AI in Financial Services: Balancing Innovation, Third-Party Risk Management, and Regulatory Scrutiny

The integration of artificial intelligence (AI) in the financial services sector presents both transformative opportunities and significant challenges. As financial institutions increasingly evaluate AI technologies, it is crucial to ensure these innovations comply with existing regulations, manage associated risks effectively, and maintain robust third-party risk management practices. This blog explores the intersection of AI, third-party risk management, information security governance, and regulatory expectations, offering actionable implementation steps.

Ncontracts Webinar: Mid-Year Regulatory Landscape 2024: 1071, CRA and Other Hot Topics

Implementing new regulations has always been challenging for financial institutions – and now a bevy of lawsuits questioning the regulatory agencies’ statutory authority has added a layer of complexity. Court cases dealing with rules including implementing Section 1071 of the Dodd-Frank Act and the updated Community Reinvestment Act (CRA) are raising uncertainty about deadlines and what implementation might look like. Join Ncontracts Thursday, July 18th at 1pm CT to hear the latest on these legal challenges, what they mean for your institution including which laws and regulations are facing legal challenges, deadlines and how to prepare for regulatory change in an uncertain environment. Register at https://hubs.ly/Q02CHck50.

CRA and Fair Lending : A Picture is Worth a Thousand

by Pamela C. Acciardo, Managing Principal, Capco Compliance Consulting Services

As US banks of all sizes study the extensive final Community Reinvestment Act (CRA) Rule and devise appropriate implementation plans, the adage “a picture is worth a thousand words” should be front of mind. We look at how mapping can be instrumental in identifying and mitigating redlining and other risk factors. 

Since President Biden signed Executive Order 13985 – Advancing Racial Equity and Support for Underserved Communities Through the Federal Government – in 2021, and the Department of Justice (DOJ) subsequently launched its Combatting Redlining Initiative, we have seen an increased focus on this form of discrimination. The DOJ has since announced redlining settlements with 10 banks and mortgage lenders, with 24 investigations pending.1 

Redlining is a type of disparate treatment in which a lender provides unequal access, or terms of credit based on a prohibited characteristic, to the residents of an area in which the borrower resides or will reside, or in which a residential property to be mortgaged is located. For example, a blanket avoidance of providing home loans and other mortgage services in majority Black and Hispanic neighborhoods would constitute redlining. 

Commensurate with the heightened regulatory focus and scrutiny that has resulted in the recent increase in redlining enforcement actions, the FDIC (among other agencies) is encouraging banks to generate maps plotting both loan applications and originations to proactively identify – and, critically, address – any potential disparities. Maps can help visually identify any gaps in loan applications and originations, particularly within majority-monitory and low-income census tracts....Read More

Check out Capco's latest insights from our recent webinar and Q&A session, "CRA Compliance in the Modern Era: Expert Insights & Best Practices," recorded on Thursday, June 20th from 2 to 3 PM EST. 
 

How to Determine Schedule F Income in FINPACK

by Dale Nordquist

FINPACK uses IRS Schedule F data in two analysis tools – the Schedule F type Tax Form and the Schedule F Cash to Accrual tool. Several items on the Schedule F tax form have both total and taxable entries. Because of this, questions arise about which Schedule F entries are used in the different FINPACK analysis tools. The FINPACK Team has created this fact sheet on the topic. Today’s post focuses on Schedule F income utilized in the Schedule F Cash to Accrual tool. This FINPACK tool takes cash income from Schedule F, along with beginning and ending balance sheets, to arrive at accrual adjusted income for the year.

Schedule F Cash to Accrual

The Schedule F Cash to Accrual tool in FINPACK uses the Schedule F tax form to generate its accrual-adjusted income statement. The cash portion of the income statement is built from the Schedule F entries. In general, the total entries are used rather than the taxable entries in order to capture the total cash income for the year. Examples of this include:

• Line 1 – Sale of livestock and other resale items: FINPACK uses Line 1a to capture the gross sale of feeder livestock and other resale items. Because FINPACK captures inventory change from the balance sheets, Line 1b is not used. Instead, the actual cash expenditure for resale items is entered in Schedule F Cash to Accrual data entry.
• Line 3 – Cooperative distributions: Here FINPACK uses the taxable amount on Line 3b. This exception to the rule results from grain sales being reported on Form 1099-PATR. Some tax preparers include the value of grain sales reported on the 1099-PATR for a producer on line 3a, exclude them on Line 3b, and instead report the grain sales on Line 2 (Sales of livestock, produce, grains, and other products you raised). Using this method ensures income is not double-counted by FINPACK in the analysis. Note: if the difference between Line 3a and 3b is material and it is determined the income difference is not included elsewhere on Schedule F, it should be added as “Other income (not on Schedule F)” in data entry.
• Line 4 – Agricultural program payments: FINPACK uses Line 4a, total payments.
• Line 5 – Commodity Credit Corporation (CCC) loans reported under election: FINPACK always treats CCC loans as loans, no matter the elected tax treatment. Therefore, Line 5a is excluded. Crops under loan are not included as income until they are sold and the loan is repaid. At that time, the income will be reported on Line 1a, 2, or 3 of Schedule F. See the FINPACK Knowledge Base fact sheet on Discrepancies Caused by CCC Loans in Schedule F Cash to Accrual for more detailed information on this topic.
• Line 6 – Crop insurance proceeds and federal crop disaster payments: FINPACK uses Line 6a, total crop insurance proceeds received. The taxable amount may be less if proceeds were deferred until the following year for tax purposes. Also, Line 6d, Amount deferred from previous year, is excluded because this was included as cash income the previous year.

Additional Income Information

Don’t forget, that there may be other sources of income for the farm or ranch that are not found directly on the Schedule F tax form. The FINPACK Team has created a worksheet to help gather this information from the producer. This input form includes the income source and where to find the necessary information. For example, cull income, from the sale of breeding livestock, is found on Form 4797.

Schedule F debt coverage

Cash available for debt service begins with Net Farm Profit or Loss from the Schedule F tax form. Adjustments to arrive at the accurate cash income are made in Other non-taxable income. Specific details on these adjustments can be found in this FINPACK Knowledge Base fact sheet.

More FINPACK ‘How-tos’

The FINPACK Knowledge Base has resources, input forms, and other helpful topics to aid in using FINPACK.  It’s a great place to start as you begin using FINPACK or if you are looking for helpful hints and tricks to enhance your use of the software. Remember, you can also find great tips and guides in the HELP section of FINPACK.