Virginia Banking March/April 2014

March/April 2014

Banker Day 2014 Results in Key Meetings with Legislators

IN THIS ISSUE

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March/April 2014

2013-2014 OFFICERS AND DIRECTORS OF THE VIRGINIA BANKERS ASSOCIATION Gary R. Shook, Chairman, Middleburg Bank John R. Milleson, Chairman-Elect, Bank of Clarke County Jeffrey M. Szyperski, Immediate Past Chairman, Chesapeake Bank Christopher W. Bergstrom, Cardinal Bank Tim Butturini, Wells Fargo Bank, N.A. J. Peter Clements, The Bank of Southside Virginia Randy K. Ferrell, The Fauquier Bank Gary Gore, Bank of America, N.A. Scott Harvard, First Bank, Strasburg William H. Hayter, First Bank & Trust Company G. Lyn Hayth, III, Bank of Botetourt T. Gaylon Layfield, III, Xenith Bankshares, Inc. Monte L. Layman, Blue Ridge Bank Susan R. Ralston, Bank @Lantec John G. Stallings, SunTrust Bank H. Watts Steger, III, Bank of Botetourt Susan K. Still, HomeTown Bank David P. Summers, Virginia Heritage Bank Daniel G. Waetjen, BB&T Michael O. Walker, Benchmark Community Bank AT-LARGE MEMBERS Benefits Corporation Chair J. Peter Clements, The Bank of Southside Virginia Management Services Inc. Chair G. Lyn Hayth, III, Bank of Botetourt Government Relations Committee Chair Monte L. Layman, Blue Ridge Bank VBA Education Foundation Chair H. Watts Steger, III, Botetourt Bankshares, Inc.

12

cover

Banker Day 2014 Results in Key Meetings with Legislators

features

17

Teach Children to Save Day is April 11

19

Save the Date for the VBA Annual Convention, June 15-18, 2014

EDITORIAL & EXECUTIVE OFFICES 4490 Cox Road Glen Allen, VA 23060 804-643-7469 Fax 804-643-6308 www.vabankers.org

If you would like to subscribe to Virginia Banking, contact Melanie Reilly at mreilly@vabankers.org.

Virginia Banking is published bi-monthly. Copyright 2014.

Bruce T. Whitehurst President and CEO Virginia Bankers Association Melanie Reilly Communications Coordinator Virginia Bankers Association

Statements of fact and opinion are made on the responsibility of the authors alone and do not imply an opinion or endorsement on the part of the officers or members of VBA.

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in every issue 4 Calendar of Events 5 Insights 6 Worth Noting 8 New Associate Members 10 Legislative Update 14 Legal Lines 16 Washington Update 18 Compliance Corner 22 Bankers on the Move

Send us your thoughts or ideas on Virginia Banking! Please email Melanie Reilly at mreilly@vabankers.org. Has your information changed? Please email Kellee Edelin at kedelin@vabankers.org with your new contact information.

March/April 2014 | Virginia Banking 3

Calendar of

Live Events

INSTRUCTOR-LED SEMINARS

Events

COMPLIANCE HOT TOPICS, CHARLOTTESVILLE APRIL 10

SECURITY RISK WORKSHOP, CHARLOTTESVILLE APRIL 23 FUNDAMENTALS OF CREDIT ANALYSIS & BUSINESS FINANCING, GLEN ALLEN APRIL 30

HR & BENEFITS CONFERENCE, CHARLOTTESVILLE MAY 4

CFO PEER EXCHANGE, ROANOKE MAY 8

OPERATIONS & TECHNOLOGY CONFERENCE,

CHARLOTTESVILLE

MAY 13

APPRAISAL REVIEW, GLEN ALLEN MAY 21

ANNUAL CONVENTION, KIAWAH ISLAND, SC JUNE 15 VBA SCHOOL OF BANK MANAGEMENT, CHARLOTTESVILLE JULY 27

CFO CONFERENCE, RICHMOND

AUGUST 25

CREDIT MANAGEMENT CONFERENCE, CHARLOTTESVILLE

OCTOBER 6

COMMERCIAL LENDING SCHOOL, GLEN ALLEN

OCTOBER 15

WOMEN IN BANKING CONFERENCE, GLEN ALLEN

NOVEMBER 5

WEBINARS

Webinars

SURVIVE AND THRIVE: SIX STRATEGIC “MUST DOS” AND

BEST-PRACTICE STRATEGIES APRIL 8 SURVIVAL OF THE FITTEST! NEW WORLD STRATEGIES FOR

EVERY COMMUNITY BANK TO PONDER APRIL 9 PENETRATION TESTING: START-TO-FINISH APRIL 10 WIN THE TALENT WAR! ROBUST TALENT MANAGEMENT

AND HOLISTIC SUCCESSION APRIL 10

MANAGING A DYNAMIC ALCO, PART 2 APRIL 10

AG LENDING IN A NEW BUSINESS CLIMATE, PART 1 APRIL 15

AG LENDING IN A NEW BUSINESS CLIMATE, PART 1 APRIL 17

CREATING COMPELLING ADVERTISING FOR COMMUNITY BANKS APRIL 17

SOCIAL MEDIA ATTACKS 101 APRIL 17

MONEY SAVING, MONEY MAKING MARKETING IDEAS APRIL 17

MANAGING A DYNAMIC ALCO, PART 3 APRIL 17

BUILD AN EFFECTIVE REFERRAL PROGRAM IN 60 DAYS APRIL 22 MANAGING THE CUSTOMER EXPERIENCE – IT’S A BOTTOM LINE NECESSITY APRIL 22

ANALYZING THE COMPANY’S LIQUIDITY POSITION USING THE CASH CONVERSION CYCLE APRIL 8

Information and online registration is available at the VBA website. Please either go to www.vabankers.org or use this form to check the box next to the program you want information about, then fax the form to the VBA office at 804-643-6308. The VBA will send you information about the program as soon as it is available, usually eight weeks before the program.

Name ___________________________________________________ Bank/Firm______________________________________________ Address_____________________________________________________________________________________________________________________ City ________________________________________________________________ State/Zip ___________________________________ Phone ___________________________ Fax _________________________ Email __________________________________________________ Visit www.vabankers.org for more information.

4 Virginia Banking | March/April 2014

www.vabankers.org

Insights Overkill

B Bruce Whitehurst President and CEO, Virginia Bankers Association

y all measures, 2013 was a very challenging year for banking – and especially for community banks – from a regulatory perspective. Earlier this year, Continuity Control, a New Haven, Conn.-based provider of compliance management systems, released a compilation of data that was startling, to say the least.

This report pointed out that last year: • The new regulations added an extra 3,400 hours to the average community bank’s compliance workload, equating to a cost of $150,000 per institution.

• Financial institutions saw more than 16,000 pages of new regulations added to the books in 2013, totaling 245 new regulatory items.

That’s a 22 percent increase over 2012.

• The average community bank devoted the equivalent of 2.15 full-time employees (FTEs) to cope with the new regulations.

• More than 600 enforcement actions were taken against banks by regulatory agencies, a 5 percent increase over 2012.

Remembering that there were people in Washington who actually believed (and maybe some who still do) that the Dodd-Frank Act would not really apply to community banks, we clearly have a disconnect between perception and reality. In truth – as VBA staff and banker delegations have noted to our congressmen every time we have had the chance – the wave of new regulations sweeping over community banks is massive and it goes well beyond anything defensible as purely in the interest of consumer protection.

Last November, KPMG released a survey of community banks suggesting that as many as 25 percent of community bank CEOs thought their banks might be acquired within a year. While it is hard to imagine that close to 2,000 banks would truly sell over the next year, it is easy to understand why so many CEOs might be thinking that’s what their banks might have to do in light of the increased cost of doing business in this hyper-regulated environment. As an indus-

try, we find ourselves in a very interesting place when even the CEOs of the largest U.S. banks are speaking out on behalf of community banks, noting their important role in our economy and the need to be reasonable with compliance and regulatory requirements.

My regular readers and good banker friends know that I am an optimist to the core, yet I would like to think I am also a pragmatic realist. From that lens, I see an unsustainable compliance burden for community banks that must be addressed if we are serious about the health and survival of our community banking system. Along these lines, I believe there are a number of things we all can do together to address this critical issue: • Stay active in VBA advocacy efforts, which this year will include a May trip to Washington specifically to meet with regulators. Contact Bobbi Weimer at bweimer@vabankers.org for details on this trip.

• Document the cost of new regulatory compliance at your bank and use that in our advocacy efforts when we meet with our congressmen. They are increasingly aware of the challenges community banks are facing, as evidenced by their recent efforts – in several cases – to intercede with regulators and ask them to reconsider proposed regulations and their impact on community banks. Isn’t it ironic that congressmen, even some who voted for Dodd-Frank, are now helping us advocate with our regulators for more reasonable treatment of new regulations?

• Strongly consider joining the VBA’s Compliance Alliance program, as about a dozen VBA member banks have already done. Feedback about this offering from a group of 16 state bankers associations has been very positive, and the support banks receive from Compliance Alliance is cost-effective and extremely helpful. Contact the VBA’s John Bowers at jbowers@vabankers.org for more information.

Continued on page 22

Email Bruce Whitehurst at bwhitehurst@vabankers.org with any comments on this article. www.vabankers.org

March/April 2014 | Virginia Banking 5

Noting

Worth

KAREN DESROCHES TO LEAD VBA MULTI-BANK TITLE AGENCIES Karen DesRoches has expanded her role at VBA Management Services Inc. as our new senior vice president in charge of the multi-bank title agencies. Karen has been working with the staff of the various agenKaren DesRoches cies since 2006 in her role as director of human resources for VBA and Bankers Insurance, LLC.

HOWARD F. PISONS TO BECOME PRESIDENT AND CEO OF COMMUNITY BANKERS’ BANK The boards of directors of Community Bankers’ Bank and CBB Financial Corp. have elected Howard F. Pisons to become president and CEO effective April 1, 2014. Pisons, currently executive vice president of CBB, will assume leadership of the bank and holding company from William H. McFaddin, who had earlier announced his retirement effective March 31. Howard Pisons came to CBB in 2002 as senior vice president and senior credit officer. He was named executive vice president in 2013. Prior to joining CBB he was a vice president with GE Capital with previous financial industry experience at Comerica Bank, BankAmerica Business Credit and Citicorp. Good luck to Howard in his new role!

GENERAL ASSEMBLY RESOLUTIONS HONOR SIX VIRGINIA BANKERS SHJ 211 and SR 6 honor Robert Shuford as the 2013 Distinguished Citizen by the Virginia Peninsula Chamber of Commerce. Robert is the president, chief executive officer and board chair of Old Point National Bank in Hampton, known for his work growing the bank from only two locations in Hampton to 18 sites throughout Hampton Roads, while increasing its assets from $10 million to more than $875 million. Congratulations to Robert, and thank you for your years of hard work and service to Virginia!

HJ 366 commends Charles H. Majors, an attorney and respected bank executive, who is the recipient of the 81st Annual Citizenship Award of the Kiwanis Club of Danville. Charley was chief executive officer of American National Bank of Danville for 20 years and currently serves as chairman of the board of directors of the fullservice community bank, which has branches in southern and central Virginia and northern and central North Carolina. Congratulations, Charley!

SJ 58 celebrates the life of Dr. Albert Will Thweatt, an outstanding educator, gifted entrepreneur, generous philanthropist and dedicated community member. He was a committed member of several civic and professional organizations, including the board of directors of the Bank of Southside Virginia. We are saddened to hear of

6 Virginia Banking | March/April 2014

Dr. Thweatt’s passing, and will remember his many contributions to the commonwealth.

HJ 223 and SR 2 celebrate the life of Walter S. Segaloff, who played a pivotal role in the founding of Harbor Bank (now TowneBank), and provided valuable insight to a number of projects and organizations on the Virginia Peninsula, including Christopher Newport University’s Real Estate Foundation. Our condolences go out to Mr. Segaloff’s family.

HJ 249 recognizes Cassell Davenport Basnight, a staple of the Chesapeake community, who died on Nov. 13, 2013. Cassell guided many initiatives, including the Chesapeake Civilian Club and Chesapeake Bank and Trust, and served as founding chairman of the board of directors for Monarch Bank. Thank you, Mr. Basnight, for your dedicated service to Chesapeake.

Finally, HJ 462 honors the life of David Grist, an important member of the banking industry who recently passed away. For more information, please see the story on David on this page.

ELIZABETH DUKE TO RECEIVE VABPW FOUNDATION BUSINESS LEADERSHIP AWARD Elizabeth “Betsy” Duke has been selected as one of the Library of Virginia’s 2014 Virginia Women in History and a recipient of the Virginia Business and Professional Women’s Foundation Business Leadership Award. Duke was a member of the Federal Reserve’s Board of Governors and helped guide the Federal Reserve System’s response to the economic crisis of 2008. She was the first female president of the Virginia Bankers Association in 1999 and the first woman to chair the American Bankers Association in 2004. In 2008, President George W. Bush nominated her to fill an unexpired seat on the Board of Governors of the Federal Reserve System. During her time on the board she served as chairman of both the Committee on Consumer and Community Affairs and the Subcommittee on Supervision and Regulation of Community and Small Regional Banking Organizations. Congratulations to Betsy on this well-deserved award!

WE WILL MISS …

We are very sad for the loss of David Grist, founding chief executive officer and president of CornerStone Bank and active member of the VBA, who passed away on Sunday, Feb. 23, 2014, at UVA Medical Center at the age of 57. David began his banking career at First National Exchange Bank, and went on to serve as executive vice president and board member of the original Bank of Rockbridge, president of One Valley Bank-Shenandoah and area executive for BB&T in Rockbridge County before becoming CEO and president of CornerStone Bank. Recently, he served on the board of directors for the Rockbridge Area Habitat for Humanity and the Lexington Police Department Foundation. Prior to his death, David was named vice chairman of the Virginia Association of Community Banks. David will be greatly missed by the communities where he lived, worked, and served. The VBA will sorely miss David, and his family is in our thoughts and prayers. www.vabankers.org

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Legislative

Update

Investing in Your Community

I

Matt Bruning Vice President, Government Relations, Virginia Bankers Association

have used this space previously to discuss how advocacy at its core is about educating lawmakers and other key decision-makers.

When your VBA Government Relations team lobbies legislators on a specific bill or discusses a proposal with our regulators, it is often centered on why certain provisions would have an impact on the banking industry that they might not realize.

Concrete examples of the direct consequences on access to credit, compliance costs or capital levels are useful facts and figures we can point to when making our case on the effects of changes.

Educating policy makers on a policy’s resultant impact to the bottom line of a bank – or any business – is critical to advocacy. At our annual Banker Day at the state Capitol in January and the many legislative meetings held throughout the year, we encouraged participants to share stories about their banks. Using real-life experiences to convey the challenges of compliance with regulations, the uncertainty of businesses and families in the still fragile economy or the encroachment of aggressive credit unions relying on their unfair tax advantage, aids in personalizing and distilling down the challenges facing our industry to a more relatable, local perspective.

While this is an effective approach, lawmakers frequently are positioned to pick winners and losers in a key decision, whether we like it or not.

Some can be swayed by the financial consequences rendered, while others apply less empathy to those considerations.

So how do we reach those in the latter category on issues of importance? To paraphrase Paul Harvey, we need to share the rest of the story.

It may not be sufficient to point out the obvious business case relative to our industry or even a specific bank. What can assist is making the correlation between the effect of a proposal to the bank and what that means for the communities you serve and the legislator represents.

Sharing your story of your bank cannot – and should not – be one solely of burdens and tribulations. The industry and individual banks and bankers have too positive a story for that to occur. That is why we also encourage sharing what you and your bank do to support financial literacy

efforts, local civic or nonprofit organizations and small businesses in your community. Those positive stories are illustrative of the powerful investment the overall industry makes across Virginia.

On the advocacy side, it can translate to legislators saying, “Well if they say it’s good for banking, then it must be good for my local bank, and I want to help them, since they are doing a lot for our community.” During a recent hearing on a VBA-backed bill before the General Assembly, Delegate Tim Hugo (R-Centreville) made the connection between the proposal’s impact on banks and our ability to lead within the community. He noted, “We need to help see that the financial pressures of community banks are lessened so they can continue to serve our communities.”

At the VBA, we want to help share those stories about the commitment our members have to investing in their communities. Your bank recently received a simple, six-question Community Investment Survey seeking information on your bank’s contribution of time and resources to community and charitable causes. We encourage you to participate, as we use aggregate survey data to share the overall story of what Virginia banks are doing in all corners of the commonwealth.

And we want you to share your individual stories of your commitment to the community with us.

We share those stories with legislators, the media and the public through conversations, social media and other avenues. Doing so helps in the critical education that something that impacts banking does not stop at the branch or board room doorway, but extends to the organizations, families and communities that rely on the support of local banks.

Unfortunately, our industry rarely is painted in a sympathetic light. It is the VBA’s duty, with your help, to share your stories about the everyday positive impact banks make on their employees, customers and communities.

To make sure your bank has completed the Community Investment Survey, or for any questions about the survey, please contact Melanie Reilly at mreilly@vabankers.org.

Email Matt Bruning at mbruning@vabankers.org with any comments on this article.

10 Virginia Banking | March/April 2014

www.vabankers.org

charity effort

past

team

volunteering

employment

help

impact

resources

financial literacy

donations

better

organizations

stories

service

recognized

scholarships future

contribution

Banks

present

connection

participation

growth

statewide

devotion

good cause

supported

aid

celebration

successes

focus

foundation

tools

events

education

Virginia development

groups

campaign

loans

action

Community

employees

investing

making a difference

commitment providing

non profits

dedication

Has your bank participated in the Community Investment Survey this year?

Please make sure that your bank participates in the VBA’s 6th annual Community Investment Survey, designed to help legislators, the news media, bank employees, and the public at large understand the vital role our industry plays in Virginia’s economy.

Your participation in this survey is an excellent opportunity for your bank to be highlighted for your community service efforts.

The data gathered will be presented in a brochure that will be distributed to the following: ·State and federal representatives at legislative meetings ·Media outlets across Virginia ·Followers on the VBA’s Facebook page ·Virginia Banking magazine readers ·VBA Executive Brief subscribers All participating banks will be listed on the survey report.

For more information on how to participate in this survey, please contact Melanie Reilly at mreilly@vabankers.org or 804-819-7461.

Over 350 bankers attended the 14th annual event.

Banker Day 2014

Results in Key Meetings with Legislators

M

ore than 350 bankers from across Virginia made their presence known at the General Assembly during the VBA’s 14th annual Banker Day event on Jan. 9. Led by VBA Chairman Gary Shook and VBA Government Relations Committee Chairman Monte Layman, the day started with remarks from Speaker of the House William J. Howell and Sen. John C. Watkins. Bankers then met with their state legislators throughout the morning, discussing key industry issues. Topics of importance included patent troll reform, third-party tax lien purchasers, and bank director stock ownership requirements.

A luncheon was held after the meetings, featuring a dis-

The VBA would like to thank everyone who participated in this year’s Banker Day. Both legislators and lobbyists from other industries took note of the significant banker turnout at this key event. Your commitment to advocate for our industry and share your story is critical to the VBA’s lobbying efforts and our success.

A special thanks as well to all the Leadership Division members who joined us for the Pre-Banker Day Reception at Havana ’59. The event, sponsored by the VBA Leadership Division, attracted a group of more than 40 people and provided the opportunity to network with other Banker Day participants.

cussion with Dr. Bob Holsworth on the state and national political landscape. Holsworth had some great insights, and also passed along some tidbits of advice to the attendees, saying, “Come to Banker Day every year, but also visit your legislators at their district offices throughout the year.” It is crucial that we engage with our elected officials on a regular basis, and not just on Banker Day.

Save the date for Banker Day 2015 on Thursday, Jan. 15!

12 Virginia Banking | March/April 2014

“

It is crucial that we engage with our elected officials on a regular basis, and not just on Banker Day...

”

www.vabankers.org

(From left) The Bank of Southside Virginia's Eric Crawford, Tammy Hamilton and Carl Thornton with Delegate Kirk Cox.

(From left) River Community Bank's Mary Handy, Ron Haley, Scott Griffin and Sherri Sowers met with Delegate Charles Poindexter (middle).

(From left) Middleburg Bank's Browning Herbert, Andy McLean and Greg Frederick with Delegate Peter Farrell (second from right).

(From left) Village Bank's Irlene Kemp, Sue Hall, Tom Winfree and the VBA's Matt Bruning.

A group of Chesapeake Bank employees met with Delegate Keith Hodges.

American National Bank & Trust Co.'s Jeff Haley discussing industry issues of importance with Senator Frank Ruff.

Members of the VBA Leadership Division attended to build relationships with their legislators.

Representatives from C&F Bank and Bank of McKenney met with Delegate Riley Ingram.

www.vabankers.org

March/April 2014 | Virginia Banking 13

Line

Legal

CFPB Actively Enforcing RESPA Anti-Kickback Provisions

T Mel Tull General Counsel, Virginia Bankers Association

he Consumer Finance Protection Bureau (CFPB) is actively policing alleged violations of Section 8 of the Real Estate Settlement Procedures Act (RESPA).

Section 8(a) of RESPA prohibits referral fees, kickbacks or unearned fees with respect to residential mortgage settlement services. The CFPB’s first Section 8 action came in April 2013, when it charged four mortgage insurers with making unlawful kickbacks by paying reinsurance premiums to captive reinsurance subsidiaries of certain mortgage lenders in return for mortgage insurance referrals from those lenders. Since then, the CFPB has acted against a number of settlement service providers and those allegedly referring business to them, including mortgage lenders, mortgage insurers, homebuilders and law firms, with penalties of $50,000 to over $15 million.

OFFICE SPACE LEASES In January 2014, the CFPB entered into a consent order with a mortgage lender and its president. The mortgage lender allegedly leased office space from a bank at an abovemarket rate that was partially tied to loan volume. In the lease agreement, the bank agreed to promote exclusively the mortgage services of the mortgage lender, and vice versa. This type of above-market rent has been found by the U.S. Department of Housing and Urban Development (HUD) in the past to be a disguised referral fee, and the CFPB found the same here. The CFPB ordered the lender and its president to disgorge $27,000 in origination fees and to pay a $50,000 civil penalty. This violation involved only 20 loans and a relatively low dollar amount, demonstrating the CFPB’s focus on RESPA enforcement against alleged violations, large and small.

More importantly, the mortgage lender in this instance is a subsidiary of a bank with $340 million in assets. Although the CFPB has

jurisdiction over nonbank entities that provide consumer financial products such as mortgages, many industry experts believed the prudential bank regulators would retain authority over subsidiaries of depository institutions with under $10 billion in assets. This action may indicate a shift in the CFPB’s view of its own jurisdiction over subsidiaries of smaller depository institutions.

AFFILIATED BUSINESS ARRANGEMENTS The CFPB also has taken action against settlement providers receiving alleged kickbacks through joint venture arrangements. RESPA contains a statutory safe harbor from Section 8 liability for “affiliated business arrangements” in which the affiliated relationship is properly disclosed; the person being referred is not required to use any particular provider of settlement services; and the only thing of value received from the arrangement is a return on ownership interest. In 1996, HUD issued a Policy Statement on Sham Controlled Business Arrangements in which it effectively added a fourth element to this analysis – that the affiliated business arrangement be bona fide rather than a “sham.” The HUD policy statement includes 10 factors to be used in making this determination including, among others, whether the entity is sufficiently capitalized and staffed, has its own office, provides substantial services on its own, and whether it actively competes in the marketplace. In its enforcement actions to date, the CFPB has continued to rely on the HUD policy statement.

In May 2013, the CFPB entered into a consent order with a homebuilder in Texas arising out of a joint venture in which the homebuilder allegedly received kickbacks for referring mortgage origination business to a bank and a mortgage company.

Specifically, the homebuilder and the bank created an entity (the JV) in which each held

Email Mel Tull at mtull@vabankers.org with any comments on this article.

14 Virginia Banking | March/April 2014

www.vabankers.org

a 50 percent ownership interest. The homebuilder referred its customers to the JV for mortgage origination services. The JV conducted no origination business outside of these referrals and did not have its own office space or advertise to the public.

All mortgage origination activities undertaken in the JV’s name, including funding, underwriting, processing and closing, were performed by the bank and its employees. The homebuilder received periodic distributions from the JV, purportedly based on its ownership interest.

The CFPB determined that these distributions were unlawful referral fees by the bank because, due to the facts above, the JV was a sham arrangement under the HUD policy statement.

The CFPB ordered the homebuilder to disgorge over $100,000 that it had received in such distributions.

In October 2013, the CFPB initiated a lawsuit against a law firm in Kentucky that operated several joint ventures (the LLCs) with owners and managers of real estate and mortgage brokerage companies. The LLCs served as title insurance agents. When one of these real estate or mortgage brokers referred closing or other settlement services to the law firm, the law firm arranged for the title insurance for the underlying transaction to be issued through the LLC co-owned by the real estate or mortgage broker who referred the business to the law firm. Profits generated by an LLC were split between the law firm and the referring real estate or mortgage brokerage company, thereby allegedly compensating for the referral.

The CFPB complaint alleges that the distributions do not meet the affiliated www.vabankers.org

business safe harbor because the LLCs were not bona fide settlement service providers. Among the facts relevant to the CFPB, the real estate and mortgage brokerage companies did not contribute funds for the initial capitalization of the LLCs. In addition, the LLCs did not advertise to the public or have their own office spaces, email addresses or telephone numbers, and could not function independently from the law firm. The only staffer of the LLCs was an independent contractor shared by all of the LLCs and concurrently employed by the law firm.

Recently, in Carter v. Welles-Bowen Realty, Inc., the U.S. Court of Appeals for the Sixth Circuit held that the 10-factor test in the HUD policy statement is not entitled to deference or persuasive weight because a government agency cannot add a new requirement to the statutory safe harbor through a policy statement. As a result of this decision, defendants in the Sixth Circuit (Ohio, Michigan, Kentucky and Tennessee) trying to gain the protection of the

affiliated business arrangement safe harbor need only show compliance with the three statutory factors set forth in RESPA. It will be interesting to see how the CFPB responds to the Carter decision.

The CFPB’s lawsuit against the law firm is pending in Kentucky and may be influenced by this decision. Courts in other jurisdictions may or may not follow suit. In addition, the CFPB may continue to investigate and negotiate settled consent orders for alleged RESPA violations arising out of “sham” affiliated business arrangements. If any of these alleged violators refuse to settle with the CFPB and litigate the matter, however, it appears for the moment that the CFPB’s job could be more difficult.

Notwithstanding the Carter decision, these recent actions by the CFPB show that RESPA enforcement is a priority at the CFPB, and that it is willing to play hardball. This is likely to be a continuing area of focus for the CFPB and for prudential regulators.

March/April 2014 | Virginia Banking 15

Update

Washington

Teaching Sound Financial Habits

B

Frank Keating President and CEO, American Bankers Association

efore getting a driver’s license, teens in states across the country have to gain both relevant experience and demonstrate a basic proficiency in driving a car. That can mean classroom training and instruction, and keeping a log of hours driven with an adult in the car, as well as hours behind the wheel with a specialized instructor.

The goal of course is to ensure that when they do hit the open road, young drivers are less likely to harm themselves and others. They have a basic understanding of the rules of the road, respect for their fellow drivers – and pedestrians – and are able to independently make good decisions. The end result – fewer accidents – benefits all.

Our industry’s financial education programs work much the same way. By providing kids with practical lessons on personal finance, and encouraging starter savings accounts, banks give tomorrow’s adults the knowledge and experience they need to safely manage money.

This is a critical building block to helping them meet their financial goals in life – from buying a house to retiring comfortably. And helping consumers meet their financial goals is what banks do.

If your bank hasn’t yet engaged in financial education, I encourage you to explore ABA’s annual Teach Children to Save program. It is a popular and turnkey way to share lessons about the importance of saving and managing money – lessons that banks have delivered to six million youth since ABA created the program in 1997.

This year’s Teach Children to Save Day is April 11. Bankers across the country have registered to make school presentations on that day and throughout April, which is also being celebrated as Financial Capability Month. (For a list of participating banks, and for free lesson plans and other resources, visit aba.com/engagement.)

This program allows bankers to accomplish several worthy goals at once. By visiting school classrooms, youth centers, after-school programs and more, you and your colleagues

provide practical lessons and share knowledge to encourage and inspire young people to develop healthy lifelong financial management skills.

You also are putting your skill set to use to help address a serious problem in our nation – the lack of financial know-how – that could threaten the economic stability of America. The 2008 financial crisis taught us many lessons, one of which is the importance of an informed consumer – one who can distinguish a loan that is good and appropriate for him or her from one that is not.

Finally, your participation also helps demonstrate two important truths about the industry: that local bankers are there to help customers in all of their families’ milestone events, and that banks have a stake in the economic growth, health, and vitality of their communities. These are two features of banking that consumers, through surveys and focus groups, have told ABA they value, so let’s remind them of those facts.

You have probably heard me say that I view banking as a white-hat industry. Banks are critical to the success of communities across America. In fact, bank community engagement is critical to the success of our nation’s economy.

Teach Children to Save is just one of several ways ABA tries to drive that point home. I hope you’ll take part and in the process help the next generation safely navigate the road to financial freedom.

Email Frank Keating at keating@aba.com with any comments on this article.

16 Virginia Banking | March/April 2014

www.vabankers.org

Our Future

Investing in

Teach Children to Save Day is April 11 Join thousands of fellow bankers across the country in Teach Children to Save Day (TCTSD) 2014 activities. Your role as a local banker and community resource provides you with a unique opportunity to participate in this vital effort to teach saving habits and basic financial knowledge to students of all ages. Specifically, you can take part in Teach Children to Save Day 2014 by: • Teaching younger students about safe saving spots, and why a bank is a safe place to keep money.

• Encouraging elementary students to develop smart saving habits now so they can enjoy the rewards of their savings later.

• Providing teens and young adults with solid tools and practical training to develop the financial knowhow needed to manage their finances and to establish credit.

Register today on the American Bankers Association website, www. aba.com. The official Teach Children to Save Day takes place on Tuesday, April 11; however we encourage your bank to participate in related activities on another day if that day does not work for you.

What better time is there to encourage financial literacy in your community?

Contact Melanie Reilly at mreilly@vabankers.org with questions, and please

Bank of McKenney teaches elementary school students about saving money during last year’s Teach Children to Save Day. be sure to share your TCTSD plans with us so that we can share your work throughout the state. See page 16 for more information.

Their Dreams Start with You Teach Children to Save Day is the ideal opportunity to start children in your community on the path to sound money management and a productive adulthood. On April 11, 2014, join with bankers across the nation as we show children how to reach for their dreams.

To learn more about available program resources and to register, visit aba.com/Teach.

Teach Children to Save Day April 11, 2014

www.vabankers.org

March/April 2014 | Virginia Banking 17

Compliance

Corner

Decoding the Biggert-Waters Flood Reform Act

By David Smith Director, CRM, CAMS, Accume Partners

T

he banking industry continues to adjust and react to the Biggert-Waters Flood Reform. Enacted in July 2012, the act re-authorized the National Flood Insurance Program (NFIP) through Sept. 30, 2017. While the impact of the act has not fully played out, financial institutions are being affected now. To no one’s surprise, it is creating new challenges for bankers, including premium reform and required compliance program changes.

Adding to the challenge, some provisions of the act were effective immediately, some have set dates, and others require further rulemaking.

Banks are in the process of familiarizing themselves with what will change so they can implement required changes and achieve compliance before effective dates. One immediate change was to increase civil money penalties (CMPs) to $2,000 and elimination of the CMP cap of $100,000, making the cost of non-compliance virtually unlimited. This article provides an overview of the changes and their effective dates, and will hopefully clear up the muddy waters regarding the impact on both banks and borrowers.

REFORM OF PREMIUM RATE STRUCTURE AND PREMIUM ADJUSTMENTS The act raises the cap on annual premium increases from 10 percent to 20 percent, excludes certain properties from receiving subsidized rates, and does not extend subsidized rates to new policies or lapsed policies. As of Jan. 31, 2013, non-principal/non-primary residence subsidized rates began increasing 25 percent per year until the full risk rating is reached.

As of Oct. 31, 2013, business property subsidized rates began increasing 25 percent per year until they reach the full risk rating.

Owners of primary residences will keep their subsidized rates until they sell their property or allow their policy to lapse or purchase a new policy. The act also phases out grandfathered rates when an area is re-mapped and phases in full risk-rates at a rate of 20 percent per year beginning in October 2014.

Bankers must analyze the impact of these changes on their institutions and develop plans to mitigate risk, such as educating borrowers on rule changes so they can plan for rate increases. Premium increases will lead to escrow account issues (due to increased cost), non-renewals and subsequent force-placement activity and, potentially, increased foreclosures due to unaffordability. Higher premiums will also have to be considered in ATR/QM calculations.

MULTI-FAMILY PROPERTIES Another major change applies to residential properties with five or more units. Previously, these buildings could only be insured up to $250,000, the maximum insurance available under the NFIP for residential buildings. Biggert-Waters increases maximum policy coverage to $500,000, the same as nonresidential. Banks must update their flood insurance policies and procedures and communicate these changes to borrowers to ensure sufficient flood insurance coverage is in place. A FEMA memo issued on Dec. 16, 2013, clarifies that these new maximum limits ($500,000) for other residential buildings will take effect June 1, 2014.

FORCE-PLACEMENT To eliminate confusion regarding whether a lender can charge the borrower premiums or fees incurred for coverage beginning on the date of lapse or insufficient coverage, the act clarifies the bank can charge the customer from the day the insurance lapses (this clarification supersedes proposed Q & A #62). In addition, lenders are now required, within 30 days of receiving proof of a borrower’s existing flood insurance coverage, to terminate any force-placed insurance and refund to the borrower all force-placed insurance premiums and fees during any period of overlap. This section was effective upon enactment.

Continued on page 20

Please contact David Smith at dlsmith@accumepartners.com for more information on the many aspects of the Biggert-Waters Flood Reform Act. 18 Virginia Banking | March/April 2014

www.vabankers.org

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Decoding the Biggert-Waters Flood Reform Act Continued from page 18

MANDATORY ESCROW The act imposes a mandatory escrow requirement applying to any mortgage outstanding or entered into on or after July 6, 2014. There is exclusion for institutions with assets less than $1 billion if the bank was not required by state or federal law to escrow and did not have a policy of consistently requiring the escrow of taxes, insurance premiums and fees.

Escrow is mandatory for loans secured by “residential improved real estate.”

Bankers must take a wait and see approach to see if mandatory escrow is required for “commercial purpose” loans secured by a residence or HELOCS, and also how it will be applied to condominium loans.

This section requires additional rulemaking to implement. It is expected this provision will soon be implemented through notice and comment rulemaking, as regulators must allow enough time for the industry to implement the rule changes prior to the anticipated July 2014 effective date.

20 Virginia Banking | March/April 2014

PRIVATE INSURANCE This section requires lenders to accept a private flood insurance policy, assuming that the flood insurance coverage provided by the private policy meets certain yet to be defined requirements. Violations of this new requirement may result in the issuance of a civil money penalty.

This section also requires that a notice be provided to the borrower outlining flood insurance is available from private insurance companies with the same level of coverage that can be obtained under a NFIP policy. The notice encourages the borrower to compare the flood insurance coverage, deductibles, exclusions, conditions, and premiums of a NFIP and a private insurance policy. This section also requires additional rulemaking to implement.

RESPA SPECIAL INFORMATION BOOKLET Finally, the act amends RESPA’s Special

Information Booklet to include an explanation of flood insurance and the availability of flood insurance under the NFIP or from a private insurance company, whether or not the real estate is located in an area having special flood hazards.

Bankers must ensure they are using the current booklet once the change is made.

This section requires additional rulemaking to implement.

Most bankers can attest that compliance with flood regulations has always been an area of focus for bank regulators and examiners. It can be expected that provisions of the Biggert-Waters Flood Reform Act will be incorporated in the scope of upcoming examinations. Thorough analysis of current flood policies and procedures and incorporation of appropriate changes to a bank’s flood program will avoid or minimize compliance problems and provide tangible proof of an institution’s intent to embrace the act’s goals.

www.vabankers.org

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Overkill Continued from page 5

• Participate in the Regulatory Feedback Initiative, another joint program of about 40 state bankers associations, in which banks complete confidential post-exam surveys and aggregate data is used to talk with regulators about problems and challenges with the bank exam process. Look for more information on RFI soon, or contact Bobbi Weimer at bweimer@ 22 Virginia Banking | March/April 2014

vabankers.org for a link to the survey.

• Give me feedback on what else the VBA can do to assist and support community banks; I would love to hear from you any time at bwhitehurst@vabankers.org.

Banking is changing in many ways, but the role and value of banks to our economy and our country remains as

clear as ever. Handling challenges is something bankers are well equipped to do, and I know banks will endure this undue burden so they can continue to serve their customers and communities. However, seeking and arriving at a more balanced regulatory landscape is essential for the long-term survival and success of community banks – and we must all work together to accomplish that objective. www.vabankers.org

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