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Agencies Clarify Requirements for Providing Financial Services to Hemp-Related Businesses
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Four federal agencies in conjunction with the state bank regulators
 issued a statement clarifying the legal status of hemp growth and production and the relevant requirements under the Bank Secrecy Act (BSA) for banks providing services to hemp-related businesses.
The statement emphasizes that banks are no longer required to file suspicious activity reports (SAR) for customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. For hemp-related customers, banks are expected to follow standard SAR procedures, and file a SAR if indicia of suspicious activity warrants.
This statement provides banks with background information on the legal status of hemp, the U.S. Department of Agriculture's (USDA) interim final rule on the production of hemp, and the BSA considerations when providing banking services to hemp-related businesses.
This statement also indicates that the Financial Crimes Enforcement Network (FinCEN) will issue additional guidance after further reviewing and evaluating the USDA interim final rule.
The statement was issued by the Federal Reserve Board, the Federal Deposit Insurance Corporation, FinCEN, the Office of the Comptroller of the Currency and the Conference of State Bank Supervisors. Banks can contact the USDA, state departments of agriculture, and tribal governments with further questions regarding the Agriculture Improvement Act of 2018 (2018 Farm Bill) and its implementing regulations.
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Mission Creep, Rising Risk Among Credit Unions
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Tax-exempt credit unions-which have seen significant growth in
 the years since the financial crisis-are increasingly "using their newfound financial heft to compete aggressively for business" against taxpaying banks, according to the Wall Street Journal. As many larger credit unions have grown in scale, they have engaged in higher-risk forms of lending while loosening the common bond requirements and even purchasing taxpaying banks, the article noted.
"They are making lots of loans with high-risk features," said Federal Financial Analytics' Karen Shaw Petrou, who was interviewed for the story. For example, credit unions have become particularly involved in auto lending in recent years-now accounting for nearly one-third of outstanding auto loans in the U.S.-and WSJ noted that a large share of these loans are for terms of six years or more, an indication that consumers may end up owing more than the vehicle is worth.
In addition to taking on more risk, WSJ pointed out that the National Credit Union Administration has repeatedly delayed a critical post-crisis rulemaking to set more stringent capital requirements for credit unions. The article noted that "economists and analysts are uneasy about how these bulked-up credit unions will fare in a recession. In another financial crisis, some could fail or shrink, stranding borrowers who prefer not to use banks. In a worst-case scenario, taxpayers could be saddled with the losses."
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Fed Fees Expected to Rise 2.4%
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The Federal Reserve Board on Wednesday announced the approval
 of fee schedules, effective January 2, 2020, for payment services the Federal Reserve Banks provide to depository institutions (priced services).
The Reserve Banks project that they will recover 100.2 percent of their priced services costs in 2020. The Reserve Banks expect to fully recover actual and imputed expenses, including profit that would have been earned if a private-sector firm provided the services. Overall, the Reserve Banks estimate that the price changes will result in a 2.4 percent average price increase. The Reserve Banks estimate that the price changes will result in a 3.3 percent average price increase for Check Services customers; a 3.7 percent average price increase for Fedwire
® Funds Service customers; and a 2.9 percent average price increase for FedLine
® Solutions customers. Fees will remain unchanged for the Reserve Banks' FedACH
® Service, National Settlement Service, and Fedwire
® Securities Service.
The Monetary Control Act of 1980 requires that the Federal Reserve establish fees to recover the costs of providing priced services, including imputed costs, over the long run, to promote competition between the Reserve Banks and private-sector service providers.
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Community Banks Outperform Industry in Q3
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Community bank net income rose 7.2 percent to $6.9 billion in the
 third quarter of 2019, the FDIC reported in its latest Quarterly Banking Profile.
Pretax return on assets rose 3 basis points to 1.51 percent, the highest rate for community banks since third-quarter 2006. Growth in net interest income (4 percent), noninterest income (16.4 percent), and securities sales (675.1 percent) were responsible for the annual increase in profitability.
Overall, the banking industry reported a 7.3 percent decline in net income from a year ago. The decline was largely due to nonrecurring events at three large institutions, with 62 percent of all institutions reporting a year-over-year increase in net income.
The number of banks on the "Problem Bank List" fell from 56 to 55 during the third quarter, while four new banks opened, 46 were absorbed by mergers, and no banks failed. The Deposit Insurance Fund balance rose $1.5 billion from the previous quarter to $108.9 billion, and the reserve ratio rose 1 basis point to 1.41 percent.
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Banks Pass Credit Unions on Satisfaction, Deposit Rates
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Banks outperformed credit unions for the first time in the history
 of the American Customer Satisfaction Index. Banks scored 80 on the index, topping credit unions' score of 79. Community and regional institutions led the way with a score of 83, while national and super regional banks scored 78.
Separately,
CU Today reported that banks are paying more for deposits than credit unions for the first time since 2007, indicating that credit union growth could be slowing. According to the report, 2019 total interest expense is 90 basis points for banks and 83 for credit unions, a 7.8 percent difference.
Meanwhile, Moebs Services recently reported that free checking has dropped 59.2 percent at credit unions compared with a 37.2 percent decline at banks, despite the credit union tax exemption.
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Question:
Does the bank need a specific policy for indirect  lending, and if so, what should be included?
Answer: A policy is always desired as it provides direction for employees and gives everyone a common source to use to ensure understanding of the bank's expectations. In general, a policy on indirect lending should include:
- Who is responsible for the indirect lending relationship - who authorizes, approval requirements, authorities of compliance officer, lending officers, etc.?
- What is expected - performance standards, review, a management program
- Establish monitoring for lending activity, way to identify, assess and mitigate risks
- Define loan types
- Establish credit underwriting, quality, administration
- Establish a complaint process - including review, resolution, and reporting
- Training program - topics, frequency and who administers
- Reporting process - including reporting to management and the board
- Copies of the relationship for each (e.g., where to find the contract) Note: the policy should include any specifics as it applies to each indirect lending relationship.
Reference: FDIC, Examination Guidance for Third party lending, July 2016, page 6.
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ACB - Bankers Assurance BSA-AML Conference March 12, 2020
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