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CBAI Comments on CFPB’s Proposed QM Amendments

This week CBAI submitted comment letters to the Consumer Financial Protection Bureau (CFPB) regarding proposed amendments to revise the definitions of “small creditor” and “rural” and “undeserved” areas which provide exemptions to the ability to repay (ATR) Qualified Mortgage (QM) underwriting requirements and escrow requirements for higher priced mortgage loans (HPML).

CBAI recommended that all community bank and thrift loans held in portfolio for the life of the loan, including balloon payment loans, in all geographic areas, should receive automatic QM status and an automatic exemption from escrow requirements for HPMLs. Community banks and thrifts that hold loans in their portfolio have 100% of the credit risk and have every incentive to ensure these loans are properly underwritten, well documented, affordable to the consumers, and properly serviced throughout the life of the loans.

If the CFPB chooses not to implement these recommendations, then CBAI supports (with qualifications) the proposed increase in the “small creditor” exemption, supports the expanded definition of “rural” areas, and again calls on the Bureau to expand the definition of “underserved” areas to include economically challenged areas. Read First Comment Letter. Read Second Comment Letter.

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CBAI Member Devon Bank Hosts Iraqi Delegation

March 4, 2015

CBAI member Devon Bank in Chicago hosted an Iraqi delegation to discuss the legal responsibilities of American banks to detect, prevent, and report fraudulent and suspicious activity. The Iraqi delegation was visiting Chicago through the U.S. State Department’s International Visitor Leadership Program to explore best practices in government transparency and accountability and to learn strategies for addressing corruption. The 13 member delegation included representatives from the Central Bank of Iraq, Iraqi Kurdistan Parliament, Independent High Electoral Commission, Commissions on Integrity, Council of Ministers Secretariat, Supreme Board of Auditing, Arab Political Council, Baghdad Provincial Council, and the University of Basrah.

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Devon Bank’s Chairman, President & CEO, David Loundy, welcomed the group and provided opening remarks, introductions, and discussed fraud monitoring at the Bank as a whole. Loundy was joined by several officers and managers (Assistant Vice President and Bank Secrecy Act Officer, Jennifer Wiedemann; Assistant Vice President and Bank Secrecy Act Administrator, Dianne Wilk; Personal Banker, Hazan Marben; and Residential Financing Specialist, Saed Alsaadi) who presented the Bank’s policies, procedures, controls and audits regarding account opening, data verification, monitoring account usage, money laundering and reporting suspicious activity (SARs). CBAI’s Vice President Federal Governmental Relations, David Schroeder, informed the delegation about how the Association supports its members in complying with laws and regulations through effective advocacy with legislators and regulators, quality education/training, and products and services.

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CBAI Urged Fed to Implement Rules to Improve Community Bank and Thrift Access to Capital

In separate comment letters to the Board of Governors of the Federal Reserve System, CBAI urged the prompt implementation of H.R. 3329 (“Act”) which would increase the Small Bank Holding Company Policy Statement asset threshold from $500 million to $1 billion, expand the scope to include previously excluded small savings and loan holding companies, and make the appropriate technical changes to regulatory capital-reporting requirements.

CBAI appreciates the Board’s recognition that these small holding companies have less access to capital than larger ones. We have consistently advocated for an increase in the Policy Statement asset threshold and supported a threshold increase in the Act. The current proposed increase to $1 billion will include 600 more bank and savings and loan holding companies under the Policy Statement and is a significant step in the right direction to make it easier for these holding companies to issue debt or equity and reduce their regulatory-reporting burden. Read First Comment Letter. Read Second Comment Letter.

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Rewards-based Checking for Rising Rates

High-yield, rewards-based checking accounts can help financial institutions weather a rise in interest rates.

The Federal Reserve has signaled that rising interest rates might be on the way, raising the risk that community banks’ margins will be squeezed in the future. Help is available, though, and it comes from a somewhat surprising source: high-yield, reward-based checking accounts.

While many banks use certificates of deposit (CDs) to mitigate rate increases, that’s a short-term solution to a long-term problem. Reward checking accounts, by contrast, provide a substantial cost of funds (COF) discount that steadily increases as interest rates rise. Additionally, these accounts work to foster closer, more profitable customer relationships and grow institutions’ core deposits.

When are rates going to rise? No one knows for sure, but it seems likely to happen soon. At its most recent meeting, the Federal Reserve announced that it was ending its bond-buying program, which has been keeping long-term rates low, and indicated that it might consider raising its benchmark short-term rate by mid-2015. Averaging the forecasts of members of the Federal Open Market Committee suggests that the federal funds rate could increase 1.13% in 2015, 2.5% in 2016 and 3.75% in the long run.

Bigger Discount

Whenever rates go up, financial institutions will see their interest costs rise and their margins compress. That’s where high-yield reward checking accounts come in. Rates on these products are tiered and based on qualification criteria that not every account holder will meet, which provides a COF discount that other types of deposit accounts can’t match. For example, the median promotional rate nationwide for high-yield, reward-based checking accounts was 1.98% in 2013, according to our data. The median COF, however, was 0.94%, representing a 52% discount. By comparison, a 3.70% APY CD has a COF of exactly 3.70% (the average 3-year rate prior to the 2008 economic collapse).

That COF discount on reward checking only increases as rates rise. A 52% discount on 4% is more than a 52% discount on 2%.

In addition to the COF benefits, high-yield checking accounts can grow banks’ core deposits, providing a stable source of funds for lending, while helping cultivate longer, closer relationships with their customers. By providing customers with a product that drives loyalty and regular use, community banks are staying top-of-mind with their customers and providing them with a product that’s of immediate value. The results are noticeable when it comes to the bottom line. According to an analysis of more than 600 of our clients in 2013, the average lifetime value of a high-yield, rewards-based checking account is $2,192. For a traditional checking account, it’s just $576.

Rising interest rates will affect all banks, in one way or another, and now is the time to get ahead of potential pitfalls. Whether interest rates rise in two months or two years, the addition of high-yield, rewards-based checking accounts can help you weather the change – and boost the value of your customer relationships in the meantime.

Mr. Foster is chief financial officer of Austin, Tex.-based BancVue, a CBSC Preferred Provider and the 2007 CBAI Vendor of the Year . He can be reached at Jeremy.Foster@bancvue.com.

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CBAI Files Amicus Curiae Brief to Protect Lender Interests

The Community Bankers Association of Illinois (CBAI) filed an Amicus Curiae brief with the United States Supreme Court urging a reversal of an Eleventh Circuit Court of Appeals’ decision to permit wholly underwater junior liens to be stripped-off or voided in bankruptcy. This matter was brought to our attention by CBAI’s Associate Member SmithAmundsen LLC. Attorney John Collen of that firm drafted and submitted the brief on behalf of CBAI. CBAI’s Board of Directors unanimously approved the filing of this brief to protect the lender interests of Illinois community banks.

In this case, the Appeals Court allowed junior mortgages to be voided or stripped-off based on the judicial determination the liens had no monetary value at the time the debtors were discharged in bankruptcy because the real estate was valued at an amount less than the indebtedness that is subject to the first mortgage. The debtors, however, retained their respective properties to which the liens had been previously attached. Accordingly, the secured party lost the ability to recover any of its indebtedness from possible future appreciation of the value of the properties. Had the secured party’s liens been allowed to pass through bankruptcy unaffected, in accordance with century-old practice, the secured party would have had a chance to recover something in the future rather than being judicially sentenced to recover nothing. The secured party was therefore deprived of a valuable right, even though, at a particular moment in time, its liens supposedly would have recovered no value from the liquidation sales.

It is fundamentally wrong to confuse a lien’s liquidation value at a particular moment in time with the value of the property right which the lien represents. This line of reasoning ignores the fact that even a wholly underwater junior lien is a valuable proper right and that a junior lien which is wholly underwater today may acquire value as underwater property values fluctuate (increases) in the future. This line of reasoning also ignores the fact that valuations/appraisals are subjective and can fluctuate widely; so that it is fundamentally unfair to void a junior lien because, for example, at a point in time a judge decides there is a $1,000 underwater value based on one appraisal when another appraisal could state there is $5,000 more in value and that no underwater situation exists. The brief concluded by respectfully urging the Appeals Court decision be reversed.

CBAI appreciates SmithAmundsen bringing this matter to the attention of CBAI and for their valuable efforts in what will hopefully be a reversal of the Appeals Court decision. Read Amicus Brief.