Scott Birrenkott profileThe Wisconsin Supreme Court (Court) recently issued its decision in Security Finance v. Brian Kirsch. The Court concluded that a creditor’s failure to provide a notice of right to cure default does not constitute a sufficient basis for relief under Wisconsin’s Consumer Debt Collection law.

In Security Finance the debtor defaulted on the payment obligation of his loan agreement. The creditor did not issue a notice of right to cure default as required by Wis. Stat. 425.105 (425) before filing a small claims lawsuit against the debtor to enforce the loan agreement. The debtor counterclaimed, seeking damages by argument that failure to send the notice of right to cure default violated Wis. Stat. 427.104 (427). The creditor motioned to dismiss the counterclaims, which the circuit court granted. The Court of Appeals affirmed and its decision was upheld by the Court.

The parties stipulated that the creditor’s failure to provide sufficient notice of right to cure constituted a procedural violation, resulting in dismissal of the creditor’s initial claim. Thus, the Court focused its analysis on the debtor’s 427 claim. The debtor argued that by filing suit prior to providing the notice of right to cure, the creditor violated 427 by “harassing” the debtor. The Court found that the procedural defect of filing suit without first providing a notice of right to cure does not create liability under 427 in absence of a specific 427 violation. Meaning, failure to provide the right to cure under 425 does not automatically create a cause of action under 427. Furthermore, the Court indicated that even though the creditor “jumped the gun,” that did not negate its right to enforce compliance with the loan agreement.

In conclusion, a creditor’s failure to provide notice of right to cure under 425 does not constitute a sufficient basis for relief under 427. Wisconsin banks must still ensure they follow the procedural requirements under 425 and should consider the procedures by which they meet those notice requirements in relation to enforcement of loan obligations. However, failure to provide notice of right to cure does not, by itself, create a cause for action under 427.

By, Eric Skrum

Statement from WBA President and CEO Rose Oswald Poels urging Congress to take action in international trade.

"On behalf of Wisconsin's dairy producers and agricultural industry, WBA urges Congress to take action quickly to conclude the ongoing international trade discussions. The markets have already priced passage of USMCA, however, our Wisconsin agriculture cannot wait for Congress to act. Wisconsin farmers need Congress to come together on a trade solution.

In addition to ratifying the USMCA agreement, Congress should consider providing additional resources for a Dairy Innovation Hub and also review all recommendations from the Wisconsin Dairy Task Force for potential ideas within the USMCA framework.

Wisconsin's banking industry has a front-row seat to the difficulties ambiguity and uncertainty are causing our state's agricultural industry. Our farmers, dairy producers, and agribusinesses cannot wait. Congress must act now."

By, Amber Seitz

The below article is the Special Focus section of the April 2019 Compliance Journal. The full issue may be viewed by clicking here.

Brokered deposits are relatively simple in concept but subject to complex regulatory restrictions. By concept, “brokered deposit” is a term used to describe a source of funding for financial institutions. That is, funds managed by a deposit broker, being an individual who accepts and places funds in investment instruments at financial institutions, on behalf of others. This concept has evolved over the years, grown controversial, and subjected to regulatory restriction. To that extent, the question is: what deposits are considered brokered for purposes of regulatory coverage? 

According to section 29 of the Federal Deposit Insurance Act (FDI Act) and Section 227 of the Federal Deposit Insurance Corporation’s (FDIC) rules and regulations, brokered deposit means any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker.1 A deposit broker is:

  1. Any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions, or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties; and
  2. An agent or trustee who establishes a deposit account to facilitate a business arrangement with an insured depository institution to use the proceeds of the account to fund a prearranged loan.

This broad language gives FDIC significant discretion to determine whether a deposit is brokered, making the above question difficult to answer. 

Emerging technologies continue to create innovative deposit opportunities. For example, internet and mobile banking did not exist when the rules were written. Brokered deposits were born from new technologies, but those technologies continue to evolve, and with them, the concept of what a brokered deposit is. 

Background 

The inception of brokered deposits came with the ability to transfer funds electronically. These technologies made it quick, easy, and cheap to access before un-reached markets, which enabled greater bank liquidity and growth. Controversy exists as to whether such growth contributed to the 1980 financial crisis, an examination of which is outside the scope of this article. However, the 1980 financial crisis did result in FDIC launching a study into brokered deposits which led the agency to write rules in 1989 and amend them in 1991. 

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 added Section 29 of the FDI Act, titled “Brokered Deposits” (Section 29). Section 29 places certain restrictions on “troubled” institutions. Specifically, Section 29 provides:

  1. Acceptance of brokered deposits is restricted to well-capitalized insured depository institutions.
  2. Less than well-capitalized institutions may only offer brokered deposits under certain circumstances, and with restricted rates.

In 1991 Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The FDICIA resulted in threshold adjustments to the brokered deposit restrictions under Section 29 and gave FDIC the ability to waive those restrictions under certain circumstances. 

More recently, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) amended Section 29 which excepted certain reciprocal deposits from treatment as brokered deposits. As seen above, Section 29 does not define the term “brokered deposit.” Rather, it defines the term “deposit broker.” Following EGRRCPA, on February 6, 2019, FDIC published an advance notice of proposed rulemaking and request for comment on unsafe and unsound banking practices: brokered deposits and interest rate restrictions (ANPR). The ANPR announces FDIC’s comprehensive review of its regulatory approach to brokered deposits and their interest rate caps. As part of its re-evaluation FDIC seeks comment on how it should revamp its definition of brokered deposits and interest rate restrictions. 

While the EGRRCPA implementation is specific to reciprocal deposits, FDIC’s ANPR is broader in scope, and presents an opportunity to re-examine the definition and treatment of brokered deposits as a whole. 

Impact 

How Brokered Deposits are Used 

Brokered deposits are a relatively new mechanism to the financial service industry. They provide:

  1. A quick, cheap, alternative sources of funding from national markets.
  2. An additional tool for institutions to maintain liquidity and interest rate risk analysis for balance sheet management.
  3. A potential tool for community banks to expand their deposits and maintain funds that do not move away when the local market shifts.
  4. Flexibility in availability of funds to institutions with varying demands in regional markets for deposits vs. loans.
  5. Greater opportunities to match deposit terms to loan funding.
  6. Alternative, competitive rates for investors.
  7. An additional tool for investing institutions to manage funds.

Significance of Regulation under Current Rules 

As discussed above, Section 29 restricts acceptance of brokered deposits and limits deposit interest rates. A well-capitalized institution is, generally, unrestricted. However, an undercapitalized institution may not accept, renew, or roll over any brokered deposit. An adequately capitalized institution may not accept, renew, or roll over any brokered deposit unless FDIC grants a waiver. Even though a well-capitalized institution is unrestricted, examiners consider the presence of core2 and brokered deposits when evaluating liquidity management programs and assigning liquidity ratings.

Furthermore, brokered deposits are a significant source of assets for some institutions. Institutions also seek to meet their customers deposit needs in an age of constantly evolving technologies. This creates uncertainty as to whether a particular deposit qualifies as a brokered deposit. The answer to that question is complex, as it lies not only in statute, but FDIC issued studies, interpretations, advisory opinions, regulations, and an FAQ on identifying, accepting, and reporting brokered deposits. 

Brokered deposit determinations are fact-specific and influenced by a number of factors. FDIC has broad discretion in application of its rules, which involves complex methodologies for determining and adjusting rates, and considers brokered deposit determinations on a case-by-case basis. For example, the term deposit broker has been applied to social media platforms, fintech, homeowners associations, and employee benefits providers. How FDIC views brokered deposits is also up to interpretation. Fortunately, FDIC states its view of brokered deposits in its 2016 FAQ:3 

“Brokered deposits can be a suitable funding source when properly managed as part of an overall, prudent funding strategy. However, some banks have used brokered deposits to fund unsound or rapid expansion of loan and investment portfolios, which has contributed to weakened financial and liquidity positions over successive economic cycles. The overuse of brokered deposits and the improper management of brokered deposits by problem institutions have contributed to bank failures and losses to the Deposit Insurance Fund.”

FDIC still appears to view brokered deposits as volatile and scrutinizes them accordingly. One direct result is rate cap limitations. By rule, rate caps only apply to less-than well capitalized banks. However, regulators have looked to the limits during exams, regardless of capital levels, pointing to potential volatility. Furthermore, under its 2009 calculation method, current rate caps are artificially low and hardly reflect what a customer can get from other sources. For example, as of April 22, 2019, a 12-month CD had a national average rate of 0.66% and a cap at 1.141%.4 On April 22, 2019, the Treasury yield was at 2.46%.5  

So, the current rules require financial institutions to identify deposits that are brokered, mind the rate cap limitations, and consider liquidity rating implications, in anticipation of regulatory examination. As technologies continue to evolve, and the financial industry follows those trends, the brokered deposit regulations designed before the age of online banking are outdated. For example, such broad coverage means banks seeking deposits through the internet could be subject to rate caps.

Significance of FDIC’s ANPR

The ANPR is an opportunity to comment and guide FDIC’s future approach to brokered deposits. Issues to comment on include:

  1. Clarify the definition of brokered deposit and deposit broker for the modern era of technology.
  2. Create a methodology to calculate a rate cap that appropriately reflects the cost of deposits.
  3. Provide examples of what brokered deposits mean to your institution with today’s modern technologies (ex: internet deposits such as online, mobile banking, and social media).
  4. Refocus of policy goals: original intent was to restrict large volumes of volatile funds. Brokered deposits were suspect of this category of deposit, but did not, and do not, necessarily continue to merit fierce restrictions.
  5. Reconsider limitations on brokered deposit offerings for well-capitalized institutions.

FDIC’s ANPR means a potential to modernize and even narrow the designation of a deposit as brokered, given the current wide scope of interpretation, stigmatization, limitation, and regulatory burden over a broad categorization of deposits. An update to Section 29 could mean new opportunities for banks to seek funding from new sources and explore new technological applications to deposits.

Conclusion

In 2019, many consumers bank from their phone. Various internet technologies give access to funds quickly, and new technologies are surely on the horizon. As businesses, banks need to accommodate these technologies in order to stay competitive. The ANPR is an opportunity to explore how brokered deposits are treated and can be better utilized. Comments can direct FDIC’s regulatory framework to enhance the functionality of brokered deposits as another deposit tool. 

Comments on the ANPR are due May 7, 2019. After the ANPR, FDIC will issue a proposed rule, with another opportunity for comment prior to a final rule. The ANPR can be found here: https://www.fdic.gov/news/board/2018/2018-12-18-notice-sum-i-fr.pdf 

1. 2 C.F.R. § 337.6(a)(2)

2. Core deposits are distinct from brokered deposits in that they are considered “stable,” including checking, savings, and CD accounts made by individuals rather than a deposit broker.

3. FIL-42-2016, Identifying, Accepting and Reporting Brokered Deposits: Frequently Asked Questions (Updated June 30, 2016; Revised July 14, 2016).

4. https://www.fdic.gov/regulations/resources/rates/

5. https://www.macrotrends.net/2492/1-year-treasury-rate-yield-chart

By, Ally Bates

The April 2019 edition of the WBA Compliance Journal has been published.

This month's Special Focus article addresses brokered deposits.

Click Here to View the April 2019 Compliance Journal.

By, Ally Bates

Q: Are There Rules for Lending to a Non-Resident Alien? 

A: No. No specific rules exist, but there are some related rules and additional considerations. 

Lending to a non-resident alien is generally a matter of a bank’s loan policy and making a business decision. From a regulatory standpoint, a bank should also consider The Fair Lending Act and the Equal Credit Opportunity Act (ECOA) in addition to some practical matters. 

The Fair Lending Act prohibits discrimination based on race, color, national origin, religion, sex, familial status, and disability. It does not include immigration status. However, Federal regulators have found Fair Lending violations based upon results, rather than active discrimination. Meaning, a bank should be cautious when evaluating non-resident aliens to ensure its decision is not based on a prohibited basis following a factor potentially related to immigration such as national origin. 

ECOA, implemented by Regulation B, indicates in 1002.6(b)(7) that a creditor may consider the applicant's immigration status or status as a permanent resident of the United States, and any additional information that may be necessary to ascertain the creditor's rights and remedies regarding repayment. 

The commentary to that section provides: 

The applicant's immigration status and ties to the community (such as employment and continued residence in the area) could have a bearing on a creditor's ability to obtain repayment. Accordingly, the creditor may consider immigration status and differentiate, for example, between a noncitizen who is a long-time resident with permanent resident status and a noncitizen who is temporarily in this country on a student visa. 

Thus, a denial of credit on the ground that an applicant is not a United States citizen is not per se discrimination based on national origin. 

So, a bank may consider immigration status from a repayment standpoint. A bank will need to consider its loan policy, which should address practical considerations as well, such as: does the bank have jurisdiction over this individual? If they are not a U.S. citizen, would the bank be able to initiate proceedings against them? Are they a flight risk? What if their plans change and they return to their country of origin? Will the bank be able and willing to pursue them if the loan goes bad? 

By, Scott Birrenkott

There are nearly 120,000 people in Wisconsin who are living with dementia, and that number is expected to double in the next twenty to thirty years. Of those living with dementia, 70 percent are people still living in the community. They still go shopping, meet with friends, and could walk into your bank. You may be asking yourself now, "do I know how to best assist a customer with dementia?"

"As a community bank it is important for us to be active and aware of our community members," said Lisa Higgins, agricultural and commercial lender for Union Bank & Trust Company, Evansville. "We have a few staff that have family impacted by dementia and wanted to train staff to better assist those members of our community." 

Dementia is a general term to describe a set of symptoms affecting mental ability. Memory loss is the most well-known of the symptoms, but it can impact other faculties like language, thinking, personality, and behavior. Dementia in and of itself is not a disease but a symptom of a variety of diseases, the most common of which is Alzheimer's.

Learn how to become a dementia-friendly bank! Access the WBA How to Become a Dementia-Friendly Bank webinar:
Click here to access webinar recording available through July 8

People living with dementia still want to continue to be viable members of society. "We've been asked by people with dementia to do three things," explained Cori Marsh, Dementia Care Specialist with the Rock County Aging and Disability Resource Center. "They would like help to [1] do the things they have always done, [2] with the people they have always done them with, and [3] in a safe way."

This is where the Dementia Friendly Initiatives come in. In 2013 the State of Wisconsin initiated its Dementia Care Redesign Effort, which, among other things, aimed to expand community resources for people living with dementia. Now, several counties have added a Dementia Care Specialist to their Aging and Disability Resource Centers and are training businesses in their communities to be Dementia Friendly.

"Banks have been our biggest customers for Dementia-Friendly Training," said Joy Schmidt, Dementia Care Specialist with the Dane County Aging and Disability Resource Center. "Banks are frequently the first to notice changes in a person… One of the first signs of dementia can be having trouble managing finances, falling for scams, and those with dementia become more vulnerable to financial abuse."

The training typically consists of an overview of what Alzheimer's and dementia are, ways to recognize the signs of dementia, and how to better communicate with those that may be living with dementia. "We were given things to look out for," explained Higgins about the bank's Dementia-Friendly training. "They were things that we may have already noticed but didn't know the 'why.'"

The acronym SLOWER is emphasized in Dementia-Friendly training. It stands for:

Smile
Listen
One thing at a time
Words clear
Eye Contact
Remaining Calm

These are the basic tenets for communicating with a customer with dementia. Schmidt also emphasized that bankers should not take things personally, or be embarrassed or uncomfortable when interacting with customers who may have dementia, and acknowledge that the customer is trying to communicate even if they are not totally understood. 

There are a variety of challenges facing those with dementia in relation to banking, such as overdrafts due to scams, paying bills multiple times, no longer being able to balance their checking account, as well as the actual act of being in a bank. Often times for those with dementia, short term memory is impacted so a customer may repeat questions and need more assistance. If the bank is busy, they may not be able to take the noise. "Talk with them in a quiet space and slow down when interacting," explained Marsh. Other environmental factors like busy patterns on the floor and signage that is too small or unclear can cause challenges to customers with dementia.

Higgins, Marsh, and Schmidt all encouraged banks to reach out to their local Aging and Disability Resource Center to see what dementia-friendly information and training is available. "Some counties help promote those that have gone through the training and will give them purple stickers to display that show they are a dementia-friendly business," said Schmidt. "We have consumers calling asking for dementia-friendly businesses." As noted earlier, many counties have a dedicated Dementia Care Specialist

Higgins says frontline staff have always been patient with customers, but since the training she notices a higher level of engaged interaction. It's not only customers with dementia who will appreciate this higher level of engagement, but their families and caregivers, too. And that is the hallmark of community banking in Wisconsin: serving and knowing your customers and community. 

By, Amber Seitz