Thursday, July 22, 2010
Tuesday, July 20, 2010
Using Evaluation Alternatives for Real Estate Loans That Don’t Require an Appraisal
by Blair Rugh
Under the agencies real estate appraisal guidelines a complete appraisal prepared by a licensed or certified appraiser is not required for loans of $250,000 or less secured by 1- 4 family residential real estate. There is also an exemption for the renewal, modification or extension of certain real estate secured loans. In circumstances where a complete appraisal is not required banks have used what are referred to as evaluation alternatives, most prominent among them being Automated Valuation Models (“AVMs”).
In November, 2008 the agencies published proposed Interagency Appraisal and Evaluation Guidelines to replace the guidelines published in 1994. To date the proposed guidelines have not been finalized but I anticipate that they will be soon, fundamentally as written. One of the reasons that the proposed guidelines were promulgated was to provide guidance and standards for the use of AVMs. Appendix B to the proposed guidelines provides requirements for the use of AVMs as well as limited guidance on the use of Tax Assessment Valuations.
Many bankers misunderstood the thrust of the proposed guidance and believed it was a prohibition or discouragement on the use of AVMs until the guidance was finalized. That was not its purpose at all. The regulatory agencies recognized and approved the use of AVMs long before the proposed guidance was published. The purpose of the proposed guidance was not to approve the use of AVMs as that was already the agencies’ standard. The purpose of the proposed guidelines, and the final guidelines when they are published, is to provide a set of standards for using AVMs. Before the proposed guidance was published there were no standards or best practices for AVM use. Now there are. I recommend that banks using AVMs follow the standards set out in Appendix B to the proposed guidelines. Certainly do not use the fact that the final guidelines have not been published as a reason not to utilize AVMs.
Another excellent use of AVMs is in portfolio monitoring. For this purpose an AVM may be used for loans that exceed $250,000. Both the proposed and existing guidelines require that a bank have a program for monitoring and updating collateral valuations. AVMs are a useful tool for updating the value of residential real estate collateral, particularly for unseasoned loans that were made at higher loan to value ratios or loans that are experiencing payment delinquencies.
If a bank determines that it will utilize AVMs it should obtain from its provider information about its sources of data, the frequency it is updated and its modeling techniques. The bank should then establish standards for validation testing and monitoring. Also a bank using AVMs should establish standards for the types of property, location, condition and price range for which AVMs may be used.
AVMs can be a useful and relatively inexpensive tool in a bank’s real estate evaluation process. If a bank is not using AVMs it should investigate their usefulness and consider their use. TriNovus offers an excellent AVM resource called TriVALU. For information about TriVALU or to obtain a demonstration of the product go to TriNovus.com or call them at (205) 991-5636.
Under the agencies real estate appraisal guidelines a complete appraisal prepared by a licensed or certified appraiser is not required for loans of $250,000 or less secured by 1- 4 family residential real estate. There is also an exemption for the renewal, modification or extension of certain real estate secured loans. In circumstances where a complete appraisal is not required banks have used what are referred to as evaluation alternatives, most prominent among them being Automated Valuation Models (“AVMs”).
In November, 2008 the agencies published proposed Interagency Appraisal and Evaluation Guidelines to replace the guidelines published in 1994. To date the proposed guidelines have not been finalized but I anticipate that they will be soon, fundamentally as written. One of the reasons that the proposed guidelines were promulgated was to provide guidance and standards for the use of AVMs. Appendix B to the proposed guidelines provides requirements for the use of AVMs as well as limited guidance on the use of Tax Assessment Valuations.
Many bankers misunderstood the thrust of the proposed guidance and believed it was a prohibition or discouragement on the use of AVMs until the guidance was finalized. That was not its purpose at all. The regulatory agencies recognized and approved the use of AVMs long before the proposed guidance was published. The purpose of the proposed guidance was not to approve the use of AVMs as that was already the agencies’ standard. The purpose of the proposed guidelines, and the final guidelines when they are published, is to provide a set of standards for using AVMs. Before the proposed guidance was published there were no standards or best practices for AVM use. Now there are. I recommend that banks using AVMs follow the standards set out in Appendix B to the proposed guidelines. Certainly do not use the fact that the final guidelines have not been published as a reason not to utilize AVMs.
Another excellent use of AVMs is in portfolio monitoring. For this purpose an AVM may be used for loans that exceed $250,000. Both the proposed and existing guidelines require that a bank have a program for monitoring and updating collateral valuations. AVMs are a useful tool for updating the value of residential real estate collateral, particularly for unseasoned loans that were made at higher loan to value ratios or loans that are experiencing payment delinquencies.
If a bank determines that it will utilize AVMs it should obtain from its provider information about its sources of data, the frequency it is updated and its modeling techniques. The bank should then establish standards for validation testing and monitoring. Also a bank using AVMs should establish standards for the types of property, location, condition and price range for which AVMs may be used.
AVMs can be a useful and relatively inexpensive tool in a bank’s real estate evaluation process. If a bank is not using AVMs it should investigate their usefulness and consider their use. TriNovus offers an excellent AVM resource called TriVALU. For information about TriVALU or to obtain a demonstration of the product go to TriNovus.com or call them at (205) 991-5636.
Monday, July 19, 2010
Ask Blair...Payment Order of Checks
Q. Blair, with all the talk about charges for overdrafts, what is your suggestion on the payment order of checks?
A. Relative to the payment order of checks, I have always recommended paying high to low. The regulations allow paying in any order that you wish and i think that high to low is reasonable. Many banks are now expanding that to all items if your automation system will accommodate it. That is you integrate all of your items and pay the largest first and so on regardless of whether the item is a check or an electronic item. One other thing, I recommend that you do not charge overdraft fees to the account until all items have been settled. For example, if I have $405 in my account and there are two items presented, one for $500 and one for $400. If you process the $500 item first and assess an overdraft fee then there are not enough funds remaining to process the $400 item because of the overdraft fee.
A. Relative to the payment order of checks, I have always recommended paying high to low. The regulations allow paying in any order that you wish and i think that high to low is reasonable. Many banks are now expanding that to all items if your automation system will accommodate it. That is you integrate all of your items and pay the largest first and so on regardless of whether the item is a check or an electronic item. One other thing, I recommend that you do not charge overdraft fees to the account until all items have been settled. For example, if I have $405 in my account and there are two items presented, one for $500 and one for $400. If you process the $500 item first and assess an overdraft fee then there are not enough funds remaining to process the $400 item because of the overdraft fee.
Wednesday, July 14, 2010
A Sneek Peek At Our Up Coming Webinar July 22
Here is just a brief glimpse of what will be covered in Blair Rugh's presentation on the The Ins and Outs of Bank Advertising Tuesday July 20 From 3-4 p.m. Central.
Register Now To Reserve Your Spot!
Now we get into the harder stuff. Let’s discuss Regulation DD and the advertisement ofdeposit products first. The general advertising rules of Regulation DD are in Section 230.8of the regulation. First they require that an advertisement not be inaccurate or deceptive, basically the same requirement as the FTC rule. Next they prohibit advertising an account as “free”, “no cost” or any similar term of any maintenance or activity fee may be charged to the account. A maintenance or activity fee is a charge that is imposed even though the customer did not violate any of the account terms or request any additional service. Examples are a minimum balance fee, a transaction fee or a monthly service charge. Charges imposed because a customer requested an additional service such as check printing fees, stop payment fees, a balance inquiry fee or fees for electronic access to the account such as an ATM fee or a fee for electronic banking are not maintenance or activity fees. Similarly fees charged for violating the terms of the account, such as an NSF or overdraft fee or a dormant account fee are not maintenance or activity fees. If a particular aspect of an account is free an advertisement may say so even though the account itself may not be advertised as free. For example if a bank offers free bill payment an advertisement could state that even though there were maintenance fees charged to the account. If an account is free for a limited period of time an advertisement may state that provided that the advertisement also states the time period for which the account is free. If an account is free based on a condition that has nothing to do with the account then an advertisement may state that. For example if you have a deposit account where you waive all fees for senior citizens you could advertise “Free for persons age 55 and older” even though you impose
fees on persons younger than that. The person’s age has nothing to do with the account. On the other hand if you waive fees if the customer maintains a certain balance you could not advertise the account as free if that balance is maintained. You could state that no fees would be imposed if the balance is maintained but you could not use the term “free”.
Cost is $95 for TriNovus Customers and $125 for non-customers.
Register Now To Reserve Your Spot!
Now we get into the harder stuff. Let’s discuss Regulation DD and the advertisement ofdeposit products first. The general advertising rules of Regulation DD are in Section 230.8of the regulation. First they require that an advertisement not be inaccurate or deceptive, basically the same requirement as the FTC rule. Next they prohibit advertising an account as “free”, “no cost” or any similar term of any maintenance or activity fee may be charged to the account. A maintenance or activity fee is a charge that is imposed even though the customer did not violate any of the account terms or request any additional service. Examples are a minimum balance fee, a transaction fee or a monthly service charge. Charges imposed because a customer requested an additional service such as check printing fees, stop payment fees, a balance inquiry fee or fees for electronic access to the account such as an ATM fee or a fee for electronic banking are not maintenance or activity fees. Similarly fees charged for violating the terms of the account, such as an NSF or overdraft fee or a dormant account fee are not maintenance or activity fees. If a particular aspect of an account is free an advertisement may say so even though the account itself may not be advertised as free. For example if a bank offers free bill payment an advertisement could state that even though there were maintenance fees charged to the account. If an account is free for a limited period of time an advertisement may state that provided that the advertisement also states the time period for which the account is free. If an account is free based on a condition that has nothing to do with the account then an advertisement may state that. For example if you have a deposit account where you waive all fees for senior citizens you could advertise “Free for persons age 55 and older” even though you impose
fees on persons younger than that. The person’s age has nothing to do with the account. On the other hand if you waive fees if the customer maintains a certain balance you could not advertise the account as free if that balance is maintained. You could state that no fees would be imposed if the balance is maintained but you could not use the term “free”.
Cost is $95 for TriNovus Customers and $125 for non-customers.
Tuesday, July 13, 2010
Additional Change To Regulation DD For Overdrafts
To read more articles like this one, visit www.trinovus.com and sign up for our weekly Bank Regulatory Compliance Update
by Blair Rugh
On June 4, 2010 the Federal Reserve published an amendment to Regulation DD to clarify its 2009 amendment relative to the disclosure of overdraft fees on periodic statements and available balance disclosures at ATMs and to conform the Regulation DD requirements with the recent changes to Regulation E.
The first change relates to the disclosure of overdraft fees on periodic statements. The 2009 amendment to the regulation requires a bank to disclose on a periodic statement the overdraft fees imposed during the statement cycle and year-to-date and the same information for NSF fees. The change requires a bank to include in the overdraft fees not only the fee imposed for the overdraft item but also any other fees or charges imposed on the account because an item was paid into overdraft creating an overdrawn balance in the account such as a daily or other periodic fee charged because an account is in an overdraft status. For example assume that in addition to a $25 per item overdraft fee, a bank charges an additional fee of $5 each day that an account is overdrawn. On Monday I have $50 in my account, an item is presented for $100 and the bank pays it, creating a $50 overdraft balance. On Thursday I make a deposit which takes the account back to a positive balance. In addition to the $25 overdraft fee, the bank charges $5 for each of the three days my account was overdrawn. The reportable overdraft fees were therefore $40. As with the prior amendment a bank is not required to include in overdraft fees charges for a transfer from another deposit account or credit line established for overdraft protection.
Additionally the regulation requires that the nomenclature “Total Overdraft Fees” be used to describe the overdraft charges. No variation of that description is allowed.
Compliance with this part of the regulation is mandatory on and after October 1, 2010 therefore all periodic statements provided to covered customers on October first of this year and thereafter must be in conformity with the new rules. Because of the relatively short time frame I recommend that all banks check with the automation provider that generates the content of their periodic statements to assure that they will have the necessary system enhancements sufficiently in advance of the mandatory date to install and test them.
The second change in the new amendment relates to the disclosure of available balances at ATMS or through other automated systems. First it clarifies that the requirement to provide a single account balance does not apply to what the regulation refers to as “retail sweep programs” but which are more generally described in the industry as reserve reclassification accounts. Many banks, to reduce their reserve requirements establish an account that has a transaction sub account and a savings sub account. Transfers are made between the two accounts by the bank to the extent allowed by regulation D to minimize the balance in the transaction account. The customer receives one statement of the aggregate of the two accounts and the account transfers are transparent. Where a bank has that type account product it may show as the account balance the aggregate balance in the two sub accounts, not just the balance in the transaction account.
The amendment also clarifies the description that is required it a bank discloses a second balance after the actual account balance that includes other funds that are available whether through a linked account or a courtesy overdraft program. If the second balance contains funds available from linked accounts or from a courtesy overdraft program there must be a statement that the balance includes overdraft funds. If the bank has a courtesy overdraft program that is not available to a particular customer because the customer has opted-out or not opted-in or otherwise the balance should not include funds that might otherwise be available under that service. If the courtesy overdraft program is available to the customer for some but not all types of transactions then it may be included in the second balance but there must be a statement that the additional funds may not be available for all transactions or reference the types of transactions for which the funds are not available. The compliance date for this portion of the amendment is July 6, 2010.
The most significant part of the amendment is the new requirements for periodic statements. Banks have less than four months to assure that their statements are compliant with the new requirement. Bankers should receive assurances immediately from their automation providers that their systems will accommodate the new requirements.
by Blair Rugh
On June 4, 2010 the Federal Reserve published an amendment to Regulation DD to clarify its 2009 amendment relative to the disclosure of overdraft fees on periodic statements and available balance disclosures at ATMs and to conform the Regulation DD requirements with the recent changes to Regulation E.
The first change relates to the disclosure of overdraft fees on periodic statements. The 2009 amendment to the regulation requires a bank to disclose on a periodic statement the overdraft fees imposed during the statement cycle and year-to-date and the same information for NSF fees. The change requires a bank to include in the overdraft fees not only the fee imposed for the overdraft item but also any other fees or charges imposed on the account because an item was paid into overdraft creating an overdrawn balance in the account such as a daily or other periodic fee charged because an account is in an overdraft status. For example assume that in addition to a $25 per item overdraft fee, a bank charges an additional fee of $5 each day that an account is overdrawn. On Monday I have $50 in my account, an item is presented for $100 and the bank pays it, creating a $50 overdraft balance. On Thursday I make a deposit which takes the account back to a positive balance. In addition to the $25 overdraft fee, the bank charges $5 for each of the three days my account was overdrawn. The reportable overdraft fees were therefore $40. As with the prior amendment a bank is not required to include in overdraft fees charges for a transfer from another deposit account or credit line established for overdraft protection.
Additionally the regulation requires that the nomenclature “Total Overdraft Fees” be used to describe the overdraft charges. No variation of that description is allowed.
Compliance with this part of the regulation is mandatory on and after October 1, 2010 therefore all periodic statements provided to covered customers on October first of this year and thereafter must be in conformity with the new rules. Because of the relatively short time frame I recommend that all banks check with the automation provider that generates the content of their periodic statements to assure that they will have the necessary system enhancements sufficiently in advance of the mandatory date to install and test them.
The second change in the new amendment relates to the disclosure of available balances at ATMS or through other automated systems. First it clarifies that the requirement to provide a single account balance does not apply to what the regulation refers to as “retail sweep programs” but which are more generally described in the industry as reserve reclassification accounts. Many banks, to reduce their reserve requirements establish an account that has a transaction sub account and a savings sub account. Transfers are made between the two accounts by the bank to the extent allowed by regulation D to minimize the balance in the transaction account. The customer receives one statement of the aggregate of the two accounts and the account transfers are transparent. Where a bank has that type account product it may show as the account balance the aggregate balance in the two sub accounts, not just the balance in the transaction account.
The amendment also clarifies the description that is required it a bank discloses a second balance after the actual account balance that includes other funds that are available whether through a linked account or a courtesy overdraft program. If the second balance contains funds available from linked accounts or from a courtesy overdraft program there must be a statement that the balance includes overdraft funds. If the bank has a courtesy overdraft program that is not available to a particular customer because the customer has opted-out or not opted-in or otherwise the balance should not include funds that might otherwise be available under that service. If the courtesy overdraft program is available to the customer for some but not all types of transactions then it may be included in the second balance but there must be a statement that the additional funds may not be available for all transactions or reference the types of transactions for which the funds are not available. The compliance date for this portion of the amendment is July 6, 2010.
The most significant part of the amendment is the new requirements for periodic statements. Banks have less than four months to assure that their statements are compliant with the new requirement. Bankers should receive assurances immediately from their automation providers that their systems will accommodate the new requirements.
Thursday, July 8, 2010
Repurchase Agreement Accounts
Dear Blair:
Q. We currently have 10 accounts that are set up as repurchase agreement accounts. These accounts are tied to a non interest bearing checking account. Those accounts have the account agreement and the required disclosures. We have a separate repurchase agreement signed by the customer.
Our auditors are telling me that we need an account disclosure that goes with the repurchase agreement. Since the repurchase agreement is not FDIC covered and we have tied investments to the account for collateral purposes what kind of disclosure are we required?
A. I disagree with your auditors. The account of your customer that holds the purchased securities is not a deposit account and therefore does not require any of the disclosures that a deposit account requires. You have numerous disclosures in your repurchase agreement and you provide notifications every time there is a transaction in the repurchase account. That is all the disclosures that the account requires.
Blair Rugh is one of the preeminent experts on United States banking laws and regulations. He has authored compliance manuals recognized by the banking industry as the definitive treatise on banking law and regulation. He has extensive experience as a speaker to bankers' associations and has written numerous articles published in banking journals. For access to more of Blair's compliance expertise, sign up for TriNovus' weekly Bank Regulatory Compliance Update at www.trinovus.com.
Q. We currently have 10 accounts that are set up as repurchase agreement accounts. These accounts are tied to a non interest bearing checking account. Those accounts have the account agreement and the required disclosures. We have a separate repurchase agreement signed by the customer.
Our auditors are telling me that we need an account disclosure that goes with the repurchase agreement. Since the repurchase agreement is not FDIC covered and we have tied investments to the account for collateral purposes what kind of disclosure are we required?
A. I disagree with your auditors. The account of your customer that holds the purchased securities is not a deposit account and therefore does not require any of the disclosures that a deposit account requires. You have numerous disclosures in your repurchase agreement and you provide notifications every time there is a transaction in the repurchase account. That is all the disclosures that the account requires.
Blair Rugh is one of the preeminent experts on United States banking laws and regulations. He has authored compliance manuals recognized by the banking industry as the definitive treatise on banking law and regulation. He has extensive experience as a speaker to bankers' associations and has written numerous articles published in banking journals. For access to more of Blair's compliance expertise, sign up for TriNovus' weekly Bank Regulatory Compliance Update at www.trinovus.com.
You Ask, Blair Answers
Dear Blair:
Q. My bank is exempt from submitting credit card agreements to the Federal Reserve.
Under 226.58(e), we must provide the agreements for all open card accounts either on our website or promptly upon customer request. When we provide the agreements, do we need to provide the actual card agreement & account opening table (pricing information)?
Or, do we need to revise the account opening table to be consistent with 226.58(c)(8)(ii)? If we need to revise the account opening table to be consistent with 226.58(c)(8)(ii), would we need to make the following revisions?
1. Delete the reference to the Fed’s credit card website.
2. Delete the billing rights information.
3. If the rate is variable, remove the actual rate from the table & state the
index + margin (or range of margins).
4. If the rate is fixed, the only changes needed are 1. & 2.
A. You are correct in your analysis of the requirement. You first provide your agreement and the pricing information as an addendum to it. There is no provision for providing extraneous information such as the reference to the Fed's website or the billing rights information. As to the rate, you disclose both the rate and if it is a variable rate the margin and index on which it is calculated.
Blair Rugh is one of the preeminent experts on United States banking laws and regulations. He has authored compliance manuals recognized by the banking industry as the definitive treatise on banking law and regulation. He has extensive experience as a speaker to bankers' associations and has written numerous articles published in banking journals. For access to more of Blair's compliance expertise, sign up for TriNovus' weekly Bank Regulatory Compliance Update at www.trinovus.com.
Q. My bank is exempt from submitting credit card agreements to the Federal Reserve.
Under 226.58(e), we must provide the agreements for all open card accounts either on our website or promptly upon customer request. When we provide the agreements, do we need to provide the actual card agreement & account opening table (pricing information)?
Or, do we need to revise the account opening table to be consistent with 226.58(c)(8)(ii)? If we need to revise the account opening table to be consistent with 226.58(c)(8)(ii), would we need to make the following revisions?
1. Delete the reference to the Fed’s credit card website.
2. Delete the billing rights information.
3. If the rate is variable, remove the actual rate from the table & state the
index + margin (or range of margins).
4. If the rate is fixed, the only changes needed are 1. & 2.
A. You are correct in your analysis of the requirement. You first provide your agreement and the pricing information as an addendum to it. There is no provision for providing extraneous information such as the reference to the Fed's website or the billing rights information. As to the rate, you disclose both the rate and if it is a variable rate the margin and index on which it is calculated.
Blair Rugh is one of the preeminent experts on United States banking laws and regulations. He has authored compliance manuals recognized by the banking industry as the definitive treatise on banking law and regulation. He has extensive experience as a speaker to bankers' associations and has written numerous articles published in banking journals. For access to more of Blair's compliance expertise, sign up for TriNovus' weekly Bank Regulatory Compliance Update at www.trinovus.com.
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