The End of Disparate Impact?

In a welcome development last week, the United States Supreme Court agreed to hear the case of Texas Department of Housing and Community Affairs v. Inclusive Communities Project. In hearing the case, the court will consider whether disparate impact claims are enforceable under the Fair Housing Act. Disparate impact is the lynchpin upon which the current administration has relied in determining and enforcing fair lending violations. 

You’ll recall that two earlier cases were slated for consideration by the nation’s highest court, only to be scuttled at the last minute as the Justice Department and defendants reached out of court settlements. No such settlement is expected between the office of Texas Attorney General Greg Abbott and the Justice Department.

“We are thankful that, once again, the Supreme Court has agreed to consider this issue,” said IBAT President and CEO Chris Williston. “Too many lenders–and more importantly, small dollar borrowers–have been harmed by the rogue misapplication of disparate impact doctrine to fair lending enforcement. We are optimistic that the Supreme Court will ultimately put an end to this unfortunate regulatory practice.”

The Supreme Court hearing of the case will occur next year. 

Staff contact: Shannon Phillips, sphillips@ibat.org, 512-275-2221

Thank You, Judge Boyle

A U.S. District Judge sent a strong message to the Federal Deposit Insurance Corporation (FDIC) in a recent decision blocking the agency’s attempt to recoup $40 million in losses from a failed North Carolina bank. 

The FDIC claimed that directors of the Cooperative Bank of Wilmington, N.C. displayed negligence, gross negligence and breaches of fiduciary duty in connection with 86 loans approved in 2007 and 2008. 

In his decision, Judge Terrence Boyle cited the FDIC’s own Reports of Examination on the bank, which assessed a CAMELS rating of “satisfactory” and not requiring “material changes” on the bank’s management. 

Judge Boyle did not argue for the reasonableness of the loans themselves, merely that the examinations reveal that the bank had a regulator-approved process in place to determine the rationality of the loans. 

Putting the icing on the cake of making Judge Boyle the IBAT hero of the week, he concluded by saying, “it appears that the only factor between defendants being sued for millions of dollars and receiving millions of dollars in assistance from the government is that Cooperative [Bank} was not considered ‘too big to fail.’”

The full judgment in the case can be downloaded here.

Staff contact: Shannon Phillips, sphillips@ibat.org, 512-275-2221

The Future of Banking Online

The .bank URL will soon be available, according to fTLD Registry Services (fTLD). fTLD is a coalition of banks, insurance companies and financial services trade associations, including ICBA, that has partnered to operate the .bank and .insurance URLS once they become open. The .bank URL is expected to be available in the second quarter of 2015. fTLD's application to operate .insurance is still pending.

Banks will have the opportunity to voluntarily convert their domains from .com to .bank, which will have enhanced security controls that exceed most existing URLs. All applicants will be confirmed as legitimate members of the banking community before any names are awarded. One of the goals of this new domain is to help prevent users from being redirected to fake bank websites and mitigate phishing.

Read here for more information about the process of applying for a .bank URL and FAQs. Stay tuned for more updates as implementation gets closer.

Staff contact: Chris Williston, cwilliston@ibat.org, 512-474-6889

Featured Event

Criminals Refine Their Attacks Every Day!
You Need Up-to-Date Information
for Successful Defense Strategies

SWACHA and FS-ISAC are continuing their commitment to leadership in risk mitigation with this timely seminar. 

We will be bringing together technology experts and leaders in the risk field, to discuss the most pressing issues for financial institutions of all sizes.

Don't miss this opportunity to interact with law enforcement, industry leaders and peers from local financial institutions!

Ideal for: Representatives from online banking products, payments operations, risk or security, information technology areas, product management, compliance and risk management staff or anyone interested in keeping up with cyber crime and how to mitigate risk.

In Celebration of National Cyber Security Awareness Month #NCSAM


  • A Review of Cyber-Crime, Threats and Risk Mitigation Techniques
  • Electronic Crimes & United States Secret Services
  • Technology and Solutions for Cyber Crime Risk Mitigation
  • Account Takeover Simulation and Exercise



October 8, 2014
University of Texas at Dallas - Richardson, TX

Click Here for More Information
or Call (800) 475-0585


Partners in Success

IBAT was honored with the Partners in Success award at the Annual Conference of the Financial Women in Texas (FWIT) this past weekend.

In recognizing the organization, FWIT President Janet Dirba recounted the role that IBAT President and CEO Chris Williston played in ensuring the survival of the organization when it faced disbandment five years ago. FWIT also expressed its gratitude to IBAT with a $100 donation to the IBAT Education Foundation.

Darlene Revers, IBAT Vice President of Membership, was on hand at the FWIT Annual Conference to receive the award. Darlene has served as an ambassador between IBAT and FWIT, standing on the frontlines to offer resources to help the organization thrive again.

Many thanks to FWIT for its recognition of IBAT and its service to women in the financial services industry.

Staff contact: Darlene Revers, drevers@ibat.org, 512-275-2217

Walmart in Banking?

Last week saw the much-ballyhooed announcement that Walmart is moving to offer no-fee checking accounts. The arrangement between Walmart and Green Dot Bank is similar to the one announced between American Express Bluebird and the retailer last year. Walmart will sell the GoBank “starter debit card” for $2.95 in stores. Consumers will then go online to set up their account, which requires no minimum balance and no regular monthly fees (if a direct deposit over $500 is set up). Walmart will also operate to accept deposits onto the cards. GoBank accounts will be FDIC insured.

The full GoBank account agreement is online for your review.

“The nation’s community banks have offered low-fee and no-fee basic checking accounts for decades. Meeting the financial needs of citizens in thousands of communities across America is at the heart of the community banking business model,” said ICBA President and CEO Cam Fine.

“So the message is simple: if a retailer like Walmart is going to serve as a conduit for offering checking accounts and other traditional banking services, it needs to know its customer and protect the customer’s financial health just as is required of all banks. This means that these accounts should be subject to the same legal and regulatory framework, consumer protections and oversight as traditional checking accounts offered by banks.”

Staff Contact: Chris Williston, cwilliston@ibat.org, 512-474-6889

Community Banking Trends

Last week, the Conference of State Bank Supervisors (CSBS) and the Federal Reserve Bank of St. Louis partnered to hold the second “Community Banking in the 21st Century” Conference. The conference featured the findings of the Community Banking in the 21st Century National Survey, which included a thorough analysis on the impact of the CFPB’s ability-to-repay and qualified mortgage rules enacted earlier this year, as well as data on technology and compliance expenses faced by community banks.

Other research papers presented at the conference included:

A full list of conference presentations can be found here.

Several Texas community bankers were present at the conference, including IBAT Chairman-Elect John Jay of Roscoe State Bank, J. Pat Hickman of Happy State Bank and David Lacy of Community Bank & Trust, Waco.

"We're the white hat guys. We're the good guys. We're the environmentally friendly, organic business providers. We're not the big machine," Hickman was quoted as saying in one session. "So why do you keep beating us up? We didn't cause these issues. Politicians tell us that. Regulators tell us that. Then why is everybody here feeling beat up by the regulators?"

IBAT applauds Commissioner Charles Cooper, CSBS and the Federal Reserve Bank for their continuing efforts to effect meaningful changes in the regulatory environment that is negatively impacting community banks and the customers they serve.

Staff contact: Chris Williston, cwilliston@ibat.org, 512-474-6889

Baker Market Update

Before everyone gets too excited about this morning’s report of a 236k gain in Non-Farm Payrolls along with the .2% decline in the Unemployment Rate to 5.9%, just remember this: these new numbers don’t include a significant number of well-trained and intermittently competent Secret Service agents looking for a new gig. That, too, could have ramifications for the Labor Force Participation Rate that fell, again, to 62.7% from 62.8%. That’s a blinking red light on Janet Yellen’s dashboard, right next to the one for the 7,103k people who are working part-time but want to work full-time. And compensation? Well, Average Hourly Earnings fell by a penny to $24.53. No big deal, but should that be falling at all? Wait, we’ve been told not to worry about the lack of wage growth because that’s a lagging indicator and if we just wait patiently that will all get fixed later on. Okay.


Executive Leadership of Cybersecurity

Texas community bank CEOs, Directors and other officers are encouraged to participate in Executive Leadership of Cybersecurity – Taking the Fear Out of Cyber Threats. 


IBATTBA, SWACHA, law enforcement and both federal and state banking regulators have partnered to bring you this overview of cyber threats to the banking industry as well as resources and actions you can take to manage these evolving threats.  In the past, cybersecurity events have been directed towards operations staff.  With recent headlines of large scale cyber breaches, cybersecurity has moved from the back room to the board room.  


This event is designed for CEOs and Directors who have focused their careers on the non-cyber aspects of banking to help them manage one of today’s most challenging aspects of bank risk management.  Table Top Exercises and an Action Planning exercise are tailored specifically for CEOs and directors.  General Sessions will bring participants up to date on current threat landscape.  


Registration will be open soon so please save the date - December 3, 2014, 8:30 a.m. - 4:15 p.m., Austin Hilton Airport. 


Also, don’t forget that October is Cybersecurity Awareness Month.  Click here to link to a previous story from IBAT, highlighting a number of resources to use during the month of October.


Call to Action

In a comment letter filed yesterday with the Federal Housing Finance Agency, IBAT called upon the agency to abandon a proposed requirement that each member of a Federal Home Loan Bank (FHLB) maintain at least 1% of its assets in long-term home mortgage loans and at least 10% of its assets in residential mortgage loans.

The letter, drafted by IBAT President and CEO Chris Williston, pointed to the onerous mortgage rules promulgated by the Consumer Financial Protection Bureau (CFPB) earlier this year, which have resulted in reduced mortgage lending activity by many community banks. Williston expressed concern that the CFPB rules, coupled with new threshold requirements for FHLB membership, “could disqualify many [community] banks.”

Further, Williston argued that the proposal stands in contrast to Congressional desire to expand FHLB membership.

IBAT members are encouraged to use our letter as a guide in drafting your own response to the proposed rule. As always, it is also recommended that you include specific information regarding the potential impact on your bank in your comment letter. The comment period is open until November 12, 2014.  

Staff contact: Chris Williston, cwilliston@ibat.org, 512-474-6889

Dallas Fed Election

Polls are now open for the election of certain directors to the board of the Federal Reserve Bank of Dallas. 

In keeping with IBAT’s longstanding policy of only making endorsements in Federal Reserve or Federal Home Loan Bank races where only one IBAT member appears on the ballot, we recommend the election of Christopher Doyle, President and CEO of the Texas First Bank in Texas City for the Group 1 Director slot.

Chris is currently serving as a Board member for both IBAT and the Southwestern Automated Clearing House Association (SWACHA) and, serves as a Federal Delegate Board member of the Independent Community Bankers Association of America.

We believe Chris and his vast knowledge of banking policy and payment issues uniquely qualifies him for this important post and deserves your support. Please remember that you are directed to list your first and second choice for this position on your ballot or it might otherwise not be counted.

Polling will remain open until October 8, 2014. Thank you for your consideration.

Staff contact: Chris Williston, cwilliston@ibat.org, 512-474-6889

S Corporation Terminations

By Jacque Kruppa

S corporations have an obligation to police their shareholder base to see that all shareholders remain eligible.  A common problem S corporations face is making sure that after the subchapter S election (the “S election”) is made, it stays effective.  When a bank is gearing up to make its S election, attorneys and accountants are typically reviewing shareholder documentation to confirm eligibility.  But, after the S election is effective, most banks do not regularly review their shareholders’ list to confirm eligibility.  Actions beyond the bankers’ control, such as the death or divorce of a shareholder, can result in an inadvertent termination of the S election.  The tax consequences can be disastrous.

One critical component in preserving the bank’s S election is confirming that all of the bank’s shareholders are eligible shareholders of an S corporation.  Generally, eligible shareholders include individuals, most trusts that make appropriate elections, and estates (please note that, while an estate is an eligible shareholder, an estate does terminate for tax purposes at some point, so as a general rule, shares cannot be held in an estate indefinitely).  Corporations, limited liability companies, partnerships (including family limited partnerships), and eligible trusts that have not made the appropriate elections are ineligible shareholders. 

Here is a common scenario.  A bank has a shareholder who passes away.  The executor, who is much more concerned with administering the estate than protecting the bank’s S election, either transfers the bank shares to an ineligible shareholder or does nothing and leaves the shares in the estate.  The executor fails to notify the bank that the shareholder has passed away for several years.  Dividend checks continue to be cashed in the name of the deceased shareholder.  All the while, the banker is not aware of what has happened. 

Then, sometimes years later, something raises the issue.  For example, the executor may finally contact the bank to effect the transfer of the shares, or a new review of the bank’s shareholder list (for example, in connection with a potential sale of the bank) may raise questions about why an estate is still a shareholder.  Only then does the banker realize that the shareholder’s will transferred the shares to a corporation or that the shares have been sitting in the estate for many years.  As a result, the S election has been compromised. 

The good news is that the Internal Revenue Service (the “IRS”) has a program in place for S corporations to request relief for inadvertent terminations.  However, consent of 100% of the S corporation shareholders is required, along with a filing to the IRS and a substantial filing fee.  If the issue is caught early enough, such expense may be avoided. 

It can be time consuming to obtain the requested relief from the IRS, but going through the process is essential if there has been an inadvertent termination.  However, bankers can avoid the inadvertent termination in the first place, which is obviously preferable.  Below are some suggestions for protecting the bank’s S election from an inadvertent termination:

1. Review the bank’s shareholders’ list frequently:  The bank’s internal audit program (or other ingrained system) should conduct a detailed review of the shareholders’ list on at least an annual basis to confirm all shareholders are eligible shareholders.  In addition, every two years, the bank’s accountants or attorneys should conduct a detailed review of the shareholders’ list.  It always helps to have a new set of eyes checking the bankers’ homework to make sure nothing has been overlooked.  If an issue is detected early, it is generally easier to fix.

2. Review the bank’s shareholders’ agreement:  Most S corporations have a shareholders’ agreement in place to protect the S election.  A shareholders’ agreement generally provides that certain transfers, such as transfers to ineligible shareholders, are not permissible.  If the shareholders’ agreement was drafted several years ago, an attorney should review it to confirm that the agreement is up to date with current law.  In addition, the agreement should contain protections in the event the S election is inadvertently terminated, such as shareholder indemnification of the expenses incurred in connection with obtaining relief for the inadvertent termination and a covenant by the shareholders to take all steps necessary to remedy the inadvertent termination.  There are other provisions that are useful as well.

3. Shareholder communication:  On an annual basis, banks should send a certification to each shareholder to confirm the shareholder still qualifies as an eligible shareholder.  This annual certification requirement can be built into the shareholders’ agreement or something that the bank just sends out on its own each year.  In our experience, shareholders have good intentions, but executors often times do not notify bankers when a shareholder passes away, and the executor may not understand the consequences of being a shareholder of an S corporation.

4. Remind shareholders of estate planning issues:  Either in conjunction with the annual certification or separately, remind the bank’s shareholders about the consequences if the shares pass upon the shareholder’s death.  For example, a shareholder should talk with the attorney who drafted his or her will to confirm that the shares pass under the will to an eligible shareholder. 

5. Train the bank’s corporate secretary:  The bank’s corporate secretary or whomever is in charge of maintaining the bank’s shareholders’ list should be mindful of S corporation qualifications and eligibility issues as well as common issues that could impact the S election.  For example, if shares are transferred to an estate, the corporate secretary should be asking questions such as where do the shares pass under the will, when does the executor plan to transfer the shares out of the estate, etc.  The corporate secretary can possibly help avoid an inadvertent termination by being proactive and asking the right questions.  Our experience is that community bankers know when a death has occurred.  After an appropriate and respectful delay, these questions should be respectfully asked.

6. Road map memos:  Banks should consider requiring shareholders (for example, as part of the shareholders’ agreement) to have their estate planning attorneys provide the bankers with a letter or memorandum detailing what happens to the shares upon the death of a shareholder, especially if the shares are already held in a trust.

By taking the steps above, a potential inadvertent termination of a bank’s subchapter S election can be avoided.  An ounce of prevention is worth a pound of cure.

Jacque Kruppa is an Attorney with Hunton & Williams in their Dallas office and can be reached at 214.468.3347 or jkruppa@hunton.com.