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Strengthening customer relationships with tangible value and personal touch

Customer retention in banking can be challenging for community financial institutions. Follow this guide for strategies to stay competitive.

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In the competitive world of banking, attracting new customers is just one piece of the puzzle. Retaining existing customers is equally—if not more—important. As a banker once put it, "Our bank has got a front door and a back door, and both of them are wide open." This metaphor underscores the challenge many banks face: while they excel at bringing customers in, they struggle to keep them.

Most bankers are adept at reactive servicing—when a customer calls with a request, they're quick to respond, especially if they've eliminated manual processes with small business loan origination software. However, proactive maintenance of the customer base is often neglected. To keep the right customers, you need a retention plan. This plan should include strategies for different types of customers. For customers who have one piece of business and may not be paying a lot, you may not go out of your way to retain them. However, for valuable customers, you should have specific strategies in place.

Reframing the annual review

The power of benchmarking in customer retention

Annual reviews are a crucial aspect of financial services, providing insights into a company's financial health and performance. However, many customers may not fully understand or appreciate the depth of analysis these reviews offer. As financial partners, your bank or credit union can collect and present data in a way that resonates with your clients and adds tangible value to their businesses.

One effective strategy is to introduce benchmarking reports alongside annual reviews. These reports compare a company's financial metrics against industry peers, providing a clear picture of where they stand and highlighting areas for improvement. Most clients are unaware of how their financials compare to competitors beyond top-line revenue, making benchmarking a powerful tool for strategic planning.

For example—perhaps you have a manufacturing customer with a 90-day inventory turnover, while the industry average is 60 days. This excess inventory could be costing them significant amounts of money. Perhaps they might aim to reduce inventory to 80 days by the end of the first quarter of 2024. By introducing the concept of benchmarking, you can engage the client in setting realistic goals for improvement and add tremendous value to your relationship.

This approach not only helps clients understand their financials better but also empowers them to make informed decisions to improve their business performance. By setting quarterly benchmarks and tracking progress, clients can see the impact of their efforts and make adjustments as needed.

Incorporating benchmarking reports into your financial services not only provides them with valuable insights into their financial health but also strengthens your relationship by demonstrating your commitment to their success.

Strengthening banking relationships

Personal touches for improved customer retention

The right products, speedy service, and being useful to the business as an industry guide can go a long way toward improving customer retention in banking. But aside from those valuable services, building personal relationships with your customers can help as well. Consider these three tips for maintaining relationships with customers:

  1. Give individual attention: Consider ways to stand out from more impersonal competition by demonstrating that you care about your customers. Instead of just sending a card, take your business clients out to lunch for their birthdays. Make it clear that the lunch is a gesture of appreciation, not a business meeting. When done sincerely, adding a personal touch can deepen the relationship and create loyalty. As you get to know your customers as individuals, you will get to know more about their business goals and how your financial institution can help.
  1. Celebrate milestones: Show appreciation for your customers by celebrating the anniversary of their relationship with your bank. This could be as simple as a phone call or more festive (bringing pizza to their business or organizing an ice cream truck visit). Acknowledging loyalty can go a long way in customer retention. No financial institution is perfect, and errors are inevitable, but when customers believe you have their back and value their patronage, you may keep their business despite setbacks. 
  1. Engage with their team: Beyond just meeting with your account-holding customers, engage with the people who work with them. If feasible, have members of your team visit their location or vice versa. Talk about what's going on at the business and strengthen the relationship at all levels of your organization. When asked their opinion on a change, the staff members who do the financial work at a business are the ones who will tell their boss they aren't interested in switching banks if they have a good relationship with your team. 

SMB benefits

The benefits of proactive customer retention

By implementing proactive customer retention strategies, you not only demonstrate your commitment to your customers' success but also create a strong foundation for long-term relationships. These strategies can help you retain your current customers and pave the way for sustainable growth in your business.

Reduce operating cost while ensuring loan policy consistency. Community lending software can help get you there. Read the buyer's guide to lending solutions.

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How to respond to CRE loan distress

Use these tips for banks and credit unions to identify and handle commercial real estate loans that are showing signs of being problem CRE credits.

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Protecting portfolio health

Recognize ailing CRE loans early

Media organizations are reporting scary-sounding data, and the headlines scream about the most recent victims. Government entities are issuing advisories and guidance for addressing this unfamiliar phenomenon and for shielding the financial institution from the potential threat. Individuals and business owners are starting to contemplate the worst-case scenario and how it can impact their earnings and balance sheet.

Is the above scenario another pandemic akin to our recent COVID experience? No, it’s the current situation in the commercial real estate (CRE) market tied to the threat that distressed and problem CRE loans pose to investors, banks and credit unions, and the economy at large.

While no potential CRE “disaster” is comparable to the COVID pandemic in terms of the human impact, it is still a clear and present danger to our banking system and the economy.

CRE is now arguably the riskiest asset class due to a perfect storm of:

  • Systemic changes in the way we utilize real estate (not just office, but retail, housing, and other sectors).

  • Unprecedented increases in interest rates from an abnormally historic low-rate environment.

  • Inflationary impacts on costs of various inputs.

  • A wave of pending maturity events ($2 trillion of CRE loans are reported to mature in the next years).

Consequently, all stakeholders of CRE assets are understandably nervous, including bankers and their investors who, due to the highly leveraged nature of CRE transactions, provided the bulk of capital financing the industry.

Bank and credit union leaders who recognize souring CRE loans with the potential to manifest like an illness in their institutions should engage their workout professionals/team. Doing so is akin to taking a relative to the doctor when sick or showing symptoms. The workout team can help lenders diagnose distressed CRE assets. Workout specialists can also provide consulting and advice (treatment) that either helps alleviate the loans’ distress (symptoms) and restore them to health or helps mitigate the spread of the “illness” to protect the health of the financial institution.

Here’s how banks and credit unions with strong CRE risk management can identify weakening property loans, assess them, triage them, and assist with their prognosis and treatment.

You might also like this podcast on leveraging the Fed's stress test scenarios.

Early symptoms

Signs of potentially troubled property loans

Given the heightened and well-established risks that CRE loans pose, banks and credit unions should be on high alert for any signs of sickness in their CRE portfolio. In this environment, any indication of early warning signs of distress from a CRE loan should be addressed immediately. Bring together the deal team, credit approvers, and workout experts to discuss and determine the grade and next steps.

Beyond a hard money default due to a payment or maturity event, early warning signs for CRE loans typically manifest as a:

  • Failure to pay real estate taxes.
  • Failure to sustain adequate insurance coverage.
  • Failure to maintain the property.
  • New lien on the commercial real estate.
  • Failure to deliver required financial information.

Each of these signs is a major CRE red flag as it represents a lack of cash and resources to pay required obligations, mitigate catastrophic risks, and support value. Furthermore, failure to pay taxes and insurance is almost always an event of default, and the mortgage instrument provides the bank or credit union the ability to advance funds and force-place insurance to protect the collateral.

Additionally, any new liens on the property demonstrate cash flow issues with the property, especially if the financial institution was notified as required under the loan documents.

Finally, any failure to deliver required financial information in a timely manner (including rent rolls/operating statements) or any covenant defaults (e.g., debt service coverage, debt yield requirements, or loan-to-value maximums) all represent major issues with respect to the loan. They should be addressed immediately. Ignoring any actual defaults is unacceptable and creates liability for the bank or credit union because this “course of dealing” can be interpreted as the institution waiving its rights. The bank or credit union can even lose the collateral (in the event of a tax deed sale or casualty event with no insurance coverage).

Learn more about managing CRE loan distress. Watch this webinar on problem loans and how to identify them quickly with data and reports.

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Take timely action

Diagnose the problem CRE loan

As stated above, once an early warning sign for a distressed commercial real estate loan is identified, there is an increased probability of future non-performance, or if an event of default occurs, it is imperative that the bank or credit union take appropriate and timely action. What should the institution do? Here are three actions to take:

 

Engage CRE credit partners

The institution’s deal team should engage with their credit partners and determine if the CRE loan should be downgraded and more closely monitored.

Engage the workout team

If there is an actual event of default or a hard money default that cannot be resolved (missed payment(s) or maturity event that doesn’t meet renewal policy), the deal team and credit approvers should engage the workout team for consultation and discussion. At this point, with the workout team involved, a diagnosis of the commercial property loan can be made as to the appropriate steps in protecting the financial institution and mitigating losses (either through further downgrades or even charge offs).

The workout team or expert will be able to approach the deal from an independent viewpoint and provide important feedback to the deal team as to current risks, future problems, and prospective strategies. Most loan workout experts are not in the blame game with their bank or credit union counterparts and are providing credible challenges as to current assumptions in order to determine the best course of action for a troubled CRE loan (similar to a doctor not shaming the patient while advising the best course of treatment).

Consult on potential treatment

After discussions, the group might determine that the issue is a short-lived, one-time event, and a waiver of default is appropriate. On the other hand, they may decide a more long-term and intensive solution is necessary, including a formal workout shadow arrangement or a full-blown transfer to the workout team. The former is similar to a doctor prescribing medication to take at home, while the latter is more like outpatient therapy and admittance to the hospital. If the illness of the property credit is significant, then intensive care is needed, and workout should own the asset.

The benefit will be that the workout specialists will have an independent and objective relationship with the CRE borrower since they didn’t originate the deal. They have no preconceptions regarding the credit or the loan documents, and they also have experience in managing the riskiest of assets so they can forecast and strategize on the best course of treatment.

Appraisals and analysis

Triage CRE loans in workout

If the bank or credit union team determines that the CRE loan should be moved to workout, or even if a formal consulting and shadowing relationship with workout is warranted, then the loan should be admitted to what’s essentially the financial institution’s emergency room. Typically, when a patient is admitted to the ER, vital signs are taken (current financial package), symptoms are closely observed (problems analyzed), new tests are ordered (new appraisals obtained and/or requests made for additional financial information), and the patient is asked probing questions to help in the diagnosis (interview with the borrower). A similar triage process and triage checklist can be administered in the case of CRE loan distress.

 

Reengage the deal team

The workout banker should reengage the deal team, especially the relationship manager who was working with the customer or member. Obtaining access to all of the loan documents and credit file is of paramount importance and the relationship manager can provide context and share any important email, correspondence, and servicing notes with the customer or member. At this point, the workout officer will conduct a full and comprehensive review of the loan documents (which are essentially the Bible governing the loan), including email correspondence, letters, or other documentation that may provide a “smoking gun” indicating lender liability or a commitment made about the loan (either directly or inadvertently). If there are weaknesses in the loan documentation or if any lender liability is discovered, the workout officer should engage legal partners and craft a strategy on how best to resolve it, first and foremost. The financial institution may also want to engage a lawyer to formally review the loan documents and title to verify there are no gaps or insecurities.

Meet with the borrower

A meeting should occur with the borrower to introduce the loan officer and workout officer (warm handoff – if possible) – hopefully at or near the collateral property. Note: I am a firm believer that a commercial property inspection must be conducted by the credit union or bank or its officer if possible. The on-site inspection can illuminate any issues with the neighborhood or the property itself (e.g., unreported vacancies, visible deferred maintenance, and busyness of the property).

Some best practices for this initial meeting with the borrower, which can be contentious if the customer or member has never been sent to workout, are to:

  • Have two bank or credit union representatives at the meeting.
  • Take good notes and minutes.
  • Email those minutes to all attendees to recap the discussion.

Often, workout meetings can be difficult discussions, and if emotions run high or the borrower makes accusations, it is best to have a record of what was discussed. It is important to note that the introductory meeting will not resolve the issues but is more for explaining the role of the financial institution, the rules of the road for communication going forward, the issues that predicated the transfer, and to make requests for additional information needed (financial and otherwise) that will be necessary to work on a solution. Again, follow up in writing with the formal request for information, and be sure to include any and all parties to the loan (including co-borrowers and guarantors).

Re-underwrite the CRE credit

The loan workout team will essentially want to re-underwrite the commercial real estate credit, especially if the borrower is open and transparent in providing updated financial information (both current and projections). It is also at this point that the bank or credit union should obtain an updated third-party appraisal of the collateral, especially if the last appraisal on the real estate or other collateral is stale (older than 12 months old) or if there have been substantial changes to the property or surrounding market. Additionally, if the loan documents allow or if the loan has an actual declared default, the institution should obtain updated financial information from all guarantors (corporate and personal).

Revisit the loan grade

Once all of this information has been obtained on the primary, secondary and tertiary sources of repayment, the bank or credit union can revisit the current grade on the distressed CRE loan and strategize on the best course to resolve the asset. The financial institution should make the distinction of whether the credit is a “retain” or “exit” customer or member. The former indicates a strategy of rehabilitation and return to line of business. The latter indicates a collection posture that seeks to get repaid via the strategy that provides the best resolution on a net present value basis.

Go-forward strategy

Make a prognosis for the CRE credit

Once the workout team has developed its recommendation and strategy for the problem CRE loan, it should follow up with the deal team to share findings and explain the go-forward strategy with the credit, i.e., the manner and course of treatment as to the patient.

If the deal team has reservations or wishes to provide a credible challenge, they should feel free to do so, as it is important that the entire bank or credit union team be on board with the ultimate strategy for the credit. Note, however, that the workout team must hold the ultimate decision. The workout group will want to keep its business partners in the loop as the deal and negotiations develop, especially in cases where the customer or member is politically or socially sensitive. It may be important to have a media relations or legal representative aware in the event any media inquiries are made regarding the CRE asset.

In essence, the workout team should be clear and deliberate in achieving its strategic objectives with respect to resolving the asset. Loan workout is not always a straight journey between diagnosis and the ultimate cure, as is the case with many medical treatments. The problem may be a chronic condition, or there may be many iterations, stop-and-starts, relapses, and even “death” via bankruptcy/liquidation. However, if the workout team follows the example set by the medical field’s principle of “First, Do No Harm” and follows a strict ethical path to achieving its desired resolution, the financial institution’s stakeholders will ultimately be best served.

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Bank wire fraud is growing and becoming more complex. 

Here are a few simple things you, as a financial crime professional, can do to slow it down.

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Bank wire fraud

Introduction

Bank wire fraud has long plagued the financial industry. While wire transfers offer speed and efficiency, they have always carried inherent risks. Despite mitigation efforts, technological advancements have empowered criminals, posing new challenges in combating fraud. In 2024, we face sophisticated schemes exploiting both technology and social engineering to target unsuspecting customers. This discussion highlights recent trends in wire fraud and offers strategies to protect both clients and institutions. 

In 2023, reported fraud losses surged to over $10 billion, a 14% increase from 2022, despite a similar number of cases being reported at 2.6 million. Notably, the nature, targets, and methods of perpetuating fraud are evolving. Investment scams were #1, with over $4.6 billion in losses reported. While only some of the funds for investment scams were moved with wire transactions, an average of 4%-5% of those scams were done with wires in all age groups. Other popular fraud scams that use wire transactions include business email compromise, real estate transaction fraud, and romance scams. The total loss attributable to wire transactions was $344 million, as described in 42,729 reports to the FTC. Keep in mind these numbers are only what is reported. We know a lot of fraud is not reported due to a lack of knowledge on reporting and victims feeling shame for their loss. 

Bank wire transfer fraud

Current fraud trends

Current fraud trends highlight a shift in scam origins. While previously, fraud was local or regional, today, scammers leverage technology extensively. Reports from various government and news sources indicate the existence of organized groups, often in other countries, exploiting individuals, including victims of human trafficking, to defraud U.S. citizens. They employ technology and social engineering tactics, reaching victims through email, social media, and text messages. Using victim artificial intelligence (AI), they gather personal information from platforms like Facebook and Instagram to customize their schemes. Funds are then funneled abroad through wire transfers and cryptocurrency transactions, financing transnational criminal networks.

 

Tips for AML/CFT efforts

How to help prevent wire fraud

So, how do we, as financial institutions and concerned citizens, stop clients, businesses, friends, and family from becoming a victim?  

  1. Educate yourself about imposter scams and the methods used to gain your information. We can no longer rely on bad grammar in an email, a phone call, or a text message that looks like it comes from our bank or credit union’s fraud department, tech support, or billing emergency communication. All these events can be manipulated into a scam and used as a catalyst to make you a victim.
  2. Understand that scammers are professionals. There are no accidental targets. Fraudsters use the same sales and marketing techniques as legitimate businesses to research and target their victims. They make fake accounts and profiles and analyze people groups, current events, and regional characteristics to appear as legitimate as possible. Everything from a phony text message that is trying to confirm an address for a USPS delivery to a business email compromise that started as a request to send money on behalf of the CFO is all curated and targeted to their recipient. It only takes one employee clicking on a phishing email to introduce malware or ransomware that can create an entry point for the fraudster’s scheme.
  3. Create and follow your internal processes for communications and security. The best defense is a good offense. Financial institutions should implement tools and protocols like dual control, transaction monitoring software, call-back numbers, and internal tracking or reporting methods to confirm the validity of a wire transaction. It only takes one human error for the entire chain to break down and potentially cause a loss. Ensure all employees are familiar with the processes and protocols and that they follow them every time. 
  4. Spread the word. As a financial institution, you are responsible for educating your community and clients on financial patterns and bank wire fraud trends. A recent study by CertifIDon, noted real estate wire fraud identified 71% of consumers believe it is someone else’s responsibility to teach them about wire fraud. Financial literacy is key critical. 

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How to comply with both Reg CC and fraud requirements

Read about the rules outlined by Reg CC, the circumstances that allow exceptions, and what to do when your financial institution suspects fraud.

Are your AML and fraud teams short-handed? Learn how one financial institution bridged the gap.

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This post was updated to add new information about upcoming changes to the minimum amounts financial institutions must make available from deposits.

Reg CC & fraud

Balance fraud-fighting with consumer compliance

As check fraud and other forms of fraud continue to soar, financial institutions increasingly are called to know when they can hold deposited funds longer than permitted by the Expedited Funds Availability Act, commonly known as Regulation CC, or Reg CC.  

Financial institutions’ AML and anti-fraud programs incorporate tremendous resources to prevent fraud and their associated losses. However, banks and credit unions must balance their fraud-fighting obligations with consumer compliance requirements on deposit-availability timeframes and notices under Reg CC.  

Efficient compliance with both Reg CC and the requirements tied to anti-fraud or anti-money laundering can also greatly impact customer or member experiences. Legitimate customers and members expect access to their deposits quickly. They equally assume their banks and credit unions will protect them against fraud. As some financial institutions have learned, it can be tricky to balance improving customer experience and fraud, but the stakes are high. 

This article explains Reg CC and its general rules for making funds available from checks after a deposit. It covers when a financial institution is allowed to hold a member or customer’s deposit for longer than the one to two days typically allowed under Reg CC. Finally, it examines what the funds availability regulation says about holding funds when fraud is suspected.  

See the regulation and discuss this topic with your institution’s attorney to evaluate your bank or credit union’s specific requirements.  

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Expedited funds availability

What is Reg CC in banking?

Reg CC is the federal requirement for banks and credit unions to make funds deposited to a transaction account available for withdrawal within specific timeframes. The regulation is rooted in the 1987 Expedited Funds Availability Act, aimed at addressing concerns that financial institutions were placing lengthy holds on checks deposited by customers or members. The consumer compliance regulation has been revised several times over the years. 

Types of accounts covered by Reg CC include demand deposit accounts or similar transaction accounts at a depository institution that can make third-party payments. Accounts that are not covered by Reg CC include savings accounts or time deposit accounts, such as money market deposit accounts, even though they may have limited third-party payment powers.

Does Regulation CC apply to business accounts?

The regulation doesn't specifically call out business or non-consumer accounts. However, it defines the types of accounts subject to Reg CC as

accounts at a bank from which the account holder is permitted to make transfers or withdrawals by negotiable or transferable instrument, payment order of withdrawal, telephone transfer, electronic payment, or other similar means for the purpose of making payments or transfers to third persons or others. Account also includes accounts at a bank from which the account holder may make third party payments at an ATM, remote service unit, or other electronic device, including by debit card."

Later, the regulation says its definition of account excludes accounts where the account holder is:

  • A bank
  • An office of an institution as described in Reg CC or an office of a foreign bank as defined in the International Banking Act that is located outside the U.S.
  • The Treasury of the United States (for either direct or indirect account holders)

Both the American Bankers Association  (ABA) and the National Association of Federal Credit Unions (NCUA) have interpreted the regulation to include business accounts.

 

When do credit unions and banks have to make deposited funds available for withdrawals?  

In all cases, the clock to make funds available starts ticking on the banking day of a deposit, which is defined as the part of any business day that an office of an institution is open to the public for carrying on substantially all of its banking functions. Deadlines are listed below and vary based on the type of deposit or payment instrument. In addition, exceptions to the deadlines can provide additional time to scrutinize the transaction, which can be particularly useful if check fraud is suspected. Read more about exceptions later in this post.  

Which deposits need fast access?

Reg CC deadlines for “next-day availability”

Many deposits, especially if made in person at the account holder’s institution or branch, must be available for withdrawal on the first business day following the deposit. The following types of deposits are among those generally required to have “next-day availability:” 

  1. Cash 
  2. Electronic payments such as wire transfers and ACH credit transactions, so long as the receiving institution has received both the payment “in actually and collected funds” and instructions on both the account and amount to be credited 
  3. U.S. Treasury checks deposited in an account held by the check payee 
  4. U.S. Postal Service money orders, Federal Reserve Bank checks, and Federal Home Loan Bank checks that are deposited into the payee’s account and in person via an employee of the institution 
  5. Cashier’s or certified checks deposited in person to the payee’s account via an employee of that depositary bank or credit union 
  6. Checks that are drawn on an account at the institution and that are deposited in person with an institution employee 
  7. State and local government checks deposited by the payee into their account, as long as the state or local government is in the same state as the bank or credit union and it’s done in person with a credit union or bank employee 
  8. Cashier’s checks, certified checks, or teller’s checks deposited to the payee’s account in person with a bank or credit union employee 

Deposits that require second-day availability 

Other types of deposits must be made available for withdrawal no later than the second business day. Those include checks not deposited in person but otherwise meeting the requirements listed above for: 

  • Postal Service money orders 
  • Fed or FHLB checks  
  • State and local government checks 
  • Cashier’s, certified, or teller’s checks  

Even if certain check deposits are not subject to next-day availability, financial institutions generally must still make available at least the first $225 of the deposits on the next business day. This is known as the Reg CC $225 rule.

In-the-know clientele

Reg CC's required disclosures

Reg CC also requires banks and credit unions to inform customers or members of the institution’s policy on funds availability “clearly and conspicuously in writing.”  

This is often in the form of posted notices where bank or credit union employees accept deposits, posted notices at ATMs, and preprinted notices on deposit slips that are provided by the institution and have the customer's name and account number preprinted on them. The policy might also be highlighted in a document describing the terms of an account. In any case, the notice should reflect the availability policy the bank or credit union follows in most cases.  

Exceptions to the rule

Check hold exceptions allowed by Reg CC

Because Regulation CC aims to implement Congress’s goal of providing customers or members access to their deposited funds as quickly as possible, exceptions to the required availability schedules are limited. That makes it important for staff to understand the Reg CC exceptions in all their check fraud detection efforts.  

The six so-called safeguard exceptions to the availability schedule under Reg CC are related to:

  1. New accounts, which are those newer than 30 calendar days. This exception allows holds on check deposits but does not cover deposits made by cash and electronic payments. In addition, suppose each customer on an account has had another account at the bank or credit union for 30 days before an additional account is opened. In that case, it is not considered a new account.
  2. Large deposits of one or more checks.  A financial institution can extend the hold placed on deposits of one or more checks to the extent that the aggregate amount exceeds $5,525 on any single banking day, regardless of how many accounts list the customer or member. Nevertheless, financial institutions must make some of the funds available quickly, as outlined in Reg CC. In addition, this exception does not apply to large cash deposits or those made by electronic payments.
  3. Redeposited checks, which are those that have been returned unpaid and redeposited by the customer or the financial institution. However, this exception doesn’t apply to checks redeposited after a missing endorsement is obtained or if a check that had been post-dated is no longer post-dated. 
  4. Repeated overdrafts, including accounts or combined accounts with negative balances on at least six days in the last six months. This exception also includes accounts with a negative balance of $5,525 or more on at least two banking days in the last six months. 
  5. Reasonable cause to doubt the collectibility of a check or other deposit, which requires “the existence of facts that would cause a well-grounded belief in the mind of a reasonable person” that the check is uncollectible.  
  6. Emergency conditions, such as natural disasters, communication interruptions, or another situation that prevents the bank or credit union from processing checks normally. 

The length of restrictions to deposited funds, including check holds, can vary under Reg CC. In addition, in all cases above except for the one regarding new accounts, financial institutions postponing access to funds from checks or other deposits must quickly provide the depositor with written notice of the delay.   

2025 adjustments

Funds availability minimum is increasing

One new wrinkle for financial institutions fighting check fraud is that adjustments to Reg CC in 2025 will increase the potential exposure of financial institutions to check-fraud losses, as they will have to make more funds available to customers before they can verify the legitimacy of the checks.

A 2019 amendment to Reg CC required the periodic increases to the funds availability minimum based on inflation. The Consumer Financial Protection Bureau has previously said regulators anticipate publishing the adjustments in the first half of 2024 to become effective July 1, 2025. The CFPB declined to comment to Abrigo on the expected increases.

However, the adjustments will be based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) over the last five years. Given inflation trends, the adjustments could be significant. That means that if fraud isn’t caught, financial institutions could be on the hook for even larger losses related to a transaction than they are now. Using fraud management software that can identify fraudulent checks in real time will be more important than ever once the increases take effect.

Under Reg CC, adjustments will be calculated by multiplying the existing amount by the aggregate percentage change in the CPI-W between July 2018 and July 2023, then rounding to the nearest $25. Based on the methodology outlined, the dollar amounts for 2025 would increase as follows:

  • The minimum amount that must be made available by the next business day from most check deposits would increase from $225 to $275.
  • Thresholds for using exceptions to hold funds related to large deposits and repeatedly overdrawn accounts would jump from $5,525 to $6,725.
  • The threshold for using a new account exception hold and the related amount still subject to next-day availability requirements would increase from $5,525 to $6,725
  • Maximum civil liability amounts for failing to comply with Reg CC would increase from $1,100 to $1,350 for an individual action and from $552,500 to $672,950 for a class action.

In addition, financial institutions will be required to send a written notice to customers or members regarding changes to their funds-availability policies as a result of the 2025 increases.

Combatting illicit activity

How to comply with Reg CC and fight fraud

So, what can financial institutions do to fight fraud while complying with Reg CC? 

Nothing in Reg CC affects a financial institution’s right to accept or reject a check for deposit, regulators have noted. Strong know your customer (KYC) training and ongoing customer due diligence (CDD) compliance are essential for this approach. Ensure bank or credit union staff, from the teller line to the fraud staff, are familiar with check-kiting red flags and other check fraud detection tips 

Reg CC also doesn’t affect the right to revoke settlement, charge back accounts for returned or unpaid checks, or charge back electronic payments if the institution doesn’t receive “actually and finally collected funds.”  

Suppose circumstances surrounding suspected check fraud or other types of fraud don’t “fit” the exceptions tied to new accounts, large deposits, or redeposited checks. In that case, financial crime professionals can also consider using the exception for “reasonable cause to doubt collectability” to extend the hold time. Indeed, commentary following Reg CC gives additional detail on this exception, including providing examples of when checks can be held, including being held for suspected check fraud. 

“This exception applies to local and nonlocal checks, as well as to checks that would otherwise be made available on the next (or second) business day,” according to regulators' commentary. “When a bank places or extends a hold under this exception it need not make the first [$225] of a deposit available for withdrawal on the next business day.” 

Examples of Reg CC's 'reasonable cause to doubt'

Financial institutions can rely on “a combination of factors that give rise to a reasonable cause to doubt” that the check will be paid, the commentary continues. Among examples, some of which could tie to fraud scenarios, for which institutions can invoke the “reasonable cause” exception allowed under Reg CC: 

  • The bank or credit union receives a notice from the paying institution that a check was not paid and is being returned. 
  • The paying bank provides information before the check is deposited that gives the depositing institution reason to believe the check is uncollectible. This includes a stop payment notice.  
  • A check is deposited more than six months after the date on the check.  
  • The financial institution has confidential information that leads it to believe the check will not be paid. “For example, a bank could conclude that a check being deposited is uncollectible based on its reasonable belief that the depositor is engaging in kiting activity,” Reg CC commentary says. “Reasonable belief as to the insolvency or pending insolvency of the drawer of the check or the drawee bank and that the checks will not be paid also may justify invoking this exception.” 

One important directive related to the “reasonable cause” exception is that a determination of uncollectibility cannot be based on “a class of checks or persons.” For example, it can’t be based on the depositor’s race or national origin. Another example: A depositary bank can’t invoke the exception because the check is drawn on a rural bank, even if it means it won’t have the chance to learn of nonpayment before the deadline to make the funds available.  

For most banks and credit unions, real-time fraud detection software is one of the most effective ways to comply with Reg CC while thwarting losses and protecting customers or members. Automated workflows combined with an AI/ML-driven solution will minimize the processing burdens while lowering costs and preventing fraud’s impacts.

Financial institutions have tremendous responsibilities when it comes to preventing and detecting fraud. Knowing Reg CC’s requirements for funds availability and when exceptions can be made is essential for financial institutions to balance regulatory compliance for AML and consumer interests. 

In a pilot program, Abrigo Fraud Detection correctly identified 93% of a Southeastern U.S. bank’s total fraudulent check value, equating to more than $330,000 in potential fraud loss avoidance.

catch more fraud

Avoid fraud losses from investment schemes called 'pig butchering' scams

FinCrime professionals looking to prevent 'pig butchering' scams in the age of cryptocurrency can follow these steps to tighten security.

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Modern investment fraud

What is a pig butchering scam?

Investment fraud schemes significantly threaten financial institutions and their customers in the ever-evolving financial crime landscape. One such scheme that has gained attention in recent years is known as "pig butchering." What exactly is a pig butchering scam? In the context of financial crime, this troubling analogy refers to a manipulation technique used to exploit vulnerabilities in a victim through frequent interactions and social engineering. Today’s pig butchering scams usually involve investment schemes and cryptocurrency fraud.

Pig butchering scams originated in Southeast Asia and have escalated significantly in the United States. A scam usually begins with online contact via social media or dating apps. Scammers build up a victim’s trust and gain access to their online account information, sometimes “fattening the pig” by soliciting more investment in cryptocurrency before “slaughtering the pig” and stealing the cryptocurrency.

The analogy is crude but accurate. “It’s a sophisticated con, and you can see that because it’s a long-term con,” said James Barnacle, who runs the FBI’s Financial Crimes Section. According to Barnacle, there were well over $3.5 billion of reported losses due to pig butchering in 2023 and around 40,000 victims in the United States. He's even seen losses as large as $4 million. 

In a recent NBC News report, Barry May, a divorced and retired insurance adjuster living in Mississippi, recounted his personal experience with “Anna,” who reached out to May over social media. The two started chatting on Facebook. Soon, Anna was sending explicit photos. May was smitten. She told him they could be together, but first, she needed a favor. Her aunt, she said, was holding $3 million of her money, and she needed May to invest in cryptocurrency so her aunt would release that money to her. 

She promised huge returns. May sold property and liquidated his 401(k), sending the woman more than $500,000 — his life savings. An account on a website appeared to show his holdings. May was about to take out a loan to send more until an FBI agent called. “They said this is a major fraud situation, and I’m not the only one,” May said. 

FinCEN updates

New FinCEN pig butchering advisory

An advisory released September 8, 2023 from the Financial Crimes Enforcement Network (FinCEN) underscores the growing concern about pig butchering scams. According to the advisory: 

  • The scam tactics have evolved, frequently including aggressive promotional campaigns and cold calls to potential victims. 
  • There has been an increased use of "money mules" in these scams. Money mules are individuals who, knowingly or unknowingly, transfer money acquired illegally on behalf of others. 
  • The advisory noted that fraudsters now use new financial products, such as decentralized finance (DeFi) platforms, to move illicit funds and obscure their transactions. 
  • FinCEN has identified red flags and behavior patterns that may indicate pig butchering scams, such as sudden and high-value investments from elderly customers, rapid withdrawal of funds after a large deposit, and the frequent use of privacy coins or mixers. 
  • Financial institutions are advised to report suspicious activities related to pig butchering scams using specific terms like "Pig Butchering Fraud Advisory" in the SAR narrative to streamline the processing and analysis of reports. 

Tightening security

Preventing pig butchering schemes

Pig butchering scams are a concern because they can go unnoticed for a long time, causing significant financial losses and damaging customers’ and institutions’ reputations. Crafty scammers exploit weaknesses in fraud and anti-money laundering (AML) compliance programs such as outdated technology, human error, or inadequate monitoring systems. 

Financial institutions can tackle the threat of pig butchering scams and other investment schemes to protect their clients. Below are some critical steps they can take:

  • Strengthen fraud detection and AML programs: Financial institutions must have a solid financial crime detection program. This means following regulatory guidelines, conducting thorough customer due diligence, assessing risks, and implementing a robust system to monitor and report suspicious activity. Regularly reviewing and improving policies and procedures is essential to stay one step ahead of emerging threats. A good first defense is investing in fraud detecting software that detects specific fraud in their clients' accounts, such as account takeover, ACH, new account, kiting, debit card, and check card fraud, along with following cybercrime security tips from the FBI. Fraud detection programs should also include the red flags identified in the FinCEN advisory on pig butchering.
  • Enhance data analytics capabilities: Data is a powerful tool. Banks can leverage data analytics to identify unusual patterns and anomalies. Financial institutions can monitor customer behavior and transactional data by implementing robust data analytics tools, like Abrigo Connect, and spot potential pig butchering activities. Establishing baseline customer behavior patterns and promptly investigating deviations can help detect and prevent fraudulent activities.
  • Conduct regular employee training and include pig butchering scams: Financial institutions should educate their employees about the risks associated with pig butchering scams, other fraud schemes, and the FinCEN red flags. Building a culture of awareness and accountability empowers employees to be the first line of defense against fraudulent activity. Staffing shortages in AML and fraud departments of financial institutions are well publicized, so make sure you have adequate staffing levels to perform well.
  • Educate customers and members: Provide educational opportunities for your community so they know when to say “no” to investment scams. Explain the types of fraud schemes circulating. Help them understand cryptocurrency so they don’t fall victim to these scams. The goodwill your institution will gain in the community will be invaluable.

Customer awareness

Educating customers on pig butchering scams

The FBI identified potential ways individuals can recognize and deter cryptocurrency investment schemes. Use the following list to educate your customers on best practices for protecting their assets:

  • Verify the validity of any investment opportunity from strangers or long-lost contacts on social media websites.
  • Be on the lookout for domain names that look like legitimate financial institutions, especially cryptocurrency exchanges, but that have misspelled URLs or slight deviations in the name.
  • Do not download or use suspicious-looking apps as a tool for investing unless you can verify the app’s legitimacy.
  • If an investment opportunity sounds too good to be true, it likely is. Be cautious of get-rich-quick schemes.

Pig butchering scams not only result in financial losses for clients; they can also lead to personal hardships, damaged credit scores, and even identity theft. The consequences can be dire for financial institutions. Massive financial losses can destabilize their operations, impact profitability, and harm their reputation. By combining fraud detection software, robust fraud and AML programs, employee education, and client awareness training, you can stay one step ahead of fraudsters, ensuring the security and trust of your institution and its stakeholders.

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Check fraud prevention is at the forefront for financial institutions

Banks and credit unions report that check fraud is impacting their institution more than any other threat. Read on for cutting-edge prevention methods. 

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Poll responses highlight the need for check fraud prevention

Abrigo recently polled banks and credit unions about their AML/fraud concerns for 2024. The results indicated that check fraud is a growing concern for institutions, with more than half reporting significant increases. Despite this alarming trend, many institutions cite resourcing and the capacity of their fraud team as the main hurdles keeping them from prioritizing check fraud defense.

Most financial institutions also reported that check forgeries and counterfeits were the fraud schemes that impacted their organizations the most in 2023. These statistics highlight the need for institutions to invest in tools like fraud detection software to combat check fraud and protect their customers.

73% of institutions said check fraud is top-of-mind at their organization

Warnings about the high prevalence and high costs of check fraud have been frequent in the media and emphasized by regulatory agencies. Perhaps some of the rise in check fraud is due to the challenging economy, which can exacerbate conditions that experts refer to as the fraud triangle fundamentals—pressure, opportunity, and rationalization. These conditions can increase the likelihood of all types of fraud. And with 81% of businesses still paying other firms with paper checks, checks remain the most common form of B2B payment — and will likely be exploited by fraudsters for years to come.

 

60% of institutions said they saw a more than 25% increase in check fraud last year

Check fraud is on the rise. Abrigo polling found that 60% of financial institutions saw a more than 25% increase in check fraud at their institution in the past year. In the same poll, 25% of financial institutions saw an even larger increase of between 50%-75%. Other sources concur that check fraud is increasing dramatically. According to fraud strategists, check fraud is projected to soar to $24 billion in 2024, and FinCEN reported that Suspicious Activity Report (SAR) filings for check fraud in 2022 exceeded 680,000, nearly doubling the number of filings the previous year.    

Fraud impacts your reputation, your customers, and your bottom line. Learn more about its snowball effect with this infographic: "Beyond immediate fraud losses."

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67% of institutions said resources and team capacity were the main hurdles keeping them from prioritizing check fraud defense 

Fraud teams are often overwhelmed by the volume of checks and other transaction types that need their attention. One way to alleviate the burden of manual processes is to leverage artificial intelligence (AI) and machine learning (ML) to automate and enhance check fraud detection. AI and ML can help institutions analyze large volumes of data, identify patterns and anomalies, and flag potential fraud cases in real-time. By using AI and ML, fraud teams can reduce false positives, increase accuracy, and save time and money on manual reviews. Other tech advancements, such as the ability to text customers to confirm unusual transactions, can also make fraud teams’ lives easier.

If staff capacity is a barrier to better check fraud prevention at your financial institution, consider upgrading your technology and investing in more streamlined, efficient processes for your fraud department. Comprehensive platforms like Abrigo Fraud Detection can also help improve workflows, which saves time, increases efficiency, and helps staff prioritize higher-risk activities. 

 

76% of institutions said check forgeries and counterfeits impacted their organizations most in 2023

Fraud counterfeit and forgery methods have improved along with technology, and financial institutions' detection methods need to be able to keep up. Emerging technologies such as AI and ML can help by quickly identifying patterns and anomalies that detect check fraud. These tools have the potential to revolutionize check fraud prevention by analyzing large amounts of historical and real-time data, AI and machine learning can identify patterns and anomalies that indicate possible fraud, such as unusual check amounts, locations, or frequencies. AI and machine learning can also use image analysis and natural language processing to verify the authenticity and consistency of the check images and text, such as signatures, dates, payees, and amounts

 

Preparing your credit administration for the next cycle

Financial institutions should consider these tips for maintaining an efficient credit process throughout the year.

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Introduction

The importance of efficient credit administration

Credit departments play a crucial role in the financial industry, and it is important to ensure that they are functioning at their best. A financial institution's credit administration department deals with all steps of the credit process. Credit administration staff are responsible for managing the entire credit process, including the approval of credit to borrowers, assessment of the creditworthiness of potential customers, and credit review of existing borrowers.

Housekeeping for your financial institution’s credit department involves more than just keeping things organized. It's about ensuring that every aspect of your lending operation is optimized for efficiency and effectiveness. One way to do this is to take stock of your credit administration processes and make necessary adjustments. Whether it's at the start of a year or some other time, focusing on these key areas will help you fine-tune your operations and set your financial institution up for success in the year ahead.

Streamline your department

Clean up your credit administration processes

Credit administration housekeeping needs to address areas of a financial institution's processes that could be streamlined to save time and effort.

  • Clarify expectations: Ensure that everyone on your team understands their roles and responsibilities. Clearly defined policies and procedures can help avoid confusion and streamline credit operations.
  • Customize documentation: Avoid a one-size-fits-all approach to documentation when it comes to the underwriting process. Tailor your templates for short-form and long-form underwriting and differentiate between a simple review and an annual review. This will save time by ensuring that staff aren’t adding unnecessary length and detail to low-risk, low-maintenance documents.
  • Improve tickler management: Ticklers are often managed by committee, but accountability and follow-through are necessary to ensure these tasks are handled efficiently. Assign clear responsibilities and establish accountability at all levels—from mechanics and calculations to analysis of covenant breaches. If your financial institution is considering automation, credit risk software can track ticklers and help manage loan documents and credit exceptions.
  • Reduce exceptions: Too many credit exceptions can lead to confusion and inefficiency. Focus on addressing the most critical issues and limit the number of exceptions to a manageable level. In a recent Abrigo webinar, Kent Kirby challenged credit officers to pick out five exceptions to stick to for one year—this can help them pinpoint the right exceptions for their unique institution and streamline their processes.
  • Ensure regulatory compliance: Stay ahead of regulatory requirements by ensuring accurate credit risk ratings, robust global cash flow analysis, and proactive rate-risk Regular portfolio monitoring is key to identifying potential issues and addressing them promptly. Kirby also recommends identifying the concentrations in your loan portfolio so regulators can see that you are planning for the future of whatever industries your financial institution specializes in.

Assess and control key risk areas with an effective credit policy. Get details in "A guide to implementing credit policy."

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Plan ahead

Optimize your credit department schedule

Scheduling in bank and credit union credit departments can be challenging, especially when dealing with the unpredictability of new money requests. However, with proper planning and effective strategies, the scheduling process can be made more manageable. Here are some key insights and strategies to consider:

  • Understand your timing: The credit year is not always January through December. For many businesses, especially those in real estate or agribusiness, the fiscal year may differ. By aligning your scheduling with these industry-specific timelines, you can avoid unnecessary stress and prioritize your workload effectively.
  • Embrace technology: Unlike in the past, today's banks have access to advanced systems that can streamline scheduling processes, such as loan administration software. Utilize these tools to track renewals, annual reviews, and other key dates, ensuring that nothing falls through the cracks.
  • Collaborate effectively: Credit is a holistic process that requires collaboration between analysts and lenders. Foster a collaborative environment where both parties can share insights and make informed decisions together, leading to more efficient scheduling and risk management.
  • Prioritize spreading: Spreading financial statements should be seen as a separate project and done promptly upon receipt. Credit spreading software can streamline this process and make it easier to track important tasks. This allows for timely risk rating, covenant testing, and packet creation, reducing the likelihood of last-minute rushes.
  • Minimize rework: Avoid unnecessary rework by getting all approvals done at once, especially for loans with similar timelines. Consider implementing guidance lines for customers with multiple financing needs to streamline the approval process.

Develop talent

Train and educate credit administration staff

Credit analysts are the backbone of any credit process, yet their education and training are often overlooked or underprioritized. Analysts need to be trained to understand the working capital cycle, look for hidden risks, and be aware of accounting changes. Here are some areas you might want your analyst training to cover:

  • Understanding the working capital cycle: The working capital cycle, also known as the trade cycle, is a critical aspect of credit analysis that is often overlooked. Analysts should be trained to understand how companies use trade to finance their obligations and recognize when they may need bank intervention. This includes understanding factors such as seasonality, inventory management, and payment terms.
  • Identifying hidden risks: Analysts should be trained to identify hidden risks at the financial institution. This includes looking beyond the obvious factors and considering supply chain disruptions, labor shortages, and other external factors that can impact a borrower's ability to repay.
  • Avoiding glittering generalities: Analysts should be cautious of relying on glittering generalities, such as broad market trends or industry reports, without considering the specific circumstances of the borrower. It's important to dig deep and understand the unique challenges and opportunities affecting each borrower and your own financial institution.
  • Staying up to date on accounting changes: Analysts should be aware of accounting changes, such as the treatment of troubled debt restructurings (TDRs) under CECL, and ensure that their policies and procedures are updated accordingly.
  • Specialization for portfolio concentrations: For banks and credit unions with heavy portfolio concentrations, consider assigning specialized analysts to handle more complicated deals within those concentrations. This can provide a more comprehensive understanding of the portfolio and help mitigate risks.

In conclusion, credit departments play a crucial role in the financial industry and there are several practical steps that can be taken to improve their functioning. These steps include effective housekeeping, optimizing scheduling, and training and educating staff. By focusing on these key areas, credit departments can fine-tune their operations and set themselves up for ongoing success.

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We can help you simplify portfolio management. Abrigo’s credit risk software automates loan administration processes like managing ticklers and tracking loan document and credit exceptions. Talk to a specialist to learn more.

Misconceptions about banking tied to cannabis-related businesses

Understand these myths about offering banking services to businesses tied to marijuana, hemp, or cannabinoids (CBD) to remain compliant with AML rules and regs.

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The demand for CRB financial services

Understand misconceptions tied to cannabis banking

The cannabis industry has grown rapidly in recent years, and demand will continue increasing as further cannabis legalization initiatives are passed at the state level. The availability of safe banking and secure financial services products is essential for the growth and credibility of cannabis-related businesses (CRBs), whether they are tied to marijuana, hemp, or cannabinoids (CBD), which are all by-products of the cannabis plant. In addition, CRBs are a potential source of local deposits that could fund additional lending, which appeals to some financial institutions.

However, many banks and credit unions are still unsure whether they should offer cannabis banking to these potential clients.

Offering banking to cannabis businesses: A huge market

According to analysis from the MJ Biz Factbook, retail cannabis sales are projected to reach $54.3 billion by 2027. Although marijuana is now legal – either medically or recreationally – in most states today, it remains illegal on a federal level, hamstringing cannabis-related businesses (CRBs) from accessing traditional financial accounts.

While there is certainly demand for traditional banking services, financial institutions are, understandably, skeptical. Is banking cannabis safe? How do you provide financial services to them? How do you navigate compliance? Are there safe banking harbors in place?

While providing financial services to CRBs can be risky, it can also be advantageous. As more states legalize marijuana, the onus is on financial institutions to complete thorough due diligence and know the clients that cross state lines for services. Even if a financial institution wants to avoid banking cannabis businesses, it must take certain steps to maintain a lower risk profile.

Below are five myths about banking services for cannabis-related businesses. Understanding these myths can help financial institutions remain compliant with anti-money laundering (AML) rules and regulations – whether they bank CRBs or don’t.

Stay up to date on federal and state laws relating to cannabis banking.

A cannabis plant. Cannabis-related businesses have a tough time getting banking services.

Know your risk

5 myths surrounding cannabis banking

Myth #1: Cannabis is illegal in my state, so the risk is minimal and not of concern.

Fact: Risks exist in states where cannabis is illegal

If cannabis is illegal in a financial institution’s footprint, it does not mean it can be ignored. With talks of cannabis safe banking and legalization at the federal level heating up once again, banks and credit unions should be prepared if legalization happens in their state. Every state where cannabis is currently illegal borders at least two other states where it is legalized medically or recreationally. Financial institutions must understand how to handle transactions with cannabis-related businesses (CRBs) and know what to do if they discover a customer or member is operating a CRB or receiving income from a CRB in another state. The first step is staying up to date with all state and federal laws that may affect their clients and the decision on whether to provide cannabis banking services.

Myth #2: Institutions that do not service CRBs simply need to state their decision.

Fact: Even if a financial institution decides against offering services to CRBs, it must ensure BSA compliance with updates to policies and procedures and other actions.

When asked if they plan to offer cannabis banking services to CRBs, banks and credit unions cannot rely on a simple yes or no answer. Stating that they are or are not planning to service CRBs is only the first step in an extensive list of actions required to ensure compliance and perform proper due diligence. No matter their decision, banks and credit unions will have to update their policies and procedures to reflect it.

Questions for consideration if an institution does NOT provide financial services to cannabis-related businesses include:

  • How will they handle an account that is found to be tied to a CRB?
  • Will they offer banking services to indirect CRBs (those not “touching” the product?)
  • Will they bank hemp-related businesses? CBD-related businesses?
  • What extra customer due diligence will they implement to ensure an account isn’t tied to a CRB?
  • What transaction monitoring will be performed to ensure there are no CRBs in the institution’s client base? How will they effectively identify and manage CRB-related risk?  

Myth #3: All CRBs carry the same amount of banking risk.

Fact: Financial institutions should determine their tier of acceptance for cannabis banking.

There are multiple tiers to cannabis-related businesses. Steven Kemmerling, CEO of CRB Monitor, first introduced the idea of CRB tiers in 2016 to differentiate the types of marijuana-related businesses and their perceived risks.

The tiers are broken down as follows:

Tier 1 – Direct  

This tier includes businesses that touch the actual cannabis plant at some point and those that have a financial or controlling interest in companies that do. This tier has the highest perceived risk for financial institutions.  

Tier 2 – Indirect with “substantial” revenue from Tier 1  

This includes companies that sell cannabis or CBD products and derive a majority of their profits from those products. The definition of “majority” or “substantial” is defined by each financial institution’s risk tolerance. This tier is of moderate risk to institutions.  

Tier 3 – Indirect with “incidental” revenue from Tier 1 

Companies that fall under this tier can include CPAs, payroll companies, cleaning companies, and other firms that service Tier 1 businesses. While these businesses earn some profit from Tier 1 companies, it is a nominal amount of their overall business. This tier is the lowest risk to financial institutions.  

As BSA officers analyze each level of risk during the AML risk assessment process and decide their risk tolerance for banking cannabis, they should define how to handle the different tiers. While the tiers are not official regulations, they are a good industry standard to adopt when defining where a financial institution’s risk tolerance stands. This analysis is critical to the final decision-making process by the board of directors and executive management.

 

Myth #4: Banking hemp is the same as banking marijuana.

Fact: Hemp banking involves less risk but still requires adherence to state and local laws.

The term cannabis covers hemp, marijuana, and CBD, which all come from the same cannabis plant but have different properties. Marijuana is cannabis with over 0.3% Tetrahydrocannabinol (THC), the psychoactive properties tied to the drug. Hemp is cannabis with less than 0.3% THC and has a variety of uses as an industrial fiber. CBD can fall into either category, depending on its THC content.

The passing of the 2018 Farm Bill removed hemp from the Controlled Substances Act (CSA) and made it federally legal if certain requirements are met. States may still regulate hemp production, so BSA professionals need to reference the state and local laws where they have branches or customers. Because hemp was removed from the CSA, there is much less risk to banking it as opposed to marijuana or even CBD.

Myth #5: CBD businesses are more common and, therefore, not as high-risk for offering banking services.

Fact: Businesses tied to cannabinoid products fall into a gray area of legality and require scrutiny.

CBD is a grey legal area in the cannabis world. If a CBD product contains less than 0.3% THC, it falls under the hemp category and is federally legal. But when the product has more than 0.3% THC, it is still considered marijuana. Testing CBD products for their THC levels is not well regulated, which makes many CBD products a gray area on the cannabis spectrum. Financial institutions should consider the source, extraction process, and laws when considering offering banking services to CBD-related businesses. Additionally, the Food and Drug Administration, which regulates food and health-related products, has not approved CBD for consumption or medicinal purposes. This adds another layer of risk associated with CBD and the way it is sold and used by the consumer.

Keep up with regulations

Stay informed and develop a plan

Financial institutions need to be aware of common myths around banking CBD, hemp, and marijuana-related businesses so they can adequately assess their risk profile. Developing a thorough CRB risk analysis as part of an AML/CFT risk assessment will enable an institution to truly understand the risk and speak to its regulators. If a bank or credit union decides to provide services to cannabis-related businesses, they should staff and price accordingly.
Until federal and state laws align, staying informed is critical to controlling the inherent risk associated with these higher-risk businesses.

Navigate cannabis banking concerns with Abrigo's AML consultants

Abrigo’s financial crime consultants, a team of former bankers, BSA Officers, and regulators, can help you with an AML/CFT risk assessment and policies and procedures tied to offering (or avoiding) banking to cannabis-related businesses. Our experts can help you get your AML program on track with customized services to meet your unique needs. 

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Find commercial real estate risks in the loan portfolio

Sound risk management practices in commercial real estate lending help lenders manage CRE credit losses and protect the portfolio's profitability. 

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Manage credit losses

Monitoring risk changes in CRE loan portfolios

The commercial real estate (CRE) landscape is in constant flux, but in recent months, several indicators signal shifts in risk and opportunity for financial institutions.

Effective CRE risk management at a bank or credit union involves a dynamic approach that adapts to changing market fundamentals. This approach to managing commercial real estate risk prudently includes setting and periodically adjusting concentration limits for different products and markets.

Reducing exposure levels may face resistance from managers and loan officers concerned about short-term earnings. However, when CRE lending is a significant revenue source, failure to adjust concentration levels amid warning signs can lead to excessive loan losses. The severity of these losses depends on loan underwriting quality and the depth of the downturn in the CRE market or specific segments of it.

Below is a look at some recent indicators that point to potential market risks in the CRE credit environment. Also provided are suggestions for evaluating exposure-related risks for CRE concentrations and managing them using CRE stress testing. Sound risk management practices in commercial real estate lending help lenders manage CRE credit losses and protect the profitability of the financial institution’s loan portfolio.

“Sound risk management practices in commercial real estate lending help lenders manage CRE credit losses and protect the profitability of the financial institution’s loan portfolio.”

CRE trends and indicators

What are the signs of potential CRE risk?

Construction companies are still struggling to cope with the impacts of higher interest rates and costs, and they are paying more to attract and retain workers, according to the Associated General Contractors of America (AGC). 

Stay up to date with CRE advice.

In AGC’s 2024 outlook report, 64% of contractors named rising interest rates and financing costs as one of their biggest concerns. Given the importance of cash flow management in construction, these pressures may point to underlying construction lending risks that may outweigh returns.

In addition, banks in the Federal Reserve’s latest Senior Loan Officer Opinion Survey reported tightening underwriting standards for all types of CRE loans. In fact, the net percentage of banks reporting tighter standards is comparable to those reported at the height of the COVID pandemic. The tightening of CRE credit could potentially impact liquidity within the CRE market. Should companies have less access to funds, this could cause further strain on CRE purchasing and development.

chart showing lenders tightening CRE lending standards for CRE risk management

Source: Senior Loan Officer Opinion Survey on Bank Lending Practices via FRED

Finally, excess vacant office space relative to market demand hints at oversupply and the need for managing CRE loan portfolio risk. CBRE stated recently that the share of U.S. office buildings with an occupancy rate over 95% declined to 60% in Q2 2023 from 63% in Q1 2020, or pre-pandemic.

Bar chart showing share of U.S. office buildings by percentage leased - CBRE

Source: CBRE

Apply scenario tests to CRE

Assessing CRE risks for informed decisions

Market monitoring and commercial real estate risk analysis are indispensable to sound CRE risk management. But their true value emerges when these insights prompt adjustments in commercial real estate concentration limits and exposures in response to shifting market conditions.

Identifying indicators that suggest CRE markets are at or near a peak is crucial. While there are no specific examples that are prescribed triggers, the observations above illustrate the need for banks to consider concrete indicators when evaluating commercial real estate risks in specific markets.

For example, during the 2008 Subprime Mortgage Crisis, commercial real estate prices fell drastically by 30 percent year over year. This indicator could be utilized as a benchmark point in stress testing practices to showcase a decline in collateral value representative of a historical recession.

Chart of commercial real estate prices over the year

Source: FRED

CRE stress testing: Avoid credit losses by examining vulnerabilities

Stress testing is integral to managing risks in CRE lending for community financial institutions. It serves as a proactive approach to evaluate how various stressors impact a bank's portfolio, helping assess vulnerabilities and identify areas needing risk mitigation. Some of these stressors include interest and vacancy rates or a decline in collateral values.

Regulators have determined that institutions with 100% of total capital in loans tied to construction and development or total CRE loans of 300% or more risk-based capital should conduct an annual stress test. Even if an institution doesn’t meet those thresholds for required stress testing, regulators increasingly expect lenders to manage CRE loan portfolios closely.

As the FDIC’s December 2023 advisory to institutions on managing CRE concentrations said:

“Portfolio and loan level stress tests or sensitivity analysis can be an invaluable tool in identifying and quantifying the impact of changing economic conditions and changing loan level fundamentals on asset quality, earnings, and capital. Applying adverse scenarios while conducting stress tests or sensitivity analysis helps banks adjust risk management processes, capital planning, liquidity management, collateral valuation processes, and workout procedures to prepare for credit risk problems before they impact earnings and capital.”

Stress testing aids in understanding the potential impact of adverse market conditions on loan portfolios with commercial real estate concentrations, enabling banks to make informed decisions about exposure levels and prepare strategies for mitigating risks. CRE stress testing, in particular, is a timely risk management practice.

Conclusion

Stress testing: A CRE "compass"

Stress testing is not merely a regulatory requirement but a strategic imperative for community financial institutions entrenched in commercial real estate (CRE) lending. It serves as a vital compass, guiding institutions through the intricate terrain of market fluctuations and economic uncertainties. By meticulously evaluating stressors such as interest rates, vacancy rates, and collateral values, stress testing enables banks to identify vulnerabilities, assess potential impacts, and formulate informed strategies for risk mitigation.

Moreover, beyond safeguarding against potential losses, stress testing fosters a culture of adaptability and resilience. It equips financial institutions with the foresight needed to set agile concentration limits, make timely adjustments to exposures, and navigate the nuanced challenges inherent in the ever-evolving CRE landscape. In essence, stress testing is not just a risk management practice; it is a cornerstone for long-term financial sustainability, allowing institutions to thrive amid the dynamic currents of the CRE market and emerge stronger in the face of economic fluctuations.

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Planning for the unexpected is part of any good plan.

Prepare for unexpected changes in your AML staffing plan, making your plans a little more "disaster" proof.

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Anti-money laundering compliance

6 Steps to build an AML staffing plan for unexpected changes

Prepare for unexpected changes in your AML staffing, whether related to the Bank Secrecy Act (BSA) Officer retiring or a key staff member going out on leave, departing for a new opportunity, or going on vacation. 

Planning now will mitigate the compliance risk from turnover and reduce stress for you and your AML program during times of change. It helps financial institutions avoid or at least plan for financial impacts tied to sudden staffing shifts. 

 Identify crucial AML staff positions and processes

  • What tasks are critical to daily operations? 
  • What tasks are required per regulations? 
  • Who performs those tasks? 
  • How often are they performed? 
  • Are there multiple people assigned to projects or tasks to share responsibilities? 

Assess key talent for AML needs

  • Review current roster. 
  • Review current workloads of relevant employees. 
  • Inquire directly with employees. 
  • Find cross-training opportunities. 
  • Identify all potential backups. 

Incorporate professional development

  • Interview each employee. 
  • Gauge interest in/willingness to take on other tasks/roles. 
  • Identify who is ready now to add tasks/roles vs. who needs additional training. 
  • Document who can do what if roles need to be adjusted unexpectedly. 
  • Cross-train and develop staff. 

 Anticipate possible triggers of AML staff changes (institution-specific)

  • Promotions. 
  • Terminations/resignations. 
  • Leaves of absence. 
  • Vacations/sabbaticals. 
  • Regulatory changes affecting your program. 
  • Major institutional realignments that could affect available backup resources. 

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Use results from above to document and approve AML succession plan

  • Scout key AML positions/talent. 
  • Watch for triggering events. 
  • Build out and document plans to remain BSA compliant. Include HR to add steps for replacing staff. 
  • Submit plans to AML program executive management for approval. Share with the board, which must appoint any interim or new officer when a BSA Officer leaves/requires an extended absence. 
  • Amend as needed. 

Activate the staffing plan when a triggering even occurs

AML employee succession plans should be “living” documents. Keep plans relevant. Follow through on training/professional development needs and set reminders to review/update the plan. Review it annually and when staff changes or other triggers occur. Consider how changes to the risk profile might alter program needs during a triggering event. 

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