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DOL proposes changes to ESG investing and shareholder rights: What plan sponsors need to know

12.05.22

Read this if you are a plan sponsor of employee benefit plans.

UPDATE: On December 1, 2022, the proposed rule was finalized with changes and will be effective 60 days after publication in the Federal Register (therefore, January 30, 2023).

The Department of Labor (DOL) is preparing to finalize a proposed rule that changes the way environmental, social, and governance (ESG) factors are viewed in a plan sponsor’s investment process and proxy voting methods. The proposal, which was issued in October 2021, aims to help plan sponsors understand their responsibilities when investing in ESG strategies and makes significant changes to two previously issued ESG rules.

Here, we provide an update on the DOL’s proposed rule and seek to help plan sponsors understand their potential new responsibilities when considering ESG investments. 

Background on ESG rules

For many years, the DOL has considered how non-financial factors, such as the effects of climate change, may affect plan sponsors’ fiduciary obligations. Amid an increasing focus on ESG investments, the Trump administration issued a final rule on ESG in November 2020 that required plan fiduciaries to only consider financial returns on investments—and to disregard non-financial factors like environmental or social effects. The rule also banned plan sponsors from using ESG investments as the Qualified Default Investment Alternative (QDIA).

A separate ruling issued in December 2020 said that managing proxy and shareholder duties (for investments within the plan) should be done for the sole benefit of the participants and beneficiaries—not for environmental or social advancements. It also stated that fiduciaries weren’t required to vote on every proxy and exercise every shareholder right.

In March 2021, the Biden Administration said it would not enforce the previous year’s rulings until it finished its own review. The current proposed rule is the result of that research.

Overview of the new proposed ESG rule

In October 2021, the DOL proposed a new rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” According to the proposed rule, fiduciaries may be required to consider the economic effects of climate change and other ESG factors when making investment decisions and exercising proxy voting and other shareholder rights. The proposal states that fiduciaries must consider ESG issues when they are material to an investment’s risk/return profile. The rule also reversed a previous provision on QDIAs, paving the way for ESG investment options to be used in automatic enrollment as long as such investment options meet QDIA requirements.

The new ESG rule also made several changes to fiduciaries’ responsibilities when exercising shareholder rights. First, it changed a provision on proxy voting, giving fiduciaries more responsibility in deciding whether voting is in the best interest of the plan. Second, it removed two “safe harbor” examples of proxy voting policies. Next, the proposed rule eliminated fiduciaries’ need to monitor third-party proxy voting services. Lastly, the proposal removed the requirement to keep detailed records on proxy voting and other shareholder rights.

In addition, the DOL updated the “tie-breaker test” to allow fiduciaries the ability to choose an investment that has separate benefits (e.g., ESG factors) if competing investments equally serve the financial interests of the plan.

Comment letter analysis shows broad support for the proposed rule

The DOL received more than 22,000 comment letters for the proposed regulation. Ninety-seven percent of respondents support the proposed changes according to an analysis of the comment letters by the Forum for Sustainable and Responsible Investment (US SIF), a membership association that promotes sustainable investing. While some respondents asked the DOL to revisit the tie-breaker provision and other specifics of the proposed rule, many respondents agreed that the proposed rule clears the way for fiduciaries to consider adding ESG investment options to benefit plans.

Insight: Consider how the proposed ESG rule affects your plan today

Based on the typical timeline for similar rule changes, the DOL is expected to issue its final version of the proposed rule by mid- to late-2022. This means that plan sponsors shouldn’t have to wait long for clarification on their ability to add ESG investments to their plans. To prepare for the potential changes, plan sponsors should review the proposed rule and consider creating a prudent selection process that reviews all aspects that are relevant to an investment’s risk and return profile. As always, documentation is a critical step in this process.

If you have any questions about your specific situation, please reach out to our employee benefit consulting team. We're here to help.

Topics: ESG

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  • William Enck
    Principal
    Financial Services, Insurance Agencies
    T 207.541.2300

BerryDunn experts and consultants

Read this if you are a community bank.

The Federal Deposit Insurance Corporation (FDIC) recently issued its third quarter 2022 Quarterly Banking Profile. The report provides financial information based on Call Reports filed by 4,746 FDIC-insured commercial banks and savings institutions. The report also contains a section specific to community bank performance. In third quarter 2022, this section included the financial information of 4,308 FDIC-insured community banks. BerryDunn’s key takeaways from the report are as follows:

Community banks see $1.0 billion increase in third quarter 2022 to $8.5 billion in quarterly net income. 

Community banks’ quarterly net income increased 13.5% in third quarter 2022 from second quarter 2022. Net interest income increased $2.0 billion and more than offset the increases in noninterest expense and provisions for credit losses and a decrease in noninterest income. Unrealized losses on securities totaled $76.1 billion in the third quarter, up from $55.3 billion in the second quarter, primarily due to increases in market interest rates.

Community bank net interest margin (NIM) increased to 3.63% due to strong net interest income growth.

Community bank NIM increased 32 basis points from the year-ago quarter and 30 basis points from second quarter 2022. Net interest income growth exceeded the pace of average earning asset growth. The average yield on earning assets rose 48 basis points while the average cost of funds rose 18 basis points from the previous quarter. 


Loan and lease balances continue to grow in third quarter 2022, with 83.3% of community banks reporting quarterly loan growth.

Loan and lease balances had widespread growth, with 81.9% of community banks reporting annual growth. Community banks saw annual loan growth in all portfolios except commercial and industrial (C&I). Despite C&I showing a decrease in annual loan balances, with the exclusion of Paycheck Protection Program (PPP) loan repayment and forgiveness, C&I loans would have shown annual growth of 21.6%. Total annual loan growth, with the exclusion of PPP loan repayment and forgiveness, was 15.7%.


Community banks reach record low for noncurrent loan rate since Quarterly Banking Profile (QBP) data collection began in first quarter 1984. 

Loans and leases 90 days or more past due or in nonaccrual status (noncurrent loan balances) hit a record low in third quarter 2022 at 0.47%. Over half of community banks reported quarter-over-quarter declines in the balance of noncurrent loans. The reserve coverage ratio (allowance for credit losses (ACL) to noncurrent loans) hit a QBP record high of 263.4%, as noncurrent loan balances hit an all-time low and the ACL continues to remain above pre-pandemic averages. Similarly, the ratio of reserve coverage to annualized quarterly net charge-offs continues to remain elevated due to an elevated ACL and low net charge-offs. The net charge-off rate was .06% for third quarter 2022, unchanged from third quarter 2021.

Institutions continue to move ahead with cautious optimism. The Federal Open Market Committee (FOMC) already increased the target federal funds rate by 375 basis points in 2022, with an additional increase expected in December 2022. Although rising rates have been the largest contributor to strengthening net interest margins, the impact these rate increases will have on the long-term economy is still yet to be seen. Inflation also continues to be elevated, although October statistics seemed to indicate some waning of inflation. As a result, the FOMC has indicated they expect smaller rate increases going forward, with a 50-basis point increase anticipated during their December 14th meeting. With increasing rates, many institutions are wondering if now is a good time to lock in duration on their balance sheet. And, if so, what is the best way to fund this duration, especially with deposit growth being outpaced by loan growth and unrealized losses on securities at unprecedented levels? Also, as we’ve recently seen, the economic situation can change significantly very quickly, which has many wondering to what extent the federal funds rate will remain relatively elevated. Many still believe we are destined for an economic downturn in 2023. Depending on the extent of this downturn, we could see federal funds rate decreases, something that hasn’t been fathomed for a couple years. 

The new interest rate environment also poses some unique opportunities on the liability side of the balance sheet. Customers that may not have been rate shopping due to low rates may now be looking to see what other products from other institutions are available. And these customers may not be looking solely for higher rates; they may also be looking for institutions that offer a better overall suite of services and products. Thus, not only do institutions need to be defensive and protect those customers already on their balance sheet, but they should also identify unique opportunities to attract new customers. Higher deposit rates may get a prospective customer in the door, but it is likely the other products and services an institution can offer that will win the customer. As always, please don’t hesitate to reach out to BerryDunn’s Financial Services team if you have any questions.

Article
FDIC Issues its Third Quarter 2022 Quarterly Banking Profile

Digital assets, such as cryptocurrencies and non-fungible tokens (NFTs), are changing how consumers and businesses pay, bank, and invest. A recent survey by Capitalize found that 60% of respondents would like a cryptocurrency investment option in their 401(k) plans. Several service providers, including Fidelity, have responded to that request by offering 401(k) participants direct but limited cryptocurrency investment options. Meanwhile, earlier this year, the Department of Labor (DOL) issued a stern warning about cryptocurrencies in 401(k) accounts. Here are some ways the federal government is assessing the benefits and risks cryptocurrencies pose to consumers, investors, and businesses.

White House calls for research on digital assets

In March 2022, the Biden administration issued an executive order calling for the federal government to report its findings on the risks and benefits of cryptocurrencies and other digital assets. For six months, various agencies conducted research and offered recommendations for responsibly developing the US digital asset industry. The result of this work was a fact sheet that was released in September. It outlines six main concepts for the development of responsible digital assets nationally and globally: consumer and investor protection; promoting financial stability; countering illicit finance; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.

Protecting consumers, investors, and businesses

The US government believes that without a solid framework of rules and regulations for digital assets, innovations in this sector could be harmful to consumers, investors, and businesses alike. In response to the White House calling for research on digital assets, several federal agencies issued reports addressing the potential benefits and challenges in protecting Americans from some of the potential risks posed by digital assets.

The Treasury Department’s report noted that about 12% of Americans own some form of digital asset. While the number of people holding these assets has grown, the volume of fraud and other scams has also increased. The Federal Trade Commission (FTC) reported that more than 46,000 incidents of cryptocurrency-related fraud occurred between January 1, 2021, and March 31, 2022, valued at more than $1 billion.

The Treasury Department’s report made four main recommendations:

  • Expand regulatory oversight
    Regulators including the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) should expand and increase investigations and enforcement related to digital assets, especially regarding potential misrepresentations made to consumers. Agencies also should increase their coordination of enforcement efforts between agencies as such efforts have been effective in shutting down fraudulent actions.
  • Increase focus on scams in online activities like gaming and entertainment
    The Consumer Financial Protection Bureau (CFPB) and FTC should expand investigations into consumer complaints. The Department of Labor should also ensure that 401(k) plans and participants are protected from aggressive marketing, conflicts of interest, and bad-faith cryptocurrency investments.
  • Encourage cross-collaboration between agencies
    While several regulatory agencies have issued guidance to deal with increasing cryptocurrency issues, the Treasury Department would like to see more cross-collaboration among agencies to create more comprehensive oversight. Building a more connected, cross-agency response is critical to promote safety and reduce consumer, investor, and business confusion, as well as the potential for fraud.
  • Educate consumers on digital assets
    Through its website MyMoney.gov, the Financial Literacy and Education Commission (FLEC) has taken the lead on educating consumers, investors, and businesses on financial issues. Now the FLEC will educate the public on common digital asset risks and scams and ways to report abuse. FLEC member agencies will also review the lack of information available to more vulnerable groups to help better understand the risks and opportunities they face. Lastly, the FLEC will engage with industry experts and academics to promote and coordinate public/private partnerships for financial education outreach.

Take a long-term approach to digital assets

Financial advisors often encourage investors to focus on the long-term and avoid trying to time the market with their 401(k) investments. Similarly, plan sponsors may want to take a long‑term perspective regarding their own approach to digital assets. Given today’s massive surge in the variety and scope of digital assets, plan sponsors should seek to understand their role in the financial landscape before rushing to implement changes.

Article
Digital assets: Potential benefits and risks for employee benefit plans

Read this if your company is a benefit plan sponsor.

While plan sponsors have been able to amend their 401(k) plans to include a post-tax deferral contribution called Roth for more than a decade, only 86% of plan sponsors have made it available to participants, according to the Plan Sponsor Council of America. Meanwhile, despite the potential benefits of such plans, just a quarter of participants who have access to the Roth 401(k) option use it. Plan sponsors may want to consider adding a Roth 401(k) option to their lineup because of the potential tax benefits and other advantages for plan participants.

A well-designed Roth 401(k) may be an attractive option for many plan participants, and it is important for plan sponsors considering such a feature to design the plan with the needs of their workforce in mind. It is also critical to clearly communicate the differences from the pre-tax option, specific timing rules required, and the tax-free growth it offers. Additionally, plan sponsors should be mindful of potential administrative costs and other compliance requirements in connection with allowing the Roth option.

Roth 401(k)s: The basics

A Roth is a separate contribution source within a 401(k) or 403(b) plan that differs from traditional retirement accounts because it allows participants to contribute post-tax dollars. Since participants pay taxes on these contributions before they are invested in the account, plan participants may make qualified withdrawals of Roth monies on a tax-free basis, and their accounts grow tax-free as well.

Participants of any income level may participate in a Roth 401(k) and may contribute a maximum of $20,500 in 2022—the same limit as a pre-tax 401(k). Contributions and earnings in a Roth 401(k) may be withdrawn without paying taxes and penalties if participants are at least 59½ and it’s been at least five years since the first Roth contribution was made to the plan. Participants may make catch-up contributions after age 50, and they may split their contributions between Roth and pre-tax. Similar to pre-tax 401(k) accounts, Roth 401(k) assets are considered when determining minimum distributions required at age 72, or 70 ½ if they reached that age by Jan. 1, 2020.

Only employee elective deferrals may be contributed post-tax into Roth 401(k) accounts. Employer contributions made by the plan sponsor, such as matching and profit sharing, are always pre-tax contributions. If the plan allows, participants may convert pre-tax 401(k) assets into a Roth account, but it is critical to remember that doing so triggers taxable income and participants must be prepared to pay any required tax. In addition, plan sponsors must be careful to offer Roth 401(k)s equally to all participants rather than just a select group of employees.

Qualified distributions from a designated Roth account are excluded from gross income. A qualified distribution is one that occurs at least five years after the year of the employee’s first designated Roth contribution (counting the first year as part of the five) and is made on or after age 59½, on account of the employee’s disability, or on or after the employee’s death. Non-qualified distributions will be subject to tax on the earnings portion only, and the 10% penalty on early withdrawals may apply to the part of the distribution that is included in gross income. Participants may take out loans if permitted in the plan document. 

First steps for plan sponsors

A common misconception among plan sponsors is that a Roth offering requires a completely different investment vehicle. The feature is simply an added contribution option; therefore, no separate product is needed.

When considering the addition of a Roth 401(k) option, it is important for plan sponsors to check with service providers to determine whether payroll may be set up properly to add a separate deduction for the participant. Plan sponsors may also need to consider guidelines for conversions, withdrawals, loans, and other features associated with the Roth contribution source to ensure the plan document is prepared and followed accurately.

Education is an important component of any new plan feature or offering. Plan sponsors should check with service providers to see how they may help to explain the feature and optimize its rollout for the plan. One-on-one meetings with participants may be very helpful in educating them about a Roth account.

A word about conversions

If permitted by the plan document, participants may convert pre-tax 401(k) plan assets (deferrals and employer contributions) to the Roth source within their plan account. The plan document may allow for entire account conversions or just a stated portion. When assets are converted, participants must pay income taxes on the converted amount, and the additional 10% early withdrawal tax won’t apply to the rollover. Plan sponsors should educate participants on the benefits of converting to the Roth inside the company 401(k).

Collaborate with the right service providers to educate your participants

The right service providers may review your current plan design, set up accounts properly, actively engage and educate your participants, and offer financial planning based on individual circumstances to show how design features like a Roth account may benefit their situation. If you would like to start the conversation about adding a Roth option or enhancing your participant education program, contact our employee benefits team. We are here to help. 

Article
Plan sponsor alert: Roth 401(k) remains underutilized despite potential benefits

Read this if you are a community bank.

The Federal Deposit Insurance Corporation (FDIC) recently issued its second quarter 2022 Quarterly Banking Profile. The report provides financial information based on call reports filed by 4,771 FDIC-insured commercial banks and savings institutions. The report also contains a section specific to community bank performance. In second quarter 2022, this section included the financial information of 4,333 FDIC-insured community banks. BerryDunn’s key takeaways from the report are as follows:

Community banks see quarterly growth in net income despite year-over-year decline.

Community bank quarterly net income increased to $7.6 billion in second quarter 2022, despite being down $523.0 million from one year ago. Higher noninterest expense, lower noninterest income, and higher provision expense offset growth in net interest income. Nearly three-quarters of community banks reported higher net income than one quarter ago. More than two-thirds of community banks reported an increase in net interest income from the year-ago quarter.


Loan and lease balances continue to show widespread growth in second quarter 2022.

Community banks saw a $82.3 billion increase in loan and lease balances from first quarter 2022. All major loan categories except commercial & industrial (C&I) and agricultural production grew year over year, and 69.9% of community banks reported annual loan growth. Total loan and lease balances increased $125.4 billion, or 7.7%, from one year ago. Excluding Paycheck Protection Program loans, annual total loan growth would have been 14.0% and annual C&I growth would have been 21.9%.

Community bank net interest margin (NIM) increased to 3.33% due to strong interest income growth.

Community bank NIM increased eight basis points from the year-ago quarter and 22 basis points from first quarter 2022. Net interest income growth exceeded the pace of average earning asset growth. The average yield on earning assets rose 25 basis points while the average cost of funding earning assets rose three basis points from the previous quarter. The quarterly increase in NIM was the largest reported since second quarter 1985. However, NIM remains below the pre-pandemic average of 3.63%. 

Slightly more than half of community banks reported quarter-over-quarter reductions in noncurrent loan balances.

The allowance for credit losses (ACL) as a percentage of total loans and leases decreased six basis points from the year-ago quarter to 1.25%. The coverage ratio for community banks is 46.4 percentage points above the coverage ratio for noncommunity banks. The coverage ratio increased 54.1 percentage points from the year-ago quarter to 245.4%, a record high since Quarterly Banking Profile data collection began in first quarter 1984.

It has been a time of momentous change for the banking industry; this has been the case since the pandemic but continues to hold true. The Federal Open Market Committee (FOMC) had already risen the target federal funds rate by 225 basis points in 2022 at the time of writing this summary, with further increases throughout the remainder of 2022 anticipated. Although rising rates have been the largest contributor to strengthening net interest margins, the impact these rate increases will have on the long-term economy is still to be seen.

Inflation also continues to run rampant, with rate increases thus far seeming to be ineffective in slowing inflation. The continued inflation has many wondering if rate increases are not the answer and that there may be other, inalterable forces at play. If this is the case, the FOMC’s target rate increases could have the effect of worsening an economic slowdown. Furthermore, although loan growth remained relatively strong in quarter two, deposit growth waned. Community banks saw only a 0.4% increase in deposits from a quarter ago. This has put some institutions in a liquidity crunch, having to rely more heavily on wholesale funding to fund loan growth. However, making funding decisions has proven to be difficult, given the economic uncertainty and potential target rate increases.

Community banks will have to continue to remain vigilant and remain a resource to their customers. Banks’ customers are facing many of the same challenges that banks are facing—interest rate uncertainty, rising costs, staffing shortages, etc. Therefore, as we’ve previously mentioned, it continues to be important for banks to maintain open dialogue with customers. As always, please don’t hesitate to reach out to BerryDunn’s Financial Services team if you have any questions. You can also visit our Ask the Advisor page to submit your questions.

Article
FDIC Issues its Second Quarter 2022 Quarterly Banking Profile

Read this if you are a chief executive officer, chief operations officer, or chief retail officer at a financial institution.

There’s been much buzz around the recent announcement by the Biden administration that up to $20,000 in federal student loans will be cancelled for low- to middle-income families. And, rightfully so, as the debt cancellation is anticipated to be eligible for up to 43 million Americans with roughly 20 million borrowers expected to have their remaining student loan debt eliminated entirely.1 Although the relief does not apply to private loans, financial institutions should see this as an opportunity to enhance the customer experience. 

Trusted advisors 

Financial institutions are often seen as trusted advisors by their customers and may be a go-to resource for customers when making financial decisions. Debt cancellation of up to $20,000 can have a major financial impact on households, especially provided relief is only eligible to borrowers with household income below $250,000 ($125,000 for individuals).2 And, with roughly 20 million borrowers expected to have their remaining student loan debt eliminated, this may free up significant monthly cash flow for those borrowers. Even though student loan repayments have been on hold for the past couple of years for many borrowers, the cancellation of this debt may free up deposits those borrowers had set aside in anticipation of the recommencement of loan payments. Now that this remaining debt is expected to be forgiven, how might they use this debt forgiveness to better their financial health? Community banks and credit unions are in the driver’s seat to assist customers in making this decision.

Data analytics

With the onset of data analytics—the understanding of how transaction, financial, and other information may be used to understand customer needs—many financial institutions are well-positioned to recommend services tailored to each customer. Although making sense of this data and putting it into something actionable can be challenging, the rewards can be tremendous. For instance, analyzing spending habits or cash flow trends can equip an institution with the insights needed to assist a customer when asked how best to deploy this excess wealth. Do they have any loans with your institution they should pay off or pay down? Given the current interest rate environment, this may also prove to be beneficial for the institution, as it could then re-deploy these funds at a higher interest rate. 

Knowing your customer

A simpler approach than using data analytics to provide actionable insights is just simply knowing your customer. This is something community financial institutions excel at and is one of their biggest value propositions. When working on financial institution audits, we often ask about specific customers as part of our audit procedures. I am always awed by our clients’ ability to provide one of their customer's stories on a whim. Bankers have well-developed relationships with their customers. Customers are neighbors, restaurant servers, bartenders, firefighters, the list goes on. These are people bankers see out in their communities—you may even have children that go to the same school together. The point I am trying to make is that these relationships are much deeper than any relationship data analytics can provide. What major life events are your customers anticipating? A wedding? A child? A vacation? Needing a new car? These are all items that data analytics may not be able to tell you but personal relationships with your customer, and general knowledge about your community, will. How can you, as their trusted advisor, provide them opportunities to save for these major life events? I don’t want to discount the importance of data analytics but, I also want to stress the importance of these personal relationships. However, combined, they create a powerful tool for community bankers.

Knowing your customer—an example

As an example, you may know your customer is planning for a wedding and that they took some wedding wish-list items off their list because they couldn't afford them. Does the proposed debt cancellation allow your customer to now afford—or save for—some of these items? You may not know the answer simply based off previous conversations with the customer but, a quick phone call and discussion will provide you with an answer. And, even if the answer is: “No, this does not change my wedding budget,” it at least shows them that you were looking out for your customer and being proactive. 

Knowing your customer combined with data analytics—an example

Taking this example a step further, what if you had data analytics that displayed your customer’s spending habits? Is there a way to query payment transactions that would allow you to identify which customers have federal student loans? This information, paired with your knowledge gained from knowing the customer, allows you to provide targeted, actionable insights. Knowing their monthly cash flow, what loans they have outstanding (based on cash outflows), and deposit balances, you can be more strategic in your outreach, not only in who you reach out to but how you structure your outreach. For instance, could a customer benefit from using those forgiven student loan payments to now pay down other debt carried at higher interest rates?  Or, going back to an earlier example, if you know when the customer’s wedding is and their monthly net cash flow, is there a deposit product you could sign them up for that would allow them to work towards affording some of their wedding wish-list items that previously couldn’t be afforded?

Saving for retirement

Another aspect to consider is saving for retirement. Although borrowers are eligible for loan forgiveness of up to $20,000, most will likely only be eligible for $10,000 in forgiveness, as the $20,000 is only for Pell Grant recipients.2 To some customers, $10,000 may not seem like a lot. But, when considering the time value of money, a customer’s perception may change. Using an example from a recent Accounting Today article1, a 40-year-old man is expected to live to 81.5 years old. Therefore, assuming an annual return of 6% over 40 years, $10,000 can turn into more than $110,000 over four decades. Those who live to 90 can turn $10,000 into more than $200,000. Institutions with wealth management divisions may find colleagues who have great suggestions on how best to approach these conversations. Even if the customer has short-term spending needs/desires, as many do, steering these forgiven student loan payments towards retirement may be the most prudent decision. But sometimes a customer needs to see the potential impact plotted out and hear it from an outside, trusted source.

Customers with loan repayments restarting

To this point, the discussion has been on those customers that will benefit from loan forgiveness. But what about those that will not benefit as well as those that will only partially benefit (i.e., the entirety of their loan balance will not be forgiven)? Loan repayments are set to recommence in January 2023. Many borrowers haven’t had to make loan payments for over two years and some newer college graduates have never had to make a loan payment. These loan payments could come as a shock to those who have never made such a payment, as well as to those who previously had, if their spending habits have changed due to loan forbearance. There are two different perspectives to consider for these customers: credit risk and, sticking with the theme of the article, the customer experience.

Credit risk

The end of the loan forbearance period could have a significant impact on certain customers’ financial situations. For some, it could be the make-or-break point on being able to make their loan payments on other loans, possibly some of which are with your institution. Does the recommencement of these student loan payments change your customer’s risk profile? Do they now require closer monitoring?

Customer experience

Closely linked to credit risk, financial institutions should also see the recommencement of student loan payments as an opportunity to enhance the customer experience. Financial institutions should be proactive in reaching out to customers they know will be impacted to see if they feel prepared. This may be a difficult conversation to have but, it is one your customers will likely appreciate. If they aren’t prepared, are there steps the institution can take to assist the customer? Deposit products may again be worth mentioning to customers. Or, for those severely impacted, does the institution need to consider workout agreements with such customers? This provides a prime opportunity to work with your institution’s collections and credit risk departments. Keeping them in the loop (and vice versa) will help provide a seamless customer experience.

Institutions should also consider if this presents itself as a larger marketing opportunity, to attract new business. Although marketing decisions are generally based on potential return on investment (ROI), the ROI in this case may not quite be there, given the relatively small amounts. However, is this an opportunity for your institution to highlight its financial advisory services? 

In closing

For something that seems so simple on the surface, there is a lot to consider once you start diving in. Financial institutions have a big role to play and should see this as an opportunity to increase what are hopefully already strong relationships with customers. For those customers anticipating debt cancellation, financial institutions should essentially ask themselves: how can customers utilize their debt cancellation in a way that makes the most sense for them given their current financial situation and anticipated life events? For those that aren’t anticipating debt cancellation, financial institutions have an opportunity to be proactive. This proactivity will not only benefit the institution but will also show the institution is prepared and cares about assisting their customers and helping them transition back into student loan payments as smoothly as possible. 

This is a lot to unravel, especially in such a short time. As always, your BerryDunn Financial Services team is here to assist. Also, please feel free to reach out via our Ask the Advisor feature.

1How student loan relief can turbocharge retirement savings | Accounting Today
2The Biden-Harris Administration's Student Debt Relief Plan Explained (studentaid.gov)

Article
Student loans: Forgiveness, the end of forbearance, and where financial institutions fit into all of this

Read this if you are a Chief Compliance Officer at a broker-dealer.

On August 3, 2022, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 22-18 (the Notice), which addresses the increasing number of reports regarding registered representatives and associated persons (representatives) forging or falsifying customer signatures, and in some cases signatures of colleagues or supervisors, through third-party digital signature platforms. The Notice details multiple FINRA Rules that may be violated in the case of a forgery or falsification and also provides five scenarios member firms reported to FINRA in which representatives forged or falsified customer signatures, including the methods firms used to identify the forgeries or falsifications. The detection methods outlined are:

  • Customer inquiries or complaint investigations
  • Digital signature audit trail reviews
  • Email correspondence reviews
  • Administrative staff inquiries
  • Customer authentication supervision

There is no doubt that digital signatures provide convenience for customers. But this convenience can sometimes lead to unethical or non-compliant behavior. Even situations that representatives believe pass the “straight face” test may be considered non-compliance under FINRA regulations. Member firms should review the Notice carefully and implement some of FINRA’s detection methods, if not already implemented. Some of these methods are likely already in place since they may be duplicative of methods used to satisfy other FINRA Rules. For instance, reviewing customer inquiries or complaints is likely already occurring to satisfy FINRA Rule 4530, Reporting Requirements. As always, if any questions arise, please don’t hesitate to reach out to BerryDunn’s broker-dealer services team.

Article
Digital signatures: FINRA sends reminder on supervision obligations

Read this if you are a Chief Financial Officer or Controller at a financial institution.

Back in April, we wrote about recently released Accounting Standards Update (ASU) No. 2022-02, Financial Instruments – Credit Losses (Topic 326). Here, we are going to look at the standard in more depth. 

One of the most notable items this ASU addresses, is that it eliminates the often tedious troubled debt restructuring (TDR) accounting and disclosure requirements. Accounting for loan modifications will now be maintained under extant US generally accepted accounting principles, specifically Accounting Standards Codification (ASC) 310-20-35-9 through 35-11. However, rather than eliminate loan modification disclosure requirements altogether, the Financial Accounting Standards Board (FASB) created some new requirements, inspired by voluntary disclosures many financial institutions made during the coronavirus pandemic. 

Rather than disclosing information on TDRs, financial institutions will now be required to disclose information on loan modifications that were in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension (or a combination thereof) made to debtors experiencing financial difficulty. These disclosures must be made regardless of whether a modification to a debtor experiencing financial difficulty results in a new loan or not. 

ASC 310-10-50-42 through 50-44 establishes these new disclosure requirements, and ASC 310-10-55-12A provides an example of the required disclosures. 

New Loan Modification Disclosure Requirements

Financial institutions have long had internal controls surrounding the determination of TDRs given the impact such restructurings can have on the allowance for credit losses and financial statement disclosures. Banks may find they are able to leverage those controls to satisfy the new modification disclosures, with only minor adjustments. Similar to previous TDR determinations, the above disclosures are only required for modifications to debtors experiencing financial difficulty. Therefore, financial institutions will need to have a process —or defined set of parameters—in place to determine debtor “financial difficulty”, thus triggering the need for modification disclosure. Banks may also find that the specific data gathered for preparation of these new disclosures will change, but should be readily available, with (hopefully) only minor manipulation required.

ASU No. 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years—the same effective date for those who have not yet adopted ASU No. 2016-13, more commonly referred to as CECL (Current Expected Credit Loss). As always, if you have any questions as to how this new ASU may impact your financial institution, please reach out to BerryDunn’s Financial Services team or submit a question via our Ask the Advisor feature.

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New loan modification disclosure requirements: A deeper dive