Monthly Archives:' May 2014

OCC Issues Collective Investment Funds Booklet

The Office of the Comptroller of the Currency (OCC) issued the “Collective Investment Funds” booklet of the Comptroller’s Handbook. This revised booklet replaces a similarly titled booklet issued in October 2005. The revised booklet provides updated guidance to examiners and bankers on collective investment funds offered to customers of national banks and federal savings associations; explains the risks inherent in such products and services; and provides a framework for managing those risks. Specifically, this booklet:

  • Updates examination procedures and groups them by risk. The expanded examination procedures supplement the core assessment standards in the “Large Bank Supervision” and “Community Bank Supervision” booklets of the Comptroller’s Handbook.
  • Updates and expands the Risk Management section. The expanded section provides examples of effective investment risk management processes and provides more detailed explanation of collective fund benchmarks, valuation, and securities lending
  • Updates the audit and financial reports discussion.
  • Updates references.
  • Adds a discussion of board and senior management responsibilities regarding oversight of risk management.

Collective Investment Funds 2014

Note for Community Banks: This booklet applies to all banks that offer collective investment funds. A community bank’s board and management should identify the material risks associated with the provision of collective investment funds and establish a risk management system that effectively assesses, measures, monitors, and controls those risks.

CFPB Proposes to Amend Regulation P

The Consumer Financial Protection Bureau (“CFPB”)is  proposing to amend Regulation P (12 CFR Part 1016) , which among other things requires that financial institutions provide an annual disclosure of their privacy policies to their customers. The amendment would create an alternative delivery method for this annual disclosure, which financial institutions would be able to use under certain circumstances.  CFPB Director Richard Cordray has said that the proposed rule “would make it easier for consumers to find and access privacy policies, while also making it cheaper for industry to provide disclosures.”

Currently the Gramm-Leach-Bliley Act (GLBA) requires that financial institutions deliver annual privacy notices to consumers individually. However, the proposed rule would allow financial institutions to simply post their annual privacy notices online, so long as they limit their customer data-sharing and satisfy other requirements such as not sharing data in a manner that would trigger a consumer’s opt-out rights.

On May 28th, the CFPB published a notice in the Federal Register extending the comment period for its proposed rule that would amend some of the privacy notice requirements imposed by the Gramm-Leach-Bliley Act (GLBA). The CFPB originally published the notice of proposed rulemaking in the Federal Register on May 13th. The CFPB is now extending the deadline for comments to be filed from June 12, 2014 to July 14, 2014.

CFPB Increases Transparency, Ending Closed-Door Meetings

The Consumer Finance Protection Bureau (CFPB) has announced that it is ending its closed-door meeting policy for its four advisory groups and will open the meetings to the public. Those groups consist of the Community Bank Advisory Council, the Credit Union Advisory Council, the Academic Research Council, and the Consumer Advisory Board.

The CFPB stated that the change is intended “to provide more transparency and to be responsive to the requests (for more openness) we’ve received.” To provide more transparency and to be responsive to the openness request, the CFPB is changing the format of their Board and Council meetings starting with their June 18th meeting, where the public may attend (or watch online).

The Community Bank Advisory Council advises us on regulating consumer financial products or services and specifically to share the unique perspectives of community banks. They share information, analysis, and recommendations to better inform our policy development, rulemaking, and engagement work.

schedule of upcoming meetings is also available.

Tax Credits Provide Equity for the Right Projects

The Legislature has given the private sector a powerful tool to facilitate development in our cities and towns.

Following a growing trend in other states, Texas has established a new tax credit based on qualified rehabilitation expenditures on historic buildings. The new State Historic Preservation Tax Credit provides a credit against the state’s margins franchise tax of 25 percent of “qualifying rehabilitation expenses.”

The credit is designed to “twin” with the Federal Historic Tax Credit, which can amount to yield a credit of up to 20 percent of such expenses against federal income tax.

The state and federal historic tax credits, when properly used, can provide a cash subsidy for a project of up to 45 percent of the project cost, providing a powerful incentive for historic redevelopment in our cities and many small towns throughout the state.

The state credit generally follows the rules established in the federal program with respect to qualifying structures and expenditures. But it has a number of other features that make it much easier to qualify for and use, including the ability to freely transfer the credit to third parties willing to purchase the credit for cash.

To qualify for the 20 percent federal historic credit, a building must be listed or eligible for listing on the National Register of Historic Places or be located in an historic district and be designated as important to the overall character of the district. Only qualifying rehabilitation expenses are eligible for calculation of the credit.

Generally, qualified expenses are those costs that are added to the property basis. Common examples include the cost of work on the building structure, architectural and engineering fees, site survey fees, legal fees, development fees and other construction-related costs.

Qualified expenses, however, will not include acquisition or furnishing costs, the cost of any new additions or expansions, new building construction, parking lots, sidewalks, landscaping or other related facilities. In addition, if the rehabilitation substantially alters the original historic structure by, for example, adding multiple stories on a one-story historic structure, such expenditures will likely not qualify for the credit.

Adaptive uses, for example, converting a school building into a modern office structure or hotel, will generally qualify, assuming the exterior walls and other key architectural features of the buildings are preserved or enhanced by the renovation.

The 20 percent federal credit may be claimed by filing an application with the Texas Historic Commission. Ultimately, it’s filed with the National Park Service in Washington, D.C., which reviews and signs off on the project.

A 10 percent federal credit is available for buildings that are not eligible to be listed in the National Register, provided they were in service prior to 1936 and meet certain other requirements regarding the proposed rehabilitation.

The 10 percent federal credit requires no such application and can be claimed on qualifying rehabilitation expenses made to a building that was constructed prior to 1936.

To be eligible for the 25 percent state credit, an application must be filed with the Texas Historic Commission, which will certify the building and qualifying expenses. Only buildings in service after Sept. 1, 2013, may qualify for the state credit. Currently, the historic commission is working on rulemaking related to the state credit, and regulations governing implementation of the credit should be finalized later this year.

San Antonio has always been mindful of the importance of preserving historic structures. The recent call for development of abandoned or underused buildings in the city’s downtown is certainly consistent with that sensitivity, which has set us apart nationally.

This article is written by Patrick J. Kennedy Jr. The article appeared in the Guest Voices Column of the San Antonio Express News on May 19, 2014.

OCC's Remarks to State Bank Supervisors

At the Conference of State Bank Supervisors, which was held on May 14 in Chicago, IL, Comptroller of the Currency Thomas Curry urged state regulators to, among other things, avoid regulatory capture and ensure balanced supervision of nonbanks and banks. Mr. Curry stated that “The OCC also has focused its attention on community bank supervision. It is important to get it right with respect to both the rules of the road and supervision. Too many community banks failed during the crisis. The Material Loss Reviews or post mortems from the crisis share a common thread of failed banks that operated with flawed business plans, excessive real estate concentrations and inadequate capital for the level of risk.”

He later stated in his remarks, “Regulatory capture is a real threat” to federal and state banking agencies and the system more broadly. Regulators should never employ chartering authority to compete for “market share.” He also cautioned about the potential rise of the “shadow banking system”—the shift of assets from regulated depository institutions to less-regulated, non-depository institutions. He specifically identified the transfer of mortgage servicing rights as an example of that shift of assets, which “could carry with it the seeds for the next financial crisis if we do not act quickly and effectively.” He called on state regulators to make nonbank supervision, including with regard to mortgage servicing, a top priority.

Congressional Letter on Sub S Banks and Basel III

The American Bankers Association along with the Subchapter S Bank Association continues to urge bankers to contact the Agencies to express their concerns and ask that the rules be amended to eliminate the negative impact of the capital conservation buffer requirement’s limitation/prohibition on distribution on S Corp banks. The goal is to get the Agencies to effect a change during the phase-in period of the Final Rule that will address the problem. This is a Basel rule problem that should be resolved by the banking agencies. They are asking that the Basel rules take into account the unique structure of S-Corps in a way that provides equal treatment for C-Corp and S-Corp banks.

Congressional Letter on Sub S Banks and Basel III


CFPB Proposes Amendments to Mortgage Rules

The Consumer Financial Protection Bureau (CFPB) on April 30th announced Amendments to the 2013 Mortgage Rules Under the Truth in Lending Act (Regulation Z) which took effect in January of this year. The proposed amendments were published in Vol 79, No. 87 of the Federal Register on May 6th, 2014, and comments are due on or before June 5th, 2014. The proposed rule would provide an alternative small servicer definition for nonprofit entities that meet certain requirements, amend the existing exemption from the ability- to-repay rule for nonprofit entities that meet certain requirements, and provide a limited cure mechanism for the points and fees limit that applies to qualified mortgages.

Specifically, the Bureau is proposing three amendments to the 2013 Title XIV Final Rules:

  • To provide an alternative definition of the term ‘‘small servicer,’’ that would apply to certain nonprofit entities that service for a fee loans on behalf of other nonprofit chapters of the same organization.
  • To amend the Regulation Z ability- to-repay requirements to provide that certain interest-free, contingent subordinate liens originated by nonprofit creditors will not be counted towards the credit extension limit that applies to the nonprofit exemption from the ability-to-repay requirements.
  • To provide a limited, post-consummation cure mechanism for loans that are originated with the good faith expectation of qualified mortgage status but that actually exceed the points and fees limit for qualified mortgages.

In addition, the CFPB is seeking comments on whether and how to provide a limited, post-consummation cure or correction provision for loans that are originated with the good faith expectation of qualified mortgage status but that actually exceed the 43-percent debt-to-income ratio limit that applies to certain qualified mortgages and feedback and data from smaller creditors regarding implementation of certain provisions in the 2013 Title XIV
Final Rules that are tailored to account for small creditor operations and how their origination activities have changed in light of the new rules.

Background on the Mortgage Rules and instructions for providing comments on any or all of the above proposed amendments are provided in the notice.

House Ways and Means Committee Addresses S Corporation Tax Extenders

This week the House Ways and Means Committee held a markup of bills that would make permanent certain tax extenders designed to help small businesses. Two of these bills (H.R. 4453 and H.R. 4454) specifically address tax treatment of S corporations. The tax provisions included in both bills were a part of the S Corporation Modernization Act introduced in 2013.

H.R. 4453 would make permanent the reduced five-year recognition period for built-in gains tax. The built-in gains or “BIG” tax, imposes a corporate-level tax on the built-in gains earned by C corporations that later make a Subchapter S election. The Internal Revenue Code imposes a tax on these built-in gains for a 10 year period form the S election. Over the years, temporary reductions or forbearance of this 10 year recognition period have been passed by Congress. H.R. 4453 would replace the 10 year recognition period with a reduced 5 year recognition period. This permanent reduction has the potential to free up access to the capital assets of many S corporations and could spur economic growth.

H.R.4454 would make permanent a rule regarding basis adjustments to stock of S corporations making charitable contributions of property. Under current law, charitable contributions made by an S corporation were accounted for in calculating the income tax liability of each shareholder based on that shareholder’s pro rata share of the contribution. Each shareholder’s pro rata share of the contribution reduces their basis in the corporation’s stock by the fair market value of the contributed property. In situations where the S corporation contributes appreciated property, shareholders would recognize gain on the sale of their stock due to this basis adjustment based on the fair market value of the property. Prior legislation amended this rule to allowed shareholders to reduce their basis in the stock in accordance with their pro rata share of the adjusted basis in the property. This provision has been extended several times, but expired for tax years beginning after December 31, 2013. H.R. 4454 would make this basis adjustment rule related to charitable contributions of property permanent and would encourage S corporations to increase their charitable contributions by reducing the likelihood that it will subject the shareholders to greater tax liability.

Along with several other business-friendly tax extenders, H.R. 4453 and H.R. 4454 were voted out of the House Ways and Means Committee on April 29th. Both bills, especially the permanent reduction in the BIG tax recognition period have the support of a wide range of industry groups.