Compliance Corner

1. First Federal Savings Bank of Kentucky 2. First National Bank of Russell Springs 3. Kentucky Bank

Over our 100+ year history, Boenning & Scattergood has managed to help our clients through many difficult market environments.

As we navigate these turbulent waters and keep transactions

moving forward, we welcome the opportunity to connect with you to address any questions you may have on how the COVID-19 outbreak is impacting your bank and its strategy.

As one of the nation’s leading community bank market makers,

we can also help advise you on everything from market trends and dividend policy to appropriate stock buybacks, effective shareholder communication, and more.

We remain focused on building long-term relationships and stand by ready to help your management team and board during these challenging times.

We wish only the best for you and your families. If we can be of any assistance, please let us know. Thank you and stay safe!

Charlie Crowley

charlesc@boenninginc.com (216) 378-1430

Chris Chapman

cchapman@boenninginc.com (216) 378-1297

Chad Hull

chull@boenninginc.com (610) 832-5310

Tony Latini

alatini@boenninginc.com (610) 832-5312

Our investment bankers look forward to helping you in 2020. Please call us.

To receive our REGIONAL BANKING STATS REPORT, please email us.

Boenning & Scattergood, Inc. is a trusted advisor and partner to the region’s community banks.

www.boenninginc.com • Member FINRA / SIPC

During COVID-19, did you mobilize a remote workforce? Did this mobilization create any security holes?

COVID-19 forced workforces which are designed to be in-person and client-facing to mobilize quickly. During this unprecedented time, your organization may have seen IT security holes after mobilizing. Dean Dorton’s cybersecurity team can provide your organization with penetration testing which assesses the effectiveness of implemented security controls (whether technical or administrative) to prevent, detect, or respond to a threat actor or threat action.

Our certified cybersecurity team members have been providing penetration testing services in the financial industry for over a decade. Our penetration testing approach is highly customizable and can be conducted in either a complete “kill chain” emulation or broken up to emulate individual tactics in specific scenario based testing. Our services are designed to meet the rigorous requirements outlined for financial organizations and we can do everything remotely via our secure, encrypted testing platform.

Contact us to fill the gap on any IT security or compliance the situation has caused.

As we all deal with changes related to Covid-19, it provides many of us additional time to reflect on compliance practices. Please feel free to reach out to me at tschenk@kybanks.com with any questions you may have!

Is there a regulatory statute that requires banks to return paid off notes and mortgages to consumers? I have been searching and have been unable to find anything regarding this requirement.

There are no federal laws on the issue and it is strictly a matter of state law.

In terms of the mortgage, KRS 382.365 requires you to release the mortgage within 30 days of satisfaction. However, there is no requirement to return the mortgage but you are required to “send by regular mail a copy of the lien release to the property owner at his or her last known address within seven (7) days of the release.” Essentially, you must send the customer a copy of the lien release.

The law on notes is a little less clear. KRS 355.3-501(2)(b)(3) says that, “Upon demand of the person to whom presentment is made, the person making present must sign a receipt on the instrument for any payment made or surrender the instrument if full payment is made.” Through that rule you are not required to send the customer the note stamped as paid, but you should provide the customer with a receipt that the note is paid. Most banks find that the easiest way to comply with this rule is to return the note or a copy of the note stamped as paid.

We want to change the branch hours. I am not familiar with the requirements for changing branch hours in Kentucky and am looking for guidance. Is that something you can provide or guide me to where to look?

There is no specific statute on point but most banks provide thirty days of notice. That is a conservative approach based on the administrative regulations and 808 KAR 15:030. However, there is justification for as short as five days of notice or even zero days of notice if impractical.

Is the KY Notice of Free Choice of Agent and Insurer disclosure required for consumers only, or commercial/ag loans also?

KRS 304.12-150 states: Every debtor, borrower, or purchaser of property with respect to which insurance of any kind is required in connection with a debt or loan on the property shall be informed by the creditor or lender of his or her right of free choice in the selection of the agent and insurer through or by which such insurance is to be placed.

The statute appears to require it with every loan regardless of type. A review of case law further affirms that position.

In short, you still need it on commercial and farm loans.

I have discussed with you before on working with mortgage customers right now. If we were to increase the maturity of a loan by three months do you think we are okay? Our mortgages state that we are covered for renewals and extensions and our Flood Determinations are for the life of the loan.

If you are extending the maturity date, you are likely going to have to re-run flood certifications.

KRS 286.3-193(3) reads: A bank, or an office thereof, may, because of an emergency or any other reason deemed sufficient by the bank, close on any day or days which it would normally be open for business by giving five (5) business days’ notice of the closing to the public by posting a statement to that effect in a conspicuous place in the office of the bank which will be closed unless the giving of the notice is impractical because of the existence of an emergency or other condition.

As 12 CFR 339.3, titled, Requirement to Purchase Flood Insurance Where Available, states:

(a) In general. A bank shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the overall value of the property, securing the designated loan minus the value of the land on which the property is located.

Based on that statute, if you have a reason deemed sufficient by the bank, you could argue that five business days, or even zero business days, notice is sufficient based on the circumstances.

Additionally, 12 CFR 339.9, titled, Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance, states:

(a) Notice requirement. When a bank makes, increases, extends, or renews a loan secured by a building or a mobile home located or to be located in a special flood hazard area, the bank shall mail or deliver a written notice to the borrower and to the servicer in all cases whether or not flood insurance is available under the Act for the collateral securing the loan.

Your mortgage may state that it covers for life of the loan, but you will still need to re-run your flood certification to meet the regulatory standard.

Social distancing is not preventing our attorneys from helping Kentucky’s community bankers to keep their operations moving forward and preparing for what will certainly come in the relatively near future. Whether you need legal guidance from banking governance and operations, to loans and loan workouts and modifications, or to borrower bankruptcies and restructurings, we are here to help.

MARTIN B. TUCKER

Lexington (859) 425-1013

MICHAEL G. DAILEY

Cincinnati (513) 977-8644

CHRISTIAN GONZALEZ

Columbus (614) 628-6921

DINSMORE & SHOHL LLP • LEGAL COUNSEL