Topic: Third Party Risk
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Can our bank obtain a consumer credit report on behalf of a landlord customer? The landlord would like our bank to obtain credit reports as part of its tenant application process. When a potential tenant applies, the landlord provides the tenant with a document requiring the tenant to acknowledge that their credit will be reviewed as part of the application. However, the document does not expressly authorize our bank to obtain the credit report.
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No, your bank should not pull credit reports on behalf of your landlord customer without obtaining express written permission from his applicants to do so. The Fair Credit Reporting Act (FCRA) permits a bank to obtain an individual’s credit report in limited circumstances. In our view, the only permissible purpose for pulling a credit…
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Can our bank receive a fee for referring commercial loan customers that our bank cannot accommodate to a lending network? We do not pass on the customers’ information to the network. When we know that we cannot accommodate a customer with a commercial loan, we provide the customer with contact information for the lending network. If the customer can find financing through the network, we receive a referral fee.
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Yes, we believe that your bank may accept a fee for referring commercial customers to a lending network. We are not aware of any Illinois or federal laws that would prohibit such an arrangement, and because these are commercial loans, RESPA’s limitations on referrals do not apply. In addition, because your bank does not disclose…
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One of our bank’s trust clients has chosen its own CPA firm to prepare its tax returns. Our other customers use a CPA firm selected by our bank. This customer’s CPA firm does not have any other relationships with the bank. We pay the CPA firm (and issue an IRS 1099 form) and pass the expense on to the client. For purposes of our third party vendor management program, should we treat the CPA firm as our vendor?
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Yes, we believe that this CPA firm should be treated as a bank vendor for purposes of your third party vendor management program. Your bank’s primary federal regulator, the FDIC, has provided guidance on third party risk management that we think encompasses this scenario. The guidance defines a “third party” broadly to include “all entities…
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We provide deposit services for a county treasurer and collateralize the deposits that are not FDIC-insured with certificates of deposit (CDs) issued by other banks. We have engaged a third party to obtain eligible collateral for the county’s uninsured deposits. We recently found that the third party had arranged for two $250,000 CDs with the same bank. The issuing bank told us that the CDs are fully insured through a state depositors’ insurance fund backed by a private insurance company. Are these CDs eligible collateral for the county’s funds?
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We believe that Illinois law would permit a county to collateralize its funds with privately-insured CDs from a qualifying issuer, but we strongly recommend reviewing the county treasurer’s investment policy to ensure that its guidelines authorize the use of this collateral. The Illinois Public Funds Investment Act requires all public agencies to adopt written investment…
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Our trust department has a trust committee that holds regular meetings. The committee has hired an attorney to attend committee meetings to serve as a “trust consultant” on issues facing the committee. Does this create a conflict of interest for our bank? Should we disclose this relationship in our meeting minutes? The attorney is not a member of the committee and has no voting privileges. However, he is compensated for attending the meetings, as are all committee members. His suggestions sometimes lead us to hire him for legal work. We want to be sensitive to potential conflicts, but he is one of the only expert trust attorneys in this geographic area, and our committee values him as a consultant.
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In our view, using the attorney as a “trust consultant” by itself does not pose a problem for your bank, provided that he continues to refrain from the trust committee’s voting process. However, because the attorney also provides legal advice on individual trust matters for the bank, we believe that he could (and perhaps should)…
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Are we required to file a 1099-MISC when a title company acts as the settlement agent for a loan and issues payments to service providers (such as appraisers or title companies) from an escrow account on behalf of a loan customer? Or does the title company have to file the form?
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In our view, neither the title company nor your bank would be responsible for filing the 1099-MISC form for the disbursements to providers of services related to the loan. When your bank makes payments to such non-employees on behalf of someone else (for example, on behalf of a borrower), the IRS rules require you to…
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Are we required to file a 1099-MISC when we issue a check to a contractor or vendor for over $600 from construction loan proceeds on behalf of a loan customer? We understand there is an exemption for payments to corporations and limited liability companies treated as corporations.
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Yes, we believe that most construction loan disbursements to contractors will require a 1099-MISC form, although whether the form is required will depend on the specific facts and circumstances of each construction loan. The IRS generally requires a 1099-MISC form for non-employees (excluding corporations and LLCs taxed as corporations) to whom your bank has paid…
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Do we have to file a 1099-MISC form to report payments to vendors and contractors who provide a service to the bank, such as lawn mowing or painting? Are payments to corporations and to limited liability companies treated as C or S corporations exempt from the 1099-MISC filing requirement? What about when our total payments to a contractor are less than $600 for the year?
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Yes, your bank generally should file a 1099-MISC form for payments to contractors and vendors who provide services to your bank. The IRS requires a 1099-MISC form for each non-employee your bank has paid at least $600 during the year for services performed for your bank. Payments to corporations or limited liability companies treated as…
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We obtain credit reports from a third party vendor. On the Loan Estimate for consumer mortgage loans, do we have to disclose and charge the exact fees expected to be charged by the vendor, or are we permitted to round up this fee?
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Regulation Z requires lenders to round credit report fees to the nearest whole dollar on the Loan Estimate. Amounts ending in $0.49 or under must be rounded down, and amounts ending in $0.50 or up must be rounded up. Under both Regulation X and Regulation Z, the general rule is that a lender must charge…
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Are banks required to notify their primary regulators when they change core accounting and processing systems? What types of vendor changes trigger this notification requirement? Who is responsible for completing this notification?
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Yes, the Bank Service Company Act requires banks to notify their primary federal regulators when contracting with a new provider for core accounting and processing services. The Bank Service Company Act requires depository institutions to notify their primary regulator when they contract with a vendor for the following types of bank services: “check and deposit…