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Vacation Time: Is it Mandatory?

By Blair Rugh 27 Jul 2016

By Blair Rugh and Leah M. Hamilton 

It’s summer time, the kids are out of school and many families take their vacations. Like every other aspect of banking, this is another area into which the regulators often stick their fingers into the pie. Most of the regulators “strongly suggest” that every financial institution have a policy of requiring all active officers and employees or employees in sensitive positions take an annual vacation for an uninterrupted period of at least two weeks – or at a minimum rotate out of their position for such time. (FRB, OCC, FDIC, NCUA)  If your institution does not have such a policy, in all likelihood, you may be criticized.

 

The regulators purpose in “strongly recommending” a vacation policy is to prevent embezzlement or other nefarious activities on the part of the employee. In most embezzlement schemes, someone has to be present to keep all of the balls in the air. The regulators believe that a two week period is sufficient for the balls to drop and the scheme to be revealed. Whether your institution elects to have a mandatory consecutive two week vacation, rotation into another position (with someone else completing their functions) or a combination thereof, regulators want to see that the institution’s policy captures sufficient internal controls to mitigate its risk of employee fraud or embezzlement.   Sufficient controls include prohibiting the employee from electronically accessing systems and records during such absence.  Similarly, other staff members should not be allowed to carry out any requests made by the employee during the “off time” to avoid indirect access to keep the fraud going.

 

There are several components of your policy that examiners will expect to see in addition to an uninterrupted two week period. First, examiners will look for your risk assessment for identifying high risk employees and activities.  Such employees typically include trading and wire transfer staff as well as back office staff with responsibilities that include reconciliation.  Those are your “typical.” But, look outside the box.  Consider other potential areas of fraud, such as the ability to apply or modify loan terms and/or balances or the payment of vendor invoices.  In 2015, a vice president of a financial services company was arrested for allegedly embezzling more than $400,000 over a seven year period by abusing her authority to issue checks to pay for invoices that the vendors did not submit. Later, as she was promoted, the culprit allegedly modified her scheme by ordering checks to be issued to pay for legal settlements that did not exist, deposited these fraudulent checks into her account and used the money to support her lifestyle, according to allegations.

 

Next, your policy should also state the allowed exceptions to the policy and who has the authority to make such an exception. If an employee is granted an exception, the employee’s duties should be performed by another employee so that the employee is absent from his or her duties for the required uninterrupted two week period. Finally, the policy should provide that the policy and procedures are audited annually to assure that it is being followed.  And, be sure that the fox cannot except or audit his/her own hen-house.

 

A benefit of a strong vacation policy is that it is a test of a financial institution’s succession plan. Every institution must have a succession plan for its key employees. If you are reluctant to allow someone to be absent for a two week period because they are just too valuable or no one else knows how to do their job, then, your succession plan probably has a pretty gaping hole. Too often, succession for an employee is only considered when the person is nearing retirement. In that case, there is a reasonable period to prepare.  Unfortunately, illness and other events can make an employee unavailable and someone has to be prepared to step in immediately.

 

It is the job of the Board of Directors of a financial institution to set the policies for things like succession and vacations. The requirement for these policies is not intuitive. The butcher, the baker and the candlestick maker who make up your board may not be required to have those policies for their businesses and may have never thought of them. Make sure that your board is aware of their responsibilities and the policies that they must have.

 

Rescission: Lender’s Equity Rights Reaffirmed 

In a rescindable transaction, not often, but occasionally, a lender will make a mistake in its disclosures.

 

Remember, the rescission clock generally begins to tick at the later of consummation/account opening, the provision of right to rescind notice or delivery of all material disclosures.  The consumer then has until midnight of the third business day to rescind.  If inaccurate material disclosures are provided, then, the clock has not yet begun to tick.  And, if the material disclosures or corrected disclosures are not provided, then, the rescission period expires three years from the date giving rise to the right of rescission.  A recent court decision upheld prior decisions and confirmed the rights of the lender.

 

In this case, the lender realized that it had omitted several finance charges from the APR calculation and advised the borrower that it was entitled to rescission. The borrower demanded rescission, and the lender quickly repaid to the borrower all of the interest and other finance charges that the borrower had paid. The lender then put a release of the mortgage into escrow with instructions that it should be released to the borrower when the borrower repaid the loan balance less the closing costs that the borrower had been required to pay.

 

The borrower, on the other hand, demanded that the release of the mortgage be filed immediately – the effect of which would have been to leave the lender with an unsecured demand obligation. The court said, “Not so quick.”  Rescission is an equitable remedy; to be entitled to equity, the person requesting it must do equity. That meant if the borrower wanted the mortgage released, the borrower had to pay the underlying debt.

 

The steps that a lender must take in these situations is fairly technical. Accordingly, whenever your institution receives a demand for rescission or you discover a rescindable loan transaction contains material disclosure errors, refer it to the legal counsel for your institution immediately.

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