Legal Ease is the weekly Q&A from the IBAT Bottom Line. Go to the Legal Ease Archive.
Latest Additions to Legal Ease:
Are we required to notify our regulator when we engage a third party service provider?
Under 12 U.S.C. §1867(c)(2), national banks are required to notify the OCC of the existence of a servicing relationship within 30 days after the making of a contract of the performance of the services, whichever occurs first.
(c) Services performed by contract or otherwise
Notwithstanding subsection (a) of this section, whenever a depository institution that is regularly examined by an appropriate Federal banking agency, or any subsidiary or affiliate of such a depository institution that is subject to examination by that agency, causes to be performed for itself, by contract or otherwise, any services authorized under this chapter, whether on or off its premises—
(1) such performance shall be subject to regulation and examination by such agency to the same extent as if such services were being performed by the depository institution itself on its own premises, and
(2) the depository institution shall notify each such agency of the existence of the service relationship within thirty days after the making of such service contract or the performance of the service, whichever occurs first.
The OCC implements this notification requirement by requiring banks to maintain a current inventory of all third-party relationships and make it available to examiners upon request.
While that rule is specific to national banks, it should be considered a best practice for all banks to communicate with their primary regulator when contemplating contracting with a third party service provider, particularly with regard to critical third party service providers.
IBAT has additional resources on third party relationships (and other compliance management issues) in its IBAT Compliance Tools, under Consumer Compliance Management Programs. The resources include OCC Bulletin 2013-29 on third party relationships. (The thirty day notice requirement is mentioned in footnote 10 to the bulletin)
Note: Erin Fonte with Cox Smith Matthews in Austin covered this at the IBAT Operations Summit last week in Dallas. Erin specializes in payments and digital commerce, privacy, and data security matters.
When a bank sells and finances OREO without the required down payment, it is considered a “Covered Transaction” and therefore the bank continues to report as OREO until the required down payment is met. Our question is: If a new appraisal shows an increase in value of the underlying real estate, and based on the new LTV the transaction now falls within the required down payment, can we stop reporting the transaction as a covered transaction; or must it be based on the original appraised value?
Below is from the FDIC the disposition of OREO.
Accounting for ORE in the Disposition Phase
The primary source of accounting guidance for sales of foreclosed real estate is Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate (FAS 66). This standard, which applies to all transactions in which the seller provides financing to the buyer of real estate, establishes five methods to account for the disposition of ORE -- full accrual, installment, cost recovery, reduced profit, and deposit. If a profit is involved in the sale of real estate, each method sets forth the manner in which the profit is to be recognized based on the terms of the sale. However, regardless of which method is used, any loss on the disposition of ORE should be recognized immediately. Refer to the Instructions for Call Reports and FAS 66 for further guidance on the appropriate method to be used based on the individual facts and circumstances relating to the sale of ORE, including such factors as the buyer's initial investment (down payment).
While that provides some guidance, it does not specifically address your situation. Since you are a state bank, we reached out to the Texas Department of Banking and below is their response (paraphrased).
Upon review of Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate (FAS 66), the adequacy of the initial investment appears to be solely determined by the percent of the “sales value” of the property and the property type. The standard provides a paragraph which describes how you calculate the sales value (paragraph 7) and a paragraph that states what down payments/periodic payments have to be depending on the property type (5-25%) of the sales value to be considered a sale (paragraph 54). Based upon that information, it seems the appraised value or FMV doesn’t come into play at all, only the calculated sales value.
You may want to follow-up with your own EIC and carefully review the specifics of your transaction.
Tip: From Karen Neeley, IBAT General Counsel, with Cox Smith Attorneys in Austin - the OCC has the Bank Accounting Advisory Series. This is in an FAQ format and is very easy to follow. It is 229 pages and covers the gamut of accounting issues, including GAAP issues, and is a relevant resource for all banks.
I have a couple of questions. Where can find I the law on the various multi-party deposit account types, particularly convenience accounts? Also, may a convenience signer close an account?
You can read about the various multi-party account types in Chapter 113 of the Estates Code. And Section 113.052 contains a form to assist in opening the type of account selected by a customer. IBAT created a customer brochure using the language of the statutory form: Which Account is Right for You? This brochure will help your customers choose the account types that are right for them. Feel free to print these out, add your bank’s name to the front panel, and any other information to the back panel. We have already included the MEMBER FDIC logo for your convenience.
You’ll notice in the Estates Code (and in our brochure) that there is an account type called Convenience Account; however, you’ll also notice that any of the multi-party accounts in Chapter 113 may have one or more convenience signers.
It may come as a bit of a surprise, but Texas Business & Commerce Code (UCC) Section 4.403(a) states that any person authorized to draw on an account may close the account. That means that any owner on a multi-owner account may unilaterally close the account. Additionally, an authorized signer on a business account may close the account, and a person with a power of attorney that gives them power to draw on an account may close the account. To prevent fraud, your bank should adopt a policy that when any account is closed, the check is made payable to the owner of the account. You could contact the owner of an account to ask them if they know a convenience/authorized signer is closing their account, but you’re under no obligation to do so. Of course, these precautions wouldn’t prevent a convenience signer from writing a check or otherwise debiting the account for the remaining balance—without closing it. Ultimately, the account owners are responsible for protecting the funds in their accounts from rogue convenience/authorized signers. That begins with the account owner very carefully choosing convenience/authorized signers.
We have been auditing our flood procedures. Our practice is to send out the flood notice along with disclosures and a form that the customer signs and returns, acknowledging receipt of the flood notice disclosure. What we have discovered is a number of flood notices that are unsigned. Is not having a signed copy of the flood notice disclosure a problem?
Under the Notice to Customer provisions of the Flood Disaster Protection Act (12 CFR §208.25(i); 12 CFR §22.9; 12 CFR §339.3; or 12 CFR §172.9) a lender must retain a record that the borrower received the notice. Retaining a record would not necessarily mean having a signed acknowledgment - but that is probably the best way to demonstrate receipt by the borrower.
From the Mandatory Purchase Guidelines (technically rescinded), page 35:
Lenders must retain a record or evidence of the borrower’s receipt of the notice throughout the period the lender owns the loan. This record can be the borrower’s statement or initials that the notice was received directly, or the U.S. Postal Service return receipt in either hard copy or electronic format. The lender need not retain a hard copy version of the notice to the borrower and loan servicer.
From the OCC Flood Disaster Protection Comptroller's Handbook (May 1999) -
Record Keeping Requirements
The record keeping requirements include retention of:
- Copies of completed SFHD forms, in either hard copy or electronic form, for as long as the bank owns the loan; and
- Records of receipt of notices to the borrower and the servicer for as long as the bank owns the loan.
Although there is no particular form, the record of receipt should contain a statement from the borrower indicating that the borrower has received the notification. Examples of records of receipt may include a borrower's signed acknowledgment on a copy of the notice, a borrower-initialed list of documents and disclosures that the lender provided the borrower, or a scanned electronic image of a receipt or other document signed by the borrower.
A lender may keep the record of receipt provided by the borrower and the servicer in the form that best suits the bank’s business practices. Lenders who retain these records electronically must be able to retrieve them within a reasonable time.