over a century: building better banks - helping … · over a century: building better banks -...

March/April 2013

OVER A CENTURY: BUILDING BETTER BANKS - HELPING COLORADANS REALIZE DREAMS

Saved By the “Fiscal Cliff” Bell

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March • April 2013

3

The Colorado Bankers Associat ion is proud to presentCOLORADO BANKER as a benefit of membership in the Association. No member dues were used in the publishing of this news magazine. All publishing costs were borne by advertising sales. Purchase of any products or services from paid advertise-ments within this magazine are the sole responsibility of the consumer. The statements and opinions expressed herein are those of the individual authors and do not necessarily represent the views of COLORADO BANKER, or its publisher Media Communications Group. Any legal advice should be regarded as general information. It is strongly recommended that one con-tact an attorney for counsel regarding specific circumstances. Likewise, the appearance of advertisers does not constitute an endorsement of the products or services featured by Media Communications Group.

5 Chairman’s Message

6 A Word From CBA...

8 FEATURE: Saved By the “Fiscal Cliff” Bell

12 FEATURE: Why Cloud? – A Tale of Server Sprawl

14 FEATURE: Portfolio Management

16 FEATURE: BOLI in Today’s Environment

18 FEATURE: CFPB Finalizes Ability-to-Repay Rule for Mortgage Lenders

20 FEATURE: Beyond Frontenac – Spousal Guarantees Are Not Just a Loan Enforcement Issue

22 FEATURE: Center for Bank Advocacy

Don Childears President/CEO

Jenifer WallerSenior Vice President

Amanda RogowskiDirector of Marketing

Amanda AverchDirector of Communications

Fritz MackeyExecutive Assistant

Margie MellenbruchBookkeeper*

Craig A. UmbaughCounsel*

Jim ColeLobbyist*

Melanie LaytonLobbyist*

Garin BrayLobbyist*

Mitch LaycockBancInsure

* outsourced

Amanda Rogowski, CBA Director of Marketing, [email protected]

140 East 19th Avenue, Suite 400Denver, Colorado 80203

voice: 303.825.1575 – fax: 303.825.1585

Websites:www.coloradobankers.org

www.smallbizlending.orgwww.financialinfo.org

Annual CBA SummitMay 29th & 30th

Grand HyattDowntown Denver

2013

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Create a Positive Agenda for Our StateDear CBA Members,

A topic that many bankers address during the first quarter of a new year is “what is going on in the economy?” We need to be students of the economy in order to develop our own business plans and create achievable budget forecasts. We need to know whether to project loan and deposit growth. We need to understand the labor force. We need to know if employees will be available, and what the cost of those employees will be. We need to know what impact new regulations in healthcare reform will have on our industry as well as the economy at large.

We also need this economic information to support our customers. We need to know what questions to ask them, to help understand their business needs and their own financial forecasts. Good bankers need economic insights to not only run our own business, but also to be a value added to our customers; in essence to be a trusted advisor. If our customers have access to good information they can plan effectively for the future, they can help create jobs and help our economy recover.

What is the general consensus regarding the economy for 2013? Most believe that 2013 will be a year of transi-tion to stronger growth.

• GDP growth in 2013’s forecast will be 2.5%, up from 2% in 2012.• Colorado job growth will be up 49,000 jobs or 2.1%. Growth was 1.8% or 40,000 jobs in 2012.• Areas of strength (Industry)

• Energy • Technology • Retail sales• Professional and business services • Healthcare • Construction (new housing permits)

• Areas of weakness (Industry)• Manufacturing • Mining • Government

One of the major impediments to sustainable growth continues to be an ineffective US Congress. As leaders of the banking industry and of the Colorado business community, we need to stay engaged with our congressional delegation. We need to work with the Colorado Bankers Association to:A. Understand the impact of the Affordable Care Act on our industry and on our customers. Many of our small

business customers, especially in the hospitality business, are concerned about rising costs and the pressure to reduce the number of full-time employees in order to comply with the Affordable Care Act. We need to stay engaged to ensure negative, unintended consequences can be avoided by adjusting this law as necessary.

B. Monitor the implementation of the Dodd Frank Act and the Consumer Financial Protection Bureau. This lengthy, exhausting piece of legislation will need to be reformed in order to not negatively impact our industry and the overall economy. This is especially true as it relates to mortgage lending and new rules issued by the CFPB. I believe one of the biggest risks facing our industry is excessive regulation, which makes it harder to provide loans to our customers and greatly increases our operating costs.

C. The most important issue that we need to address is the debt and defi cit issues facing our economy. We must hold our congressional leaders accountable and we must demand that they come up with a balanced strategy reducing our government spending and debt. They need to work to reform the tax code, to create new revenues, along the lines of the Simpson Bowles report issued now over two years ago. The looming cuts required by the sequester and a potential default of the US debt and a potential downgrade of that debt, is unacceptable and could drive us all back into recession. It is time for our congressional leaders to put aside partisan issues and

Chairman’s Message continued on page 9

6


A Word From CBA...

Advocating for Yourself, Your Bank and Industry

The CBA Board last fall saw a critical need for bankers to be stronger advocates for our interests, so CBA is off and running with an exciting new program to help bankers become stronger proponents for themselves, their banks and the industry. It is the Center for Bank Advocacy – A Training Practicum. Bank-ing’s government relations issues (therefore its vulnerabilities) are more numerous than what others face: While other indus-tries focus on 1-2 big issues at a time, banking is drowning in countless federal and state issues of major importance. The fi rst sessions for the initial Advocacy class have been terrifi c successes. The participants are very enthusiastic.

They want to be better equipped to advocate successfully, using relationships just as you use “relationship banking.” They are learning that public offi cials and media rely more on people they know and trust just as you do. They’re learning to build relationships early; you don’t know when you need them.

CBA’s Center for Bank Advocacy is a yearlong, hands-on course in increasing banks’ infl uence on public policy. It in-cludes nine concentrated sessions, several other events and a brief project relevant to the bank. The course is capped by a bank advocacy trip to Washington D.C. This is “learn by doing” with expert guidance along the way.

The Center’s programming covers: • Election analysis, • State and federal banking legislation, regulation, litigation and image issues; and broader issues impacting banking, • Gov-ernment processes and requirements – elections, campaigns, legislation, regulation, community/media/customer relations, • Roles, risks and rewards of community and political involve-ment, • Volunteer community involvement and bank/industry image, and • Infl uence activities – customer communications, community/public communications, lobbying, public offi cial relationships, regulatory infl uence and more. Emphasis is on active participation.

WhyThese advocacy skills are needed as our industry struggles

with Basel III, a battlefi eld that will determine community bank-ing’s future. If the battle is lost we will see fewer community

banks, less lending to certain customers, and damage to our communities. If it is won then community banks can continue to serve their customers well, while still dealing with an avalanche of Federal regulation.

Banks’ Basel III concerns focus on the amount of capital required, the defi nitions of that capital, the risk-weighting of assets where regulators determine broad assessments of loan risk, and therefore the bank’s profi tability, ability to serve customers, and, for some, even the survival of the bank. The viability of the bank directly impacts your career and probably your investment in the bank. Each banker has a lot at stake.

On the state level we are fighting legislation that would devastate the foreclosure process. The damage it would inflict on lenders and borrowers alike can’t be overstated – establishing requirements the secondary market cannot meet (thus imperiling the 80% of CO mortgages sold there now) and creating a protracted process that allows homeowners delinquent in payments to occupy the house indefinitely. CBA is fighting this ugly proposal, but concurrently we also must spend resources on dealing with energy efficiency programs for commercial real estate, standards for proposed mandated reporting of suspected elder abuse and penalties for not do-ing so, complications under Federal law that preclude and penalize banks from providing services to the marijuana businesses recently blessed under amendment 64, and many other issues.

These federal and state issues are why your CBA Board of Directors focused on enhancing our industry’s advocacy skills. We’re on our way with this fi rst class of participants and we look forward to more participants next year. Plan on it. For your sake and your bank’s.

Don ChildearsCBA President/CEO

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FEATUREARTICLE

“Financial organizations

that administer

ESAs and IRAs will

want to have a good

understanding of

these latest legislative

changes, not only to

ensure compliance,

but to better serve

their clients.”

Saved By the “Fiscal Cliff” Bell

As most Americans were ringing in the New Year, the Senate was holding an early morning roll call vote on a bill to avoid hurtling off of the “fi scal cliff” that would

have resulted from the expiration of the Bush-era tax rates and spending cuts mandated by the Budget Control Act of 2011. The compromise bill passed the Senate and the House on New Year’s Day, pulling us back from the brink, and saving us from falling off the fi scal cliff.

Subsequently, on January 2, 2013, Presi-dent Obama signed into law the American Taxpayer Relief Act of 2012 (ATRA), making permanent most of the Bush-era tax rates, postponing for two months the automatic across-the-board spending cuts mandated by the Budget Control Act of 2011, and extend-ing a host of other expiring individual and business tax provisions. The bill contains something for everyone, including those who

are saving through retirement and education savings plans. Even financial organizations offering IRAs and Coverdell education sav-ings accounts (ESAs) will benefit from two provisions of the bill.

EGTRRA Coverdell ESA Provisions Made Permanent

ATRA makes permanent the Coverdell ESA provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that were set to expire on December 31, 2012. As a result, there are no changes to ESAs and the accounts will operate permanently under the rules that were in place for 2012.

DENNIS ZUEHLKECompliance ManagerAscensus

Fiscal Cliff continued on page 10

C E N T U R Y : B U I L D I N G B E T T E R

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gislative

E N T U R Y : B UUUUUUUUUUUUUUUUUUUUUUUU I LI LI LII LI LII L DI LI LI LI LI LLLI LI LI LI LLI LI LI LII LLLLLLI LI LLI LI LLI LI LLLLI LIII LLLI LLI LLII LI LI LLLIIII LII LLI LLLLI LI LI LI LLLLLI LLLI LLLLLLII LII LI LI LI LI LII LLLI LLI LI LLI LI LI LI LLLI LLLLLI LLI LII LLIII LI LI LII L I N G B E T T E

izations

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s will

a good

of

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9

come up with a solution to move our country and our economy forward.

The bottom line is that bankers in Colorado also have a significant responsibility. We need to be students of the economy and add value to our own companies, and to our customers. We need to continue to work to explain our industry to our congressional leaders, the press, and the community at large to show them that we are, indeed, part of the solution and not part of the problem. We need to stay diligent regarding actions taken by congress, and ensure that our voice is heard.

Bankers across the state of Colorado can have an impact on our economic and political future by getting involved. Please join us at the CBA to help create a posi-tive agenda for our state.

Bruce Alexander, CBA ChairmanPresident & CEO, Vectra Bank Colorado

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CHAIRMAN’S MESSAGE – continued

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10


The permanent ESA provisions include the following.• Annual $2,000 ESA contribution limit• Higher income thresholds for contribution eligibility• Contribution deadline of the contributor’s tax return due

date, excluding extensions• Ability to make ESA contributions after age 18 for special

needs individuals• Ability for non-person entities to make ESA contributions• Treatment of elementary and secondary school expenses as

qualifi ed education expenses• Treatment of computer and related technology expenses as

qualifi ed education expenses• Coordination with American Opportunity and Lifetime

Learning credits and state qualifi ed tuition programs

Qualifi ed Charitable Distributions Extended Through 2013

ATRA also extends qualified charitable distributions (QCDs) from Traditional and Roth IRAs for two years: De-cember 31, 2011, through December 31, 2013. This popular tax break expired at the end of 2011 when Congress failed to act on bills in both the House and Senate to extend the provision.

This provision allows IRA owners age 70½ or older to take a tax-free distribution from their Traditional or Roth IRA if paid directly to a qualified charity, subject to a $100,000 annual limit. The provision also contains special transition rules to enable IRA owners to have charitable do-nations made before February 1, 2013, treated as 2012 QCDs.

Under the special transition rules, IRA owners may make QCDs (paid directly from the IRA to the charity) through January 31, 2013, and treat the distributions as QCDs for 2012. This special rule applies only for distributions treated as QCDs for 2012. QCDs for 2013 must be made by December 31, 2013.

IRA distributions paid directly to IRA owners in De-cember 2012 (rather than paid directly from the IRA to the charity) also may be treated as 2012 QCDs if paid (indirectly) by the IRA owner to the charity by January 31, 2013.

As in previous years, a QCD may be used to satisfy an IRA owner’s required minimum distribution (RMD) for the applicable year if the QCD amount is equal to or greater than the RMD amount and taken by December 31 of that year. However, the ATRA provision allows a taxpayer who failed to take his RMD in 2012 to treat a January 2013 payment as a 2012 QCD. This will satisfy his 2012 RMD requirement if the amount meets or exceeds the 2012 RMD. But a January 2013 payment treated as a 2012 QCD cannot satisfy the tax-payer’s 2013 RMD. In fact, a January 2013 payment treated as a 2012 QCD must be subtracted from an IRA’s December 31, 2012, balance for purposes of calculating the 2013 RMD.

Taxpayers treating a January 2013 payment to a charity as a 2012 QCD should be aware that they will need to rec-oncile this on their 2012 Form 1040, U.S. Individual Income Tax Return, by entering the QCD amount on Line 15a, and entering the letters “QCD” next to Line 15b. They also may need to file a 2012 Form 8606, Nondeductible IRAs, with their 2012 Form 1040.

Financial organizations that administer ESAs and IRAs will want to have a good understanding of these latest legis-lative changes, not only to ensure compliance, but to better serve their clients.

Dennis Zuehlke is Compliance Manager for Ascensus in Middleton, Wisconsin. Mr. Zuehlke provides clients with technical support on tax-advantaged accounts (including individual retirement accounts, health savings accounts, simplifi ed employee pension plans, and Coverdell education savings accounts), and information reporting and tax withholding issues. He is a frequent national speaker on compliance-related issues and retirement savings trends within the fi nancial services industry.

FISCAL CLIFF – continued

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FEATUREARTICLE

“As a business owner,

are you comfortable

with the IT business

plan of server sprawl?

If not, research the

cloud and what it can

do for your specific

business.”

Why Cloud? – A Tale of Server Sprawl

Once upon a time there was a man who liked to help people. He was good at helping people reach their dreams in business and in their personal lives. He decided to open a bank so

he could make good honest loans to good honest people.

He bought all the necessities to make a bank work. But his biggest investment was the people he hired to help him.

Soon, however, he had to start buying computers. Then he had to buy servers. Then he had to find a room to put the servers in.

Pretty soon he had to buy more comput-ers and more servers because the first ones broke down. There were always computer problems. So he hired someone to maintain

the computers and servers. He expanded the server room. He expanded his IT staff.

Every year his budget grew. Every year computers and servers broke down and he bought new ones. He bought a data center and hired more people to manage his data.

Years f lew by. He wondered what had happened. How had he turned his business into a computer company – instead of what he wanted to do – help people.

NATHAN DAHLSTROMAspire Sales Representative CoNetrix



13

As our banker found out, increasing technology needs can lead to a massive data canter fi lled with physical machines that don’t run at full capacity. They take up space and run at low rates of usage. In the computer world, we like to call this “server sprawl.” Cloud computing eliminates server sprawl by maximiz-ing resources and moving data and servers off-site.

Although the cloud has been around awhile, recent develop-ments in technology and security have made cloud computing a viable solution to answering the banking industry’s computing needs. Did you know that if you have a gmail, yahoo or hotmail account – you have been using “the cloud” for years. These email service providers store your email and attachments on their hardware in the cloud. They are responsible for it, they maintain it – and usually for free.

The cloud is best defi ned as computing resources that are not owned or maintained by the end-user. Because of this, cloud hosting and other cloud resources can eliminate long-term in-ternal computer infrastructure. It also provides an immediate and scalable resource for all computing needs.

Cloud computing is constantly discussed as the major emerg-ing tech trend. More than a trend, it is the way business-class computing will evolve in the foreseeable future. In fact, recent

statistics show that the cloud is being deployed successfully by numerous Fortune 500 companies (Forbes, Nov. ’12). These companies expect to continue their cloud deployment over and above their static IT departments, as the cloud has proven to boost both effi ciency and effectiveness of IT budget dollars.

In-house servers and IT staffs were not designed as a long-term solution. They have simply grown and developed as a means to an end. They are reactionary to the development of computers and business’s evolving reliance on them.

Cloud computing rewrites that paradigm. It is a pro-active design for long-term sustained computing service to businesses.

As a business owner, are you comfortable with the IT busi-ness plan of server sprawl? If not, research the cloud and what it can do for your specifi c business. Find a provider that has a proven record and one that you trust. It’s a solution that has arrived and is worth a look.

Nathan Dahlstrom is currently the Aspire Sales Representative for CoNetrix, a provider of network consulting, Aspire cloud hosting, security testing, risk management and tandem information security compliance software to fi nancial institutions. Visit our website at www.conetrix.com.

14


Portfolio Management

As the year gets underway, it is important for portfolio managers to complete an evalu-ation of their portfolios – understanding the current earnings and cash fl ow risks,

and managing the impact that a turn in the rate cycle would have on those same earnings and cash fl ows.

There are four actions items to consider as we head into 2013:

1. Shorten your time horizon – It’s easy to get caught up in the thought that a Japan-like, 10-years scenario is in the works. While that certainly may be the case, it is imperative to manage to the most painful outcome for a portfolio. Right now, that outcome would be a sharp increase in rates. • Look at the price risk of individual

holdings. Overall, portfolio price risk might be reasonable, but there are,

undoubtedly, securities with material potential price volatility. Look at the table below, and use it as a benchmark when evaluating the price risk of individual holdings.

Approximate Price Variability Given Rate Change

US Treasuries +100 +200 +3003 Yr -2.89% -5.67% -8.35%5 Yr -4.77% -9.28% -13.56%7 Yr -6.46% -12.47% -18.05%10 Yr -8.66% -16.50% -23.59%

In most cases, securities with more price risk will produce a higher yield. The question

“Portfolio yields

continue to roll lower

and cash balances

continue to increase,

so earnings pressure

is likely to increase as

well. We are also one

year closer to the end

of this cycle, and the

longer that the market

remains in this mode,

the more that portfolio

risk increases.”

FEATUREARTICLE

KARL SCHWABCFA, Managing DirectorCantorFitzgerald



15

portfolio managers have to ask is whether an extra 10-20bp in current yield is worth an extra 5 points in price risk.

2. Look closely at unrealized losses – Given the current level of rates, most portfolio holdings are carried at a gain. There are, though, securities that are currently carried at an unrealized loss. This isn’t a bad thing but if unrealized losses are a result of structural changes in securities, or credit concerns, look to remove them.

3. Consider taking gains now – This is referred to as the “bird in the hand” strategy. As mentioned above, there are many holdings carried at signifi cant unrealized gains, and given the uncertainty of the year ahead, many institutions like the idea of having some realized gains tucked away for future use.• Consider short securities that will be rolling off (or

largely rolling-off) before year-end or longer holdings with large percentage gains. In the fi rst case, an institution is simply transferring this year’s income from margin to gain-in-sale, in the second, minimizing the proceeds needed to produce a target gain.

In either case, future fl exibility is enhanced by taking the gain now for use to offset losses as the year progresses,

4. Move out of negative yield mortgage assets – Carry is important, and the fact that balance sheets are fl ush with cash – earning nearly nothing – means that the earnings produced by the portfolio are essential. If a mortgage holding is generating a sub-0% current yield, look closely at moving it.

From a macro perspective, for portfolio managers, it’s the ex-ercise of evaluating holdings that is most important. Whether an institution actually undertakes action is secondary to the benefi t derived by thoroughly evaluating each holding. This exercise simply provides a means to better manage the impact that a changing environment can have on the portfolio and balance sheet.

While it may feel as if 2013 could be a repeat of 2012, there are some important differences for market participants. The Fed is an even bigger asset acquirer, so spreads are tighter. Portfolio yields continue to roll lower and cash balances continue to in-crease, so earnings pressure is likely to increase as well. We are also one year closer to the end of this cycle, and the longer that the market remains in this mode, the more that portfolio risk increases. It is imperative to stay engaged.

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16


FEATUREARTICLE

“By utilizing BOLI to

offset the increasing

costs of employee

benefits, banks

are improving their

financial metrics while

maintaining safety

and soundness and

flexibility for future

changes in rate

environments.”

BOLI in Today’s Environment

Current Banking EnvironmentSlack loan demand, increasing deposits and

record low yields on cash and securities port-folios have been an all-too common story for community bankers lately. In addition, banks are wrestling with concerns about the impact of Dodd-Frank, the CFPB, BASEL III, QE3, market uncertainty, and a closely contested election cycle. As a result, many are revisiting what they thought was a familiar topic - BOLI - and fi nding that this asset has evolved into a powerful tool for managing risk and improving the bank’s bottom line in today’s environment.

Why BOLI?Page 1 of the Interagency Statement states

that “…, BOLI can provide attractive tax-equiv-alent yields to help offset the rapidly rising cost of providing employee benefi ts.” It is important to note that there are specifi c reasons for pur-chasing BOLI that are regulator approved, and some of those are more fl exible than others. In addition, there are also some specifi c rationales that do NOT qualify as an approved reason for

purchasing BOLI, such as “To generate funds for normal operating expenses other than employee compensation and benefi ts.”

It is also signifi cant to note that a BOLI purchase does not depend upon an executive benefi t plan. While many community banks do use BOLI in conjunction with some sort of non-qualifi ed benefi t plan for their key execu-tives and/or directors, the decision to purchase BOLI is completely independent of the decision to implement a supplemental benefi t plan. The two can be informally lined up in a way that cre-ates a projected income stream that will offset a projected benefi t expense stream, or either element (the benefi t plan or the asset) can be pursued individually, or in any combination.

How Can BOLI Improve the Bank’s Financial Bottom Line?

There are many advantages to executing a carefully constructed BOLI portfolio strategy. The design of the portfolio should refl ect the bank’s goals. By utilizing BOLI to offset the

RICHARD K. BRATTENPartner Bank Financial Services Group



17

increasing costs of employee benefits, especially the seemingly endless rate increases for health care plans, banks are improving their financial metrics while maintaining safety and soundness and fl exibility for future changes in rate environments. » Earnings: Most banks with BOLI

capacity today can generate a 5-10% increase in their net earnings compared to their 2011 results. This increase in income compounds going forward, resulting in an increasing amount of net income each year.

» Valuations: When a bank valuation is made based upon income and projected future income, the increase in bank earnings translates into increased valuations.

» Performance Metrics: BOLI income can signifi cantly improve bank EPS, ROA and ROE, as well as favorably impact other metrics such as RBC ratios (depending upon product selection) and effi ciency ratios (due to the non-interest nature of the income).

» Balance Sheet Stability: BOLI is held at book value, so unlike many bank securities, there is no balance sheet fl uctuation due to a changing interest rate environment. Potential new rules for banks under BASEL III could make this feature more important than ever.

» Sub-S AMT Considerations: For Sub-S banks that have signifi cant Muni concentration, the fact that BOLI income is not an AMT tax-preference item is one of several advantages of BOLI over Muni’s.

» Reduced Effective Tax Rates: Since BOLI generates tax-deferred income (ultimately becoming tax-free upon fi nal payment via a death benefi t), banks can lower their effective tax rates.

» Interest Rate & Reinvestment Risk: BOLI mitigates interest rate and reinvestment risk because the combination of book value treatment plus a fl oating interest rate going forward allows for active asset

management and reinvestment by the BOLI provider (insurance company) with no balance sheet fl uctuations for the bank – the best of both worlds.

» Safety & Soundness: Safety and soundness are key, and creating a diversifi ed portfolio of the highest rated carriers in the industry, along with a constant monitoring of their fi nancial condition, gives bankers real peace of mind. Credit risk can also be additionally mitigated through the use of “hybrid” products.

» No Hidden Costs: There are no costs for loan loss reserves or other overhead costs that exists with other

assets, nor are there any deferred tax liabilities to incur.

» Icing on the Cake: In addition to the stellar performance as an asset on your balance sheet, BOLI provides a life insurance benefi t for those offi cers and directors whom you select to participate. In some cases, this can even be accomplished without any medical exam. This benefi t is generally shared between the bank and the executives/directors, providing an additional benefi t to your key group to incent, retain and reward their valuable

BOLI continued on page 19

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18


CFPB Finalizes Ability-to-Repay Rule for Mortgage Lenders,

Defines “Qualified Mortgage” and Proposes Exemption to Ability-to-Repay Rule for Community Banks and Credit Unions

MARK GOLDSCHMIDT, partner, Denver office of Patton Boggs LLP, and SHAWN TURNER, senior associate, Denver office of Patton Boggs LLP.

On Thursday, January 10, 2013, the Con-sumer Financial Protection Bureau

(CFPB) released its fi nal rule on the ability-to-repay requirements,

including the defi nition of “Qualified Mortgage,” mandated by the Truth-

in-Lending Act, as amend-ed by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule re-quires lenders to determine

whether prospective borrow-ers have the ability to repay their

mortgage loans over the long term and seeks to prohibit the “risky lending practices” the CFPB believes contributed to the 2008 housing crisis. The new rule covers traditional residential mortgages and any consumer credit transaction secured by a dwelling. The CFPB also proposed an amendment to this rule that would add other exemptions from the ability-to-repay requirements. The rule will become effective on January 10, 2014.

Rule RequirementsIn determining whether a borrower has the ability to repay both the principal and interest of a mortgage loan over the long term, lenders must obtain the borrower’s fi nancial information from a reliable third-party. Lenders must document the borrower’s employment status, income and assets, current debt obligations, alimony, child support, credit history, monthly payments on the mortgage loan, monthly payments on any other mortgages on the same property and monthly payments for mortgage-related obligations. No-doc or low-doc loans are no longer permissible, and the ability to repay teaser rates can no longer be the basis for determining whether to provide a mortgage loan.

Borrowers attempting to refi nance “non-standard” mortgages to “standard” loans are exempted from the ability-to-pay require-ments if certain conditions are met. “Non-standard” mortgages are those that can lead to payment “shock” resulting in default,

such as adjustable rate mortgages, interest-only loans, and negative amortization loans. “Standard” mortgages must have required characteristics such as a fi xed interest rate for fi ve years, lower monthly payments and total points and fees that do not exceed three percent of the loan amount.

Presumed Compliance - Qualifi ed Mortgages • Lenders will be presumed to have satisfi ed the ability-to-

repay requirements with respect to “Qualifi ed Mortgages,” which are mortgages that (i) generally are available only to people with debt-to-income ratios less than or equal to 43 percent, (ii) do not include points or fees in excess of three percent of the total loan amount, and (iii) do not include toxic loan features, such as terms that exceed 30 years, interest-only payments, balloon payments (except as described below), or negative-amortization payments.

Balloon-payment mortgage loans originated by lenders in rural or underserved areas also qualify as Qualifi ed Mortgages if they have a fi xed interest rate, a term of at least fi ve years and meet certain underwriting criteria. The lenders must have less than $2 billion in assets, originate at least 50 percent of their fi rst-lien mortgage loans in rural or underserved counties and originate no more than 500 fi rst-lien mortgage loans per year.

The rule also includes a transitional provision expiring in a maximum of seven years that expands the defi nition of Quali-fi ed Mortgage to include loans that do not satisfy the 43 percent debt-to-income ratio threshold, but otherwise meet the stan-dards set by Fannie Mae, Freddie Mac or other government housing agencies.

Two types of Qualifi ed Mortgages have different protective fea-tures for borrowers and different legal consequences for lenders: • Qualifi ed Mortgages with a rebuttable

presumption. Lenders offering higher-interest mortgage loans (typically to borrowers with insuffi cient or weak credit history) are presumed to have determined that the borrower has an ability to repay the loan. However, borrowers can challenge that presumption by proving they



19

did not have suffi cient income to repay the mortgage loan.• Qualifi ed Mortgages providing a safe harbor for

lenders. With respect to Qualifi ed Mortgages that are lower-priced (generally because the borrower presents fewer credit risks), lenders have a safe harbor against challenges by borrowers claiming that a lender did not comply with the ability-to-repay rules. Borrowers are not precluded from challenging lenders if the loan does not otherwise meet the defi nition of a Qualifi ed Mortgage or for violating any other federal consumer protection.

Proposed Ability-to-Repay Amendments The CFPB also proposed certain amendments to the ability-to-repay rule that include, notably, a provision to give Qualifi ed Mortgage status to mortgage loans originated by smaller credi-tors, such as community banks and credit unions which originate and hold mortgage loans in their own portfolios.

The CFPB would like to fi nalize these proposals this year and have them go into effect simultaneous with the effectiveness of the ability-to-repay rule in January 2014.

contributions to the bank’s success. The bank is positioned to respond to the low probability/high impact scenario of an untimely death by providing a source of fi nancial security to the executive’s family.

Other Considerations in Constructing a BOLI Portfolio

The construction of a BOLI portfolio does not lend itself to a cookie-cutter approach. The bank’s goals, time horizons, financial metrics, capital position, risk tolerance, tax position, corporate structure, business model, and other considerations must be evaluated. Once this is done from the perspective of a potential BOLI purchase, BOLI products must be evaluated for suitability. Product considerations include product type (general account, hybrid, or separate account), credit rat-ings, guarantees, liquidity/transfer restrictions, rate history, market commitment, product rate crediting methodology and trends, etc. Only then can a portfolio be constructed using the appropriate combination of carriers and products that will align with the bank’s goals and requirements.

Mr. Bratten can be reached at 303-482-1844, or by email at [email protected]. Visit their website at www.bfsgroup.com to view a brief video about BFS Group.

BOLI – continued

Welcome to Denver.

Ernie Panasci Managing Partner 303.376.8402

[email protected]

5613 DTC Parkway, Suite 970

Greenwood Village, CO 80111

Stinson is proud to announce the addition of partners Ernie Panasci, Deborah Bayles,

Zsolt Bessko, Kristin Godfrey and Perry Glantz, along with four associate attorneys

in our new Denver Tech Center office. Our new partners represent many financial

institutions throughout the Rocky Mountain and Southwest regions. They also offer

legal counseling in corporate, securities, M&A, litigation, IP and real estate matters.

Please join us in welcoming our Denver team. Stinson.com

Denver

Kansas City

St. Louis

Phoenix

Washington, D.C.

Omaha

Wichita

Overland Park

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Decatur The choice of a lawyer is important and should not be based solely on advertisements.

Mark Goldschmidt and Shawn Turner are securities and M&A attorneys in the fi rm’s Banking and Financial Institutions Group. Patton Boggs LLP is a Washington, DC headquartered international law fi rm and represents community and regional bank-ing and fi nancial institutions in Colorado and nationally.

20


Beyond FrontenacSpousal Guarantees Are Not Just a Loan

Enforcement Issue Much has been written and discussed

regarding the recent decision of the Missouri Court of Appeals last September in Fronte-nac Bank v. T.R. Hughes, Inc. However, the issue of obtaining spousal guarantees is now reverberating beyond banks simply seeking to enforce these spousal guarantees.

In the Frontenac case, the Court of Ap-peals upheld the lower court’s decision which found Frontenac Bank had violated the Equal Credit Opportunity Act (“ECOA”) when ob-taining guarantees from the spouse. Among the lower court’s findings in reaching its deci-sion, the court determined that:• It was Frontenac’s practice to require the

submission of financial statements and then to consider the submission of a joint financial statement as an application for joint credit.

• The evidence at trial showed that Frontenac failed to conduct any analysis of the loans sued upon with respect to

the borrowers’ creditworthiness prior to requiring the spousal guarantee.

• Frontenac did not demand the wife’s guarantees based on any purported relationship she had with the borrowers. Rather, the guarantees were demanded solely on the basis of the spousal relationship.

With these findings, it was not surprising the court determined a violation of the ECOA had occurred and the spousal guarantees were rendered void and unenforceable.

On the heels of this decision, we are find-ing that spousal guarantees are a point of emphasis in recent compliance examinations of Missouri banks. Examiners are reviewing both loan policies and specific loan files to confirm ECOA and Regulation B compli-ance. To the extent a loan includes a spousal guarantee, the loan file must indicate that an additional guarantee was necessary to sup-

FEATUREARTICLE

“Frontenac was an

important wake up

call to banks to ensure

they will be successful

when enforcing a

spousal guarantee.”

ERNIE PANASCIPartnerStinson Morrison Hecker LLP

JASON NONNEMAKERAssociateStinson Morrison Hecker LLP



21

port the extension of credit, or that the spouse’s guarantee was obtained in a manner compliant with the ECOA and Regulation B.

It is important to remember that there are clear instances under Regulation B in which a guarantee from a spouse may be obtained in compliance with the regulation. Below are some of the instances provided for in Regulation B permitting spousal guarantees: • As explained in the official staff interpretations, a lender

may require the personal guarantee of the partners, directors or officers of a business, and the shareholders of a closely held corporation, even if the business or corporation is creditworthy. This is permitted so long as the guarantee is obtained based on the guarantor’s relationship with the business or corporation, not on a prohibited basis. To the extent a lender obtains a guarantee on this basis, the loan file must properly document that the guarantee was obtained based on such a relationship.

• In addition, a lender is permitted to request a guarantor under certain circumstances. If, under a lender’s standards of creditworthiness, the personal liability of an additional party is necessary to support the credit requested, the lender may request a cosigner, guarantor, endorser, or similar party. The applicant’s spouse may serve as this additional party, but the bank cannot require that the spouse be the additional party.

• Regulation B also permits the lender to require the signature of the applicant’s spouse or other person on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the property being offered as security available to satisfy the debt in the event of default, for example, an instrument to create a valid lien, pass clear title, waive inchoate rights, or assign earnings. However, the decision by the Missouri Court of Appeals in Frontenac provides a word of caution to lenders utilizing this exception under Regulations B. In particular, the court noted that an unlimited personal guaranty was more than a financial instrument necessary to make property being offered as security available to satisfy a debt upon default. In contrast, the court cited favorably a

Tennessee case where a limited guaranty was obtained from a spouse. In the case, the wife’s guaranty was limited to the wife’s interest in the property owned with her husband, the debtor, as tenants by the entirety. The guaranty was secured with a mortgage deed on the property. Under such circumstances, the Tennessee court found that this method to obtain an interest in the real property offered as collateral was proper.

A careful assessment of your bank’s loan policies with respect to spousal guarantees is necessary in ensuring com-pliance with ECOA and Regulation B. In addition, if your bank obtains a spousal guarantee from a spouse who is not involved with the borrower as a partner, director or officer of the business or a shareholder of a closely held corporation, you should ensure that your loan files include appropriate documentation to evidence compliance with the ECOA and Regulation B. It is important to note that a bank should take a similar approach where an uninvolved spouse enters into a loan transaction as a co-borrower.

The risks to banks extend beyond problems in enforcing spousal guarantees. Violations of the ECOA and Regulation B subject a lender to significant penalties and liabilities, including: • Civil liability for actual and punitive damages in

individual or class actions. The ECOA provides for awarding of costs and reasonable attorney’s fees to an aggrieved applicant in a successful action.

• A banking regulator may refer a matter to the Attorney General of the United States.

• Violations of the ECOA provide a basis for banking regulators to utilize other enforcement tools, including cease and desist orders, civil money penalties or requiring the lender to void the spouse’s guarantee.

Frontenac was an important wake up call to banks to ensure they will be successful when enforcing a spousal guarantee. However, banks should also be on notice that their regulators will be closely scrutinizing any guarantee obtained from an uninvolved spouse as well.

A careful assessment of your bank’s loan policies with respect to spousal guarantees is necessary in ensuring compliance with ECOA and Regulation

B. Banks should also be on notice that their regulators will be closely scrutinizing any guarantee obtained from an uninvolved spouse as well.

22


Mark Abell was recently asked to become a part of a new program offered by the Colo-rado Bankers Association – the Center for Bank Advocacy. This program is a one-year program spent demystifying the legislative process (both in Colorado and on a Federal level), meeting with our legislators and lob-byists, and understanding the key issues our industry faces. The goal of the program is to help educate the participants about leg-islative actions being contemplated which could impact (positively or negatively) our industry, and to get more bankers involved in the process.

I am sure it is no surprise to any of you that our industry has taken a beating, both in the press and the court of public opinion, and that government at both the state and national level has recently passed, and continues to contemplate, an unprecedented level of new laws and regulations that will impact our industry. Current hot topics at the state legisla-ture include more restrictive foreclosure laws, financing and banking the marijuana industry, and protecting against elder abuse. At the national level, the rulemaking behind Dodd-

Frank and the Durbin Amendment continues to limit the ways a bank can make a profit and expand regulatory oversight; the potential adoption of International Banking Standards (Basel III) would have a strong negative impact on access to capital; and the Consumer Finan-cial Protection Bureau could have significant impact on our industry.

You can help our cause. Watch for ways you can educate our clients and our communities and help them understand the role banks play

in our economy, how we help build our communities through our investment and lending activities, how access to capital builds business and improves lives, and how new regulations intended to create a healthy industry could have a disastrous effect through unintended consequences.

Watch for more news on legislative issues in future com-munications – and be on the lookout for specifi c ways you can help. We all need to take up this cause. The impact on our industry – and our careers – will be signifi cant – one way or the other.

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