TAG Program Extended Through December 31, 2010
Mortgage Loan Officers Not Exempt Under FLSA According to New DOL Interpretation
Banks’ Right of Setoff vs. Federal Exemption for Social Security and Other Exempt Federal Benefits – Which Wins?
S.A.F.E. Act Update
Compliance Dates Roundup
TAG Program Extended Through December 31, 2010
Note: If your bank is not a current participant in the TAG Program, this announcement does not affect you as there are no “opt-in” provisions.
In some good news, the FDIC adopted an interim rule on April 13, 2010, offering banks that are enrolled in the Transaction Account Guarantee (TAG) Program the opportunity to continue in the program for at least an additional six months beyond the previously slated termination of the program, from June 30 to Dec. 31, 2010. In addition, the FDIC Board may extend the program by as much as an additional 12 months without any additional rulemaking under the interim rule.
The interim rule was unusual in that while the rule allowed for comments to be received, it also contained a deadline of April 30, 2010 for banks that already participated in the TAG Program to opt out of the extension. Hopefully, all OBA Members who participate in the TAG Program were made aware of this. We sent out an Oklahoma Banker Direct update to try to make sure everyone had notice of this prior to the deadline. It is possible that the FDIC could somehow modify the interim rule, but unlikely under the circumstances. Several important changes were made by the interim rule. These include:
Program Extended for 6 Month with another 12 Months Extension Possible without further rulemaking. The TAG program is extended through December 31, 2010. In addition, the interim rule gives the FDIC Board the authority to further extend the program by as much as an additional year, without having to go through any additional rulemaking. The FDIC Board just has to say it is so. Importantly, if the Board elects to extend the program beyond December 31, 2010, participating banks will likely not have another opportunity to opt out at that time, unless changes are made to the interim rule.
Assessment rates unchanged, but reporting changed to average daily balance. Assessment rates during the program extension are unchanged from the current 15 to 25 basis points, based upon the bank’s deposit insurance assessment risk category. However, to date the assessments have been calculated by using account balances as of the end of each calendar quarter. Under the interim rule, beginning July 1, 2010, banks must report their TAG amounts as average daily balance amounts. The amounts to be reported as daily averages are the total dollar amount of the noninterest-bearing transactions accounts of more than $250,000 for each calendar day during the quarter divided by the number of calendar days in the quarter. For weekend days and holidays, the amounts from the previous business day would be used.
Maximum rate of interest payable reduced from 0.50 percent to 0.25 percent. Although the TAG Program is ostensibly designed to guarantee “non-interest bearing accounts,” since its inception the TAG program has defined “non-interest bearing” accounts to include NOW accounts with interest rates of no higher than 0.50 percent. Banks that wanted to cover their NOW accounts under the TAG Program had to be committed to maintain their interest rate on such qualifying NOW accounts at a rate not exceeding 0.50% through the duration of the TAG Program.
Presumably due to market forces on interest rates, the interim rule provides that beginning July 1, in order for a NOW account to continue to be covered under the TAG program, the maximum interest rate that can be paid will be 0.25 percent. Banks that wish to continue to cover their NOW accounts under the TAG program are committing to maintain the interest rate at or below 0.25 percent through the remainder of the extended program, potentially through December 31, 2011. If your bank is forced to reduce its interest rates on its NOW accounts in order to maintain participation in the TAG program, you may need to provide new disclosures to consumers under the Truth in Savings Act.
NOTE: The interim rule seems to indicate that a bank may offer both TAG-qualifying and non-qualifying NOW accounts. If this is the case, a bank should be especially careful to provide appropriate disclosures in order to avoid consumer confusion.
New lobby notice requirements. All banks that are currently participating in the TAG Program will have to post new notices in their branches relating to the TAG Program, whether they opted out of the program extension or not. Those that did not opt out must modify their in-bank notice on or before May 20, 2010, to reflect December 31, 2010 as the termination date for the TAG program. Banks that choose to opt out must also modify their in-bank notice on or before May 20, 2010, to inform customers and depositors that, beginning on July 1, 2010, they will no longer participate in the TAG program and the deposits in noninterest-bearing transaction accounts will no longer be guaranteed in full by the FDIC. For specific direction on what the lobby notices should provide, go to 12 C.F.R. § 370.5(h)(5)(i).
Mortgage Loan Officers Not Exempt Under FLSA According to New DOL Interpretation
Byron’s Quick Hit: If your bank employs mortgage loan officers and pays them on a salary basis, a new interpretation letter issued by the Department of Labor may open your bank up to potential liability for failure to pay overtime. Banks should take immediate action to evaluate their employees’ job duties in light of this development.
The U.S. Department of Labor issued a significant Administrator’s Interpretation on March 24, 2010. Administrator’s Interpretation No. 2010-1 (the “Interpretation No. 2010-1”) can be found at http://www.dol.gov/WHD/opinion/adminIntrprtn/FLSA/2010/FLSAAI2010_1.pdf. Interpretation No. 2010-1 is significant because for the first time it states as the official position of the U.S. Department of Labor that:
[E]mployees who perform the typical job duties of a mortgage loan officer … do not qualify as bona fide administrative employees exempt under section 13(a) of the Fair Labor Standards Act, 29 U.S.C. § 213(a)(1).
This conclusion appears to be in direct conflict to U.S. Department of Labor Administrator Interpretation, FLSA2006-31, issued September 8, 2006. In fact the new Interpretation No. 2010-1 goes so far as to withdraw FLSA2006-31.
Basics of the FLSA
The Fair Labor Standards Act of 1938 is codified at 29 U.S.C. §§ 201, et seq. Although the FLSA contains numerous provisions, including the federal minimum wage and child labor provisions, it is frequently invoked to require employers to pay overtime pay for its employees that work more than 40 hours per week. In general, employers are required to pay their employees at one and one-half times their regular hourly rate for all hours actually worked over 40 hours, unless an employer may treat a particular employee or class of employees as “exempt” from the overtime provisions of the FLSA. Thus, frequent distinctions are made between “exempt employees” (those who employers DO NOT have to pay overtime pay) and “non-exempt employees.”
There are several exemptions that employers may rely upon to consider a particular employee exempt from the FLSA. For purposes of employees of financial institutions, the provision that can be invoked by the financial institution most often in order to avoid paying overtime is often referred to as the “administrative exemption,” contained at 29 U.S.C. § 213(a)(1). This provision provides an exemption for:
any employee employed in a bona fide executive, administrative, or professional capacity … except that an employee of a retail or service establishment shall not be excluded from the definition of employee employed in a bona fide executive or administrative capacity because of the number of hours in his workweek which he devotes to activities not directly or closely related to the performance of executive or administrative activities, if less than 40 per centum of his hours worked in the workweek are devoted to such activities…
Issuance of 29 C.F.R. § 541.203(b)
In 2004, the Department of Labor issued implementing regulations under the FLSA. 29 C.F.R. § 541.203(b) specifically addressed application of the administrative exemption contained at 29 U.S.C. § 213(a)(1) in the context of the financial services industry. 29 C.F.R. § 541.203(b) provides:
Employees in the financial services industry generally meet the duties requirements for the administrative exemption if their duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.
A review of the statute and regulation providing for the administrative exemption reveals a dichotomy between employees whose principal responsibilities boil down to “selling financial products” versus “collecting, analyzing, advising and marketing.” Those who are primarily in product sales tend to be non-exempt. Those who perform higher level functions of collecting, analyzing, advising and marketing can be considered exempt.
As mentioned above, in 2006, the Department of Labor issued Administrator Interpretation FLSA2006-31. FLSA2006-31 tackled the issue of the application of the administrative exemption to “mortgage loan officers.” FLSA2006-31 was generally seen as favorable to bank employers, seemingly sanctioning treating many mortgage loan officers as exempt from the overtime requirements of the FLSA. FLSA2006-31 concluded, “[I]t is our opinion that the mortgage loan officers you describe are exempt administrative employees.”
The characteristics of the mortgage loan officers described in FLSA2006-31 included the following: (1) they spend the majority of their working time inside the employer’s place of business; (2) they are not spending the majority of their time prospecting for potential customers who have not previously expressed an interest in obtaining information about a mortgage loan; (3) they are not simply “loan processors” who coordinate appraisals and review paperwork; (4) they work with the employer’s customers to assist them in identifying and securing a mortgage loan that is appropriate for their individual financial circumstances and is designed to help them achieve their financial goals, including home ownership; (5) despite having technological tools to help evaluate whether the customer qualifies for a particular loan, such tools do not substitute for the discretion and judgment of the loan officer, and the loan officer remains responsible for recommending the best products for the customer; (6) despite exercising “customer-specific persuasive sales activity,” they spent less than 50% of their working time on such activities; and (7) the loan officers earn at least $455 per week ($455 is the minimum amount prescribed by regulation in order for an employee to qualify as non-exempt).
The assumptions listed above regarding applicability of the administrative exemption are somewhat rosy. FLSA2006-31 was also careful to point out the limited application of the interpretation under any different set of circumstances. The caselaw history surrounding the administrative exemption in the context of mortgage loan officers had led to very mixed results, with courts often finding in favor of the employee, determining that the employee was not exempt and that overtime wages were owed.
Caselaw Following FLSA2006-31
Despite the positive conclusion of FLSA2006-31 and banks’ reliance on that interpretation to support the position that many or most loan officers should be considered exempt under the FLSA, subsequent court decisions have not always found in favor of banks seeking to avoid paying overtime. For example, in Davis v. J.P. Morgan Chase & Co., 587 F.3d 529 (2nd Cir. 2009), the court held that a bank employee who functioned as an underwriter, evaluating whether to issue loans to individual applicants was not exempt from the FLSA, as his work constituted “production” of loans.
Significantly, the employee in Davis’s activities were largely governed under a printed “credit guide.” The credit guide essentially determined the outcome as to whether an applicant qualified for a loan. The Davis court stated:
As an underwriter, [the employee’s] primary duty was to sell loan products under the detailed directions of the Credit Guide. There is no indication that underwriters were expected to advise customers as to what loan products best met their needs and abilities…
We conclude that the job of underwriter as it was performed at [the bank] falls under the category of production rather than administrative work.
DOL Administrator’s Interpretation No. 2010-1
Interpretation No. 2010-1 is a significant development. It determined that a “typical” mortgage loan officer does not qualify for the administrative exemption to the FLSA. In reaching this decision, Interpretation No. 2010-1 defined “typical mortgage loan officer job duties” as follows: (1) the mortgage loan officer receives internal leads and contacts potential customers or receives contacts from customers generated by direct mail or other marketing activities; (2) he collects required financial information from customers he contacts or who contact him, including running credit reports; (3) he enters the collected financial information into a computer program that identifies which loan products may be offered to customers based on the information provided; (4) he assesses the loan products identified and discusses the terms and conditions of particular loan products with the customers, trying to match the customers’ needs with one of the company’s loan products; and (5) mortgage loan officers also compile customer documents for forwarding to an underwriter or loan processor, and may finalize documents for closing.
Given these assumptions, Interpretation No. 2010-1 focused on the “production versus administrative dichotomy.” The Letter states:
[T]he administrative exemption is “limited to those employees whose primary duty relates ‘to the administrative as distinguished from the production operations of the business.’” … This “production versus administrative” dichotomy is intended to distinguish “between work related to the goods and services which constitute the business’ marketplace offerings and work which contributes to ‘running the business itself.’”
Interpretation No. 2010-1 reasoned that the typical mortgage loan originator’s primary duty is to make sales. In reaching this determination, the Letter pointed to factors including the fact that MLOs are often paid partially or entirely based upon sales commissions. This determination led to the determination that MLOs “perform the production work of their employers.” Interpretation No. 2010-1 concludes:
Thus, a careful examination of the law as applied to the mortgage loan officers’ duties demonstrates that their primary duty is making sales, and therefore, mortgage loan officers perform the production work of their employers. … The typical job duties of a mortgage loan officer comprise a financial services business’ marketplace offerings, the selling of loan products.
Why Administrator’s Interpretation No. 2010-1 Is Important
The general tone of Interpretation No. 2010-1 is in stark contrast to FLSA2006-31. Rather than leading the reader to infer that there may be many, perhaps most of the situations where a mortgage loan officer will qualify as an exempt employee, Interpretation No. 2010-1 leads the reader to believe that in the vast majority of situations, a mortgage loan officer should not be considered exempt. The contrasts in these two interpretations are more than can be reasoned away by simply distinguishing the sets of assumptions made in each. Interpretation No. 2010-1 recognizes this, and explicitly withdraws FLSA2006-31, stating:
Because of its misleading assumption and selective and narrow analysis, Opinion Letter FLSA2006-31 does not comport with this interpretive guidance and is withdrawn.
So where does that leave financial institutions? Clearly, any particular employee may qualify as exempt, depending on the employee’s specific functions and job duties. Both FLSA2006-31 and Interpretation 2010-1 make it clear that whether a particular employee is exempt must always be determined on a case-by-case basis. However, FLSA2006-31 offered important protection to employers, in that employers could reasonably rely upon it for guidance, and thereby avoid penalties under the FLSA for acting in bad faith.
One example of this is Henry v. Quicken Loans Inc., 2009 WL 3270768 (E.D. Mich. 2009). Henry involved numerous employees who were employed as “loan consultants” at a call center. Although the Henry court distinguished the facts in that case from the assumptions made in FLSA2006-31, the Henry court granted a motion for summary judgment in favor of the financial service company on the plaintiffs’ claims of bad faith. The Henry court stated:
Because the 2006 Opinion Letter addressed the same industry and the same classification decision at issue in this litigation, … no reasonable fact finder could conclude that [the defendant’s] position that it acted in conformity with the DOL 2006 Letter was not plausible.
Id., at *16.
Thus, the withdrawal of FLSA2006-31 is important because it could lead to more charges against financial institutions that their failure to pay overtime was done willfully, thus subjecting them to potential liability over and above the actual overtime not paid, including possible criminal penalties under 29 U.S.C. § 216. Clearly, until Interpretation 2010-1 was issued, employers in many cases could reasonably rely upon this interpretation in formulating their employment policies. Now that FLSA2006-31, financial employers will need to carefully evaluate their employment practices relating to mortgage loan officers.
What Should Banks Do Now?
Any bank that employs mortgage loan representatives, mortgage loan consultants, mortgage loan originators, or mortgage loan officers should take swift action to evaluate the application of Interpretation 2010-1 to the job duties and responsibilities of their employees. Banks that have been relying upon FLSA2006-31 can no longer do so. Unlike most of the regulatory changes that come down the pike, the application of Interpretation 2010-1 and the withdrawal of FLSA2006-31 takes effect immediately. Your bank should document what considerations were made. If you determine that it is necessary to treat your mortgage loan officers as non-exempt, you should take steps to begin tracking their hours and plan on paying them accordingly.
Banks’ Right of Setoff vs. Federal Exemption for Social Security and Other Exempt Federal Benefits – Which Wins?
Byron’s Quick Hit: Oklahoma banks enjoy a statutorily recognized right to setoff obligations that a customer owes a bank against the bank’s obligation to repay amounts deposited in an account by the same customer. However, this right arguably comes into conflict with federal provisions that provide that Social Security and other federal benefits are protected from collection efforts. This article considers the status of the law in this area.
I recently had a phone call discussing whether the bank in question was authorized to collect a negative balance on an account that received direct deposit of social security benefits. (Note to readers: Your calls are a frequent inspiration for articles here). In researching this topic, I found out that this topic has not been covered here in any detail since the October 1999 Legal Update. Moreover, there have been important caselaw developments that shed new light on this important issue.
What Is the Right of Setoff?
The right of setoff (this compound word sometimes has the words placed in the opposite order and is referred to as “offset”) is an equitable right that exists in many situations. Generally, the right of setoff is used so that as between two parties, if party 1 owes money to party 2, party 2 may be allowed to subtract a separate debt that party 1 owes to party 2. This equitable right is often recognized even in the absence of specific statutory authority.
In the context of a bank and its customers, the bank owes a debt to its depository customer for the funds the customer has deposited. At the same time, the customer will normally have payment obligations back to the bank pursuant to the deposit agreement, including, for example, monthly account fees, overdraft fees, etc. When the bank covers items for which the customer does not have sufficient funds on deposit, the negative balance on the account represents an obligation of the account holder. In addition to the situation where the obligations of the bank and the customer relate to the same deposit account, i.e., funds on deposit versus fees associated with the same deposit account, a customer may have other payment obligations to a bank where it has a deposit account, such as a loan or personal guarantee.
In Oklahoma, a bank’s right of setoff has specific statutory authority. A bank’s right of setoff is set out at 42 Okla. Stat. § 32, which states:
A banker has a general lien, dependent on possession, upon all property in his hands belonging to a customer, for the balance due to him from such customer in the course of the business.
Although the above statute appears in Title 42, which is the statutory title on Liens, and is described in the statute itself as a lien, several Oklahoma cases have recognized that 42 Okla. Stat. § 32 is simply a statement of a bank’s right of setoff. See, e.g., Ingram v. Liberty Nat’l Bank & Trust, 533 P.2d 975 (Okla. 1975) (stating “The statute uses the term ‘lien.’ This is not an accurate description of the right given a bank to apply deposits of its customer to the payment of a debt due it by the depositor. The money deposited is no longer the property of the depositor, but becomes the property of the bank, and the bank becomes debtor to the depositor. This right of a bank is more accurately a right of set-off for it rests upon, and is co-extensive with, the right to set-off as to mutual demands.”)
Federal Protection Provided to Social Security and Other Federal Benefits
Most anyone reading this article has seen a garnishment summons issued to their bank related to one of their customers. If you have, you may have noticed that one of the forms that you are required to give your account holder after receiving a garnishment summons is a list of claims for exemption that the account holder may be able to claim. Although there are many exemptions from garnishment, several are provided by federal law. Under federal law, Social Security benefits, SSI benefits, VA benefits, Federal Railroad Retirement benefits, Federal Railroad unemployment and sickness benefits, Civil Service Retirement System benefits and Federal Employees Retirement System benefits are protected from garnishment and the claims of judgment creditors. By far, the most frequently used claim for exemption among these is Social Security benefits. To the extent that these provisions conflict with state law (for example, Oklahoma’s statutory banker’s lien), federal law will control.
Section 207 of the Social Security Act [42 U.S.C. § 407] provides that Social Security benefits are not “subject to execution, levy, attachment, garnishment, or other legal process.” Similarly, VA benefits are exempt in most cases from “attachment, levy, or seizure by or under any legal or equitable process whatever, either before or after receipt [of the benefits] by the beneficiary.” See 38 U.S.C. § 5301(a)(1).
An important and ongoing struggle persists between a bank’s right of setoff and the protection afforded by federal law for these federal benefits. Specifically, courts have struggled with whether the right of setoff falls within the statutory prohibitions against “execution, levy, attachment, garnishment, or other legal process.”
Tom v. First American Credit Union – Still the Last Word from the Tenth Circuit
As mentioned above, the last time this topic was treated in depth was by former OBA General Counsel Charles Cheatham in the October 1999 Legal Update. Ironically, the case that was the primary focus of that article, Tom v. First American Credit Union, 151 F.3d 1289 (10th Cir. 1998), remains the last word on the topic from the United States Court of Appeals for the Tenth Circuit. Oklahoma is part of the Tenth Circuit. As such, on questions of federal law, a decision of the Tenth Circuit represents binding authority in Oklahoma, unless a contrary finding comes at a later time from the Tenth Circuit or the United States Supreme Court.
Tom involved a pledge of deposits to secure a loan that was made by a credit union. In the Tom case, the credit union had a provision in its Revolving Credit Plan Agreement which pledged all deposits and earnings thereon “as security for any and all moneys advanced” by the credit union, and gave the credit union the right to set off those deposits to satisfy debt. The Tom Court described the arrangement as a “contractual right to setoff.”
The Tom interpreted the provisions of the Social Security Act quoted above that provides, “The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process . . .” The issue addressed was whether a bank exercising a right of setoff violated this provision of the Social Security Act.
The credit union argued that the Social Security provision prohibits use of “legal process” but should not prohibit a credit union from using setoff to collect debts if no use is made of the court system. However, the Tom case DISAGREED with the credit union. The Tom court reasoned that there was no reason to differentiate between creditors who use the court system and those who devise methods of collecting debts outside of the court system “through procedures that afford less protection” than the court system does.
The court in the Tom case found that the bank’s exercise of its right of setoff fell within the meaning of “other legal process” as used in 42 U.S.C. § 407. As a second issue, the court considered whether the credit union’s contractual right of setoff also violated the anti-assignment provision of the Civil Service Retirement Act (because the account holder also had certain civil service retirement payments in her same deposit account). The relevant provision, at 5 U.S.C. Section 8346(a), states that civil service retirement benefits “are not assignable, either in law or equity . . . or subject to execution, levy, attachment, garnishment, or other legal process, except as otherwise provided by Federal laws.” The court found no rationale for treating civil service pension payments any differently from Social Security payments. Accordingly, the court held that any pledge or attempted setoff with respect to civil service retirement benefits was also void.
Despite the fact that Tom remains the last word on this topic from the Tenth Circuit, there have been significant caselaw developments that draw the conclusions reached by the Tenth Circuit into question.
Washington v. Keffeler
Although it does not involve a bank’s exercise of setoff, a very important case affecting the holding in Tom is Washington Dept. of Social and Health Serv. v. Keffeler, 123 S. Ct. 1017 (2003). In Keffeler, the United States Supreme Court considered whether a state agency (Washington’s equivalent of Department of Human Services) violated the same Social Security Act prohibition on garnishment or assignment considered in the Tom case when it reimbursed itself out of accounts it held as representative payee for the benefit of children in foster care. Under Washington’s foster care scheme, the state was entitled to reimbursement for expenditures made on the foster care children’s behalf.
The Keffeler court held that the state of Washington’s actions did not violate the Social Security Act. As in Tom, the plaintiffs argued that taking the funds held in the representative payee accounts (which no doubt were social security benefits) violated the statutory prohibition on “execution, levy, attachment, garnishment, or other legal process.” In contrast to the Tom court, the Supreme Court found that the phrase “other legal process” had to be something more than appeared in that case. The Supreme Court stated:
“[O]ther legal process” should be understood to be process much like the process of execution, levy, attachment and garnishment, and at a minimum, would seem to require utilization of some judicial or quiasi-judicial mechanism, though not necessarily an elaborate one, by which control over property passes from one person to another in order to discharge or secure discharge of an allegedly existing or anticipated liability.
Id., at 1026.
Despite its importance and coming to a contrary conclusion reached in Tom regarding application of the same statutory language, Keffeler does not overrule the Tom decision (indeed, Tom is not even cited in Keffeler) and does not rule directly in favor of a financial institution. However, I think a strong argument can be made that Keffeler requires that a court re-considering the same facts as in Tom should come to the opposite conclusion.
What Should Banks Do Now?
Unfortunately, the holding in Tom cannot be completely ignored. Unless the issue is reconsidered by the Tenth Circuit or a case interpreting the same issue as considered in Tom is issued from the Supreme Court, banks must exercise caution when exercising the right of setoff with accounts that receive Social Security and other protected federal benefits. However, I do think in light of Keffeler, banks have some additional latitude in protecting their rights. Here are a few general statements that may affect how your bank chooses to deal with accounts receiving such funds:
1. Setoff Is Not a Bank’s Only Remedy. Even if the holding in Tom is assumed to be fully operational, one thing that decision does not do is prohibit a bank from exercising other rights it may have. For example, if a bank is owed funds pursuant to an account agreement, including monthly fees, NSF fees, etc., the bank does not lose those rights just because it cannot exercise the right of setoff. Further, where an account holder has obligations to the bank that are unrelated to an account, e.g., an automobile or home loan, a bank is in no way prohibited from taking actions other than setoff, including, if appropriate, repossession and/or foreclosure of a mortgage.
2. Banks Have a Stronger Argument for Exercising Setoff Related to Standard Account Fees, as Opposed to Overdrafts and Unrelated Loans. One aspect of Tom that was unique is that it involved a bank’s attempts to collect the amounts that were overdrafted by the account holder. In effect, an overdraft is equivalent to a loan to your customer. In contrast, if an account holder is obliged to pay a monthly account fee, that fee is something that the account holder has agreed to pay and is not a loan. The Tom court was careful to point out that the issue of account fees may be treated differently.
3. Banks Should Consider Treating Representative Payee Accounts With More Caution. Representative Payee accounts are a unique creature. The beneficiary of the account technically owns the funds in the account. However, the beneficiary has no authority to deal with the funds in the account. That power is instead entrusted to the Representative Payee. One of the special features of such an account is that the funds that are deposited in such accounts should be exclusively social security benefits, and should not be comingled with funds belonging to the Representative Payee and should not be comingled with other funds belonging to the beneficiary. Thus, as a general rule, funds in a Representative Payee account should always be funds that are arguably exempt from execution. By contrast, an individual who has a standard checking or savings account into which she receives social security benefits will often have mixed social security benefits with other sources of funds. I do not believe it is the bank’s job to decipher what dollars in an account are social security benefits versus other, clearly non-exempt funds. In the instance where an account holder objects after the fact to a bank exercising its right of setoff, it will often times make sense to work with the customer to determine if the funds were in fact social security or other exempt funds and consider reversing the seizure of such funds.
4. When Push Comes to Shove, Your Bank May Decide to Setoff. There are times where an exercise of a bank’s right of setoff is the only way that the bank is ever going to realize any funds on a particular debt. In those instances, banks should carefully consider the facts and circumstances and decide whether exercising its right to setoff is worth the risk of ill will from the customer and possible litigation. Given the Supreme Court’s Keffeler decision, a strong argument can be made that a bank is not violating the law.
S.A.F.E. Act Update
There has been little activity about registration for mortgage loan originators (“MLOs”) since this topic was last covered in the December 2009 Legal Update. Unfortunately, we are still not at the end of this process. The good news has always been that MLOs that are employed by Oklahoma banks would be exempt from registration under the more onerous provisions of the Oklahoma SAFE Act, so long as they were registered under the federal registry. The bad news is that the federal registry is still not available. This creates a potential gap in the exemption provided by the Oklahoma SAFE Act, because in order to qualify for the exemption the MLO has to register under the federal registry. Further, licensing under the Oklahoma SAFE Act would otherwise be required by July 31, 2010.
I recently reached out to the Roy John Martin, General Counsel for the Oklahoma Department of Consumer Credit, to confirm that despite the fact that the federal registry is not yet available, MLOs that work for Oklahoma banks are not subject to the Oklahoma SAFE Act. Mr. Martin was kind enough to confirm that: “Even though the federal registration system is not available at this time, loan originators employed by banks are not required to obtain a license from the Department of Consumer Credit.” Although I would rather the statute did not contain this potential lapse in coverage, this statement goes a long way toward making me comfortable advising Oklahoma banks that they can wait until the federal registry comes on line to do anything about registering under the SAFE Act.
Compliance Dates Roundup
4/1/2010 – Escrow Required for HPML Applications Received after April 1 (except manufactured housing) (See September 2009 Legal Update)
5/20/2010 – Deadline for banks participating in TAG Program to update in-bank notices relating to TAG Program extension (NOTE: This applies to all participating banks, not just those that opted out on or before 4/30/2010).
7/1/2010 – Deadline to comply with new Reg E Opt-in Requirement for Overdraft Protection for ATM and One-Time Debit Card Transactions (See December 2009 Legal Update)
7/1/2010 – Deadline to comply with new regulations under Fair and Accurate Credit Transactions Act (“FACT Act”) (See March 2010 Legal Update)
Deadline to Comply with Changes to Reg AA (under Unfair and Deceptive Acts or Practices (UDAP), dealing with marketing and account management of credit cards) Note: Previously published final rule amending Reg AA has been RESCINDED. These changes are now incorporated in the Changes to Reg Z relating to credit cards.