Thursday, December 12, 2024

July 2007 Legal Briefs

  1. Consumer Loan Dollar Amounts Adjust on July 1
  2. Changes to Identity Theft Provisions
  3. All ATV’s Transferred After June 30, 2008 Require Titles & Liens
  4. How to Re-title a Mobile Home Merged Into the Real Estate
  5. Commissioner’s Bill Includes Several Miscellaneous Changes

1. Consumer Loan Dollar Amounts Adjust on July 1

As of July 1 each year, the Consumer Credit Administrator adjusts for inflation certain dollar amounts found in various sections of Oklahoma’s Uniform Consumer Credit Code (U3C). 

The Administrator has announced a new set of increased U3C dollar amounts (in a chart at the end of this article), taking effect on July 1, 2007.  (Most amounts have increased by approximately 2.4%, compared to the amounts established on July 1, 2006.)

a. Increased Late Fees.  The fee that banks ask most questions about is the maximum late fee for consumer loans and dealer paper.  During the past year, the maximum permitted late fee has been the greater of $20.50 or 5% of the past-due payment. This formula changed on July 1, 2007 to the greater of $21.00 or 5% of the past-due payment.  

Before a bank can charge any late fee, the consumer must agree to it in writing.  Whenever a loan is originated, deferred or renewed, the signing of documents is an opportunity to get the borrower to consent in writing to the new $21.00 portion of the late-fee formula.  However, for loans that are already outstanding and are not being modified or renewed, a bank has no good way to increase the amount of late fee that the consumer has previously agreed to pay. 

Some banks’ loan documents have specifically pegged the “dollar amount” portion of their late fee formula at $20.50 (or lower amounts in earlier years)—and so for existing loans there may be no way to raise the late fee at July 1.  Other banks have used an adjustable formula in the late-fee provision of their loans, allowing for the greater of 5% of the late payment or the maximum dollar amount established by rule of the Consumer Credit Administrator from time to time.  (Banks using a formula that specifically allows for this type of inflation adjustment can now re-set their existing loans to charge the new, higher late fee as of July 1.) 

b. “508B” and “508A” Loans.  Some banks make small consumer loans based on a special finance-charge method that combines an initial “acquisition charge” with monthly “installment account handling charges,” and does not have a stated annual interest rate.  The requirements for such loans are outlined in Section 3-508B of the U3C.

The maximum permitted principal amount for one of the small loans just mentioned has been $1,230.00, but now is adjusting to $1,260.00 at July 1. 

The specific fees chargeable on one of these “508B” loans depend on where the loan falls within certain dollar brackets.  Both the dollar brackets and the fees chargeable within each bracket are adjustable for inflation, and the revised amounts as of July 1 are set out in more detail in the chart at the end of this article.

The Administrator warns that lenders making “508B” loans should be careful to switch promptly to the new dollar amount brackets, and the new permissible fees within each bracket, as of July 1.  Because of some peculiarities in how the maximum fees for loans are set within each bracket, and the changing of the bracket amounts, using a chart with the old rates after June 30 (without shifting to a revised chart) could result in excess charges for certain loans of $122.97 to $125.96, $143.51 to $147.00, $287.01 to $294.00, $410.01 to $420.00, and $615.01 to $630.00.

The chart that banks use to determine the “maximum rate of interest” allowable on small loans calculated by the other available finance charge method (under Section 3-508A) will also change somewhat because of adjustments for inflation at July 1. The maximum consumer-loan dollar amount on which a blended interest rate higher than 21% can be charged by the 3-508A method will increase from $4,100 to $4,200.  At www.americanbanksystems.com/compliance/3508A.pdf there is an online chart showing the maximum interest rate chargeable on “508A” loans of various dollar amounts as of July 1, 2007, as well as a calculator for “508B” loans.

c. Dealer Paper “No Deficiency” Amount.  Based on Section 5-103(2) of the U3C, if dealer paper is secured by goods having an original cash price less than a certain dollar amount, and those goods are later repossessed or surrendered, the creditor cannot obtain a deficiency judgment if the collateral sells for less than the balance outstanding.  This dollar amount was previously $4,100, and increases to $4,200 on July 1.   

2. Changes to Identity Theft Provisions

This year the Oklahoma Legislature passed two bills related to identity theft—House Bill 1329 and Senate Bill 567.  Both provisions are limited in scope, but will be useful on the points that they cover.

1.  House Bill 1329

H.B. 1329 amends the existing Oklahoma criminal provision that sets out the penalty for identity theft (21 O.S. Section 1533.1).  Under previous law, identify theft was punishable by a prison term “not to exceed two (2) years” (with no required minimum), or a fine of up to $100,000, or both.  As of November 1, the prison-term option is changed to “not less than one (1) year nor more than five (5) years.”  The fine (up to $100,000) remains the same. It will still be possible to impose the prison term alone, the fine alone, or both.

Various activities meet the definition of “identity theft” in existing Section 1533.1, ranging from assuming the identity of a deceased person (as an illegal immigrant might do, in buying a false I.D.), to pretending to be the person whose name is printed on stolen or dummy checks (fraudulently passing another person’s checks to merchants), to forging an endorsement, to applying falsely for credit in another person’s name, to simply changing the mailing address on another person’s credit card account.

The amended statute (effective November 1) attempts to “get tough” on identity theft, both (1) by setting a minimum prison sentence of one year, and (2) by extending the maximum sentence from two years to five years.  Of course, tightening the sentencing guidelines in the statute doesn’t automatically result in tougher punishment being doled out.  

As an interesting comparison, note that the existing criminal penalty for writing a “false or bogus check” under $500.00 is limited to one year in prison or a fine of not more than $1,000.00; and for a bogus check of at least $500.00 but less than $1,000.00, the maximum jail term is one year, and the maximum fine is $5,000.00.  (See 21 O.S. Sections 1541.1 and 1541.2.)  Of course, it’s possible to write an “insufficient” check or “closed account” check, and if it’s not on someone else’s account, it does not involve “identity theft.”

However, it’s important to recognize that the average “stolen checks” or “dummy check” scenario will also satisfy the definition of “identity theft” in 21 O.S. Section 1533.1.  In most cases where there is a forged signature or forged endorsement, a bank should encourage a district attorney also to consider an “identity theft” charge.  (The same facts satisfy two different crimes, although the “identity theft” statute has harsher penalties.)

Another little-known but useful provision is 21 O.S. Section 425.  If there is a “pattern of criminal offenses” occurring in more than one county, that “pattern” of criminality crossing county lines is a separate (add-on) criminal offense that can be prosecuted in addition to charges for the separate underlying offenses (such as five separate “bogus check” charges). 

The existence of a “pattern or criminal offenses” is punishable by a separate prison term of up to two years, and/or a separate fine of up to $25,000.00.  The statute’s definition is satisfied if (1) there is a string of two or more criminal offenses of the same type (such as writing “bogus” checks), separated by not more than 30 days between incidents, and (2) the activity occurs in at least two separate counties (for example, four “bogus checks” written in Oklahoma County and one written in Cleveland County). 

In the example just given, 22 O.S. Section 125.1 would allow all five  bogus checks to be prosecuted in either Oklahoma County or Cleveland County, depending on which county has a lighter case load and/or is more willing to investigate and prosecute the offender.  If the same type of activity occurs close enough in sequence and in two (or more) separate counties, it may be possible to charge someone with a “pattern of criminal offenses,” as well as “identity theft” (for impersonating the owner of the account or of checks), and multiple “bogus check” charges.

In summary, a variety of provisions are now available in Oklahoma for prosecuting financially-related criminal activity; but an opposite trend is also at work, due to prison overcrowding: Many law enforcement officials and legislators believe that “violent” crimes must be given priority, and that non-violent offenders should be dealt with by plea bargains, shorter sentences or deferred sentencing (requiring restitution, but perhaps avoiding jail time if the person has no other violations).

Time will tell whether judges, juries, and district attorneys will utilize the harsher punishment options created by this year’s amendment to Section 1533.1.  Certainly for more extreme cases, having broader options available is good.

2. Senate Bill 567

Senate Bill 567 adopts a new Section 1533.3 of Title 21 O.S., effective November 1, giving each identity theft victim the right to file an “incident report” with his local law enforcement agency—although the perpetrator may be located in a distant jurisdiction, making local investigation or prosecution impossible.

It may sound like “a pointless step” to file a victim report with a law enforcement agency that cannot do anything about it.  However, allowing the victim to file an “incident report” can have several important benefits (and banks should encourage their customers to do so.)

First, by creating the report and obtaining a copy, a victim is able to provide documentation to a credit card company or check-approval company that otherwise might think that the victim is just a deadbeat trying to avoid payment. 

(After some inconvenience, matters usually can be straightened out with a creditor if an identity-theft victim provides (1) a letter explaining the circumstances, (2) a copy of a driver’s license, and (3) an “incident report” filed with a law enforcement agency.  Until a victim shows proof of contacting local law enforcement, a defrauded creditor is unlikely to back off.)

Second, the “incident report” can be very useful as supporting documentation in notifying a credit bureau that certain transactions reflected on a consumer’s credit report are not really transactions of the consumer.

Third, 2006 legislation makes it possible for someone in Oklahoma to place a “security freeze” on his credit report.  Normally, anyone under 65 is required to pay for a file-freeze request or temporary release of the credit report, unless that person is an identity-theft victim who also provides to the credit bureau “a copy of a valid investigative or incident report or complaint with a law enforcement agency about the unlawful use of the victim’s identifying information by another person.” (21 O.S., Section 156(B)(1).)  This year’s “incident report” statute will assist an identity-theft victim, by creating a right to file an incident report with local law enforcement.  

In the past, it has sometimes been difficult to convince local police to take an identity theft “incident report” when the apparent perpetrator is distant and unknown—or when the crime is something that the local law enforcement agency has no ability to investigate or prosecute.Based on this year’s new law, a local police or sheriff’s office cannot refuse to take an incident report regarding identity theft.  With this incident report, a victim is assured of being able to obtain a file freeze without cost.

Fourth, the new law allows a local law enforcement agency to “share the incident report with law enforcement agencies located in other jurisdictions.”  Because there is no requirement to do so, this part of the statute does not necessarily create an additional workload.  Hopefully, with clear authority to share information, local law enforcement will be motivated to provide an “incident report” to any other jurisdiction (including another state or country) that may have the resources and authority to investigate or prosecute the suspected perpetrator.  A local law enforcement agency can share information, as it chooses, with surrounding jurisdictions (because they may be experiencing similar problems, or as a warning), or with centralized agencies, such as the F.B.I. or Oklahoma State Bureau of Investigation.

Fifth, encouraging the filing of “incident reports” may provide a better record of the rate of identity theft that is actually occurring.  Better information may reveal patterns that perpetrators are using, or may dramatize the real scope of the problem. It has been estimated that only a small percentage of identity theft is currently reported.

Sixth, this year’s new law may help a bank to tighten its procedures in dealing with a customer who reports unauthorized transactions on his account (usually stolen and forged checks).  Based on the new law, a bank might require a customer (1) to file an incident report, and (2) to sign a forgery affidavit, before the bank will reimburse that customer.  (Some banks already do both.)

This could become somewhat of a tricky issue, in that a bank is probably absolutely required to reimburse a customer for an unauthorized item, after the bank has satisfied itself that (1) the customer did not authorize the item, and (2) the customer’s own negligence or delay or other legal provisions have not shifted the loss to the customer.  In other words, a customer’s refusal to file an “incident report” will not necessarily eliminate a bank’s apparent obligation to reimburse for an unauthorized item.

However, I believe a bank is justified in (a) asking questions, (b) conducting a reasonable investigation, and (c) gathering reasonable documentation (if possible) in support of the customer’s statement that an item is unauthorized.  Certainly, it’s a widely accepted practice to require a forgery affidavit from a customer, because without this affidavit a bank has difficulty in bringing charges against a forger.  Now that the process of filing an “incident report” is a guaranteed right, it becomes more reasonable to require an identity-theft victim to take this step, and to provide a copy to the bank.

There are two main situations in which a customer might be reluctant, although the bank nevertheless would benefit by requiring the customer to provide a copy of an “incident report”:  (1) where an allegedly forged check has such a good signature that the bank can’t be sure whether the customer wrote it or not, or (2) where the customer wants reimbursement for obvious forgeries, but doesn’t want to provide any information that could help to identify the forger.  (In the second case the customer often is shielding a family member or “significant other.”)

There are two important ways that a bank’s requirement to file an incident report can be helpful: (1) If an “incident report” is filed, the police or sheriff will have a basis for investigating (for example, interviewing payees or viewing a merchant’s videotapes), and may be more likely to bring charges. 

(2) Filing a false report of a crime is punishable by up to 90 days in jail or a fine of up to $500, or both.  (21 O.S. Section 589.)  A customer who is telling the truth in reporting identity theft to the bank should have no objection to filing an “incident report.”  However, someone falsely alleging that an item is unauthorized, or trying to shield the perpetrator by making inaccurate statements, might trigger a misdemeanor charge against himself.

I think it’s good strategy to put a customer in a position where he must choose between two options:  Either (a) he must file an “incident report” with local law enforcement (which, if false, may get him into serious trouble), or (b) he must back off from his claim that an item is unauthorized, unless he is willing to file an “incident report” that may result in criminal charges against the perpetrator.  
 
Many customers apparently believe that “rights” should flow only one way in this situation: They are outraged that the bank would pay bad checks on their account, and they demand full reimbursement; but often (particularly when the perpetrator is someone close to them) they expect the bank not to inquire about the details and not to have a “get tough” attitude toward the forger.

Many banks, while asking questions about unauthorized items and helping to prepare an “affidavit of forgery,” will deliberately explain that the bank’s policy is to prosecute forgers to the full extent of the law.  If the customer objects or otherwise becomes alarmed at this, the bank could then state that the only way to avoid that outcome is if the bank has no loss–for example, if the customer were to withdraw his claim of unauthorized items.  (This approach avoids some losses where the customer/victim is unwilling to see the forger prosecuted.)

Now that filing an “incident report” is so easy, it may be a good practice to explain that the bank requires a copy of an “incident report” to assist in pursuing the forger.  (If the customer backs up on his allegations, not wanting to file an “incident report,” the bank may avoid some losses that otherwise it would have to take.)

3. All ATV’s Transferred After June 30, 2008 Require Titles & Liens

Legislation enacted in 2005 (amending 47 O.S. Section 1105) requires titling for a majority of ATV’s (also known as “four-wheelers”) that are purchased at any time after June 30, 2005.  (With a title comes an automatic requirement to record a lien on the certificate of title in order to perfect a security interest.  However, for any ATV not yet required to have a title, a security interest still must be perfected by filing a UCC-1.)  

The 2005 legislation did not require a purchaser of a new or used ATV to obtain a certificate of title if he held an agricultural exemption permit—in other words, if he was a real farmer or rancher.  (Some ranchers use an ATV to check their cattle.  Most farmers and ranchers probably have an ATV mainly for recreational use, but nevertheless avoid obtaining a title for that ATV if they have an agricultural exemption permit.  I have no statistics on what percentage of ATV purchasers fit the exemption, but persons with acreages are more likely to own an ATV, compared to city dwellers.)

One of the problems with the 2005 approach is that it sets up two ways to go, but only one way is “right” in any specific case:  A lender currently has to determine an ATV’s intended use in order to know whether the purchaser must obtain a title so that the lender’s lien can be recorded on the title—or whether, instead, a UCC-1 must be filed to perfect the security interest because the borrower is not required to have a title.

As an additional complicating factor, it continues to be true for any ATV acquired before the earlier law’s July 1, 2005 effective date (regardless of who the owner is or what the use may be), that the pre-existing owner is “grandfathered” and not required to obtain a title.  Only if that used ATV is transferred to someone else after June 30, 2005 (by sale, trade, gift, inheritance, etc.) will there ever be a need to obtain a title for that ATV.  If a lender makes a new loan today (or continues to have a loan already outstanding), secured by an already-owned ATV acquired before July 1, 2005, there almost certainly will be no title—and the lender is perfected by filing a UCC-1.  

This year’s House Bill 1016 takes an important step in the direction of “unwinding” some of the complexity created by the 2005 law.  Specifically, as of July 1, 2008, this legislation eliminates the exception for someone holding an agricultural exemption permit.  Based on the new provisions, all ATV’s that are purchased or transferred after June 30, 2008 (including those for farm use) will have a certificate of title–and the only method of perfecting in those ATV’s will be to file a lien on the title.  

 (Of course, “dealer inventory” will continue to be a special case, and will be treated the same way for ATV’s as for motor vehicles:  Whether a particular ATV has a certificate of title or not, the only way to perfect in an ATV that is part of dealer inventory is to file a UCC-1 in inventory.)

4. How to Re-title a Mobile Home Merged Into the Real Estate

In 2002 the Legislature created a procedure in 47 O.S. Section 1110(E) for merging a manufactured home into the real estate to which it has become permanently attached.  (Sometimes a homeowner puts his manufactured home on a permanent foundation, gradually adds some additional rooms, constructs an elaborate deck, etc.  With enough steps like this, it no longer makes sense to consider the manufactured home as personal property (requiring a certificate of title and annual tag)—so the law allows for cancelling the certificate of title and merging the manufactured home into the real estate.)

In order to be merged into the real estate, a manufactured home must be permanently attached to the real estate, and any loan secured by a lien on the manufactured home’s certificate of title must first be paid off. The homeowner then applies to the OTC to cancel the title on the manufactured home, and provides a legal description of the real estate into which the manufactured home is to be merged.  The county assessor is notified, and a notice is filed against the real estate records, to inform anyone examining the title that the manufactured home is now part of the real estate.

The effect of merging a manufactured home into real estate is that it becomes part of the real estate to the same extent as an ordinary home.  A standard mortgage form, covering a certain real estate description, always says “together with improvements” in the fine print, and automatically covers not just land but also any “merged” manufactured home, without specially mentioning the home—in the same way that a mortgage on real estate means “including the house.”  If a mortgage already exists on real estate before the manufactured home is merged into it, the process of cancelling the certificate of title and merging into the real estate will cause the manufactured home to become subject to the pre-existing mortgage—just like building a home on a bare lot that was already mortgaged will cause the home to become subject to the pre-existing mortgage.

Which brings us to this year’s question:  What happens when I change my mind?  If I have a manufactured home that has already been merged into the real estate, what should I do to “unwind” that process?  In other words, if I now want to buy a newer manufactured home to put on my land, or I want to build a house, how do I obtain a certificate of title again for the older manufactured home (assuming that it still has axles and can be moved), so that I can sell it?

This year’s House Bill 1340 (effective November 1, 2007) creates a method for legally separating a manufactured home from the land into which it has been merged (in other words, changing the “merged” home from part of the real estate, back into personal property).  The language amends 47 O.S. Section 1110(E).

The owner of the manufactured home must apply to the Tax Commission for a new certificate of title, submitting two documents:  (1) the owner’s attestation that he owns the manufactured home and that there is no security interest or lien of record in the manufactured home, and (2) a title opinion from a licensed attorney, showing that the owner has marketable title to the real estate and that it is free of any mortgage, judgment, or lien of record.

Why is the second part necessary?  Because there cannot be clear title to the “merged” manufactured home unless there is clear title to the real estate it is part of.  As some examples, an unreleased mortgage might be on file against the real estate; a materialman’s lien could be filed against the real estate for repair work performed and unpaid; there might be a tax lien on file in the county, naming the owner and clouding title to the property; or there could be a judgment rendered against the owner, which automatically operates as a lien against any real estate he owns in the county.  

If an attorney’s opinion indicates none of these problems, the manufactured home can be split off from the real estate without harming any third party having an interest in the real estate.  In some cases, where there continues to be an existing mortgage on the real estate, I suspect that the lender will have to give a partial release of mortgage as to the manufactured home only, in order to allow an attorney to provide the required title opinion.

This procedure for separating the “merged” manufactured home from the real estate title is unlikely to be used very often—but will be available if needed.

5. Commissioner’s Bill Includes Several Miscellaneous Changes

This year’s House Bill 1543 (the “Bank Commissioner’s Bill”) makes several relatively small changes to the Banking Code.  I will discuss two of them.  

1. ILC Branching

Perhaps the most significant change from the standpoint of bankers is an amendment to 6 O.S. Section 501.2 (the branching statute).  This is not really a change from what has existed in the past, but rather an effort to prevent unfavorable structural changes in the future, mixing banking and commerce.

Effective January 1, 2008, Section 501.2 is amended to prohibit a bank, savings association, industrial loan company, or industrial bank from establishing or maintaining a branch in this state “on the premises or property of an affiliate if the affiliate engages in commercial activities.” Last year Wal-Mart applied to the FDIC for permission to own an industrial loan company (ILC) that would be able to engage in various banking services.  The fear by many bankers was that this authority could be used to open branches in Wal-Mart locations throughout the country, although Wal-Mart denied that intent.  After FDIC and then Congress imposed temporary moratoriums on approval of ILC applications, Wal-Mart withdrew its application.  Home Depot, however, has an ILC application still pending (halted by moratorium) and other retailers may have similar plans.

Because of provisions in federal law, a state must treat all types of financial institutions alike from a standpoint of branching restrictions–treating banks and S & L’s in the same manner as ILC’s, for example. Under the new restriction in Section 501.2, a retail company or other commercial business will be barred from opening an ILC branch on its premises; however, any bank or S & L in Oklahoma will also be prevented from opening a branch in a commercial establishment owned by the same person or company controlling the financial institution.

“Commercial activities” include any activity that a bank cannot legally engage in, either directly or through a subsidiary.

2.  Public Welfare Investments

Based on 6 O.S. Section 402(18) (part of the Oklahoma Banking Code), a state-chartered bank is allowed to invest up to 10% of its capital in “public welfare” investments.  This limitation is the same that applied to national banks until 2006, when the national bank limit became 15% of capital.

The amendment to Section 402(18)—effective January 1, 2008–allows state-chartered banks to invest 15% of capital in “public welfare” investments—the same amount now allowed for national banks.  (Unless FDIC grants special permission, a state-chartered bank cannot engage in activities except to the extent that a national bank may do so.)

The actual amended language allows state-chartered banks to “make investments [up to 15% of capital] designed primarily to promote the public welfare, including the welfare of low- and moderate-income communities or families, such as by providing housing, services, or jobs.” Such an investment cannot expose the bank to unlimited liability.

A 26-page “Community Development Investment Guide” is available on the FDIC website at www.fdic.gov/consumers/community/investmentguide.pdf and is helpful in understanding what types of investment are permitted–and whether they also qualify for CRA credit.