FEDERAL RESERVE BANK OF NEW YORK BORROWER-IN-CUSTODY OF COLLATERAL (BIC) PROGRAM REQUIREMENTS

Transcription

1 FEDERAL RESERVE BANK OF NEW YORK BORROWER-IN-CUSTODY OF COLLATERAL (BIC) PROGRAM REQUIREMENTS INTRODUCTION The Federal Reserve Bank of New York (FRBNY) accepts loan pledges from qualifying depository institutions (DI) to secure borrowings from the Discount Window (DW) or for payment system risk (PSR) purposes, subject to certain terms and conditions. This document outlines the requirements of the BIC program. ELIGIBILITY REQUIREMENTS Eligibility for the BIC program is based on the FRBNY s comfort level with a DI s overall financial condition, loan administration controls, documentation practices, asset quality, and ability to meet all of the requirements of this program. To qualify for the BIC program, a DI must be in sound financial condition in the judgment of both its primary regulator and the FRBNY. Generally, Secondary Credit DIs and/or DIs rated CAMELS 4 or 5 will be excluded; other DIs will be accepted on a case-by-case basis. Acceptance into the BIC program for pledging a particular loan collateral type does not imply acceptance for another loan collateral type. LEGAL DOCUMENTATION REQUIREMENTS To qualify for the BIC program, a DI must have the necessary Operating Circular 10 (OC10) documentation on file with the FRBNY prior to completing a BIC Certification Form. Refer to Operating Circular No. 10 for required documentation. UCC FILING: PERFECTION OF SECURITY INTEREST The FRBNY s policy is to perfect its security interest in pledged collateral. To ensure that the FRBNY will continue to have a first priority security interest in pledged collateral, the FRBNY completes a Uniform Commercial Code (UCC)-1 financing statement as well as a UCC-1 search to ensure no other entities hold a first priority lien over the same collateral. DIs that are members of and pledge collateral to a Federal Home Loan Bank (FHLB) or a corporate credit union should be aware that a blanket lien may already be filed against its assets. DIs should also know what loan types are pledged to the FHLB or corporate credit union to avoid any potential double-pledging of this same collateral to the FRBNY. Eligible Loan Types Refer to the Discount Window and PSR Margins Table. The following types of loans are not eligible under the BIC program: Ineligible Insider loans (i.e. loans to a director, officer, or principal shareholder); Loans owned by a subsidiary or affiliate; Loans made to a depository institution or affiliate of a depository institution; Loans made to an affiliated Employee Stock Ownership Plan (ESOP) or secured by stock held by an affiliated ESOP; Loans already pledged to another institution; Foreign obligor loans Foreign obligor loans are defined as loans to entities incorporated outside of the U.S. or whose principal place of business or main office is outside of the U.S. For loans that rely on the strength of guarantors, the domicile of the guarantor determines the classification (e.g., loans to U.S. shell companies Revised April 2016 Page 1

2 that are guaranteed by foreign parents should be considered foreign); Loans that are not written in English; Loans that are not denominated in U.S. dollars and/or not governed by U.S. law; Loans that have either been paid off, sold or matured; Consumer loans more than 60 days past due (principal and/or interest); Commercial type loans (e.g., agricultural loans, commercial loans/leases, commercial real estate loans, construction loans, and agency guaranteed loans (e.g, Export-Import Bank) more than 30 days past due (principal and/or interest); Loans on non-accrual status; One-to-four family mortgage loans, home equity loans, and manufactured homes where the borrower is not an individual or individuals, such as a corporation, partnership or other business entity; Loans classified as Other Loans Especially Mentioned; Substandard; Doubtful or Loss; Loans that fall below the approved acceptable internal/credit risk ratings; Loans subject to adverse legal actions; and Loans that have clauses with assignability or transferability restrictions Required Loan Documentation Refer to Appendix A for documentation requirements by loan type. The FRBNY relies on the internal risk rating assigned by the pledging institution to determine the acceptability of commercial type loans. However, the FRBNY must first determine whether the DI s loan rating system is acceptable. Internal Risk Ratings Imaged Loan Documentation In order to assess the integrity of an institution s loan rating system, the FRBNY may rely on examination reports and/or discussions with the institution s primary regulator. Provided the institution s internal risk rating system is deemed acceptable, the FRBNY will notify the institution regarding the internal risk ratings that will be acceptable to pledge. The institution s internal risk ratings will be mapped to FRBNY s minimal and normal credit quality standards used in valuing loan collateral. After the initial acceptance of the institution s internal risk ratings, it is the institution s ongoing responsibility to inform the FRBNY of any changes in its loan rating system. The FRBNY accepts pledges of imaged loans. An imaged loan is a loan whose original paper documentation has been imaged, and the image is relied upon as the primary source of the original document. The original documentation associated with an imaged loan might be destroyed or might be stored, perhaps at a third party custodian, such as a Records and Information Management company ( RIM ). For details, please refer to the BIC Imaging Guidelines. Third-Party Custodian Arrangements An institution may designate a third-party custodian to provide custody services for collateral pledged to the FRBNY. Third-party custodian (TPC) arrangements involve an institution (borrower), another institution that holds the assets to be pledged (custodian) and the Reserve Bank (lender). An institution must contact the FRBNY to request this pledging arrangement and receive instructions. The custodian and the institution will be required to complete an additional agreement found in Appendix 5 of Operating Circular 10. In addition, the custodian must complete a TPC questionnaire. For additional information on TPC arrangements, contact the Discount Window. Revised April 2016 Page 2

3 Storing Documents Identification All supporting documents evidencing the pledged loans ( including promissory notes if the loans are noted) should be held together in a segregated, secured, fire-resistant environment and be identified as pledged to the FRBNY. However, when space is limited, a DI may hold such documentation (other than the promissory notes) in a separate location (e.g., file room, cabinets, etc.) in close proximity to where the promissory notes are kept within the secured facility. The notes and supporting documentation should be housed in a location that is both accessible to and known by the FRBNY. Physical access should be controlled, limited to specific individuals, and the removal of documentation should be tracked. Ideally, the collateral should be maintained in a secured vault that allows for immediate removal in the event the FRBNY needs to take possession of the collateral. The documents relating to the pledged loans should be segregated from other documents and clearly identified as being pledged to the FRBNY so that a potential purchaser of such assets would be aware of the existing pledge and the institution does not transfer or repledge such assets. If the collateral consists of noted loans, the notes evidencing such loans should be identified as pledged to the FRBNY in the following manner: Label file cabinets/file cabinet drawers with a sign indicating that all of the notes in the cabinet/drawer are pledged to the FRBNY or; Place a prominent sign indicating that all the notes residing in the general area are pledged to the FRBNY or; Label individual notes or file folders with a conspicuous stamp or affix a legend that indicates that the note is pledged to the FRBNY. In addition, the DI must clearly identify the loans as pledged to the FRBNY in the institution s information management system in a manner satisfactory to the FRBNY. If the DI is not able to meet this requirement, they must provide evidence of an internal control sufficient, in the judgment of the FRBNY, to prevent the sale or other transfer of the loans pledged to the FRBNY. If an entire loan center has been pledged to the FRBNY, then there generally is no need for individual files or file cabinets to be labeled as mentioned above. However, the institution must post a highly visible sign in the area where the files are stored indicating that the loans are pledged to the FRBNY. A DI may not move the location of its BIC arrangement without prior written notification to, and approval from the FRBNY. Moving Documents A DI must request approval to move (internally to another floor or externally) the location of its BIC arrangement by completing a New Location Questionnaire. The request must be made at least thirty days prior to the requested move date in order to ensure the necessary protective measures are taken. Before the transfer can take place, the FRBNY may require, at its discretion, that an on-site inspection of the new location be conducted. FRBNY staff will then work with the DI to develop a suitable schedule to transfer the collateral documents to the new site. If the DI s pledge includes promissory notes, the FRBNY will not give any value to the pledged loans while they are in transit to the new location. While the loans are in transit and depending on the circumstances, the FRBNY may request that a DI pledge other assets as collateral. If the DI s pledge does not include promissory notes, the DI must still notify the FRBNY of the pending move by completing a New Location Questionnaire. However, the DI will continue to receive value for its BIC pledge while the supporting loan documentation is in transit. Revised April 2016 Page 3

4 Damaged/Lost Documentation Loan Valuation and Margins A DI must immediately contact the Discount Window if the promissory notes, loan agreements and other supporting documentation relating to the pledged loans are damaged due to a flood, fire or any other reason. The FRBNY will work with the DI to determine the extent of the damage and make appropriate adjustments to the value of the collateral. A DI must immediately remove from its pledge any loans for which the promissory notes, loan agreements and other supporting documentation are lost. For information on how loans are valued, refer to Frequently Asked Questions regarding collateral. For information on the margins applied to loans, refer to Discount Window and PSR Margins Table. DIs that pledge loans as collateral to the Discount Window are required to submit periodic reports detailing the pledged loans. In most instances, institutions are requested to submit these reports in a format that supports the Automated Loan Deposit (ALD), the Federal Reserve's process for recording loan pledges at the individual loan detail level in its Management System (CMS). This requirement does not apply to the student loans and credit card receivables loan categories, which are not currently supported by the ALD format. Existing (prior to January 2013) BIC participants not already pledging loans in a format supported by the ALD process, will be expected to meet this requirement by December 31, Automated Loan Deposit To supply ALD-ready files, institutions may submit their collateral reports in a fixed position text file (referred to as Legacy ALD) that conforms to the Federal Reserve's electronic loan file specifications. Alternatively, they may submit their collateral reports in a Microsoft Excel format (referred to as Enhanced ALD) using a template provided by the FRBNY. Institutions are required to utilize the same file layout for each collateral report submission. When reporting in Excel format, the following formatting guidelines apply: Files should be saved in Excel format; Files should be saved without Excel password protection, but may be encrypted in transit (such as via the FRSecure Message Center); Column headers, including names, spellings, and positions, must remain unchanged; Worksheet (tab) names and positions must remain unchanged; Files should not have merged cells, hidden rows or columns; and The following Excel number formats should be utilized: o Currency for dollar amounts ($0.00) o Short date for dates (mm/dd/yy or mm/dd/yyyy) o Interest rate should be expressed as a percentage (e.g. 2.5%) or decimal (e.g Percentage is the preferred method. Reporting Requirements A DI must provide a collateral schedule in electronic form monthly or more frequently as deemed necessary by the FRBNY. A separate file is required for each loan type (e.g., commercial loans, commercial real estate, home equity loans, etc.). Each collateral schedule should include the DI s name, ABA number, a statement that the loans identified on the collateral schedule are pledged to the FRBNY, and the following Revised April 2016 Page 4

5 information for each pledged loan: Borrower name Internal loan number of the obligor Note: If the obligor has multiple loan obligations, the individual loan obligation number must also be provided. Social Security and credit card numbers should not be used as loan numbers. Location of the obligor (street address, city, state) Original par amount Current outstanding principal balance (refer to Note 1) Loan type (e.g. term, demand, revolver, etc.) Internal risk rating (for commercial type loans) NAICS codes (for commercial type loans) Maturity date Current interest rate with a notation as to whether the interest rate is fixed or floating Weighted average coupon (WAC) and weighted average maturity (WAM) information (refer to Note 2) Note 1: Only those portions of participated loans that are owned by your institution are able to be pledged as collateral to the FRBNY. Only the portion drawn on a revolver or line of credit is eligible for pledging. Note 2: WAC and WAM information is not required for loan pledges that are submitted in the ALD format; WAC and WAM are only required for group deposit submissions. The FRBNY requires that institutions use one of the following secure methods for transmitting information or documentation pertaining to pledged BIC loan collateral: Federal Reserve Secure Message Center (FRSecure provided by ZixMail), Intralinks or with Mandatory Transport Layer Solution ( TLS ). Data Submission All pledge submissions should be sent to the FRBNY s BIC mailbox at the following e- mail address: BIC@ny.frb.org. Pledges will only be accepted from authorized individuals listed on the DI s Electronic Pledge Authorization Letter ( EPAL ). Only authorized individuals listed on the Official OC10 Authorization List as a pledger can appear on the EPAL. Refer to the link below to register for FRSecure. If your institution would like to use Intralinks or TLS, contact the DW staff for additional information. A BIC Pledge Cover Letter and updated collateral schedule must be submitted to the FRBNY (i) monthly and (ii) any time the outstanding principal balance of the pledged collateral declines by 10 percent or more between reporting dates. Updates For example: If the DI normally submits its pledge file on the first business day of the month and has a decline of 10 percent or more on the tenth business day of the month, the DI must promptly notify the FRBNY by updating its pledge on the tenth business day. The DI must not wait until its next regularly scheduled monthly update. If the DI is not able to update its pledge on the same day as the decline, the DI should promptly contact the Discount Window by phone or send an to BIC@ny.frb.org. Contact information for the Discount Window is on page 7 of this document. For DIs with multiple types of BIC arrangements (e.g. commercial loans, commercial real estate, consumer loans, etc.) the monitoring requirement is at the individual BIC level. Please note that it is also possible for an institution to have multiple BIC arrangements Revised April 2016 Page 5

6 under one loan type. For example: An institution may have multiple commercial loan BICs (e.g., floor plan commercial loans, equipment lease commercial loans). If your institution segregates minimal and normal rated commercial loans on your BIC Pledge Cover Letter and/or collateral schedule, please note that these are not considered separate BIC arrangements. If your institution is not clear as to the number of BIC arrangements it has or what constitutes a separate BIC arrangement, please contact the Discount Window for guidance. At minimum, weekly monitoring is recommended. If your institution pledges a pool of loans for which the outstanding balance fluctuates widely, weekly monitoring may not be sufficient and your institution should have a process in place to monitor these balances on a more frequent basis. The FRBNY will make every effort to promptly process pledge updates. DIs can access realtime collateral information using the Account Management Information (AMI) system. On an ongoing basis, the DI should monitor concentrations of credit risk within its portfolio of pledged commercial type loans. Generally, a given borrower or industry should not represent more than 25 percent of the outstanding value of the pledged commercial loans. Industry concentrations should be monitored on a NAICS code level. Concentrations of Credit Risk Monitor for concentrations at both the industry and borrower levels for these commercial loan types: Agricultural loans Commercial loans and leases Agency-guaranteed loans (e.g., Export-Import Bank) Monitor for concentrations at the borrower level for these commercial loan types: Commercial real estate loans Construction real estate loans Independent Audit Review Certification Form Note: If the DI pledges multiple commercial type BIC arrangements (e.g. commercial loans, commercial real estate, etc.), the monitoring requirement is at the individual BIC level. The FRBNY requires DIs to provide periodic audits of BIC collateral. The DI shall notify the FRBNY immediately of any irregularities discovered during any audits. The audit must include a review and assessment of compliance with all BIC guidelines. A complete audit report including any findings and management s response and corrective action plan should be included with the annual BIC certification form. The BIC certification ( certification ) form attests to the controls and other procedures in place to safeguard the pledged loans and related documentation. To be considered for the BIC program, a DI must perform an initial certification, and, thereafter, a periodic certification. All certifications should be submitted to the FRBNY on an annual basis or within the auditor cycle of between 12 and 18 months. It is the responsibility of the DI to keep track of their certification due date. Zero collateral value may be assigned to DIs that do not submit their certification form in a timely manner. In addition to the completed certifications, all DIs must submit a copy of the most recent audit pertaining to the pledged loans. Additionally, DIs that pledge commercial type loans must submit a copy of their internal risk ratings and loan review report. For DIs that rely on electronic images as their primary loan documentation, the appropriate BIC certification addendum (e.g., Image and Destroy or Image and Store ) must also be completed. If your institution images and stores on-site and not at a third-party location, Revised April 2016 Page 6

7 then an imaging addendum is not required. It is a requirement that one or two (see note below) authorized individual(s) and an auditor sign off on the certification form. In the case where the DI does not have an internal audit department, a director or a senior level officer that is not directly responsible for discount window borrowing or collateral pledging may sign the form. Note: The number of authorized signers required on the certification depends on the designation provided in the OC 10 Authorizing Resolutions for Borrowers on file with the FRBNY. Handwritten certifications will not be accepted. Old versions of the form will not be accepted. The most recent version of the certification form and imaging addenda can be found at the link below. All BICs will require a periodic review of their loan documentation and controls. The frequency of the review will be at the discretion of the FRBNY, but generally will depend on the financial condition and any identified control or documentation issues of the DI. The basic purpose of the review is to validate that the DI is operating in compliance with the BIC program guidelines. The review will cover a number of program requirements, including, but not limited to: 1) required supporting loan documentation is properly maintained, 2) sufficient operational controls are in place, 3) pledged loans are current with evidence of payment history, and 4) any other procedures that were attested to on the BIC Certification Form are performed. All reviews will be conducted with relatively short notice to the DI, to ensure a review of actual current conditions and practices. Periodic Review of BIC by the FRBNY At the discretion of the FRBNY, reviews will either be conducted remotely or on-site. If the necessary due diligence cannot be achieved remotely, an on-site review will be conducted. The duration of a review will depend on, among other things, the number of pledged loans. a. Remote reviews. These reviews will require the DI to deliver (usually electronically) sample loan documentation to the FRBNY, which will be reviewed. b. On-site reviews. As have traditionally been conducted, these reviews will require FRBNY staff to travel to the DI s BIC site. During the review, DIs are expected to respond promptly to any issues found and submit additional documentation as needed. Following the review, FRBNY staff will formally document their findings and recommendations in a letter to the DI. The DI must promptly correct each exception found, if not already corrected during the review, or remove the problematic loan(s) from the collateral pledge by submitting a new collateral schedule excluding all such loans. If the review uncovers severe breaches of the BIC program requirements, participation in the program may be suspended or terminated at the discretion of the FRBNY. Statement of Holdings Consolidated collateral statements that indicate all Discount Window pledges, including loans and securities, are available to DIs. To request collateral statements, a DI must complete a CMS Reports Request Form for each recipient. It is the responsibility of the DI to manage who has access to collateral statements and inform the FRBNY when distribution changes need to be made. Revised April 2016 Page 7

8 Termination of BIC Arrangement Discount Window Contact Information Upon approval by the FRBNY, the participating DI may terminate the BIC arrangement by submitting a BIC Termination Withdrawal Form. Toll-free Phone Number: General address: Discount.@ny.frb.org address for BIC Pledges: BIC@ny.frb.org Mailing Address: Federal Reserve Bank of New York, Discount Window Staff, 33 Liberty Street, New York, NY Revised April 2016 Page 8

9 Appendix A Below is a list of the minimum required documentation by loan type. Minimum documentation requirements are subject to change and the FRBNY reserves the right to request additional supporting documentation evidencing the debtor s obligation. If a loan is noteless; a note need not be provided. If a loan is unsecured or not guaranteed, a security agreement or guarantee agreement need not be provided. Please note that references to the credit agreement include, loan agreements, participation agreements, syndication agreements, or any other agreement that details the terms and conditions of the loan. Any modifications, amendments and/or addendums to the supporting documentation should be included in your file. Evidence of recording is required to be maintained for all documents that are required to be recorded. An agricultural loan is made to agricultural producers to finance the production of crops or livestock. Agricultural Loans Credit Agreement Original Recorded Mortgage/Deed of Trust Assignment and Assumption Agreement Security Agreement Guarantor Agreement Appraisal Crop insurance A commercial loan is generally a short-term renewable loan to finance the working capital needs of a business. The loans may represent secured or unsecured financing. Commercial Loans The types of commercial loans that may be pledged include revolving loans, syndicated loans, participations, secured loans and unsecured loans. Only those portions of the participated loans that are owned by the pledging institution are eligible for pledging to the FRBNY. Credit Agreement Allocation/Commitment schedule for participations and syndications Assignment and Assumption Agreement Lease Agreement Security Agreement Guarantor agreement A commercial real estate loan is a loan secured by commercial or industrial property that will be used for a business purpose. Commercial real estate loans include office buildings, warehouses, factories, apartment buildings with more than four units and shopping malls. Commercial Real Estate and Construction Real Estate Loans A construction real estate loan (construction loan)is a short-term loan for financing the cost of construction of a real estate project. The types of commercial real estate and construction loans that may be pledged include revolving loans, syndicated loans and participations. Only those portions of the participated loans that are owned by the pledging institution are eligible for pledging to the FRBNY Revised April 2016 Page 9

10 Credit Agreement Allocation/Commitment schedule for participations and syndications Assignment and Assumption Agreement Assignment of Leases and Rents Original Recorded Mortgage/Deed of Trust Lease Agreement Security Agreement Guarantor Agreement Appraisal Title Policy Export-Import Bank Guaranteed Loans The Export-Import Bank of the United States (Ex-Im Bank) is the official export credit agency of the United States. FRBNY accepts Ex-Im Bank medium and long-term guaranteed loans as collateral. Loans under the working capital and export credit insurance programs are not eligible for pledging. Evidence that the loan is under the Medium or Long Term Program Follow the documentation requirements for the applicable loan type (e.g. commercial loans) A loan in which proceeds are used to purchase or refinance residential property and which is itself secured by a first lien on the purchased property (a mortgage loan) is eligible to be pledged under the BIC program as a one-to-four family mortgage. Only owner occupied FIRST mortgage loans on one-to-four family residential property (i.e., a single family home or up to a four family home or condominium complex) are acceptable collateral. The underlying property should be an owner-occupied primary residence. One-to-Four Family Mortgages i A mortgage loan with a loan-to-value ratio greater than 80 percent at time of origination should have evidence of private mortgage insurance (PMI) on file. Original Recorded Mortgage/Deed of Trust Title Policy, Attorney Certificate, or Torrens Certificate Appraisal Homeowner s Insurance Coverage Evidence of Private Mortgage Insurance Coverage (if applicable) Documentation evidencing status of property tax payment Note: Secondary homes, vacation homes, investment property, and co-ops are not eligible for pledging under the BIC program. Manufactured Homes Home Equity Loans and Lines of Credit Manufactured homes are built at a factory and transported to their permanent home site. Refer to above requirements for One-to-Four Family Mortgages Home equity loans and home equity lines of credit are normally secured by a lien on an obligor s home. These loans are usually made for debt consolidation, home improvement, or other personal use. Home equity loans secured by one-to-four family residential property (i.e., a single family Revised April 2016 Page 10

11 home or up to a four family home or condominium complex) are acceptable collateral. Home equity loans secured by a mortgage on secondary homes, vacation homes, investment property, co-ops, commercial property or raw land are not eligible for pledging. Original Recorded Mortgage/Deed of Trust Appraisal Consumer loans are credit extended to individuals for personal or household use, rather than for business or home purchases, and include auto loans/leases, recreational vehicle (RV) loans, boat loans, personal loans, credit card receivables, aircraft loans, student loans, and private banking loans. Based on the loan type, required documentation may include: Consumer Loans Installment Contract Credit Application Documentation evidencing borrower s FICO score Credit Agreement Guaranty Agreement Security Agreement Loan Agreement Lease Agreement Mortgage/Deed of Trust (recorded) Marine Mortgage Title i A mortgage loan originated by another organization, including an affiliate mortgage company, and subsequently purchased by an institution will be eligible collateral under the BIC program only if (i) the note has been properly endorsed and (ii) the mortgage has been assigned to such institution. A mortgage that is in the name of the mortgage company or an affiliate is not eligible under this BIC program unless the institution provides evidence acceptable to the FRBNY that it has legal title to the mortgage. A mortgage loan originated by another organization which was subsequently acquired by an institution will be eligible collateral under the BIC program only if such institution provides evidence acceptable to the FRBNY that the mortgage loan (i) was subject to the acquisition transaction and (ii) is owned by such institution. In the case of any merger that resulted in a name change, an institution should provide evidence of the merger to affirm that such institution is in fact the successor and sole owner of the pledged mortgage loan. Revised April 2016 Page 11