Monthly Archives:' March 2014

Net Investment Income Tax

Passed as part of the Health Care and Education Reconciliation Act of 2010 and codified as Internal Revenue Code (“Code”) section 1411, the Net Investment Income Tax (NIIT) imposes a 3.8% tax on net investment income of individuals, trusts, and estates for tax years beginning on or after January 1, 2013. Proposed regulations were issued in late 2012 and after a review of numerous comments from the legal community and interested parties the IRS issued final and new proposed regulations implementing the NIIT in late 2013. If you have questions on if you are subject to the tax, how the tax is calculated and which types of income will be taxed contact Patrick J. Kennedy, Jr.

Kicks for Kindness

Kennedy Sutherland is proud to support the community in which we work and live, which is why we are active in a variety of civic, community, church, educational and charitable organizations. Please join us in “Kicks for Kindness” as we help Churchill High School attempt to break the Guinness Book World Record for the longest chain of shoes. The record is currently about 25,000 shoes and they are shooting for 30,000. From now until April 15th we will be collecting shoes on their behalf at our office. After this attempt, Churchill High School will be donating all of the shoes to Soles for Souls and Whitehouse & Schapiro, two organizations that help people in need domestically and abroad.

http://www.ksat.com/news/-Kicks-for-Kindness-to-break-world-record/-/478452/24747258/-/u9rwf9z/-/index.html

Basel III Capital Rule for Subchapter S Banks

Kennedy Sutherland attorney, Patrick J. Kennedy, Jr., sent a letter to Chair Yellen, Comptroller Curry and Chairman Greenberg expressing continued concern regarding the unequal treatment depository institutions and their holding companies that elect to be taxed under Subchapter S of the Internal Revenue Code (IRC) receive compared to their peers taxed under Subchapter C, especially when considered in the context of the capital conservation buffer rules presently contained in Basel III and regulatory dividend restriction policy.

In addition to revisiting the dividend restriction rule contained in the Basel III Capital Conservation Buffer provisions, he encouraged the Agencies to support efforts to expand access to capital for Subchapter S banks by supporting an increase of the shareholder limit from 100 to 500 and permitting entities other than natural persons and trusts to hold shares of an S corporation. Finally, he encouraged the Agencies to support expansion of capital instruments for Subchapter S banks to include preferred stock.

These issues are of critical importance to one-third of the banks in the United States, 90% of which are under $1 billion in assets and serve as the essential credit back bone of smaller communities and their local businesses throughout the country.

In the letter Mr. Kennedy strongly urges the Agencies to embrace the Subchapter S bank community and undertake a concerted effort to promote their health and ability to raise capital and function as freely as possible in the best interest of their shareholders and communities. Mr. Kennedy further states that he believes this can only be achieved through discussion and policy-making that includes the needs and interests of Subchapter S banks at the outset of the process rather than as a mere afterthought.

Download File

Proposals on Minimum Requirements for Appraisal Management Companies

Six regulatory agencies (the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau, the Federal Housing Finance Agency, and the National Credit Union Administration) issued a proposed rule that would implement minimum requirements for state registration and supervision of appraisal management companies (AMCs).

The minimum requirements in the proposed rule would apply to states that elect to establish an appraiser certifying and licensing agency with the authority to register and supervise appraisal management companies. The proposed rule would not compel a state to establish an appraisal management companies registration and supervision program, and there is no penalty imposed on a state that does not establish a regulatory structure for appraisal management companies. However, an AMC is barred by section 1124 from providing appraisal management services for federally related transactions in a state that has not established such a regulatory structure.

Under the proposed rule, participating states would require that an AMC:

  • Register in the state and be subject to supervision;
  • Use only state-certified or licensed appraisers for federally related transactions;
  • Require that appraisals comply with the Uniform Standards of Professional Appraisal Practice;
  • Ensure selection of a competent and independent appraiser; and
  • Establish and comply with processes and controls under the appraisal independence standards established under the Truth in Lending Act.

The proposed rule also would require certifying and licensing agencies of a participating state have certain authorities, including the authority to:

  • Approve or deny initial AMC registration applications and applications for renewals;
  • Examine the AMC and require the AMC to submit information to the state;
  • Verify that the appraisers on the AMC’s appraiser network or panel hold valid state certifications or licenses;
  • Conduct investigations of AMCs to assess potential violations of appraisal-related laws;
  • Discipline an AMC that violates appraisal-related laws; and
  • Report an AMC’s violation of appraisal-related laws, disciplinary and enforcement actions, and other information about an AMC’s operations to the Appraisal Subcommittee of the Federal Financial Institutions Examination Council.

The proposed rule would provide states 36 months after its effective date to implement the minimum requirements. In conjunction with the proposal, the Federal Deposit Insurance Corporation is proposing to rescind appraisal regulations promulgated by the former Office of Thrift Supervision (OTS). The OTS appraisal regulations are duplicative of the FDIC’s appraisal regulations in Part 323. Similarly, in a separate rulemaking, the Office of the Comptroller of the Currency is rescinding appraisal regulations promulgated by the former OTS.

The agencies are seeking comments from the public on all aspects of the proposal. The public will have 60 days to review and comment on the proposal and the proposed Paperwork Reduction Act analysis. The proposal and information on commenting can be viewed in the Federal Register.

CFPB Proposes New Disclosures for Prepaid Cards

Yesterday, the Consumer Financial Protection Bureau (CFPB) announced it has begun testing two new potential consumer disclosure models for prepaid cards in order to provide a standard format for fee disclosure. Currently, each prepaid card company’s retail package discloses different information, which makes it difficult to do side-by-side comparisons. The goal of the proposed disclosures is to present a prepaid card’s most important fees so a consumer can easily identify the best prepaid card for their needs.

Content wise, the two models models are for the most part identical (maintenance fees, reload fees, per purchase fees, ATM withdrawl fees, balance inquiry fees, and inactivity fees) with the exception of a “decline” fee which appears on only one of the models. The two models disclosure forms have currently been tested in Baltimore and Los Angeles and a third select market will be tested soon. CFPB is also seeking comments on the model disclosure through its social media channels (blog, twitter, facebook) and has asked that anyone interested comment through email. Following testing, the CFPB plans to propose a rule “later this spring.”

report released by The Pew Charitable Trusts finds that general purpose reloadable prepaid cards have become increasingly accessible for consumers and in many instances are now more affordable than basic checking accounts. Although prepaid cards offer many benefits to consumers, protections lag far behind other banking products. There are no federal laws or regulations to protect consumers from hidden fees, unauthorized transactions, or loss of funds. According to The Pew Charitable Trusts, a general purpose reloadable (GPR) prepaid card is a relatively new consumer financial product growing in popularity: a debit card that is not attached to a traditional, individual checking account. The cards can be used at ATMs and retail cash registers, and to make purchases online. U.S. consumers loaded more than $64 billion onto the cards in 2012, more than double the amount loaded in 2009.

Extending New Markets Tax Credit Program

Kennedy Sutherland, along with a group of more than 1,400 businesses, investors, nonprofit organizations and community leaders, sent letters to the House and Senate tax-writing committees, urging legislators to extend the New Markets Tax Credit (NMTC) program.

The New Markets Tax Credit  was established in 2000 by a bipartisan coalition of lawmakers. Over the last decade, the Credit has promoted and leveraged private-sector investments in distressed urban and rural communities, spurring economic growth, entrepreneurship, and job creation in areas that need it the most. Since 2003, New Market Tax Credit investments have directly created over 550,000 jobs at a cost to the federal government of under $19,500 per job and leveraged $60 billion in capital investment to credit-starved businesses in communities with high poverty and unemployment rates.

Over the last 30 years, federal spending on community development, measured as a share of Gross Domestic Product (GDP), has fallen by 75 percent. In many economically distressed urban and rural communities, the only capital resource available for revitalization – to finance growing small businesses and manufacturing ventures, construct child care and health care facilities, and invest in new grocery stores or supermarkets – is New Market Tax Credits.

The New Market Tax Credit is an effective and economical tool for attracting private sector capital, creating jobs and business opportunities, and improving the local economies of some of the poorest urban and rural communities in America. Due to the program’s results Kennedy Sutherland urged the Committee to prioritize an extension of the New Markets Tax Credit.

Mid Size Banks Stress Test

Three federal bank regulatory agencies (the Federal Reserve, the FDIC and the Comptroller of the Currency) issued a press release regarding final guidance describing supervisory expectations for annual stress tests. Financial institutions with total assets of $10 – $50 billion are required to conduct the stress tests annually under rules issued pursuant to Dodd-Frank Wall Street Reform (Section 165(i)(2)) and Consumer Protection Act. These firms are required to perform their first stress tests under the Dodd-Frank Act by March 31, 2014.

The final Guidance for Medium-Size Banks is outlined as follows:

  • Stress Test Timelines
  • Scenarios for Stress Tests : Medium-Size Banks must assess the potential impact of a minimum of three macroeconomic scenarios—baseline, adverse, and severely adverse—on their consolidated losses, revenues, balance sheet (including risk-weighted assets), and capital.The Federal Agencies will provide a description of any additional scenarios no later than Nov. 15 each calendar year.
  • Stress Test Methodologies and Practices : In conducting a stress test, Medium-Size Banks must estimate loss projections, PPNR, balance sheet and risk-weighted asset projections, estimates for immaterial portfolios, projections for quarterly provisions and ending allowance for loans and lease losses, and projections for quarterly net income for each scenario. Stress test methodologies and key practices should be commensurate with the bank’s size, complexity and sophistication. Key practices for stress tests include the appropriate use of data sources, data segmentation and model risk management. Medium-Size Banks may use partially validated risk models, provided that such banks have (1) made an effort to identify models based on materiality and highest risk and to prioritize validation activities accordingly; (2) applied compensating controls so that the output from models that are not validated or are only partially validated are not treated the same as the output from fully validated models; and (3) clearly documented such cases and made them transparent in reports to model users, senior management and other relevant parties.
  • Estimating the Potential Impact on Regulatory Capital Levels and Capital Ratios
  • Controls, Oversight and Documentation : Senior management must establish and maintain a system of controls, oversight and documentation, including policies and procedures designed to ensure that its stress-testing processes comply with Dodd-Frank requirements. Board of directors or a committee must then review and approve the stress-testing policies and procedures processes. In addition, the board of directors and senior management must receive a summary of the results of the stress test. The board of directors and senior management must consider the results of the stress test in the normal course of business and as part of the bank’s ongoing capital planning, assessment of capital adequacy and risk management practices.
  • Report to Supervisors : Medium-Size Banks must report the results of the stress test to the appropriate Federal Agencies by March 31 of each year.
  • Public Disclosure of Stress Tests : Medium-Size Banks must also publicly disclose a summary of the results of the stress test in the period beginning on June 15 and ending on June 30 of each year. A summary of the stress test results should also be included on the bank’s website.

The agencies’ stress test rules are flexible to accommodate different risk profiles, sizes, business mixes, market footprints, and complexity for companies in the $10 billion to $50 billion asset range. Consistent with this flexibility, the final guidance describes general supervisory expectations for these companies’ Dodd-Frank Act stress tests, and, where appropriate, provides examples of practices that would be consistent with those expectations.

The final guidance from the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency is similar to proposed guidance issued by the agencies last year. The agencies clarified certain aspects in response to comments received.

Read More Here

Are Small Banks Deeply Effected by Dodd-Frank?

A study was recently published by The Mercatus Center at George Mason University on the effects of Dodd-Frank on small banks, defined as banks with less than $10 billion in assets each serving mostly rural and small metropolitan areas. The 96 question, web based survey relied on responses from about 200 banks across 41 states and was conducted between July 2013 and September 2013.  A large majority (65.6%) of respondents viewed Dodd-Frank as more burdensome than the Bank Secrecy Act, and the participating banks reported substantially increased compliance costs in the wake of new regulations.

The study sought to analyze the impact of increased regulations on different areas of a small bank’s operations, including products and services offered. 82.9% of respondents indicated that their compliance costs had increased by more than 5% since Dodd-Frank. 94% percent of the respondents stated hey would not be adding new products or services as a result.With one respondent stating, “We will not be adding any products, services or lines of business because of Dodd-Frank. It makes compliance too difficult and we will only be reducing the products offered. . . . These regulations have all but destroyed our market and will do the same to the banking industry as a whole if nothing is done to prevent further damage.” Respondents had already discontinued or were anticipating discontinuing residential mortgages, mortgage servicing, home equity lines of credit, overdraft protection, and credit cards.

The survey also stated that 71% of small banks surveyed are most concerned about the Bureau of Consumer Financial Protection and the new mortgage rules. According to the study, small banks have responded to the increased regulatory burdens by shrinking the products and services they offer, particularly in the mortgage sphere. The study’s authors urge federal policymakers to support small financial institutions by “freeing them from regulatory burdens that impose costs without corresponding benefits.”