Small Intermediate Banks and Changes in CRA Regulations
Post-Closing “Real-Estate-Related” Fees are Finance Charges
Banks Sharing Information about Former Employees
More Details on Lottery Accounts
Public Employees’ Payroll Deductions to Financial Institutions
FDIC Statistics for Oklahoma
Small Intermediate Banks and Changes in CRA Regulations
The Federal banking regulators have acted jointly, effective September 1, to make some important changes to reduce the regulatory burden for banks with total assets between $250 million and $1 billion. These revisions affect the Federal Reserve’s Regulation BB (Community Reinvestment), and also the OCC’s and FDIC’s own versions of the CRA regulation, and will reduce recordkeeping requirements and allow greater flexibility.
I will discuss only Regulation B, but the changes to the OCC and FDIC regulations are identical.
Up until now, a “small bank” was defined for CRA purposes as one with less than $250 million in assets. With inflation and normal asset growth, many more banks around the country have hit the $250 million threshold and have become subject to the CRA requirements for “large” banks. The revised regulation cuts some slack by re-defining “small bank” as any bank with up to $1 billion in assets.
The banks directly affected by this change are those between $250 million and $1 million in assets, which are now defined under a new subcategory of small banks, called “intermediate small” banks. These banks will be subject to fewer requirements than before, when they were considered “large” banks; but they still will have more requirements to meet than small banks with less than $250 million in assets. In Oklahoma, 17 banks will immediately fall out of the “large” category into the “intermediate small” category because of the changes. An additional six to ten Oklahoma banks, assuming only normal future growth without expansion of locations, could easily reach the $250 million mark within a few years, so they also are indirectly benefited by these changes.
1. Collection of Loan Data
The largest change for banks in the $250 million to $1 billion category is that they will no longer be required to collect and report CRA loan data, on or after September 1. The data collection and data reporting requirements in Section 228.42 of Reg BB have not applied to “small” banks, and that term now will include all banks under $1 billion in assets. “Intermediate small” banks (now considered a subcategory of “small” banks) will no longer be required to collect and report data on small business and small farm loans or on the location of certain mortgage loans outside of MSA’s. The regulators have decided, for banks in this category, that the cost of collecting and reporting this data outweighs the benefits of reporting.
2. Basis for Evaluation
The efforts of small banks under $250 million in meeting the needs of their communities will be evaluated based only on a “lending test” set out in revised Section 228.26(b)—which is identical to the “performance criteria” for small banks, previously set out in Section 228.26(a). “Intermediate small” banks ($250 million to $1 billion) will be evaluated not only on (1) the “lending test” for small banks, but also on (2) a flexible “community development” test set out in revised Section 228.26(c). (To receive an overall “satisfactory” CRA rating, an “intermediate small” bank must receive at least a “satisfactory” rating on both the “lending test” and the “community development” test.)
The four criteria for evaluation under the “community development” test (for “intermediate small” banks) are (1) the number and amount of community development loans; (2) the number and amount of qualified investments; (3) the extent to which the bank provides community development services; and (4) the bank’s responsiveness to community development lending, investment and services needs.
Large banks will continue to be evaluated on three separate tests applicable to them–a “lending test,” “investment test,” and “service test,” set out in Sections 228.22, 228.23 and 228.24, respectively. An “intermediate small” bank ($250 million to $1 billion) now drops out of the more elaborate “lending test” for large banks, and instead is measured based on the small bank “lending test.” An “intermediate small” bank will no longer be required to meet the separate “investment test” and “service test” for large banks, but instead will use the more generic “community development” test. The regulators will be flexible in applying the “community development” test, so that a bank will be able to allocate its resources strategically to provide community development services (loans, investments and services) that are most responsive to the community’s particular needs.
Each “intermediate small” bank, after assessing the needs of its community, should engage in different types of community development activities that are appropriate to those needs and the bank’s capacities. The new “intermediate small” bank approach will allow more effective tailoring of activities to provide what a community actually needs, instead of the previous situation where some banks felt obligated to find activities fitting into specific CRA categories on which large banks are evaluated—whether those activities are relevant to the local community’s needs or not.
3. “Community Development” Definition
The revisions (in Section 228.12(g)(4)) expand the key “community development” definition. This phrase will no longer be limited just to “low- or moderate-income” areas or persons. The definition is broadened to also include certain activities to revitalize and stabilize either (1) “distressed or underserved non-metropolitan middle-income geographies,” or (2) designated disaster areas.
All banks (small, “intermediate small” and large) can take advantage of the two new categories that are now part of the broadened “community development” definition—provided that a bank is serving a community falling within one of those two new categories. (There are only 94 “distressed or underserved” census tracts listed for Oklahoma; and the location of “designated disaster areas,” of course, occurs randomly.)
Regardless of a bank’s size, the phrases “community development loans” and “qualified investments” are very important for CRA evaluation purposes. Both of those terms are now automatically broadened in scope because they are built on the definition of “community development,” which is expanded to include “designated disaster areas” and “distressed or underserved non-metropolitan middle-income geographies.”
A “designated disaster area” qualifies for CRA credit without regard to income level, and can be either rural or metropolitan. The fact that something is a disaster area almost automatically justifies the need for banking services to “revitalize or stabilize” the area, after the ice storm, drought, flood, tornado, hurricane, forest fire, terrorist act, etc., that earned the Federal “disaster area” designation. Helping to revitalize or stabilize a disaster area will be “community development” for CRA purposes.
Similarly, the revised definition classifies as “community development” a bank’s efforts at revitalizing or stabilizing “distressed or underserved non-metropolitan middle-income geographies.”
Although a remote rural community may technically be “middle-income,” it also may have a sparse and declining population. Low population often means insufficient community resources and insufficient customers to sustain basic local services. The problem of not having enough services available locally becomes worse if the closest city with desired services is many miles away. For example, people in a remote rural area may need to drive a long distance to a hospital. To address this issue, a bank could assist in the establishment of a minor-emergency clinic in the “distressed or underserved” non-metropolitan census tract and could earn “community development” credit for doing so.
There are four ways that a particular census tract can qualify as a “distressed or underserved” non-metropolitan census tract. Meeting any one of these is sufficient. One determinant is rural remoteness (tied to the “underserved” part of the definition). The other factors are three independent indicators of “distress”: (1) an unemployment rate at least 1.5 times the national average; (2) a poverty rate of 20 percent or more; or (3) a population loss of 10 percent or more from the 1990 census to the 2000 census, or a net migration loss of 5 percent or more in the five-year period preceding the 2000 census. If, for example, the area is “distressed” because of high unemployment, a bank could qualify for “community development” credit by helping to bring in a new employer with jobs that especially fit the low- to moderate-income work force.
4. “Distressed or Underserved” Areas in Oklahoma
The FFIEC web page lists those census tracts in Oklahoma that are designated as “distressed or underserved non-metropolitan geographies” that need “revitalizing and stabilizing” and are eligible to earn “community development” credit for the bank. Go to www.ffiec.gov/cra/pdf/distressedorunderservedtracts.pdf for a list of 94 “distressed or underserved” census tracts in Oklahoma, located in 31 counties. The definition does not permit these census tracts to be “metropolitan,” so none are listed in counties that form part of the Lawton, Oklahoma City, Tulsa and Ft. Smith metropolitan statistical areas.
Many of the Oklahoma census tracts that are on the “distressed or underserved” list have two separate qualifying factors–usually either (1) poverty and unemployment, or (2) remote rural location and population decline. A total of 41 “distressed or underserved” census tracts in western Oklahoma have either “remote rural” or “population loss” factors, or both, but do not meet either the “poverty” or “unemployment” trigger. In other words, these 41 census tracts in western Oklahoma apparently are not “low- to moderate income” and were not eligible for CRA credit under the former definition of “community development.” However, with the expanded definition, banking activities in these western Oklahoma census tracts become eligible for CRA credit for the first time.
5. Discriminatory Practices
Expanded Section 228.28(c) lists some examples of discriminatory or other illegal credit practices that will adversely affect the regulators’ CRA evaluation of a bank. (Improper credit practices have always affected a bank’s CRA evaluation, but previously there was no list of examples, which now include violations of (a) the Equal Credit Opportunity Act or Fair Housing Act; (b) HOEPA; (c) Section 5 of the FTC Act; (d) Section 8 of RESPA; and (e) TILA’s right of rescission.)
6. Inflation Adjustment
Section 228.12(u)(2) provides that the $250 million and $1 billion asset levels defining the boundaries between “small bank,” “intermediate small bank,” and “large bank,” respectively, will be adjusted annually for inflation, based on the Consumer Price Index. On this basis, any bank’s pattern of asset growth that does not exceed the rate of inflation should theoretically never turn an “intermediate small” bank into a large bank, or a small bank into an “intermediate small” bank.
7. Examination Procedures
The FFIEC web page at www.ffiec.gov/cra/examinations.htm includes CRA Examination Procedures for small institutions, “intermediate small” banks, and large institutions. The procedures for small and large banks are unchanged, but the thirteen pages of “intermediate small” bank procedures are completely new, as of August 1, 2005.
FDIC examiners are apparently citing some banks for Regulation Z disclosure violations if they fail to treat as finance charges certain real-estate-related fees collected at closing that are actually for services to be provided post-closing.
Comment 3 under Paragraph 4 (c)(7) of the Federal Reserve Commentary to Regulation Z’s Section 226.4 states, “Real estate or residential mortgage transaction charges excluded under section 226.4(c)(7) [of Regulation Z] are those charges imposed solely in connection with the initial decision to grant credit. * * * The exclusion does not apply to fees for services to be performed periodically during the loan term, regardless of when the fee is collected.”
Under this approach, if a real-estate-related fee is for some service occurring after the consumer-purpose loan has been originated, it is a finance charge—even if the fee is collected at closing. (The conclusion that the fee in question is a finance charge assumes that no other, more specific exclusion from the finance charge under a different subsection of Section 226.4(c) would apply.)
Where a bank has improperly excluded from the finance charge a real-estate-related fee that is for post-closing services, the FDIC has required the bank to refund the fee to the consumer so that the actual finance charge (as disclosed) will be made accurate.
As an example, a title insurance update to be prepared immediately after closing, or an abstract update reflecting that both the borrower’s title and the bank’s mortgage have been recorded, would apparently not relate to the lender’s decision to grant credit and to originate the loan. Credit is already extended before the update is performed; so an update fee, even if charged at closing, is not excluded from the finance charge, based on the Federal Reserve’s Commentary.
In the past, many lenders have believed that the Reg Z language allowed them to charge at closing, for example, a $30 “update fee” for supplementing the abstract immediately after closing, but this apparently is not allowed by the Commentary. (If the abstracting fee is a “total” bill that includes a post-closing update, then the portion of the fee relating to the post-closing update, even if not priced separately by the abstracter, apparently should be broken out from the “combined” fee and not deducted from the finance charge, to be technically correct.)
The conclusion that a fee for a post-closing update cannot be excluded from the finance charge is not so clear by reading only Section 226.4(c)(7)(i) of Reg Z, which just makes a blanket exclusion from the finance charge for “fees for title examination, abstract of title, title insurance, property survey, and similar purposes,” without stating that those types of services cannot be provided post-closing.
Surveys are grouped with abstracts and title insurance, in the same subcategory, in Reg Z Section 226.4(c)(7)(i), so the issues are the same. Some lenders require a property survey after construction is completed, either to verify the square footage “as built,” or to show that the improvements are located within required setbacks, or are located on the portion of the property that is actually mortgaged to the lender. But charges for a post-closing survey are also not excludable from the finance charge, based on the Fed’s Commentary—even though Reg Z itself would seem to allow it.
Additional examples of the same issue occur with respect to construction loans. If the consumer borrower has a line of credit for construction purposes, the bank may require inspections at certain intervals (subsequent to loan closing) to verify the status of construction. Even if there are no inspections at important stages in the construction, a bank will almost certainly require an inspection at the end, to verify final completion of the improvements. Some banks impose a fee for these inspections (which may even be performed by a third party), but such fees are not excludable from the finance charge on a consumer loan, even if the fees were imposed in advance, at closing. (This point is more obvious from Reg Z itself, because inspections are in a different subcategory, Section 226.4(c)(7)(iv), which specifically says the service must be “performed prior to closing” in order to be excluded from the finance charge.)
In addition, some lenders require an as-built appraisal after construction is completed, but this is not a fee that can be excluded from the finance charge on the construction loan, even if it is charged at the closing. For appraisals, Section 226.4(c)(7)(iv) explicitly states the service must be “performed prior to closing” in order to be excluded. (If the lender will provide both construction and permanent financing, a fee for the as-built appraisal would be considered in connection with giving final approval to and closing the permanent financing.)
Confusion over the proper treatment of various post-closing real-estate-related services has resulted because Reg Z’s Section 226.4(c)(7) seems to allow the charges for certain types of services (those enumerated in four of five subcategories) to be excluded from the finance charge, without specifying that the services have to be performed prior to closing. Apart from the “appraisals and inspections” subcategory (as to which both Reg Z and the Commentary say “prior to closing”), the other violations being cited by the FDIC are based only on language in the Commentary to Section 226.4, paragraph 4(c)(7), at Comment 3, without any clear prohibition in Reg Z itself.
The moral is to comply with both Regulation Z and the Commentary, whichever is more restrictive on a particular point. Relying on the regulation itself doesn’t seem to be enough. Whether this issue seems fair or not, banks need to comply with it.
Banks Sharing Information about Former Employees
A banker asked me to discuss Section 355 of the USA Patriot Act, codified at 12 U.S.C. Section 1828(w). Based on this section, a depository institution can disclose in a written employment reference provided to another depository institution that a current or former employee, officer, director, or controlling shareholder, who now is applying for employment at the other institution may have been involved in potentially illegal activity. Any insured depository institution can give this written disclosure, and any director, officer, employee or agent of such institution can do so.
Negative information of this type (concerning the person’s potential illegal activity) is to be disclosed (1) only in a written employment reference, and (2) only in response to a request from the other insured depository institution for a written reference. This disclosure concerning a bank’s former employee occurs only in narrow circumstances: Another depository institution will not be making such a request unless the ex-employee actually applies for a position at the other institution.
In giving a written employment reference, a bank is not required to mention or discuss any suspected illegal activity involving the particular individual. If another bank requests the information, and the prior bank chooses to disclose that type of information, the prior bank will be protected from liability for making the disclosure. But the disclosing bank must act in “good faith.” If the disclosing bank has malicious intent in providing the information (if the disclosing bank’s goal is to injure the ex-employee more than to inform the requesting bank), the disclosing bank’s shield from liability would go away.
A bank’s comments in a written employment reference should be confined to accurate and relevant information that would assist another depository institution in making an employment decision. A bank’s written employment reference should not come across as insulting the former employee or his character. Any disclosure should be professional and detached, with no obvious anger or disgust. Section 355 allows a bank to give a written reference that is fair but frank.
In a Section 355 disclosure, a bank could state, “We fired her as a teller because there were irregularities and we strongly suspected her of embezzlement.” By contrast, when Section 355 does not apply (for example, when the entity requesting a written employment reference is not a depository institution), the bank needs to have greater concern about whether the ex-employee could sue for slander if the bank’s comments keep that person from being hired.
(Technically, a person has not embezzled (a crime) until a judge or jury says so. If no criminal charge has been filed, or the D.A. has dismissed any charges, it might not be wise to refer to the ex-employee in connection with a possible “embezzlement”—except in the circumstances where Section 355 provides a shield from liability.)
Sometimes a bank is just glad to get rid of an employee, even if it decides not to file criminal charges. However, if the ex-employee later applies for a job at another financial institution, a criminal background check in this situation will reveal no criminal charges or convictions. Many times an ex-employer would like to tip off the other bank concerning some of its reasons for firing the ex-employee–but it doesn’t want to get into trouble for doing so.
In limited but important circumstances, Section 355 allows a firing bank to tell a hiring bank about its suspicions concerning an individual. (Congress has basically decided that if a bank is hiring, it needs good information about the job applicant’s possible criminal activity, more so than the applicant needs protection from possible criminal allegations by the firing bank.)
Still, Section 355 only helps when the hiring bank asks the firing bank for a written employment reference, and the firing bank must be willing to share its suspicions.
Section 355 gives no protection to a firing bank making a disclosure, if the circumstances involve (a) disclosure to a non-depository employer that may be hiring, (b) disclosure (such as gossip) in a non-employment context, (c) verbal disclosure to anyone, or (d) disclosure to a depository institution not specifically requesting a written employment reference.
If someone applies for employment at your bank, should you ask the person’s previous employer (a bank) to give a written employment reference? It may delay your decision process, but–except for that–it can’t hurt and may actually be very helpful. If a job applicant’s answers don’t quite ring true concerning how and why he left the previous job, then asking the previous bank for a written employment reference might turn up some eye-opening information that Section 355 does allows to be disclosed (upon request).
When a bank asks for written employment information from another bank pursuant to Section 355, possible responses by the other bank could range from (1) refusal to answer (“We do not respond to requests for this type of information”), to (2) a clean bill of health (“We have no suspicions or information concerning possible involvement by this individual in any potentially unlawful activity”), to (3) a vague hint of a problem (“We decline to provide any information that we may have”), to (4) a concise statement of the other bank’s suspicions concerning this individual. Most of these responses are helpful in one way or another, so the request for written employment information remains a good idea.
More Details on Lottery Accounts
In early August the OBA sent out an e-mail to 3,800 bankers regarding how to set up lottery accounts. (If you would like this information but did not receive it, please contact the OBA.)
Retailers who want to sell lottery tickets must establish lottery accounts to deposit lottery proceeds. Instant-winner “scratch off” tickets will go on sale in October, and tickets for the actual lottery will be sold beginning in November.
Accounts should be styled in the name of the business entity (or sole proprietor’s name plus d.b.a. name) followed by the phrase “in trust for the Oklahoma Lottery Commission.” The T.I.N. used for the business should be used on the account.
The Oklahoma Lottery Commission (OLC) requires the retailer and the bank to sign a “Retailer Electronic Funds Transfer Authorization” that authorizes the OLC to withdraw lottery proceeds from the account by ACH. Approximately 94% of the funds in a lottery account will belong to the OLC (subject to adjustments), and the remainder belongs to the retailer as commissions.
Mr. Mick Thompson, Oklahoma’s Banking Commissioner, issued an “interpretive statement” on August 22, stating several important conclusions concerning lottery accounts:
1. A retailer is permitted to withdraw funds from a lottery account, because only 94% (approximately) of the lottery proceeds are actually required by law to be held “in trust for” the OLC. The retailer has no fiduciary duty with respect to the remainder of the funds (approximately 6%), which belong to the retailer and represent allowable sales commissions, together with credit for lottery prizes paid directly to the winners by the retailer.
2. A bank has no special or fiduciary duty either to the OLC or to the retailer, with respect to an account containing lottery proceeds. It is the retailer who has a fiduciary duty, imposed by law. Section 425 of the Banking Code makes clear that no special or fiduciary duty will be imposed on a national or state bank in Oklahoma unless that bank expressly agrees to assume special or fiduciary duties.
(The required Retailer Electronic Funds Transfer Authorization, revised as of August 10, no longer asks a bank to acknowledge (in the third paragraph) that the funds in a lottery account are being held in trust. Instead, in the revised version the bank acknowledges only that the retailer has opened an account, as listed above, for the Oklahoma Lottery Commission.)
3. A bank is not liable to the OLC for wrongdoing by a lottery retailer. The statute imposes liability only on the lottery retailer, not on the bank.
Following are additional issues that the OLC has addressed since the OBA memo was sent out:
1. Originally the OLC wanted a merchant to establish a lottery account as part of the application process to become a lottery ticket retailer. However, some banks have been reluctant to open a lottery account until they receive notification that the particular retailer has actually been approved by the OLC.
To get around this issue, the OLC will accept an alternative procedure: The bank can just fill out the “Retailer Electronic Funds Transfer Authorization” and handle all the paperwork for opening an account, and assign an account number to the account, without actually opening it. The retailer can then fill in the bank routing number and the account number on the EFT form that is submitted to the OLC as part of the application. Instead of attaching a sample deposit slip to the EFT form (as the instructions on the EFT form require), the retailer instead can attach a letter from the bank, stating that the account will be activated when the bank is notified that the retailer is approved by the OLC. Later, the OLC will directly notify the bank that the particular retailer’s application to sell lottery tickets has been approved (or disapproved). Upon notice of approval, the bank then can open the account.
2. Every retailer who is approved to sell lottery tickets will be issued a license from the OLC that must be prominently displayed in that retail establishment. The bank isn’t required to have a copy of this license on file. An OLC document listing “Retailer Contract Requirements” states that OLC will be reviewing annually all retailers who have previously been approved. OLC is planning to issue a new license for retailers each year and will notify banks (a) of approvals for retailers listing that bank as their bank, (b) of retailers who are not approved, who listed the bank, and (c) of retailers whose license to sell lottery tickets is revoked (or not renewed). The OLC also plans to notify a bank when a retailer switches its active lottery account to another bank.
3. Some retailers have asked whether it is necessary to maintain a separate lottery account for each store in a chain–if the same entity operates multiple stores (in the same town or different towns). The general rule is that a store should have its own lottery account, separate from its main account; however, the OLC has statutory authority to issue written exemptions, and will probably do so for stores with multiple locations. Under these circumstances, the store in each town would be allowed to deposit lottery proceeds to its local deposit account, provided that the main office takes responsibility to collect the money from the individual stores and gets at least the “net” lottery proceeds deposited into the entity’s main lottery account. The OLC will probably still require chain retailers to “get” the lottery proceeds to their main lottery account (by whatever means) by the end of the next business day following the date of lottery ticket sales; but the money can go through each local store’s main business account first, or other funds can be transferred instead, if that’s how the chain wishes to do it.
4. The OBA memo says the OLC prefers that banks block lottery accounts to any transactions by check; however, if a bank indicates that it cannot block an account to transactions by check, the retailer can still maintain its lottery account at that bank. (The requirement is waived.)
For additional questions, call Mr. Rollo Redburn at (405) 521-0520, or Rollo.Redburn@lottery.ok.gov by e-mail.
Public Employees’ Payroll Deductions to Financial Institutions
House Bill 1245 amends subsection A(1) of 62 O.S. Section 7.10, effective July 1, 2005, to provide that any State of Oklahoma agency, board or commission must allow voluntary payroll deductions by any State employee, to any credit union, bank or savings association having an office in this state.
Previously, this same statute allowed voluntary payroll deductions by state employees to be directed only to a credit union primarily serving state employees. The revised language puts all banks, S & L’s and credit unions on equal footing: A state employee can arrange for voluntary deductions from his or her payroll, payable directly to any financial institution in the state.
This provision allows a loan payment to be deducted from payroll and forwarded directly to the financial institution that holds a State employee’s loan, even if that’s not the same financial institution receiving a direct deposit of the State employee’s payroll. This arrangement is voluntary on the employee’s part, and can be rescinded at any time.
Of course, a bank customer already is able to authorize a monthly automatic transfer from his bank account (or an ACH debit if the lender is not the financial institution where his payroll is deposited) to make the monthly mortgage payment, car payment, etc. But the “payroll deduction” approach is slightly different, with the State directly sending an ACH credit (or a check) to the bank that holds the state employee’s loan.
(One advantage credit unions have always enjoyed with “payroll deductions” is that the payment automatically comes out of the paycheck first:
The employee never sees, nor has access to, the portion of his money that represents the “payroll deduction,” whether payroll is in the form of a physical check or a direct deposit to a bank account. Some borrowers may budget their money better, or may have greater “peace of mind,” if the loan payment gets made “no matter what,” and they are never tempted to spend the funds that are required for the loan payment. It also helps financial institutions to have a loan payment automatically deducted first, ahead of everything else.)
House Bill 1245 has an additional provision, relating to ability of county, municipal, or school district employees to request voluntary payroll deductions from their paychecks. Subsection A(2) of 62 O.S. 7.10 previously allowed (but did not require) any county, municipality or school district in Oklahoma to give its employees the ability to make voluntary payroll deductions to any credit union serving the employees of that county, municipality, or school district.
The bill’s author attempted to amend this existing statute so that if the political subdivision allowed payroll deductions to be made to any credit union, it would also have to allow payroll deductions to be made to any financial institution in Oklahoma. Many county treasurers complained that the proposed change was too burdensome, because the political subdivision would go from preparing payroll deductions for maybe only one credit union, to preparing payroll deductions for as many financial institutions in Oklahoma as their employees selected.
As a compromise, the language regarding counties, municipalities and school districts was changed in a different way. What it says in the final version is this, in effect: No county, municipality or school board is required to allow payroll deductions at all; but if it chooses to allow payroll deductions for a credit union that includes its own employee group within the field of membership, then that political subdivision must also allow voluntary payroll deductions from its employees’ payroll to any other credit union, bank or savings association that has at least 20% participation by employees of that political subdivision.
This provision may be useful in allowing customers to set up payroll deductions payable to the bank, if the employer is the city government in the same town as the bank, the school district in the same town as the bank, or the county government in a county seat where the bank has an office, but in other cases a bank will probably not meet the requirement that its customers represent 20% or more of the government unit’s total employees. Of course, no political subdivision is required to allow payroll deductions to a bank (no matter how many of that bank’s customers work for the political subdivision) if the political subdivision does not already allow payroll deductions to a credit union serving its members.
Voluntary payroll deduction arrangements are not likely to be set up unless the bank informs the particular state employee, or political subdivision employee, that this option is available. In reviewing loan applications, loan officers can help to identify which customers this “payroll deduction” option would fit. Because of the 20% threshold requirement for employees of political subdivisions (but not for State employees), it’s to the bank’s advantage to figure out what political subdivisions have 20% or more of their total employees doing business at the bank.
FDIC Statistics for Oklahoma
Each year the FDIC prepares statistical information by state, based on data current as of the end of the first calendar quarter. The information for Oklahoma, entitled “Oklahoma State Profile—Summer 2005” can be found online at www.fdic.gov/bank/analytical/stateprofile/Dallas/ok/OK.xml.html on the FDIC’s website. I will highlight some of the data here.
The Tulsa MSA had a small annual employment decrease of less than 1/10 of one percent (primarily due to loss of telecommunications jobs), while the Lawton MSA had a 2.08% annual employment increase and the Oklahoma City MSA had a 1.84% increase.
Home prices in many parts of the country have risen much faster than income, creating what some economists view as local housing “bubbles.” In Oklahoma, by contrast, home prices have risen by 56% over the past 10 years, while income has risen by 59% during the same period. On this basis, home prices in general are completely in line with income growth in Oklahoma, and this trend is consistent across all of Oklahoma’s MSA’s.
Oddly, the percentage of mortgages being originated in Oklahoma with adjustable rates has almost tripled in the past year to 23%, although fixed-rate long-term mortgages are about the cheapest they have been for decades. One explanation may be that banks (which have never made long-term fixed-rate mortgage loans for their own portfolios) are now offering fully-amortizing, adjustable-rate mortgages, and are getting away from the older standard practice of originating mortgages with a fixed rate and a two or three year balloon, followed by a renewal for another two or three year term with perhaps a different fixed rate and a balloon, and so on.
Another unusual fact is that the quantity of Oklahoma mortgage loans in foreclosure remains at the highest level in a decade and significantly above the national average, yet Oklahoma insured institutions continue to report relatively low mortgage loan past-due and charge-off rates. One explanation could be that Oklahoma banks are not making many sub-prime loans, while those non-bank lenders that do originate sub-prime loans may account for a disproportionate share of mortgage foreclosures.
Past-due loans (of all types) and charge-offs in Oklahoma remain near ten-year lows. Low provision expense (as well as solid net interest margins and strong non-interest income) helped to produce a ten-year high in average quarterly return on assets for banks and thrifts in Oklahoma in the first quarter of 2005.
Information on loan concentrations suggests that commercial real estate loans increased by approximately 13% in the last year, while residential real estate loans and consumer loans in general have steadily decreased in each of the past three years.