Category: Financial Institutions and Banking

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Financial Institutions and Banking

Should your bank use third-party vendors?

In the uncertain economy resulting from the COVID-19 pandemic, community banks continue to streamline operations, improve efficiency and eliminate waste so that they can survive — and thrive. To help in this process, they’re increasingly turning to outside vendors to provide specialized services beyond the bank’s usual offerings. If your bank uses third-party vendors, though, you need to be aware of the ins and outs.

Evaluate liability

Outsourcing to a third party doesn’t relieve a bank from responsibility and legal liability for compliance or consumer protection issues. And as banks and vendors increasingly rely on evolving technologies to deliver products and services, their exposure to ever-changing cybersecurity risks demands constant vigilance.

Even if you have a solid vendor risk management program in place, you’ll need to review it periodically. Banking regulators expect your program to be “risk-based” — that is, the level of oversight and controls should be commensurate with the level of risk an outsourcing activity entails. But here’s an important caveat: That risk can change over time. Some vendors, such as appraisal and loan collection companies, have traditionally been viewed as relatively low risk. But in today’s increasingly cloud-based world, any vendor with access to your IT network or sensitive nonpublic customer data poses a substantial risk.

Assess risk

Here are some ways to review your vendor risk management program:

Conduct a risk assessment. Determine whether outsourcing a particular activity is consistent with your strategic plan. Evaluate the benefits and risks of outsourcing that activity as well as the service provider risk. This assessment should be updated periodically.

Generally, examiners expect a bank’s vendor management policies to be appropriate in light of the institution’s size and complexity. They also expect more rigorous oversight of critical activities, such as payments, clearing, settlements, custody, IT or other activities that could have a significant impact on customers — or could cause significant harm to the bank if the vendor fails to perform.

Thoroughly vet your service providers. Review each provider’s business background, reputation and strategy, financial performance operations, and internal controls. The depth and formality of due diligence depends on the risks associated with the outsourcing relationship and your familiarity with the vendor. If your agreement allows the provider to outsource some or all of its services to subcontractors, be sure that the provider has properly vetted each subcontractor. The same contractual provisions must apply to subcontractors and the provider should be contractually accountable for the subcontractor’s services.

Diversify vendors. Using a single vendor may provide cost savings and simplify the oversight process, but diversification of vendors can significantly reduce your outsourcing risks, particularly if a vendor has an especially long disaster recovery timeframe.

Ensure contracts clearly define the parties’ rights and responsibilities. In addition to costs, deliverables, service levels, termination, dispute resolution and other terms of the outsourcing relationship, key provisions include compliance with applicable laws, regulations and regulatory guidance; information security; cybersecurity; ability to subcontract services; right to audit; establishment and monitoring of performance standards; confidentiality (in the case of access to sensitive information); ownership of intellectual property; insurance, indemnification and business continuity; and disaster recovery.

Review vendors’ disaster recovery and business continuity plans. Be sure that these plans align with your own and are reviewed at least annually, and that vendors have the ability to implement their plans if necessary.

Monitor vendor performance. Monitor vendors to ensure they’re delivering the expected quality and quantity of services and to assess their financial strength and security controls. It’s particularly important to closely monitor and control external network connections, given the potential cybersecurity risks.

Conduct independent reviews. Banking regulators recommend periodic independent reviews of your risk management processes to help you assess whether they align with the bank’s strategy and effectively manage risks posed by third-party relationships. The frequency of these reviews depends on the vendor’s risk-level assessment, and they may be conducted by the bank’s internal auditor or an independent third party. The results should be reported to the board of directors.

Stay aware

Having a robust vendor risk management program in place at your bank is the key to benefiting from vendors’ specialized skills and abilities while avoiding legal and regulatory problems. We can help you stay on top of the latest regulations and rules pertaining to third-party vendor use.

©2021

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Financial Institutions and Banking

5 Tips for Fair Lending Compliance

Community banks need to develop and follow fair lending practices; providing customers with nondiscriminatory access to credit is, of course, the right thing to do. What’s more, violations of fair lending laws and regulations can result in costly litigation and enforcement actions, hefty monetary penalties and serious reputational damage.

What are the laws?

The two primary fair lending laws are the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA). The FHA prohibits discrimination in residential real estate-related transactions based on race or color, national origin, religion, sex, familial status (for example, households with one or more children under 18, pregnant women, or people in the process of adopting or otherwise gaining custody of a child), or handicap.

Similarly, the ECOA prohibits discrimination in credit transactions based on race or color, national origin, religion, sex, marital status, age (assuming the applicant has the capacity to contract), an applicant’s receipt of income from a public assistance program, or an applicant’s good faith exercise of his or her rights under the Consumer Credit Protection Act.

The Home Mortgage Disclosure Act (HMDA) requires certain lenders to report information about mortgage loan activity, including the race, ethnicity and sex of applicants. Finally, the Community Reinvestment Act (CRA) provides incentives for banks to help meet their communities’ credit needs.

How can you comply?

Here are five tips for developing an effective compliance program:

  1. Conduct a risk assessment. Conduct a thorough assessment to identify your bank’s fair lending risks based on its size, location, customer demographics, product and service mix, and other factors. This assessment can pinpoint the bank’s most significant risks. It also can reveal weaknesses in the bank’s credit policies and procedures and other aspects of its credit operations. It’s particularly important to examine the bank’s management of risks associated with third parties, such as appraisers, aggregators, brokers and loan originators.
  2. Develop a written policy. A comprehensive written fair lending policy is key to help minimize your bank’s risks. And by demonstrating your commitment to fair lending, this document can go a long way toward mitigating the bank’s liability in the event of a violation. The policy should cover all of the bank’s products, services and credit operations and provide details about which practices are permissible and which aren’t.
  3. Analyze your data. Analyzing data about your lending and other credit decisions is important for two reasons: First, it’s the only way to determine whether disparities in access to credit exist for members of the various protected classes. These disparities don’t necessarily signal that unlawful discrimination is taking place — but gathering this data is the only way to make this determination.

Second, lending discrimination isn’t limited to disparate treatment of protected classes. Banks are potentially liable under the FHA and ECOA if their lending practices have a disparate impact on protected classes. For example, a policy of not making single-family mortgage loans under a specified dollar amount may disproportionately exclude certain low-income groups, even though the policy applies equally to all loan applicants. Banks can defend themselves against allegations of discrimination based on disparate impact by showing that the policy was justified by business necessity and that there was no alternative practice for achieving the same business objective without a disparate impact.

  1. Provide compliance training. Even the most thorough, well-designed policy won’t be worth the paper it’s printed on unless you provide fair lending compliance training for bank directors, management and all other relevant employees (and evaluate its effectiveness). Indeed, lack of training is a red flag for bank examiners. (See “Discrimination risk factors” at X.)
  2. Monitor compliance. You’ll need to monitor your bank’s compliance with fair lending laws and promptly address any violations or red flags you discover. You can do this by, among other things, performing regular data analysis, monitoring and managing consumer complaints, keeping an eye on third-party vendors, and conducting periodic independent audits of your compliance program (by your internal audit team or an outside consultant).

Reduce your risk

Fair lending laws are complex, and guidance can sometimes be ambiguous. Although a full discussion of the subject is beyond the scope of this article, the five tips outlined here are a good start in helping you evaluate the effectiveness of your fair lending compliance program.

Sidebar: Discrimination risk factors

A useful source of guidance on fair lending compliance is the Interagency Fair Lending Examination Procedures used by federal financial agencies. Among other things, the guidelines list the following compliance program discrimination risk factors:

  • Overall compliance record is weak,
  • Legally required monitoring information is nonexistent or incomplete,
  • Data or recordkeeping problems compromise the reliability of previous examination reviews,
  • Fair lending problems were previously found in one or more products or subsidiaries, and
  • The bank hasn’t updated compliance policies and procedures to reflect changes in law or in agency guidance.

If any of these problems are present in your institution, it’s important to rectify them as soon as possible. That way, you’ll avoid penalties and at the same time contribute to fair lending practices.

©2021

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Paycheck Protection Program – CARES Act Small Business Administration Loans

FOR IMMEDIATE RELEASE
Mark Puckett, CPA
info@atacpa.net

 

Paycheck Protection Program – CARES Act Small Business Administration Loans (Update)
We are releasing an update to our previous email. Due to the changing nature of the loan initiative discussed below, please contact your lender for the most up-to-date information.  
(April 1, 2020 | 8:45 p.m.) 

 

 

The Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted March 27, 2020 and provides an unprecedented level of national emergency assistance for individuals, families and businesses impacted by the Coronavirus pandemic. The Act provides for a loan program that will be administered by the Small Business Administration (SBA) and provides up to $349 billion in loans to eligible borrowers with the express intention of motivating employers to retain and re-hire employees.
The Loan Program

Among the economic relief provisions of the CARES Act, the Paycheck Protection Loan Program establishes a loan regime that allows qualifying businesses negatively impacted by the Coronavirus pandemic to obtain loans through the SBA to fund a variety of qualified costs including:

  • Payroll costs
  • Continuation of health care benefits
  • Employee salaries and commissions for U.S. based employees (up to $100,000 per person)
  • Mortgage interest obligations (but not loan principal)
  • Rent
  • Utilities
  • Interest on any other debt obligations incurred before the covered period

Qualifying businesses can apply through banks that are already authorized to make loans under the SBA’s existing 7(a) loan program. The SBA and the Secretary of the Treasury will also extend eligibility to additional qualified lenders that do not currently participate in such program. Repayment of a Paycheck Protection loan may be fully or partially guaranteed by the SBA. Neither the SBA nor any participating lenders will charge fees to the borrowers.
Eligibility

Borrowers with 500 or fewer employees (or a greater number based on the size standard applicable to the industry) may be eligible:
  • For-profit businesses of all types, including self-employed individuals, independent contractors and sole proprietorships
  • Nonprofit organizations exempt under Section 501(c)(3)
  • Veterans organizations
  • Tribal businesses

The Act contains exceptions to standard SBA rules that relax eligibility restrictions for certain covered entities such as businesses in the accommodation and food service industry (NAICS 72) that have less than 500 employees per physical location. Other exceptions include franchises assigned a franchise identifier code and businesses licensed under Section 301 of the Small Business Investment Act.
Loan Amount & Terms

The maximum loan amount permitted for an eligible borrower is equal to the lesser of 2.5 times the average monthly payroll costs incurred in the one-year period before the loan is made (except for seasonal employers and employers not in business between February 15, 2019 and July 30, 2019), or $10,000,000.

Loans are available for an amortizing term of up to 2 years at 0.5 percent interest.  The SBA will direct lenders to defer payment of both principal and interest for a minimum of 6 months and up to a maximum of 12 months.  Borrowers will not be required to pledge any collateral or provide personal guarantees to secure the loans.
Loan Forgiveness

Borrowers will be eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period following the loan disbursement actually spent on rent, payroll and benefit costs, utilities and mortgage interest.

The loan forgiveness amount is subject to reduction if the borrower terminates employees or reduces employee salaries and wages during the 8-week forgiveness period.  Reductions in workforce, salaries and wages that occur from February 15, 2020 to April 26, 2020 will be disregarded for purposes of reducing the forgiveness amount so long as the reductions are eliminated by June 30, 2020.

Borrowers who satisfy the requirements for loan forgiveness will be able to exclude the forgiveness amount from taxable income.
Continue to monitor ATA’s COVID-19 resource page for more information. Please know that we continue to be here to partner with you and amplify your business. 
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Six Key Cybersecurity Controls that are Critical to Banks

Cybersecurity risk heightened with bank wiring
The OCC and FDIC recently issued an interagency statement on heightened cybersecurity risks, prompted in part by a warning from the Department of Homeland Security of potential cyberattacks against U.S. targets because of increased geopolitical tension. The statement reminds banks not only to implement and maintain effective preventive controls, but also to prepare for a worst-case scenario by maintaining sufficient business continuity planning processes for the rapid recovery, resumption and maintenance of the institution’s operations.
The statement describes six key cybersecurity controls that are critical to protecting banks from malicious activity:
  1. Response, resilience and recovery capabilities,
  2. Identity and access management,
  3. Network configuration and system hardening (that is, modifying settings and eliminating unnecessary programs to minimize security risks),
  4. Employee training,
  5. Security tools and monitoring, and
  6. Data protection.
For a detailed discussion of these controls, you can read the statement at https://www.fdic.gov/news/news/financial/2020/fil20003.html.
OCC Annual Report emphasizes BSA/AML risk
The OCC recently issued its 2019 Annual Report. The report warned that compliance risk related to Bank Secrecy Act/anti-money laundering activities remained high last year. It encouraged banks to implement BSA/AML risk management systems commensurate with the risk associated with their products, services, customers and geographic footprint. Noting that BSA/AML compliance remains a priority, the OCC outlined recent guidance that embraces using innovative technologies to meet these compliance obligations. The agency also encourages community banks with lower BSA risk profiles to reduce costs and increase operational efficiency by sharing BSA compliance-related resources.
Debt collection: Handle with care
A recent federal court case, Hackler v. Tolteca Enterprises Inc., illustrates the importance of carefully following the Fair Debt Collection Practices Act (FDCPA). In that case, a collection agency sent a letter to a debtor attempting to collect a debt. It stated, “If you dispute the validity of this debt within 30 days, from receipt of this notice, we will mail verification of the debt to you. If you do not dispute the validity of this debt within 30 days, from receipt of this notice, we will assume it is valid. At your request, we will provide you with the name and address of the original creditor if different from the current creditor.”
Because the letter failed to specify that the debt must be disputed, and the request must be made “in writing,” as required under the statutory notice requirements, the U.S. District Court for the Western District of Texas found the defendant liable for violations of the FDCPA.
© 2020
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Financial Institutions and Banking News

Breaking Up Is Hard To Do

Protect Bank Interests After a Divorce
Privately owned family businesses typically make up a significant portion of community banks’ loan portfolios. Often, such businesses are co-owned by two partners — who are also married. If the marriage falls apart, will the business follow suit? There are several factors to be aware of if your bank’s loans are at risk due to divorce.
Control and goodwill matter
Sometimes one spouse controls the business, and the other spouse pursues outside interests. A key question in these cases is how much of the private business interest to include in the marital estate. The answer is a function of purchase date, prenuptial agreements, length of marriage, legal precedent and state law.
Goodwill is another point of contention. If a business has value beyond its tangible net worth, how is intangible “goodwill” split up? All goodwill is included in (or excluded from) the marital estate in some states. But about half the states divide goodwill into two pieces: business goodwill and personal goodwill. The latter is excluded from value in these states.
Accurate valuations and reasonable payout periods are important. Settlements that disproportionately favor the noncontrolling spouse can drain company resources and cause financial distress. If the parties can’t reach an equitable settlement, it’s also possible for the court to mandate a liquidation, which threatens business continuity.
When the company buys out a spouse, Treasury stock might appear on the customer’s balance sheet. Or you might see an increase in shareholder loans if the owner-spouse borrows money from the business to pay divorce settlement obligations.
Avoidance strategies can backfire
The noncontrolling (or nonmonied) spouse also may receive alimony and child support from the controlling shareholder. Maintenance payments typically are based on the owner’s annual salary, bonus and perks.
Unscrupulous owner-spouses may try to change compensation levels in anticipation of divorce. Depending on the type of entity they own, a lower wage level may benefit them in negotiations for spousal maintenance and child support.
Also be aware that what divorcing borrowers say about unreported revenues, below-market compensation and personal expenses run through the business could lead to negative tax consequences. Publicly admitting these tax avoidance strategies puts both spouses and the business at risk for IRS inquiry, which could lead to difficulties repaying the loan.
Buyout plans can prevent dissolution
Many private businesses are run by both spouses, whose complementary skill sets make for a hard decision: Who’s going to run the business after the divorce? In limited cases, the spouses may want to continue to run the business together. Like most stakeholders, if co-owners decide to split up personally, but maintain their professional relationships and continue co-managing the business, you may be rightfully skeptical about their future business relationship. Usually, however, the parties can’t imagine working with each other. Such a scenario requires a buyout and a non-compete agreement.
Buyouts should occur over a reasonable time period and can include an earnout — wherein a portion of the selling price is contingent on future earnings — to avoid undue strain on the business. Future success is uncertain when a business loses a key person. It’s fair for both shareholders to bear that risk. If they don’t, the remaining owner, and your bank, could be at risk.
Even if your family-owned business borrowers aren’t currently contemplating divorce, consider what might happen if they did. Proactive family businesses have a buy-sell agreement in place before personal relationships sour. Factors to consider include valuation formulas and methods, valuation discounts, earnout schedules, postbuyout consulting contracts, non-compete agreements and payment of appraisal fees.
Staying engaged with borrowers is key
Keeping your bank’s loans stable and profitable requires you to stay aware of many issues that might crop up for your borrowers over time — including divorce. If you stay on top of potential problems, you’re likely to be able to help your borrowers navigate these difficult waters and come out relatively unscathed, protecting your loans in the process. Visit our financial institutions’ page to connect with an expert.  © 2020
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Financial Institutions and Banking

AI Benefits in Community Banking

Artificial intelligence may be the future of community banking
Recent technological developments — such as artificial intelligence (AI), robotic process automation (RPA) and machine learning — are rapidly changing the way we do business. And the banking industry is no exception. Although large banks were the first to embrace these technologies, an increasing number of community banks are now recognizing their value. It may be some time before smaller banks can afford these technologies, but their potential benefits shouldn’t be ignored.
Enhance relationships
At first glance, AI and automation may seem inconsistent with the personalized attention most community banks rely on to distinguish themselves from their larger competitors. But in fact, these technologies enhance a community bank’s ability to personalize a customer’s experience.
Of course, technology can’t replace human judgment, but by automating and streamlining routine tasks, it can free up staff to focus on what they do best: onboarding new customers, developing personal relationships with current customers, and educating all customers about products, services and promotional opportunities.
Take advantage of new technologies
The potential uses for AI, RPA and other new technologies are virtually limitless. For instance, community banks can use these technologies to:
Open accounts. Some banks are using RPA to automate the account opening process and even accept loan applications. It may take a staff person only five or 10 minutes to open an account. But when you consider the many thousands — or tens of thousands — of accounts opened every year, automating the process can save a significant amount of staff time. Plus, automated systems can help ensure all required information is collected.
Change addresses and other information. Typically, when a customer calls a bank to change his or her address or other information, an employee must go through multiple computer screens in the bank’s system to process the change. With RPA, once the initial information is input, the system can complete the remaining steps automatically, saving time for both customers and bank staff.
Detect BSA/AML crimes. Banks can use AI and machine learning to support their Bank Secrecy Act (BSA) and anti-money laundering (AML) compliance efforts. For example, these technologies can sift through enormous amounts of transaction data and identify suspicious behavioral patterns that would be virtually impossible for humans to detect. And by minimizing the number of false positives and negatives, they can help ensure that investigators focus on truly suspicious activities rather than legitimate transactions.
Improve cybersecurity and fraud protection. The ability of AI to mine huge amounts of data and quickly spot anomalies makes it a powerful fraud detection tool. It’s particularly effective when it comes to cybersecurity. A bank’s IT department may receive hundreds of thousands, or even millions, of cyber threat alerts every month — too many to investigate effectively. AI can comb through this information and alert the bank to potential threats that require immediate attention.
Mind the data gap
As advanced technologies become more commonplace, one of the biggest challenges for community banks will be to ensure they have sufficient data to use these technologies effectively. To do their jobs, AI and machine learning require large amounts of data from which to learn and train. For large institutions with millions of customers, this generally isn’t an obstacle — but many community banks lack the data they need to ensure these technology solutions are effective and accurate.
To prepare to take advantage of the many benefits offered by AI and machine learning, banks should start by taking inventory of their own data. If necessary, banks can supplement this data through data-sharing arrangements or by purchasing data from third parties. A relatively new technique that shows promise is “synthetic data,” which is generated by applying algorithms to a bank’s existing data.
Ready for prime time?
AI and automation have great potential, but it may be some time before community banks fully embrace the technology, which is expensive to implement and maintain. In addition, there may be significant costs associated with gathering the data needed to run it effectively. Nevertheless, it’s important for community banks to monitor developments in this area and consider how these technologies might improve their businesses down the road. © 2020
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Financial Institutions and Banking

Bank Stress Tests – Two Approaches, Four Methods

Should you be stress testing your borrowers?
Most banks are familiar with the concept of stress testing: By evaluating the impact of adverse external events on a bank’s earnings, capital adequacy and other financial measures, stress testing can be a highly effective risk management tool. And while community banks generally aren’t required to conduct stress testing, banking regulators view it as a best practice.
For example, Office of the Comptroller of the Currency (OCC) guidance considers “some form of stress testing or sensitivity analysis of loan portfolios on at least an annual basis to be a key part of sound risk management for community banks.” Stress testing is often performed at the enterprise, or portfolio, level. However, testing at the individual loan level — beginning during the underwriting process — can be a powerful technique for revealing hidden risks.
Two approaches, four methods
Stress testing generally involves scenario analysis. This consists of applying historical or hypothetical scenarios to predict the financial impact of various events, such as a severe recession, loss of a major client or a localized economic downturn. Tools for performing such tests can range from simple spreadsheet programs to sophisticated computer models.
The OCC’s guidance doesn’t prescribe any particular methods of stress testing. It describes two basic approaches to stress testing: “bottom up” and “top down.” A bottom-up approach generally involves conducting stress tests at the individual loan level and aggregating the results. In contrast, a top-down approach applies estimated stress loss rates under various scenarios to pools of loans with similar risk characteristics.
The guidance outlines four methods to consider:
  1. Transaction level stress testing. This estimates potential losses at the loan level by assessing the impact of changing economic conditions on a borrower’s ability to service debt.
  2. Portfolio level stress testing. This method helps identify current and emerging loan portfolio risks and vulnerabilities (and their potential impact on earnings and capital) by assessing the impact of changing economic conditions on borrower performance, identifying credit concentrations and gauging the resulting change in overall portfolio credit quality.
  3. Enterprisewide stress testing. This considers various types of risk — such as credit risk within loan and security portfolios, counterparty credit risk, interest rate risk and liquidity risk — and their interrelated effects on the overall financial impact under a given economic scenario.
  4. Reverse stress testing. This approach assumes a specific adverse outcome, such as credit losses severe enough to result in failure to meet regulatory capital ratios. It then works backward to deduce the types of events that could produce such an outcome.
The right approach and method for a particular bank depends on its portfolio risk and complexity, as well as its resources. Even a simple stress-testing approach can produce positive results. (See “Canada’s mortgage stress-testing law.”)
Stress testing and the underwriting process
A bottom-up approach at the transaction level may offer a significant advantage: In addition to assessing the potential impact of various scenarios on a bank’s earnings and capital, it can, according to the OCC, help the bank “gauge a borrower’s vulnerability to default and loss, foster early problem loan identification and strategic decision making, and strengthen strategic decisions about key loans.”
For example, when evaluating a loan application, consider gathering information on the various risks the borrower faces — including operational, financial, compliance, strategic and reputational risks. This information can be used to run stress tests that measure the potential impact of various risk-related scenarios on the borrower’s ability to pay. An added benefit of this process is that, by discussing identified risks and stress test results with borrowers, you can help them understand their risks and develop strategies for managing and mitigating them, such as tightening internal controls, developing business continuity / disaster recovery plans or purchasing insurance.
A powerful tool
Stress testing is an important part of a community bank’s risk management process. It can also be a powerful tool for evaluating loan applications and revealing hidden vulnerabilities that may jeopardize potential borrowers’ ability to pay down the road. 
Sidebar: Canada’s mortgage stress-testing law
Canada takes an interesting approach to evaluating mortgage loans. Under a law that took effect in 2018, federally regulated banks are required to “stress test” all mortgage applicants. To pass the stress test, an applicant must qualify for a loan at the contractual interest rate plus 2% or at the Bank of Canada’s five-year benchmark rate (5.19% at press time), whichever is higher. So, for example, a borrower applying for a 3.75% mortgage would have to qualify for a mortgage at 5.75%. The rule doesn’t apply to borrowers who are renewing a mortgage with the same lender.
The idea behind the law is that requiring borrowers to qualify at a higher rate than they’re actually paying prevents them from overextending themselves. And since the law took effect, delinquency rates are down. But the law is also controversial because, among other things, it reduces purchasing power for many homebuyers and the benchmark rate is susceptible to manipulation by the largest banks. © 2020
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Financial Institutions and Banking General

Take steps to curb power of attorney abuse

A financial power of attorney can be a valuable planning tool. The most common type is the durable power of attorney, which allows someone (the agent) to act on the behalf of another person (the principal) even if the person becomes mentally incompetent or otherwise incapacitated. It authorizes the agent to manage the principal’s investments, pay bills, file tax returns and handle other financial matters if the principal is unable to do so as a result of illness, injury, advancing age or other circumstances. However, a disadvantage of a power of attorney is that it may be susceptible to abuse by scam artists, dishonest caretakers or greedy relatives.
  • Watch out for your loved ones. A broadly written power of attorney gives an agent unfettered access to the principal’s bank and brokerage accounts, real estate, and other assets. In the right hands, this can be a huge help in managing a person’s financial affairs when the person isn’t able to do so him or herself. But in the wrong hands, it provides an ample opportunity for financial harm. Many people believe that, once an agent has been given a power of attorney, there’s little that can be done to stop the agent from misappropriating money or property. Fortunately, that’s not the case. If you suspect that an elderly family member is a victim of financial abuse by the holder of a power of attorney, contact an attorney as soon as possible. An agent has a fiduciary duty to the principal, requiring him or her to act with the utmost good faith and loyalty when acting on the principal’s behalf. So your relative may be able to sue the agent for breach of fiduciary duty and obtain injunctive relief, damages (including punitive damages) and attorneys’ fees. 
  • Take steps to prevent abuse. If you or a family member plans to execute a power of attorney, there are steps you can take to minimize the risk of abuse: Make sure the agent is someone you know and trust. Consider using a “springing” power of attorney, which doesn’t take effect until certain conditions are met, such as a physician’s certification that the principal has become incapacitated. Use a “special” or “limited” power of attorney that details the agent’s specific powers. (The drawback of this approach is that it limits the agent’s ability to deal with unanticipated circumstances.) Appoint a “monitor” or other third party to review transactions executed by the agent and require the monitor’s approval of transactions over a certain dollar amount. Provide that the appointment of a guardian automatically revokes the power of attorney. Some state laws contain special requirements, such as a separate rider, to authorize an agent to make large gifts or conduct other major transactions. 
  • Act now. If you’re pursuing legal remedies against an agent, the sooner you proceed, the greater your chances of recovery. And if you wish to execute or revoke a power of attorney for yourself, you need to do so while you’re mentally competent. 
Considering appointing a power of attorney? Contact your long-term business partner to discuss planning. Contact us with questions.
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The Tax Aspects of Selling Mutual Fund Shares

Perhaps you’re an investor in mutual funds or you’re interested in putting some money into them. You’re not alone. The Investment Company Institute estimates that 56.2 million households owned mutual funds in mid-2017. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex.
Tax basics
If you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax. When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One difficulty is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. Another problem may arise in determining your basis for shares sold.
What’s considered a sale
It’s obvious that a sale occurs when an investor redeems all shares in a mutual fund and receives the proceeds. Similarly, a sale occurs if an investor directs the fund to redeem the number of shares necessary for a specific dollar payout. It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, you surrender shares of an Income Fund for an equal value of shares of the same company’s Growth Fund. No money changes hands but this is considered a sale of the Income Fund shares. Another example: Many mutual funds provide check-writing privileges to their investors. However, each time you write a check on your fund account, you’re making a sale of shares.
Determining the basis of shares
If an investor sells all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments) including commissions or sales charges. Then add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital. The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices.
You can use one of several methods to identify the shares sold and determine your basis:
First-in first-out.
The basis of the earliest acquired shares is used as the basis for the shares sold. If the share price has been increasing over your ownership period, the older shares are likely to have a lower basis and result in more gain.
Specific identification.
At the time of sale, you specify the shares to sell. For example, “sell 100 of the 200 shares I purchased on June 1, 2015.” You must receive written confirmation of your request from the fund. This method may be used to lower the resulting tax bill by directing the sale of the shares with the highest basis.
Average basis.
The IRS permits you to use the average basis for shares that were acquired at various times and that were left on deposit with the fund or a custodian agent.
As you can see, mutual fund investing can result in complex tax situations. Contact us if you have any questions. We can explain in greater detail how the rules apply to you. © 2020
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Financial Institutions and Banking

Fed issues guidance on accounting for leased bank premises

With the effective date of the Financial Accounting Standards Board’s new lease accounting standard rapidly approaching for nonpublic companies, most community banks are preparing for the standard’s impact on loan covenants and regulatory capital. But it’s also important to consider its potential impact on your institution’s investment in bank premises, such as office space and retail branch leases.

For banks supervised by the Federal Reserve, adoption of the new standard may trigger certain obligations under Regulation H, which places limits on such investments. Recently, the Fed issued guidance on this subject.

When do the new rules take effect?

The new standard — Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) — is effective for fiscal years starting after December 15, 2019, and for interim periods in fiscal years starting after December 15, 2020. (The standard is already in effect for many public companies.) Banks may adopt the new standard early. But, if they do, they must apply it in its entirety to all lease-related transactions.

What’s the impact on operating leases?

The most significant impact of the new standard will be on operating leases. Under current accounting standards, lessees don’t recognize lease assets or liabilities on the balance sheet for operating leases (as opposed to capital leases). But the new standard will require most lessees to record both a right-of-use asset and a lease liability on their balance sheets, based on the present value of minimum payments under the lease (with certain adjustments). After a bank adopts the standard, it will be required to record all of its operating leases (with limited exceptions) on its balance sheet. That includes those entered into before the standard’s effective date.

What are the Regulation H implications?

Regulation H implements Section 24A of the Federal Reserve Act. One of its provisions prohibits Fed-supervised banks from making aggregate investments in bank premises that exceed the amount of the bank’s capital stock, unless they first obtain the Fed’s approval. For some banks, adoption of the new lease accounting standard will cause the carrying value of bank premises (which includes leases recorded on the balance sheet) to surpass their capital stock.

The Fed’s guidance — found in Supervision and Regulation Letter No. SR 19-7 — clarifies that Fed approval isn’t needed when adopting the new standard requires a bank to capitalize premises leased before the standard’s effective date. In other words, if a bank’s investment in bank premises is less than its capital stock before adopting the standard, but adoption causes that investment to increase to an amount that exceeds the bank’s capital stock, it’s not necessary to seek the Fed’s approval. But prior approval will be required for any postadoption leases that cause investments in bank premises to exceed capital stock.

What’s your plan?

As you plan your bank’s transition to the new accounting standard for leases, it’s important to evaluate the impact of adopting the standard on your investment in bank premises. Moving existing leases to the balance sheet won’t cause you to run afoul of Regulation H. But if you’re planning any significant new leases of retail branches or other facilities, be sure to consider the timing of those investments in relation to your planned adoption of the standard. Your financial professional can help you assess the impact.

© 2019