Category Archives: Specialty Services

Banking Indian Nations

Posted on by
Hands exchanging money

Deposits and Treasury Services for Indian Nations and their Subsidiaries

Indian Nations, their members, and related businesses run on tribal properties are historically underserved communities who have an ongoing and growing need for banking services. Historically, many tribal governments, their citizens, and their businesses have had relatively little in the way of resources and commerce, which can limit banking opportunities in these communities. However, there are a number of significant business successes run by members of Indian Nations. Love’s Travel Stops of Tom Love, a member of the Chickasaw Nation is one example. In recent years, a wider number of Indian Nations have successfully found ways to drive new commerce and earn new money on their own lands on a broader and more diversified basis. Developing commerce has, of course grown demand and need for banking services for lending, deposit services, cash management services, and other financial services for Indian Nation members and communities.

In some cases, and tribes have been able to bring in new and significant funds and resources based on activities like oil and gas drilling, tourism, and running hospitality and casino services and venues. Increases in cash flow and resources ought to lead to further development of other businesses and industries that operate within and close to Indian Nations.  The influx in revenue and business have created new opportunities for other industries to serve businesses on Indian Nation lands.  

Because banking Indian Nations is an area that requires some additional knowledge beyond nationwide offering of banking services, banking Indian Nations offers an excellent niche banking opportunity with moderate barrier to entry. For a banking service provider who is willing to get to know the necessary background and develop a relationship with Indian Nation communities, there are opportunities for lending, deposit services, cash management, and other basic but critical banking services.

Developing Familiarity with Banking Indian Nations

Much of the barrier to entry can be dealt with by developing some familiarity with the ins and outs of the nature of laws and governing bodies of Indian Nations. Banking can deliver most services efficiently by having a basic understanding of laws and by making some limited adjustments to service contracts.

Sovereign Status

Indian Nations have their own sovereign power and make their own laws. Indian Nations are not subject to the state laws of the state which surrounds the reserved territory. Congress has plenary power over Indian tribal lands and nations which means it may enact laws and legislation to govern Indian Nations in their lands. However, since Indian Nations have their own sovereign power, Indian Nations govern their own affairs within their own lands. Indian Nations have their own courts and own lawmaking organizations and authorities.

Addressing Differences in Laws

Though the variety in legal authorities sounds like a recipe for legal difficulties, many Indian Nations have enacted laws and rules that coordinate with uniform laws efforts or are otherwise similar to state law. For example, many governing bodies have enacted versions of the Uniform Commercial Code in an effort to make business transactions simpler and more consistent on and off Indian Nation lands.

Also, just as with contracts across state lines, it is common practice and permissible to use choice of law contract provisions to clarify which laws apply and which do not. Choice of venue and forum clauses can be used to select an appropriate court and location for resolving disputes regarding a contract. Agreeing to arbitration is a possible option for dispute resolution.

Sovereign Immunity

Similar to municipal and state bodies, the sovereign status of Indian Nations provides them immunity from most types of lawsuits and legal actions. As with any city, it is usually not possible to bring suit against a local government if you don’t like its taxes or policy. It is possible, however, for an Indian Nation to waive its sovereign immunity by contract. Cities, states, and the federal government regularly waive their immunity by entering into contracts that may be enforced against them in court. Indian Nations may do the same.

Indian Nation Subsidiaries

Also like municipal and state governments, Indian Nations may form subsidiary corporations for providing services or operate businesses. It is not uncommon for an Indian Nation to operate a hospitality service as a subsidiary to the nation’s governing body. Government subsidiaries may also have the benefit of sovereign immunity.

Addressing Legal Hurdles by Contract

Considering the points above, a bank can offer deposit services and cash management services to an Indian Nation, its businesses, and residents by making some relatively simple adjustments to service agreements. One of the simpler approaches may be to adjust deposit contracts and service agreements to provide for dispute resolution by arbitration, set a choice of law provision that is acceptable to both parties, and select an appropriate location for holding disputes. For agreements to provide services to an Indian Nation itself or a subsidiary of the nation, the agreement should include a limited waiver of immunity for purposes of managing disputes between the financial institution and the Indian Nation. Where a bank and an Indian Nation are both agreeable to these contract adjustments, services provided by a bank can be readily and efficiently offered to sovereign organizations.  

While dealing with banking services for a sovereign nation may sound intimidating and out of reach, there are some legal solutions that make banking Indian Nations and their residents and business feasible for banks who are willing to spend a little time getting to know the rules of the road.

Prize-Linked Savings: Save to Win!

Posted on by
Growing money, stacks of coins

In the United States, legal lotteries and raffles are the exception, rather than the norm. Most states ban lotteries with few exceptions. However, in recent years, many states have opened up lotteries ever so slightly to allow for promotions that encourage people to save money. These savings promotions come in the form of a prize-linked savings account.

Prize-Linked Savings Accounts

A prize linked savings account offers account holders a chance to win an amount of money simply by making a deposit of money in a savings account. The deposit and prizes may vary, but, to illustrate, a bank might offer account holders one chance to win $25,000 for every $15 deposit an account holder makes within a month’s period of time. After the month is over, the bank would run a drawing based on the numbers of $15 deposits made by each account holder, and one lucky winner would gain $25,000.

One critical difference between prize-linked savings accounts and traditional lotteries is that the account holder keeps her deposits and interest earned on those deposits. Reports from pilot programs seem to show that these types of deposits tend to accumulate, rather than disappear. (See the links at the end of this article.) This is encouraging as prize-linked savings have been a successful draw for people who might not otherwise retain an account at a bank.

From a depository institution perspective, this program presents a niche banking opportunity. That is, offering a unique and still little-used incentive for opening a savings account and making regular deposits. The cost of prizes, spread over many accounts, does not need to unreasonably increase the cost of funding to the bank. For new account holders, this can be an attractive way to earn a little interest and also to get a chance to increase the income from a deposit account.

Niche Banking Opportunity

As this sort of prize linked savings program directly falls within the definition of a lottery, states wishing to permit this sort of program have been changing their lottery laws to allow this savings promotion to be conducted legally by banks and other financial institutions. Federal laws prohibiting banks from conducting a lottery have also been changed to allow banks and financial institutions to offer prize-linked accounts.

Lawful Lottery

In Texas, banks may offer prize linked savings account where a chance to win is obtained by the deposit of an amount of money in a savings account or savings program. The fees, interest earned, and withdrawal limitations for the prize-linked account must be commensurate with the fees, interest earned, and withdrawal limitations applied to other accounts at the bank offering the program. The program must also be administered in a safe and sound manner for the financial institution.  

Federal law has been amended to permit prize linked savings accounts where a person may obtain a chance to win by depositing a specified amount of money in a savings account or savings program. Each chance to win must be equal, and the prize must be designated in advance. The text of the change implies that the prize could be money or other prizes, like a trip, hotel stay, or valuable property.  

Many other states permit similar prize-linked savings account programs that banks and other financial institutions may offer to their customers.  

Pilots and Studies

Michigan Pilot  

South Africa Study

Heard of other success stories? Please send a note.

Turning to History for Lending Opportunities: Lending into Historic Tax Credit Developments

Posted on by
Moody Mansion in Galveston

A historical and stable niche lending opportunity is found lending into historic rehabilitation projects. There are 10s of 1,000s of historic buildings across the United States. Many of them need a face lift or adaptive rehabilitation. Many of these historic structures are in key areas of town and carry a strong sentimental value for their communities. Lending for the rehabilitation and maintenance of these buildings can check several important boxes for community banks, often including community revitalization, positive press, high profile developments, community reinvestment act credit, catalytic investments, and more.

Federal historic tax credits provide a critical supplement for rehabilitating historic structures. They also provide for interesting niche lending opportunities. The Internal Revenue Code provides for an income tax credit of 20% of the rehabilitation costs of qualified historic structure. The tax credit may be used to offset federal income taxes. The federal historic tax credit may be taken over five years and unused portions may be carried forward for up to 20 years. The tax credit benefit may be transferred in a way by making an allocation of partnership income and credits to a third-party in return for an equity capital investment in the rehabilitation. This incentive was created to encourage the revitalization and reuse of historic structures that are often torn down to make way for less expensive development of newer improvements. Since its introduction, the federal historic tax credit has been used to aid the rehabilitation of over 40,000 structures in the United States.

Texas offers an additional powerful incentive for the redevelopment of historic structures. Texas historic tax credits of up to 25% of the rehabilitation costs of a qualified historic structure may be used to offset the cost of rehabilitating a historic structure. The credit may be used against franchise tax liability or insurance premiums tax liability. The credit is a useful tool for bringing cash equity into a redevelopment because the Texas historic tax credit may be freely transferred in return for cash. The Texas credit has been highly effective at encouraging the rehabilitation of historic structures in the State of Texas and may be used in conjunction with the federal credit. Over $2 billion in project costs have been supported by the Texas historic tax credits.

A number of other states also have state level historic tax credit programs or other redevelopment incentive programs that may be used alone or in conjunction with the federal historic tax credit.

Galveston Arts Center, San Angelo Auditorium, Tower Life Building

Both state and federal programs are frequently used to bring sources of cash equity into the rehabilitation and redevelopment of historic structures. That is, tax credit investors or purchasers are introduced to bring cash in return for the use of the credits generated by the rehabilitation. The capital injection can be used to pay rehabilitation expenses and does not need to be repaid like a loan.

The advantage and opportunity for traditional construction and permanent lenders is that a project with a 5-15% equity contribution by its owner can turn into a project with a 50-60% equity contribution. Up to 45% of the project costs of the redevelopment can be covered without introducing debt or other expensive sources of funding. Overall, using the historic tax credits reduces the debt service and stabilizes the project’s prospects for success. The credits can be used for many types of properties, including office, retail, industrial, special purpose, and, dare I say it in 2020, hospitality. For state only historic tax credit projects, this opportunity comes with little added complexity and can be treated much like another construction loan.

For construction and senior lenders lending into federal historic tax credit projects, the barrier to entry lies in complexity. Understanding the ins and outs of allocating federal income tax credits to a third party takes effort. The IRS code imposes restrictions on owners of buildings rehabilitated with federal historic tax credits for five years following completion of the project. This means that loan workout and foreclosure scenarios must be carefully planned in advance and may require more creativity than typical construction loans. Nevertheless, large and small institutions have been lending into historic tax credit projects for over 40 years and have developed adequate strategies for managing historic rehabilitation projects.  

For a construction banker willing to learn a new construction niche, making a bridge loan in support of a historic tax credit project carries a risk profile that is similar to construction lending and carries substantial benefits. Most of the cash generated by historic tax credits project becomes available upon completion of the project. For projects where the tax credits are is necessary to pay for the construction costs, a bridge lender may advance funds in anticipation of receiving tax credit dollars at the end of the project. The bridge loan may be secured by a lien on the tax credit proceeds and interests which control the proceeds. The proceeds from the transfer of tax credits would then be used to repay the loan at the completion of the project. The tax credit bridge loan does not require a lien on the real estate.

Advantages of tax credit bridge lending are a) this is a niche banking opportunity for which there are few competitors; b) the bridge lender does not need to compete with a senior lender for its security interest; c) repayment of the bridge loan is not dependent on the income from the project; d) once the construction is complete, the loan is repaid without any risk for the failure of permanent financing; and e) moderate cost overruns actually make repayment easier. The risks of bridge lending resemble construction lending. Risks to consider include construction completion, casualty risk for the structure, and non-payment of construction period interest. These risks and others can be adequately mitigated through insurance, interest reserves, underwriting, and other traditional risk management strategies. For an alert construction lender, historic tax credit bridge lending is an opportunity worth looking at.

As noted above, historic tax credit incentives have been used to finance the construction of over 40,000 buildings over more than 40 years throughout the United States. Most of these projects have had the support of bank financing, yet relatively few banks are involved in this area of lending. The longstanding success of these programs and limited competition make this a great niche banking opportunity.  

Driskill Hotel

Earn Fee Income By Providing Underwriting Expertise

Posted on by
Homes and housing development

A couple of weeks ago, I found a compelling request for qualifications from a very active housing finance corporation in a large Texas city. The request asked for “Asset Management and Underwriting Services” to support several housing finance corporations run mostly by the city.  

If you are a banker staring down the barrel of a recession and another long low-interest environment, the title should read more like “Low-Risk, Non-Interest Income for My Bank Where I Can Earn Community Reinvestment Act Credit”.

This would be a fantastic niche banking activity. Banks have been outsourcing functions to other vendors for years. So much so, that many banks really only retain a few important competencies in house. Many banks pay vendors to provide resources for every other function. Why not turn the tables and provide core underwriting knowledge and expertise as a vendor of investment advisory and counseling services?

The underlying request here is for needed expertise in vetting proposals for the financing and construction of housing resources. This is for a city that has a strong demand for affordable housing. The housing finance corporations are very active in providing financing and housing. The asset management and underwriting services would be compensated by a government entity without requiring any change to the bank’s balance sheet. Banks are well positioned to provide this sort of service since most banks retain substantial expertise in investment and loan underwriting. In an environment where interest rate margins are compressed, why not consider providing underwriting advisory services for a fee?

Assisting housing finance corporations in providing affordable housing is a service that directly benefits low to moderate income persons. This is a community development activity that would garner CRA credit for most banks. This also means CRA credit without taking on credit risk. Even without CRA credit, furthering the construction of affordable also fills an increasingly critical need in cities nationwide. This niche banking services opportunity could probably be extended to other areas with similar needs.

Obviously, investing in the bonds produced by these housing finance corporations is the traditional move for most banks. For many banks, investing in the bonds will better fit their strategic needs. However, thinking outside the box a little here, for some banks it may make a lot more sense to earn reasonable fee income in an outstanding niche banking activity without putting additional assets and risk on their balance sheet.  

Can Banks Provide Underwriting Services to a Third Party for a Fee?

Yes, national banks can engage in providing underwriting services or counseling to government entities and instrumentalities, like housing corporations. National banks are authorized to:

“[act] as investment adviser (including an adviser with investment discretion) or financial adviser or counselor to governmental entities or instrumentalities, businesses, or individuals, including advising registered investment companies and mortgage or real estate investment trusts, furnishing economic forecasts or other economic information, providing investment advice related to futures and options on futures, and providing consumer financial counseling….” 12 CFR 5.34(e)(5)(v)(I).

National banks are also authorized to:

“[provide] financial and transactional advice and assistance, including advice and assistance for customers in structuring, arranging, and executing mergers and acquisitions, divestitures, joint ventures, leveraged buyouts, swaps, foreign exchange, derivative transactions, coin and bullion, and capital restructurings….” 12 CFR 5.34(e)(5)(v)(K);

This portion of the federal regulation focuses on new activities in which a national bank operating subsidiary is authorized to engage. Bank operating subsidiaries may engage in activities in which a bank could engage directly. The activities described in (e)(5)(v) are permissible for national banks and national bank operating subsidiaries.

Curious to see the RFP? Send me a note on the Contact Us Page.