Monthly Archives:' July 2014

Kennedy Sutherland to Speak at ESOPs Web Seminar

Close to 250 S corporation banks across the country sponsor an employee stock ownership plan.  ESOPs can be an effective tool in the right situation to create a market for bank stock, obtain tax incentives, raise capital and reward employees with the ability to own bank stock.  This program will explore the advantages and disadvantages of ESOPs and dispel myths associated with them.  Even if your bank has an ESOP, the program will provide useful information on how you can get more out of your ESOP.


-Overview of leveraged and non-leveraged ESOP transactions

-Transfers of 401(k) assets by employees to purchase shares of bank stock in the ESOPs

-Use of an ESOP to raise capital

-Overview of IRS requirements applicable to S corporation ESOPs

-Overview of bank regulatory requirements applicable to ESOPs


This session is a cost-effective way to learn more about ESOPs to help you determine if one could be helpful to your bank, or how you can get more out of the ESOP you currently have.  You may train as many individuals as you like for one set price.  There will be no travel costs, time lost from work and no one will be required to leave the institution.


This program is directed to CEOs, Presidents, CFOs, Human Resources Directors and members of the Board of Directors.


Alexander Mounts
Krieg DeVault LLP

Patrick J. Kennedy, Jr.
Managing Partner
Kennedy Sutherland LLP


CDFI Releases Data on NMTC Investments

The Community Development Financial Institutions Fund (CDFI Fund) released yesterday data on New Market Tax Credit (NMTC) Investments for the past ten years. Over $31.1 billion in New Markets Tax Credits (NMTC) investments have revitalized low-income communities nationwide in the past decade. To maintain its practice of transparency, the CDFI Fund released a breakdown of all NMTC investments reported to the CDFI Fund through fiscal year (FY) 2012. The CDFI Fund has awarded in total $40 billion in NMTC Allocation Authority through calendar year 2013. Community Development Entities that receive NMTC Allocation Authority are required to report on the tax credits for seven years, and the time lag in reporting means that more recent awards are not accounted for in the public data release.

As  mentioned before, the NMTC Program was established by Congress in December 2000 to help economically distressed communities attract private investment capital by providing investors with a Federal tax credit. Investments made through the New Markets Tax Credit Program are used to finance businesses and real estate projects in neglected, underserved low-income communities. 

Of the investments made:

  • 4,670 (57.9 percent) of the total number of NMTC investments, in the amount of $20,315,818,262 (65.3 percent), were in real estate development and leasing activities.
  • 3,234 (40.1 percent) of the total number of NMTC investments in the amount of $10,224,240,295 (32.9 percent) were in operating businesses. A small fraction of investments in operating businesses, totaling $398,684, were in microenterprises.
  • 156 (1.9 percent) of the total number of NMTC investments in the amount of $577,698,894 (1.9 percent) were investments in other financing purposes. 

Summary Report

CFPB Aims to Simplify Reporting Process for Financial Institutions

The Consumer Financial Protection Bureau (CFPB) aims to simplify the reporting process for financial institutions by proposing a rule  to improve information reported about the residential mortgage market. The goal of the proposed rule is to shed more light on consumers’ access to mortgage credit by updating the reporting requirements of the Home Mortgage Disclosure Act (HMDA) regulations. 

“It is critical that we shed more light on the mortgage market – the largest consumer financial market in the world,” said CFPB Director Richard Cordray. “The Home Mortgage Disclosure Act helps financial regulators and public officials keep a watchful eye on emerging trends and problem areas in the mortgage market. Today’s proposal would help us understand better how to protect consumers’ access to mortgage credit while simplifying the reporting requirements for financial institutions.”

Enacted in 1975, HMDA requires many lenders to report information about the home loans for which they receive applications or that they originate or purchase. The public and regulators can use the information to monitor whether financial institutions are serving the housing needs of their communities and identify possible discriminatory lending patterns. In 2010, the Dodd-Frank Act directed the CFPB to expand the HMDA dataset to include additional information about loans.

In 2012, 7,400 financial institutions reported information about approximately 18.7 million mortgage applications and loans. However, the HMDA dataset has not kept pace with the market’s evolution, such as adjustable-rate mortgages and non-amortizing loans. To rectify this concern, the CFPB proposed rule would expand to include:

  • Improving market information- This new information includes, for example: the property value; term of the loan; total points and fees; the duration of any teaser or introductory interest rates; and the applicant’s or borrower’s age and credit score.
  • Monitoring access to credit

In addition the CFPB  is looking to simplify HMDA reportingt requirements for financial institutions by:

  • Standardizing the reporting threshold
  • Easing reporting requirements for some small banks
  • Aligning reporting requirements with industry data standards
  • Improving the electronic reporting process
  • Improving data access

The proposed rule will be open for public comment through October 22, 2014.

Copy of Proposed Rule

S Corp Shareholder Basis Increase

On July 23, 2014, the Treasury Department and Internal Revenue Service (“IRS”) issued final regulations providing guidance on the circumstances under which an S corporation shareholder may increase their adjusted basis due to indebtedness of the S corporation. Internal Revenue Code (“Code”) Section 1366(d)(1) generally provides that the aggregate amount of losses and deductions taken by a shareholder in any tax year cannot exceed the sum of the shareholder’s adjusted basis in its stock and the adjusted basis of any indebtedness of the S corporation to the shareholder. To the extent a shareholder does not have sufficient basis in their stock to take losses in a particular year, they may use a loan to the S corporation to increase their basis and avoid having to carry forward losses to a subsequent year. The final regulations describe the circumstances under which such loans will be treated as “bona fide” indebtedness of the S corporation to the shareholder – allowing the shareholder to increase their basis by the amount of the indebtedness and recognize the losses currently.

The regulations amend Treasury Regulation Section 1.1366-2(a)(2) to define “basis of indebtedness” which is not otherwise defined in the Code. Finalized without substantive changes from the proposed regulations issued in 2012, the regulations provide that an increase in the shareholders basis is warranted only to the extent that indebtedness of the S corporation to the shareholder is “bona fide” – under general Federal tax principles. Further, shareholders may only increase their basis with respect to a guaranty of bona fide S corporation indebtedness to the extent they actually perform on that guaranty. The new regulations also provide several examples clarifying the interpretation of “bona fide” indebtedness in common situations.

While some courts have held that bona fide indebtedness exists only where a shareholder makes an actual economic outlay and is thus made “poorer in a material sense” as a result of the transaction, the regulations state that a basis increase will be permitted provided the indebtedness of the S corporation to the shareholder is bona fide, without regard to the economic outlay test. This standard would allow a basis increase in situations where a shareholder borrows funds from one wholly-owned S corporation and lends them to another wholly-owned S corporation and other transactions where there is no actual economic outlay by the shareholder, but, nonetheless, bona fide indebtedness exists.

With the implementation of these final regulations, shareholders of S corporation that desire to increase their adjusted basis in S corporation stock related to indebtedness of the S corporation should be mindful to structure debt arrangements as third-party or arm’s-length transactions, including execution of a note at third-party or market interest rates, adherence to repayment schedules and other formalities that would establish the indicia of bona fide indebtedness of the S corporation to the shareholder.

Should you have any questions or need guidance or assistance regarding the new regulations, please contact us at (210) 228-9500.

House to Hold Hearing on Impact of Dodd-Frank Act

Tomorrow, on Wednesday, July 23, 2014, the House Financial Services Committee will hold a hearing entitled “Assessing the Impact of the Dodd-Frank Act Four Years Later.” The hearing will explore a variety of specific provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203)—such as the Volcker Rule, the Orderly Liquidation Authority, and consumer financial protection provisions—and the cumulative effect that the legislation has had on the American financial services industry and the economy more generally over the four years since President Obama signed it into law. Most notably, the witness list includes former Congressman Barney Frank, who formerly chaired the Committee and for whom the Act is named (together with former Senator Chris Dodd).

The other witnesses scheduled to appear are:

  • Anthony J. Carfang, Partner, Treasury Strategies, Inc.
  • Thomas C. Deas, Vice President & Treasurer, FMC Corporation, on behalf of the Coalition for Derivatives End-Users
  • Paul H. Kupiec, Resident Scholar, American Enterprise Institute
  • Dale K. Wilson, Chairman, President, and Chief Executive Officer, First State Bank

On July 21, 2010, President Obama signed the “Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010” into law (Pub. L. No. 111-203). Drafted in response to the financial crisis of 2008 and 2009, in which the federal government bailed out a number of large financial firms at taxpayer expense, the Dodd-Frank Act is a sprawling piece of legislation, numbering over 2,300 pages in length and requiring federal regulators to embark on some 400 rule-makings. The Dodd-Frank Act represents the most ambitious change in the regulation of financial institutions since the Great Depression, and its reach extends not only to every financial institution in the United States, but to virtually every corner of the U.S. economy as well.

FDIC Guidance for Subchapter S Banks

The FDIC, yesterday afternoon, issued guidance outlining the circumstances under which the Agency would approve an S corporation bank’s request for relief from the dividend restrictions imposed under the Basel III capital conservation buffer. Exceptions will generally be granted to 1- and 2- rated banks which are adequately capitalized and are not subject to a written supervisory directive. While the guidance only applies to capital conservation buffer considerations, it does recognize that there may be other circumstances such as a bank returning to a healthy condition that might present circumstances where a dividend exception could be granted. The Agency noted that it does not expect the concern to be an issue for some time as a result of the three year phase-in through 2019. We are pleased that the FDIC recognizes the unique circumstances under which S corporation banks operate and hope this guidance will result in greater recognition and willingness by the Agencies to consider case by case dividend approvals to pay taxes in a broader set of circumstances, beyond the capital conservation buffer issue. Importantly, the Agency recognizes that the ability to pay dividends is a crucial element of an S corporation bank’s capital access strategy.  A more detailed description of the issuance follows.

Financial Institution Letter (“FIL”) 40-2014, issued by the FDIC, provides detail on the considerations for approving exceptions from the capital conservation buffer dividend restrictions as contemplated by 12 CFR 324.11(a)(4)(iv). The FIL was issued in response to broad-based industry concern about the ability of S corporation bank shareholders to satisfy their tax liability under dividend payout restrictions imposed by the capital conservation buffer.

Under the Basel III capital rules, a capital conservation buffer – measured as a percentage of a bank’s risk-based based capital ratio above the minimum requirements – serves to limit the amount dividends a bank can pay when the capital ratios fall below the buffer. Beginning in 2016, the capital conservation buffer will be phased-in over three years to a maximum buffer of 2.5% above minimum requirements, effective in 2019. If a bank’s risk-based capital ratio is greater than 2.5% above the minimum requirements, no dividend payout restrictions are imposed. As the capital ratio falls below this buffer, dividends are limited to between 20% and 60% of eligible retained income and bank’s with capital ratios that are not 0.625% above the minimum requirements may not pay any dividends.

These dividend payout restrictions have a unique effect on S corporation banks, where income, and thus tax liability, is passed through to its shareholders. Most S corporation shareholders rely on distributions from the corporation to satisfy this tax liability. The dividend payout restrictions imposed by Basel III can impair bank shareholders’ ability to pay the tax due by creating a situation in which S corporation bank shareholder recognize income from the S corporation, but regulatory restrictions prohibit a corresponding distribution to the shareholder.

FIL-40-20-14 explains that in certain circumstances an exception from the capital conservation buffer and dividend payout restrictions is available where (i) the circumstances warrant the payment of dividends, (ii) such payment is not contrary to the purpose of the rule, and (iii) the payment would not impair the safety and soundness of the bank. The FDIC emphasizes that this inquiry will be based on the particular facts and circumstances of each bank making a request. The FIL goes on to describe four factors that will be considered in each request for an exception from the rules:

1.   Is the S corporation requesting a dividend of no more than 40%  of net income?
2.   Does the requesting S corporation believe the dividend payment is necessary to allow the shareholders of the bank to pay income taxes associated with their pass-through share of the institution’s earnings?
3.   Is the requesting S corporation bank rated 1 or 2 under the Uniform Financial Institutions Rating System and not subject to a written supervisory directive?
4.   Is the requesting S corporation bank at least adequately capitalized, and would it remain adequately capitalized after the requested dividend?

The FIL goes on to describe how it will evaluate each of these factors and states that generally, request for an exemption to allow a dividend to S corporation bank shareholders to satisfy their tax liability will be granted where the above-described factors have been met by the requesting bank.

For further information, see the full text of FIL-40-2014 and the accompanying press release. If you have any questions regarding the FIL or implementation of the capital conservation buffer, please contact us at (210) 228-9500.

Comments Open for New Market Tax Credits

In Volume  79, No. 135 on Tuesday, July 15, 2014, The Internal Revenue Service (IRS) published a notice inviting/opening comments concerning existing final regulation T.D. 9171, New Markets Tax Credits. This regulation finalized the rules relating to the new markets tax credit (NMTC) under Internal Revenue Code 45D and replaced the temporary regulations that expired Dec. 23, 2004. A taxpayer making a qualified equity investment in a qualified community development entity that has received a new markets tax credit allocation may claim a 5-percent tax credit with respect to the qualified equity investment on each of the first 3 credit allowance dates and a 6-percent tax credit with respect to the qualified equity investment on each of the remaining 4 credit allowance dates. There are no changes proposed to the existing regulation at this time.Written comments should be received on or before September 15, 2014 to be assured of consideration.

CFPB Accepting Complaints on Prepaid Cards & Nonbank Products

The Consumer Financial Protection Bureau (CFPB) announced that it is now taking complaints from consumers about prepaid cards, such as gift cards, benefit cards, and general purpose reloadable cards. Consumers can also now submit complaints about additional nonbank products, including debt settlement services, credit repair services, and pawn and title loans. The Bureau requests that companies respond to complaints within 15 days and describe the steps they have taken or plan to take. The CFPB expects companies to close all but the most complicated complaints within 60 days. Consumers are given a tracking number after submitting a complaint and can check the status of their complaint by logging on to the CFPB website.

Consumers can submit prepaid card complaints to the Bureau about:

  • Problems managing, opening, or closing their account
  • Overdraft issues and incorrect or unexpected fees
  • Frauds, scams, or unauthorized transactions
  • Advertising, disclosures, and marketing practices
  • Adding money and savings or rewards features

Consumers can submit debt settlement and credit repair complaints to the Bureau about:

  • Excessive or unexpected fees
  • Advertising, disclosures, and marketing practices
  • Customer service issues
  • Frauds or scams

Consumers can submit pawn loan and title loan complaints to the Bureau about:

  • Unexpected charges or interest fees
  • Loan application issues
  • Problems with the lender correctly charging and crediting payments
  • Issues with the lender repossessing, selling, or damaging the consumer’s property or vehicle
  • Unable to contact lender

Senate Greenlights Community Banker to FRB

On July, 17th, the US Senate acted on the Terrorism Risk Insurance Act for seven years. In a vote of 93-4, lawmakers greenlighted the bill that Senator Charles Schumer (D-NY) introduced which keeps the federal backstop in place through 2021 while slightly reducing the government’s financial obligations. Also approved as part of the bill were three amendments, including a proposal by  Sen. David Vitter (R-La) requiring the Federal Reserve Board (FRB) of Governors to have at least one member on the board with community bank or community bank regulatory experience.

Presenting his amendment to the Senate floor, Mr. Vitter said “It would help introduce balance to a Federal Reserve that has come to lean too heavily on officials with academic and “megabank” experience.There’s an unmistakable trend away from having adequate representation from folks with community bank experience,” he said. Vitter had previously introduced similar stand-alone legislation, arguing that community banks are under-represented in policy debates.

The other two amendments that were passed unanimously were by Sen. Jon Tester, (D-MT)., to establish the National Association of Registered Agents and Brokers and a proposal from Sen. Jeff Flake, R-Ariz., to create an advisory committee on private market reinsurance options. The Senate blocked a fourth amendment that was introduced that would have given the government more time to recoup funds from insurance companies following a terror attack.

It is now left to the House to pass a TRIA reauthorization which is being carried by Representative Randy Neugebauer (R-TX). Action on the legislation is forcasted to take place next week and could face opposition from several parties.


Community Banks Urge CFPB to Review Title XIV Mortgage Rules

The Independent Community Bankers of America (ICBA) and a 45-member coalition of state and regional banking associations submitted a letter to the Consumer Financial Protection Bureau (CFPB) on July 15th urging the agency to review and revise the current ability-to-repay/qualified mortgage (QM) rules and escrow requirements for higher-priced mortgage loans to allow community bank loans held in portfolio for the life of the loan to receive automatic QM safe harbor status and an exemption from the escrow requirements if the loans are higher priced.


Based on the rules’ current requirements, there are community banks that would be considered small financial institutions due to their asset size but that still do not qualify for the small creditor exemption because they exceed the loan volume threshold. A threshold of 500 total first lien originations per year is only 41 first lien mortgages per month, or nine per week, an amount that easily can be exceeded by a smaller creditor. For community banks that wish to grow their mortgage business, this low number is restrictive since some banks will not provide loans that do not have QM safe harbor status, so they stop providing mortgage loans all together after they reach this low threshold.

Also, they believe community bank loans held in portfolio should be exempt from new escrow requirements for higher-priced mortgage loans because portfolio lenders have every incentive to protect their collateral by ensuring the borrower can make tax and insurance payments. For many community banks, establishing and maintaining escrow accounts is expensive and impracticable and, again, will only deter lending to consumers who have no other options.

Lastly, the current exceptions for community banks in the escrow and QM requirements to be pedantic and cumbersome, because community banks must constantly consider their current loan volume and where and to whom they are lending to in order not to lose exemption status, if indeed they qualified for it to begin with.

The coalition asks CFPB to expand small creditor exemptions so they can continue to serve the consumers in their communities by underwriting based on firsthand knowledge of their customers, which is a contrast to how larger financial institutions operate.