.
Group Meetings were a great opportunity for networking and learning. I attended the Group 7 meeting in London where I was drafted at the last minute to play golf. The meeting itself was full of useful information on the upcoming elections and the lobbying that KBA does for community banks. John Cooper’s report on local/state politics was enlightening and gave me a fresh outlook on how banks have a symbiotic relationship with political and civic groups. Ballard Cassidy’s insights on the national political scene were also interesting as I had some understanding of the lobbying process, but didn’t fully understand why we have a KBPAC and how the money is used until this talk. Paul Ratterman gave us an Economic report that was by no means bleak, but much more realistic than what we see on the nightly news. As for the post-meeting round of golf…I literally almost killed a stray Seeing the bank dog with my first shot out of the tee box! But, as a reactive after 16 holes, I finally warmed up and hit a few good balls. Overall, it was a great day organism, and not as I learned so much, made some great conjust a place folks tacts and didn’t embarrass myself on the golf course.
Besides the learning that took place that week, the relationships forged are an invaluable asset to us as young bankers. Folks from very different walks of life with completely different life experiences working across the Commonwealth are now bonded through this experience and we are able to call upon one stick their cash, or another for advice, guidance or maybe even It wasn’t long after our Group Meeting that I come get a loan, just to vent. Strangely enough, I met another banker who, like me, produces a television was packing up and heading to Louisville for was a revelation to show when not working at the bank. And year 2 of KBA’s Banking School. After going through their Essentials school and Year 1, I many of us at the when the week was over, every team was asked to give a Board of Directors Presentawas finally starting to feel somewhat comfort(KBA) school. tion in which ours included a mock commerable in my knowledge of whole bank operacial for our bank. Overall, it was a wondertions. At least in the sense that I could pass a 30-question Multiple Choice test, not run the ALCO meet- ful experience going through the KBA Banking School. I ings! Our week was centered on “The Game,” BankExec! truly believe that every bank employee would benefit from And for the hyper-competitive among us, and that was pretty both the Emerging Leaders Program and the KBA Banking much everyone, gold star stickers were more precious than School tremendously. July 2015 | 18
KENTUCKY BANKER
CoBank does it again – lends to investor-owned water company
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oBank not only lends to investor-owned utilities, but brags about it. According to a recent blog post on AGgregator, run by the Farm Credit Council (the FCS trade association), CoBank is a substantial lender to the Connecticut Water Service, Inc. The company characterizes itself as “the largest U.S. based publiclytraded water utility company in New England.” Its ticker symbol is CTWS. The company had $671 million in assets at the end of 2014, a net worth of $210 million, and after-tax profits in 2014 of $21.3 million. S&P has given CTWS an investment-grade credit rating of A, so CTWS is hardly struggling financially and certainly does not warrant any taxpayer-subsidized funding. According to CTWS’s most recent 10-K, CoBank has provided the company with a $15 million line-of-credit, alongside a $20 million line-ofcredit from a commercial bank. At the end of 2014, CTWS and its subsidiaries also owed CoBank $75.63 million in long-term debt, for a total credit-risk exposure of almost $91 million. Some of CTWS’s long-term debt appears to remain from the $36.1 million CTWS borrowed from CoBank in 2012 to help finance the acquisition of a water company in Maine. CTWS has to be one of CoBank’s larger individual risk exposures in its water/ wastewater lending business, where it had lent a total of $1.26 billion at the end of 2014. Possibly CoBank has participated portions of its CTWS credit exposure to other FCS institutions. It is highly unlikely, though, that any FCS participants in CoBank’s CTWS loans understand that credit risk. The FCS loves to talk about how it seeks to work with
commercial banks in providing credit to rural America. For example, the Farm Credit Council states that “the [FCS] works with commercial banks across America on a daily basis to meet the needs for vital capital.” Working with commercial banks usually means banks taking participations in FCS-originated loans, and vice versa. CoBank, for example, has participated in loans to large, investor-owned telecommunication companies, such as Verizon, that were originated by a commercial bank. CoBank also routinely sells to banks participations in loans it has originated, all of which is authorized under the Farm Credit Act. The matter of FCS institutions and commercial banks buying and selling loan participations to each other may begin to clash with a key difference between the FCS and commercial banks – unlike banks, most FCS institutions, but not all, pay “patronage dividends” to their member/borrowers. Although called dividends, patronage dividends effectively are interest-rate rebates as the amount of the annual patronage dividend generally relates to the amount borrowed the previous year. In effect, the FCS passes through to its borrowers a portion of the tax savings and funding-cost advantages the FCS enjoys by virtue of being a government-sponsored enterprise. These rebates are not insignificant. For 2014, the FCS as a whole recorded cash patronage dividends totaling $1.20 billion, equal to 14.5% of the total amount of loan interest income the FCS reported for 2014. The dividend/rebate each borrower received likely varied from this percentage, but this percentage gives an idea of the current magnitude of patronage dividends. In addition, various FCS institutions granted $387 million of non-cash continued on next page
July 2015 | 20
KENTUCKY BANKER continued from previous page
capital stock, participation certificates and surplus allocations to their member/borrowers. Recently, a large commercial bank participating in a large loan originated by a very large FCS association was told that it was being dropped from the loan “because [the bank does] not pay patronage.” As bankers know, interest-rate spreads on large loans are quite thin. In this case, the requested patronage payment would have chewed up much of the bank’s lending spread over LIBOR, leaving an insufficient spread to cover the bank’s operating costs, credit risk and required return on its equity capital. This particular case, where a bank is being squeezed out of an FCS loan participation, illustrates so well the competitive edge the FCS enjoys by virtue of being a substantially tax-exempt GSE. Ironically, that bank’s share of the loan probably will be reparticipated within the FCS. FCS associations are plunging into the banking business, offering both payments services and accepting what are tantamount to deposits, even though the FCS is not authorized to accept deposits. Here is how FCS effectively accepts deposits: FCS banks are authorized under the Farm Credit Act and related regulations to sell Farm Credit Investment Bonds to member/borrowers of the associations they fund. These bonds are not insured by the FDIC or by the Farm Credit System Insurance Corporation, which insures FCS bonds sold to investors. Instead, these bonds are unsecured, interest-bearing debt of the FCS bank which sold them. However, an FCS bank selling investment bonds must hold “specific eligible assets at least equal in value to the total amount of [these] debt securities outstanding.” In effect, the FCS banks selling investment bonds are running the equivalent of an uninsured money-market fund. As last month’s FCW reported, though, Fitch Ratings assigned AA- ratings to the FCS banks – three notches below the federal government’s credit rating – so investment bonds issued by FCS banks clearly are not as creditworthy as FDIC-insured bank deposits. At the present time, only two of the four FCS banks – Co-
Bank and AgriBank – issue investment bonds; in effect, the FCS associations, acting as sales agents for their funding bank, sell these bonds as one element of the payments services they offer to their member/borrowers. These services include remote deposit capture as well as using drafts to make payments; these drafts are the functional equivalent of a check. Any positive account balance in a borrower’s account with an FCS bank is then invested in the bank’s investment bonds. Because the Federal Reserve Act authorizes Federal Reserve Banks to “act as depositories for and fiscal agents of” the FCS banks, each FCS bank has an ABA routing number and therefore can deal directly with the Fed; they do not need to clear deposits and drafts through a commercial bank. In effect, FCS banks function as if they were a commercial bank, but without providing FDIC insurance to their customers. The investment bonds the two banks sell, which at AgriBank are shown on its balance sheet as Member Investment Bonds and at CoBank as Cash Investment Services Payable, provide a not insubstantial amount of funding to the banks. At the end of 2014, CoBank reported a $2.53 billion payable for its cash investment services, up from $1.61 billion at the end of 2012. AgriBank reported $1.10 billion in outstanding Member Investment Bonds at the end of 2014, up from $786 million at the end of 2012. One can reasonably wonder when the other two FCS banks – AgFirst and the Farm Credit Bank of Texas – will begin to sell investment bonds through the associations they fund as one element of expanding the payments services their associations can provide to their member/borrowers, in direct competition with taxpaying commercial banks. The Senate Banking and House Financial Services Committees might want to examine this uninsured FCS deposit-taking. Bankers are continuing to send FCW reports of FCS lending abuses, such as FCS loans for rural estates, weekend getaways, and hunting preserves. Email reports of similar lending abuses to: green-acres@ely-co.com
July 2015 | 21
KENTUCKY BANKER
Preventing Loss: A Quick Review by Craig M. Collins, OneBeacon Financial Services
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perating a community bank is becoming increasingly complicated, with customers demanding online and mobile banking options, headlines raising concerns about data breaches, and regulators enacting tougher compliance standards. While these changes and evolving technology expose banks to new types of risk, there still remains a risk that banks have had to contend with since the beginning – employee dishonesty. This type of risk has not decreased, nor should it be overlooked. Financial institution bond insurers, in providing insurance coverage for employee dishonesty losses, see frequent occurrences of bank employee theft each year. As such, they are in a position to provide some suggestions on possible prevention. While no internal control procedure can be completely foolproof (or in this case employee proof), applying or reinforcing some basic procedures may help in both preventing and discovering the activity of dishonest employees. To help prevent these situations from occurring, a bank can utilize four potential risk management strategies.
1. Mandating Vacation Policies While not always popular with employees, a mandatory vacation policy should be considered for all bank employees. These policies require that employees take a consecutive week of vacation that also includes two weekends, which equals a total of nine consecutive days away from the bank. During this time, the employee must not be allowed to return to their work station, or use their employee credentials to log onto the bank’s system, for any reason. Many banks are now able to temporarily disable both the employee’s computer access as well as deactivating their security badges during this time period. They can also restrict the employee access to the bank via the drivethru, if necessary. Past loss history confirms that many long-term employee dishonesty schemes (lasting years or even decades) have been discovered while the employee was away on vacation. July 2015 | 22
If an employee resists the policy, or is non-compliant, then this should be considered a potential red flag.
2. Segregation of Duties and Job Rotation Proper dual control is a significant piece of the structure of a bank’s internal control process. Most banks have written procedures in place, but losses may occur when exceptions to the procedures are granted. For example, many smaller banks and remote branch locations have difficulty maintaining strict dual control due to the low number of employees at the location. The majority of losses from lapses in dual control involve cash transactions (tellers, vault tellers, etc.). The impact of effective proper dual control procedures potentially decreases the chance of a loss (collusion between employees would need to occur). While the teller function has more frequent losses, the loan area has the higher dollar amount of losses. Fictitious loans originated by a loan officer can possibly become very large dishonesty losses. Most of these losses center on situations where the loan officer is able to manipulate the process and can originate, process the paperwork and disburse funds for the customer. Many large losses have been discovered when the phantom customer’s loans exceeded the loan officer’s authority or are questioned by fellow employees, auditors or regulators. Both of these areas of risk may be mitigated by the use of dual control and segregation of duties. In addition, job rotation is an excellent method of deterrence against losses. Human nature tends to resist change, but job rotation may also be beneficial to the bank by expanding the skills and knowledge of the employees while at the same time potentially preventing and discovering losses.
3. The Unpredictable Internal Audit Internal “surprise” audits are an excellent loss control tool. Unfortunately, many times the audit schedule becomes precontinued on next page
KENTUCKY BANKER continued from previous page
dictable, and a dishonest employee is able to cover their actions before the arrival of the auditor. Many banks are now altering the frequency and scheduling of their audits. For example, a three-branch bank might audit each branch every 30 days. By changing the order of audits so that a particular branch was audited within the same week twice (last to be audited during one month, and first to be audited in the second month), a bank uncovered a teller loss that was in the early stages of development. In addition to changing the frequency, another suggestion would be to alter the “order” that the audit is conducted. For example, if the standard procedure is to audit the teller line first and then the vault, an option would be to audit the vault and individual tellers in a random order. This option enabled another bank to discover a loss caused by two tellers who were colluding, and who were able to transfer cash between their stations during normal audits.
4. Open Door Policy Most employee dishonesty losses are not discovered by senior management or by auditors. They are discovered by fel-
low employees. With that being said, a well-defined “open door policy” is critical to have in place at the bank. Employees should feel comfortable approaching managers or others at the bank and discussing suspicious or unusual activity. A confidential communication should be welcomed without any fear of retaliation.
Employee Dishonesty: Conclusion There is no perfect prescription for the prevention of employee dishonesty. People commit dishonest acts for many different reasons, and many actions are done with the intention of repaying the bank. Changes in lifestyle, possessive behavior towards work product or an unwillingness to take vacation may be outward signs of employee dishonesty. Hopefully, additional emphasis on the four areas outlined above – in combination with your current policies – will help in your efforts to prevent employee dishonesty losses from occurring at your bank. Craig M. Collins is President at OneBeacon Financial Services. Collins can be reached at ccollins@onebeacon.com.
KENTUCKY BANKER
Are You Prepared? by Merrie Spaeth
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mpersonating reporters on panels has become one of my favorite past times. After the annual American Bankers Association meeting, where I played a reporter on a panel examining how to handle a computer hack/cyber-attack, the ABA invited me to recreate my performance at their annual meeting for Risk Managers. The panel was titled: “Incidence Response and Recovery: Is the Response Worse than the Attack?” The scenario was similar: your bank has been hacked. In this mock scenario, the institution in the hot seat was a billion dollar bank in the South named Lucky Bank, and the media outlet I represented was “UOMe” TV. The first news of the hack came from credit card companies reporting that customers were complaining en masse about unauthorized charges and cancelled charges. Updates from the annual meeting panel included a plaintiffs law firm, Dewey Cheatum & How (borrowed from NPR’s Car Talk) trolling the internet looking for bank customers for a class action suit, and a well-connected, disgruntled blogger, Bankerbabe. In addition, Lucky Bank received word that the hackers were selling information allowing criminals to access ATMs so bank personnel were physically reprogramming ATMs outside their branches. Internet savvy customers noted the workmen and posted pictures of them on Instagram. Bankerbabe called them to my attention at the television station. My role was to ask the questions the media would ask and to illustrate how social media platforms such as Facebook and Twitter complicate the communication challenge. Experts speaking at the conference were virtually unanimous: it’s not if you’ll experience a hack, it’s when; so it’s wise to prepare. The conference covered the technical, legal and operational issues–and there were many. Although bank executives may feel they have quite enough to contend with in those areas, don’t forget that communication, both internal and external, is needed across the entire enterprise. And, you will undoubtedly have to communicate with key audiences before you have all the facts. Typically, you will not have any of the key facts confirmed when you get word through third parties or social media. Are you prepared? Create a timeline beginning with taking the first phone call or reading the first tweet. How would you handle the questions below after the first hour? day? week? Hint: we’re not advising you be able to “answer” the questions, but you must have credible responses which convey confidence and inspire
trust. And, you’ll have to deal with these questions from reporters, customers and the general public. If you’re lucky, the reporter or customer will call customer service, but they may also be trading rumors on social media. I have heard that your bank has been hacked. Can you confirm or deny this? - How many customers have been affected? - What information did the hackers get? - Social security numbers? - What other kinds of customer data? - What have you told customers? - Who’s to blame? - Are you going to change your IT/security providers? - When did you detect the problem? - Did you have any warning signs? - How long were you exposed before discovering it? - Why did you wait to announce it? - What are you trying to cover up? - What kind of liability do you have? - Will you pay for credit counseling for customers? - Has this happened before? - Have you notified your regulators? - Are you confident you have identified all intrusions? - Are you confident you have blocked all intrusions? - Do you have insurance to cover this? - Are you going to apologize? - What if you do not find out who’s responsible? - Is this a criminal event or terrorism/sabotage? - Can you guarantee this will never happen again? Our reporter in this scenario had recently read a lengthy article about security procedures so she had some specific technical questions: - Did you have Intrusions Detection Systems implemented? - What about sandboxing as a preventive technique? Does your IT department regularly send fake emails to employees to see if they open unauthorized emails, a primary way that hackers gain access? (The technique is controversial as an invasion of privacy and because so many scam emails look so realistic, lots of employees inevitably get caught.)
CYBERSECURITY SEMINAR Come one, come all. . . security officers, technology staff, CEOs, senior managers, operations personnel and anyone with responsibilities or interest in bank security and technology . . . Join us for a look into Cybersecurity. Register Today! Two Locations: BOWLING GREEN October 22, 2015 @ Hilton Garden Inn
LEXINGTON October 23, 2015 @ Marriott Griffin Gate
Online registration is available at: www.kybanks.com (Education Solutions/Seminars) July 2015 | 24
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KENTUCKY BANKER
Consumer Compliance Applies to Commercial Credit? by Darlia Fogarty
W
hen your Compliance Officer informs you that Loan Officers who only work with the bank’s commercial portfolio should be trained on consumer compliance, it is not a joke. We hear complaints from Loan Officers on a daily basis about the Compliance Officer insisting they attend consumer compliance trainings. Whether that be webinars or online training, we agree. Let’s talk about the reasoning behind this recommendation. While the group of the regulations, consumer compliance or consumer protections and even the name of the new government agency, Consumer Financial Protection Bureau, understandably would lead a reasonable person to believe these regulations would only apply to consumers, there are a group of these regulations that extend their protection to commercial customers. Thus making it imperative for the commercial loan officers to not only know the regulations exist, but to also understand how the regulations apply to the commercial customers.
tice of Action Taken, commonly referred to Adverse Action Notice. This requirement is a little different for commercial customers vs consumers, but it still applies. Also, I would be remiss if I didn’t also state that the record retention for commercial customers, under the ECOA requirements, is also a little different vs the consumer customer requirement. Commercial credit is to be retained 12 months after the customer is made aware of the action taken, consumer customers is 25 months. The difference between commercial vs consumer are reasons to require your commercial officers to have training for ECOA.
The best place to start is always at the beginning.
That being said which regulations extend protection to commercial products and services? The best place to start is always at the beginning. In the beginning, banks determine the credit needs of their communities. The Community Reinvestment Act (CRA), which is Regulation BB, requires that determination to be strategically planned and executed. CRA requires large banks to collect and report their CRA small business and small farm lending activities. While this leaves the smaller banks breathing a sigh of relief, you may want to familiarize (train) the bank’s staff with the reporting requirements, especially in this time of mergers and acquisitions, because it is within the realm of possibility that your bank could go from the Intermediate-Small size bank, for CRA purposes, to a large bank rather quickly.
Another regulation that applies across business lines is the Flood Disaster Protection (“FDPA” - Regulation H). The FDPA mandates that banks cannot make, increase, extend or renew a loan secured by a building or mobile home located in a special flood hazard area unless is covered by flood insurance for the term of the loan. What determines if flood insurance is required? The type and location of the collateral, however the purpose of the loan (whether it is consumer or commercial) does not matter at all. Are there nuances in the requirements? Absolutely. Training should be mandatory for all loan staff.
Servicemembers Civil Relief Act While we are talking about typical consumer protection regulations that are not typically considered when discussing requirements for commercial lenders training schedule, is the Servicemembers Civil Relief Act (SCRA). This regulation provides protection to service members, and in some cases, their spouses, dependents and other persons subject to the obligations of service members. These protections apply to loans contracted prior to entering military service, and you guessed it, does not make a distinction between consumer and commercial credit.
Equal Credit Opportunity Act
Home Mortgage Disclosure Act
Next we will move on to a regulation that will affect your bank, no matter what the asset size is. The first one that comes to mind is Equal Credit Opportunity Act (ECOA/ Regulation B). This regulation prohibits the bank from discriminating on a prohibited basis in any aspect of a credit transaction (loan). Those prohibited basis include race, color, religion, national origin, sex, marital status or age. These protections apply to all consumers as well as commercial transactions. Don’t forget a part of ECOA is also the No-
Are there other regulations that make no distinction between consumer and commercial customers? Yes, there are. One of those is the requirements under the Home Mortgage Disclosure Act (HMDA - Regulation C). Even though mortgages are the primary focus for the requirements in this regulation, there are implications for certain commercial loans. HMDA requires reporting of multi-family loans which are typically commercial loans. There are also some nuances that can lead to confusion. For example, a customer takes out a loan
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KENTUCKY BANKER continued from previous page
for a business purpose to be secured by the customer’s primary residence, the loan would not be HMDA reportable at origination, but if it were refinanced, then it would become reportable. Why, you ask? Well, the regulation requires all refinancings of dwelling secured loans to be reported. Now you are beginning to see the need for training.
Fair Credit Reporting Act Another regulation that may be overlooked when listing regulations that have implications for compliance is the Fair Credit Reporting Act (FCRA). While the regulation specifically states it is to regulate the furnishing and collecting consumer credit information, there are instance that commercial credit transactions involve a consumer. For instance, guarantors or co-makers in many instances, are consumers. You will also find adverse action requirements in this regulation as well. If the above regulations and the implications to commercial credit isn’t enough to persuade the commercial credit side of the house to participate in consumer compliance training, remind them of the monetary penalties that accompany violations of many of these regulations, and hopefully training will be readily accepted.
Darlia Fogarty, Director of Compliance, brings a wealth of knowledge and practical experience to our banks as well as our staff. After 12 years as a commissioned national bank examiner with the OCC, Darlia developed an expertise in compliance while administering examinations in banks of all sizes. She contributed as a member of the Retail Credit Team, with a Compliance Designation. Darlia also holds 10 years of experience as a compliance officer/auditor and 4 years as a compliance/audit consultant. Darlia has spoken at a number of conventions, meetings and schools throughout the years. Her articles can be found in State Banking Association magazines, Compliance Alliance newsletters and several other publications. Darlia oversees the creation of tools and resources while also fielding questions from a wide range of regulatory and compliance issues faced by banks of all sizes. Compliance Alliance offers a comprehensive suite of compliance management solutions. To learn how to put them to work for your bank, call (888) 353-3933, visit compliancealliance.com, or email info@compliancealliance.com.
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Learn more at www.kraftcpas.com/banking.htm July 2015 | 27
BANKERS ON THE MOVE AJ Taulbee
Chuck Skinner
Farmers Capital Bank Corporation, headquartered in Frankfort, has promoted within the Internal Audit department, effective June 1, 2015, AJ Taulbee to Assistant Vice President. FCBC has 36 banking locations in 23 communities throughout Central and Northern Kentucky.
Farmers Bank – Jessamine County is pleased to announce that Chuck Skinner has joined the lending staff as Senior Vice President. Chuck has over 35 years of banking experience and will be located at the Brannon Crossing location in Nicholasville.
Darrell Roberts
Houston Hall
Farmers Capital Bank Corporation, headquartered in Frankfort, has promoted within the Internal Audit department, effective June 1, 2015, Darrell Roberts to Assistant Vice President. FCBC has 36 banking locations in 23 communities throughout Central and Northern Kentucky.
Forcht Bank is pleased to announce Houston Hall has joined Forcht Bank as the Lexington Market President. Hall was previously with Cumberland Valley National Bank. Houston has enjoyed a long career in banking and is an active member of the Lexington community.
Jasie Curtis
Kristin Wells
Farmers Capital Bank Corporation, headquartered in Frankfort, has promoted within the Internal Audit department, effective June 1, 2015, Jasie Curtis to Assistant Vice President. FCBC has 36 banking locations in 23 communities throughout Central and Northern Kentucky.
Forcht Bank is proud to announce that Kristen Wells has joined Forcht Bank as a Treasury Management Officer. Mrs. Wells brings with her over 15 years of business development and client relations expertise in the financial and medical industries.
Tyler Montell, J.D.
Earl D. Twinam
Tyler Montell, J.D. recently joined WealthSouth, the Trust and Investment unit of Farmers National Bank in the role of Assistant Vice President, Institutional Specialist. Montell earned a Bachelor of Arts from the University of Kentucky where he was student body president and Trustee, and a Juris Doctor from the University of Louisville (Law).
In May Earl D. Twinam, Business Development Officer at First & Peoples Bank and Trust Company in Russell, Kentucky was awarded the Northeast Kentucky Small Business Champion of the Year. This award is presented for assisting small businesses through advocacy and support efforts.
FEATURED KENTUCKY BANKER Maurie McGarvey, Paducah Bank Senior VP and HR Director, Earns Coaching Designation Maurie McGarvey, SPHR, SHRM-SCP, Senior Vice President and Human Resources Director for The Paducah Bank and Trust Company, has earned the Certified Professional Coaching designation awarded by The Institute for Professional Excellence in Coaching (iPEC). “I am very proud of Maurie and admire her commitment to Paducah Bank,” said Paducah Bank President Mardie Herndon. “Maurie’s active participation in this ten-month certification process is evidence of her passion for our company and the seriousness with which she takes her role. We recognize that employee engagement is a critical competitive differentiator, and Maurie’s newly defined skill set will allow us to become even more intentional with our development of talent and will lift results over time
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given expectations for the future.” Accredited by the International Coach Federation, iPEC is the originator of the most effective leadership framework and change process in use today. Founded on more than 30 years of substantial research, the Energy Leadership Development System is a comprehensive and experiential approach, combining intensive inperson modules, distance learning and extensive coaching practice. Founded in 1999 by Bruce D. Schneider, MCC, Ph.D, the Institute graduates Certified Professional Coaches in the specialties of corporate, executive, business, career/transition, life and relationship coaching and operates in 16 major cities across the U.S., Canada and the U.K.
Want to announce a promotion? Email photos & announcements to Angie White awhite@kybanks.com
COMPLIANCE CORNER
Friendly Reminders regarding Integrated Disclosures and the August 1 Deadline 1. Be prepared to transact business under separate regulatory regimes for at least a few months or longer. Why? Because applications received prior to August 1st will still require the TIL and GFE/HUD-1. Applications received on or after August 1 will require the Loan Estimate and Closing Disclosure. 2. The definition of application is changing. Once an application is received, the three (3) day window to provide the Loan Estimate begins. An application is received once the applicant submits six (6) pieces of information. These pieces of information are: • Name of Consumer; • Consumer’s Income; • Consumer’s Social Security Number (for purpose of obtaining credit report); • Estimated Value of the Property; • Property address; AND • Loan amount requested. The bank is allowed to request other information, but once these six (6) items have been submitted, the three (3) day period begins without exception. 3. The new Loan Estimate and Closing Disclosure may not apply to all mortgage loans. For example, loans secured by manufactured housing where no land is taken as collateral will require the TIL, but not the new integrated disclosures. Why? Because RESPA does not apply to loans where no real property is taken as collateral. However, Regulation Z applies to consumer purpose loans secured by 1-4 family dwellings. Dwelling does not require land. So in this situation, the bank will have to provide the TIL. If the land is included as collateral, then the new Loan Estimate and Closing Disclosure will be required. 4. Under the new rules, some loans that were exempt from RESPA are no longer exempt. For example, loans secured by vacant land or by 25 acres or more of land are no longer exempt from RESPA. So these loans will now require the Loan Estimate and the Closing Disclosure. 5. The new rules require the customer to RECEIVE the Closing Disclosure no later than three (3) business days (all days except Sunday and legal public holidays) before consummation. So if it is not delivered in person, the customer is presumed to have received it three (3) business days after the disclosure is mailed, emailed, or delivered by other methods. Essentially, if the bank is mailing the Closing Disclosure, the bank must do so a minimum of six (6) business days prior to consummation.
For more information email Natalie Kaelin nkaelin@kybanks.com
Proudly Serving KentucKy BanKS for 25 yearS t ax -f ree /t axaBle M uniciPal B ondS • uS t reaSurieS /a gencieS
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KBA EDUCATION SOLUTIONS | EVENTS & SEMINARS CALENDAR BSA/AML School Pegasus Program July 8-9 Lexington Personal & Business Tax Return Analysis Seminar August 11 Bowling Green August 12 Lexington New Accounts - Pegasus Seminar August 17 Morehead August 18 Hazard August 19 Somerset August 20 Elizabethtown August 24 Paducah August 25 Bowling Green August 26 Lexington
Internal Audit Seminar August 19 & 20 Elizabethtown Lending Compliance School August 24 - 28 Louisville Certified Teller Seminars August 31 Paducah September 1 Marion September 2 Owensboro September 3 Bowling Green September 14 Grayson September 15 Prestonsburg September 16 Somerset September 21 Carrollton September 22 London September 23 Elizabethtown Commercial Lending School September 21 – 25 Louisville
PBS Live Seminars Sept 10 Flood Insurance Compliance Lexington Sept 22 New Integrated Mortgage Disclosures - Somerset Sept 23 Mortgage Lending Start To Finish - Somerset Sept 24 Mastering HMDA Somerset Sept 29 ACH Processing Compliance - Bowling Green PBS Webinars August 11 IRS Reporting and Compliance Webinar Series Program 4: Types of Backup Withholding A, B, C & D and the IRS B & C Notices
FOR MORE INFORMATION
email: kbaeducationsolutions@kybanks.com phone: 502-582-2453
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A full library of schools, seminars, trainings, webinars, and Education Solutions to keep you on top of your game this year Please visit kybanks.com and browse through our educational resources