Tag Archives: Non-Interest Income

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.

Low Hanging Fruit: Insurance Sales

Posted on by
French Fries

Banks can act as insurance agencies and sell insurance policies. Insurance sales is a common activity for banks because insurance sales pairs very well with extending secured loans. Collateral needs to be protected. Most of the time, this means the borrower must get insurance for the collateral. Since the customer is already dealing with the bank for a loan, the insurance quote is a simple and effective cross-sell. Not quite a simple as “would you like fries with that?” but the same idea. The bank can earn a commission on the sale of the insurance policy.

This niche banking op will exist, regardless the number of competitor insurance agents. This is because the bank is the first to know of the insurance need and because the bank already has a relationship with the customer.

Maybe this is an obvious tactic since banks have been selling insurance for at least a hundred years, but plenty of banks have not taken advantage of this opportunity. Insurance sales checks a number of important boxes for banks. Commission income is non-interest income. The capital investment to start is low. The risk profile is low if properly managed. There are also overlapping skill sets in the sale of insurance and the sale of financial products like loans.

Strategy for Structuring Insurance Activities

Below are some of the ways banks can structure new and existing insurance activities.

A national bank is authorized to act as an insurance agency directly. Texas and many other states authorize their state banks to act as insurance agents directly. The advantage of this format is that licensed bank employees can offer quotes, referrals, sales support, and the bank may pay commissions and referral fees directly to licensed employees. Where the agency is an affiliate or subsidiary, the cross-sell may be less seamless. Referral fee programs for employees may also be limited or restricted where the bank is not acting as an insurance agency handling the policy.

A national bank can create or invest in a subsidiary that acts as an insurance agency. Texas state banks and many other state charters can do the same. A bank holding company can also invest in a subsidiary insurance agency as a sister corporation of the bank. Structuring the agency as a subsidiary or affiliate may be a means of bringing in outside expertise and investment to start the agency. This may also be a means of acquiring an existing book of business from an established insurance agency. Separating the insurance agency activity may offer the bank some liability protection from the insurance sales activity. Affiliate transaction limitations play a role in deciding whether an insurance agency should be a bank or bank holding company subsidiary. More on this in another post.

Some large insurance organizations are aware that banks have a unique opportunity for offering insurance products to their customers and offer turn-key insurance agency solutions to banks. With this strategy, the insurance organization handles quotes, onboarding, most of the sales activities, and all of the back-end operations. This setup allows a bank to earn commissions income on the sale of insurance without needing to get into the weeds of licensing and training. More on this strategy coming up in a later post.

Regulatory Matters

Licensing

States regulate the business of insurance. By and large, states license insurance agencies who sell policies and insurers who underwrite policies separately. If the bank engages directly as an insurance agency, the bank will need to obtain an insurance agency license. We’ll cover bank affiliates as insurers in a separate post. States may vary in how they handle licensing for agencies and agents or in how they handle compensation and referrals.

In Texas, employees who sell insurance must also obtain an individual license to sell insurance and must have adequate training. In Texas, an employee must hold a license to give quotes, discuss coverage, and give details on the terms of an insurance policy. Non-license holders may point out that the bank offers insurance and may point an interested customer toward a licensed agent for further information. Texas permits a bank to pay a non-license holder a nominal referral fee if the fee is not conditioned on the sale of insurance.

Anti-Tying

Banks generally may not tie insurance products to loans. That is, they may not require a customer to obtain an insurance policy from the bank as a condition of obtaining a loan. The bank may be required by state or federal law to deliver an anti-tying notice to the customer at the time of a loan application if the bank intends to solicit insurance in connection with the loan.

RESPA

If a bank will be referring a customer to an affiliated insurance agency in connection with a federally-related mortgage loan, the bank must provide an affiliated business arrangement notice to the borrower before making the referral. Where the insurance agency is an affiliate, compensation for any referral should not be paid from the affiliate to bank employees. The only compensation the affiliate may provide the bank is by way of a bona fide dividend if the affiliate is a subsidiary of the bank.

FDIC Insurance Disclaimer

If insurance products and deposit products are offered in a branch location where deposit products are offered, the not-not-not insurance product disclaimer must be shown at stations where insurance products are offered.

 

Is there something else you want to see covered? Please fill out the contact form to get a hold of me.