SDBA eNews: July 28, 2016

In This Issue

Fed Aligns Policies to NACHA Same-Day ACH Rule

The Federal Reserve Board last week announced updates to its Policy on Payment System Risk that will align its procedures for measuring institutions' intraday account balances with NACHA’s same-day ACH rule. The rule--which takes effect in September--requires financial institutions to have same-day ACH capability.

Beginning on Sept. 23, credits and debits for same-day ACH credit transactions will post at 1 p.m. and 5 p.m. ET, depending on when the ACH file is received by the Reserve Banks for processing. All ACH return items will post at the next available posting time or following the settlement of the associated forward transaction.

Credits and debits for return items will post at 8:30 a.m., 1 p.m., 5 p.m., or 5:30 p.m. ET, depending on when they are received by the Reserve Banks. Read more. For more information, contact ABA's Steve Kenneally.

FBI Issues Warning About Email Scams

The FBI last week issued a notification to warn companies of the ongoing threat of business email compromise (BEC) scams that caused losses of nearly $76 million between December 2015 and March 2016. The notice outlines common types of BEC scams, steps businesses can take to mitigate their risk and what to do if they fall victims to this type of cybercrime.

The FBI noted that in most BEC scams, fraudsters typically target businesses that work with foreign suppliers or regularly transmit payments through wire transfers. Once the victim company is selected and compromised--often through social engineering or computer intrusion techniques--the fraudster conducts surveillance to understand the company’s processes and protocols and identify those with the authorization to perform or authorize these transactions.

The fraudsters then compromise and assume control of the victim’s legitimate email account and, posing as the employee, instruct others to transact on their behalf.

Question of the Week

Are deposits made through a customer's mobile phone (remote deposit capture) subject to Regulation CC?

Answer: No. Checks deposited through a mobile device such as a phone (remote deposit capture) are not subject to the funds availability requirements of Regulation CC. A check deposited through a mobile device is not a check as defined in Regulation CC. Regulation CC - 1029.2(k)(1) defines a "check" as "a negotiable demand draft drawn on or payable through or at an office of a bank." A picture of a check transmitted to the bank using the customer's mobile device is not "negotiable" and therefore not a check under Regulation CC's definition of the term. These types of deposits also do not fit in the ACH  or wire definition for Reg CC purposes. 

That being said, many banks apply the bank’s funds availability policy to these types of deposits. Keep in mind, the bank should disclose its funds availability policy with regard to checks deposited through a mobile device, because customers might presume that such items would be subject to the normal check availability schedule, unless they are specifically advised otherwise, and then rely on that expectation.

Many banks explain the funds availability of these items in the bank’s mobile banking agreement where customers might be more likely to notice the policy.

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Contact Alisa DeMers, SDBA, at 800. 726.7322 or via email.

Kansas City Fed: FCS Tax Advantages Distort Competition

A recent article published by researchers at the Federal Reserve Bank of Kansas City demonstrated how the Farm Credit System’s tax advantages have distorted competition in the marketplace between commercial banks and FCS lenders.

Bert Ely pointed to the article in yesterday’s edition of ABA’s Farm Credit Watch e-bulletin. While both classes of lenders currently hold roughly a 40 percent market share, the article’s comparison of real estate and production loans showed the competitive edge FCS enjoys as a result of its tax-advantaged status.

When it came to real estate loans--from which all FCS profits are tax-exempt--FCS lenders had 10 percent greater market share than commercial banks. That trend was reversed, however, for production loans, where FCS profits are only exempt from state income taxes. Commercial lenders held roughly 61 percent of those loans, compared to 39 percent held by their FCS competitors.

These data “illustrate the distorting effect of the differential tax treatment of banks and the FCS,” Ely wrote. “They provide powerful evidence as to why the taxation of banks and the FCS should be comparable.” Read Farm Credit Watch.  Read the Kansas City Fed article

FinCEN Expands Scope of Geographic Targeting Orders

The Financial Crimes Enforcement Network yesterday expanded the scope of its Geographic Targeting Orders temporarily requiring certain U.S. title insurance companies in targeted areas to identify the individuals behind companies used to conduct high-end, all-cash real estate transactions.

First issued in January for the borough of Manhattan in New York City and for Miami-Dade County, Fla., the GTOs will now cover all boroughs of New York City; Miami-Dade, Broward and Palm Beach counties in Florida; Los Angeles, San Diego, San Francisco, San Mateo and Santa Clara counties in California; and Bexar County, Texas, where San Antonio is located. All GTOs take effect for 180 days from Aug. 28, when the previous two GTOs were set to expire.

“The information we have obtained from our initial GTOs suggests that we are on the right track,” said FinCEN Acting Director Jamal El-Hindi. “By expanding the GTOs to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course.”

FinCEN identified all-cash real estate transactions as an area particularly vulnerable to money laundering, as individuals may use shell companies to purchase high-value properties. Since title insurers typically play a central role in real estate transactions, FinCEN will require the companies to record and report the “beneficial ownership” information of entities making these purchases without external financing. Read more.

ABA Proposes Improvements to Executive Compensation Proposal

In a comment letter to six federal financial regulatory agencies last Friday, ABA raised numerous concerns about the agencies’ proposed incentive-based compensation rule. Mandated by the Dodd-Frank Act, the proposed rule would prohibit incentive-based compensation arrangements for executives that the regulators believe could encourage excessive risk-taking behavior.

The proposed rule would apply to banks with more than $1 billion in assets, dividing banks into three “tiers” based on asset size, with the largest banks subject to the most stringent requirements. Banks with more than $50 billion in assets would be required to defer a percentage of qualifying incentive-based compensation for executives and significant risk takers for a specified amount of time. Regulators would have discretion over requirements for firms with less than $50 billion in assets.

The rule also requires institutions to keep records of senior executives and risk-takers and their compensation arrangements, and includes a "clawback" provision that allows a covered institution to recover vested incentive-based compensation if the executive or risk-taker engaged in the behavior was found to have hurt the firm.

ABA pointed out that the proposal is a poor fit with banks’ existing compensation plans and with sound risk management and government practices. The association criticized the overly broad proposed definitions of “significant risk takers” and “senior executive officers,” which it said would encompass many employees that do not make material risk decisions, while likely leaving out many employees that do make those decisions. ABA urged regulators to acknowledge on an individual basis how employees’ responsibilities and authorities are distributed in each covered bank.

The Association further noted that the proposed restrictions on incentive compensation would likely serve to make banking organizations uncompetitive with non-regulated employers, a significant point of concern for an industry that is already facing a talent shortage. Moreover, the proposal would add unnecessary layers of complexity to existing compensation plans, making them more difficult to manage and explain to prospective employees, while offering no significant advantages for risk management, ABA said. Read the comment letter. For more information, contact ABA's Hu Benton.

ABA Calls for Changes to Midsize Bank Stress Test Requirements

In a comment letter to federal regulators last Friday, ABA provided recommendations for improving the stress testing process for midsize banks and maximizing the effectiveness of the annual tests.

ABA pointed out that the stress tests for mid-sized banks are tailored significantly to each bank based on a number of factors including the institutions’ local economy and risk profile, and that because of this tailoring, comparing banks’ results side by side could lead to inaccurate conclusions about the health of the institution. Rather than publishing identifiable stress test information for each bank, regulators should instead consider publishing an aggregate summary of stress test information, which would satisfy the mid-sized stress test disclosure requirement under the Dodd-Frank Act, ABA said.

The Association also favored a floating submission date, which would allow banks to conduct their stress tests during their capital planning process, allowing them to make more efficient use of their resources. Additionally, ABA recommended that midsize banks be permitted to use the same stress-test scenarios over a multi-year period, which would allow regulators to make more accurate comparisons of results from year-to-year, while reducing regulatory burden. Read the letter. For more information, contact ABA's Hugh Carney.

NCUA Board Reduces Credit Union Exam Frequency

The National Credit Union Administration announced that it will eliminate the annual examination requirement for federal and federally insured state chartered credit unions. The change was part of NCUA’s 2017-2021 strategic plan, which was unanimously approved by the board last week.

Effective immediately, federal credit unions will not be required to undergo an exam every calendar year (though the time between exams may not exceed 23 months). Regional directors will have discretion in scheduling exams for federally insured, state-chartered credit unions with assets more than $250 million, based on several factors including the institution’s risk profile and the amount of time since the last exam. Chairman Rick Metsger said that further changes to the credit union exam cycle may be forthcoming after recommendations from NCUA’s ongoing Exam Flexibility Initiative.

In addition to approving the strategic plan, the board reviewed the agency’s budget, projecting a decline in expenditures of $2.7 million. Read more.

CFPB Extends Comment Deadline for Small-Dollar Credit Proposal

The Consumer Financial Protection Bureau has extended the comment deadline on its small-dollar lending proposal to Oct. 7. The proposed rule would sharply curtail short-term, small-dollar consumer lending by defining loans as “abusive and unfair” if lenders fail to reasonably determine borrowers’ ability to repay the loan or satisfy an exception.

ABA is in the process of drafting its own comments, which will emphasize how, with appropriate regulation, banks can play an important and growing part in meeting the needs of small dollar borrowers. The association is seeking feedback from bankers on the impact that the proposed rule would have on their institutions' ability to make small dollar loans.