Thursday, May 23, 2024

June 2010 Legal Update

Clarifications Made to Reg E Regarding Restrictions on Overdraft Charges on ATM and One-Time Debit Card Transactions Further Revisions to Reg E (Overdraft Protection)

HIRE Act Provides Tax Incentives to Employers to Hire in 2010
FDIC Issues Guidance for Periods of Lapse of Flood Insurance Authority
Executive Order 13496 Requires Posting of Notice of Employees Right to Organize by June 21, 2010 – Affects Some Banks
Using a “Mark” as a Signature, What Is Required and What Risks Are There to the Bank?

Clarifications Made to Reg E Regarding Restrictions on Overdraft Charges on ATM and One-Time Debit Card Transactions

Byron’s Quick Hit: Readers are no doubt aware of the overdraft restrictions for ATM and one-time debit card transactions that go into effect on July 1. The previous final rule contained some inaccuracies and in one important instance, simply provided something the Federal Reserve did not intend. In a new final rule, Reg E is again amended to make some important changes. The new final rule clarifies that for ATM and one-time debit card transactions, banks will not ever be able to charge an overdraft fee unless its customers has opted in. The new final rule makes further clarifications as well.
                Readers of the Legal Update are no doubt aware of important new restrictions made to the ability of banks to charge overdraft charges on ATM and One-Time Debit Card Transactions that go into effect on July 1, 2010. An article discussing the Final Rule dated November 12, 2009 can be found in the December 2009 Legal Update. In general, 12 C.F.R. § 205.17 requires that all consumer customers (new and existing) must “opt in” to overdraft protection in order for banks to charge overdraft fees for ATM overdrafts and “one-time” debit card transactions. Customers that opt in must also be given the continuous right to opt out. In addition, the rule prohibits “bundling” of the opt-in for ATM and one-time debit card overdraft services for checks and other transactions, i.e., ATM and one-time debit card transactions must get their own, independent opt-in. A new final rule was published on June 4, 2010 at 75 F.R. 31665, making further revisions to Reg E “to clarify certain aspects of the [November 12, 2009] Regulation E final rule.” Interestingly, Section 205.17 is effective under the November 12, 2009 on July 1, 2010. However the revisions described herein do not become effective until July 6, 2010. Practically speaking, it makes sense for banks to incorporate the changes described here effective July 1.
Deletion of Section 205.17(b)(4)
                As noted in the December 2009 Legal Update, there was only one notable exception to the opt-in requirement, under which banks arguably could charge an overdraft charge without obtaining a customer’s opt-in, at Section 205.17(b)(4), which states:
The requirements of § 205.17(b)(1) do not apply to an institution that has a policy and practice of declining to authorize and pay any ATM or one-time debit card transactions when the institution has a reasonable belief at the time of the authorization request that the consumer does not have sufficient funds available to cover the transaction. …
                Thus, in the December 2009 Legal Update, this author determined that:
Thus, where a bank elects to simply decline approval of transactions that it knows will take an account into overdraft, it does not have to obtain a customer’s opt-in. In that context, if the bank were to have a transaction that when authorization was given, the bank had a good-faith belief the transaction would not take the account into overdraft, if between the authorization and actual posting of the item the account became overdrafted, the bank could charge an overdraft fee for such transaction. Further, the regulation makes clear that banks can apply this exception on an account-by-account basis.
Although, the above conclusion was the only one that could be reached from the regulatory language, this evidently is not what the Federal Reserve Board intended. Thus, in the newly published final rule, the Federal Reserve Board pointed out that this issue had been frequently raised and the result which I hypothesized above was not their intention. As a result, the newly published final rule deletes Section 205.17(b)(4).
                The new final rule offers further clarifications to Section 205.17(b)(1) to clearly indicate that banks are not required to obtain an opt-in from any customer. Rather, banks that do not obtain an opt-in from their customers will in all cases be prohibited from charging an overdraft fee for an ATM transaction or one-time debit card transaction that drives their customer’s account balance negative. Thus, the Official Staff Interpretations have been revised to provide, in part:
[A financial] institution is not required to comply with … the notice and opt-in requirements [of § 205.17(b)(1)(i)-(iv)], if it does not assess overdraft fees for paying ATM or one-time debit card transactions that overdraw the consumer’s account. Assume an institution does not provide an opt-in notice, but authorizes an ATM or one-time debit card transaction on the reasonable belief that the consumer has sufficient funds in the account to cover the transaction. If, at settlement, the consumer has insufficient funds in the account (for example, due to intervening transactions that post to the consumer’s account), the institution is not permitted to assess an overdraft fee or charge for paying that transaction.
                In my opinion, this change is fundamentally unfair to banks that do not offer true “overdraft protection.” Many banks for years have had a policy and practice of simply declining ATM/debit card transactions that they know would take their customer’s account into overdraft status. However, it is an all-too-common circumstance that an ATM or debit card transaction that is approved on the basis of funds available at the time the transaction is approved may take one or more days to post to an account. Because of charges that have posted in the interim period, the account will be taken negative. Yet, because the bank has approved the transaction, they are contractually bound to pay it. This revision makes it clear that your bank will not be able to collect an overdraft fee in this circumstance, unless your customer has opted in. At the same time, a customer that is aware that the bank must pay such transactions will have no incentive to opt in, as the bank will be required to pay the transaction anyway.
                This change will give many banks an incentive to offer true overdraft protection for the first time. Alternatively, banks that wish to be compensated for paying their customers overdrafts may be forced to adopt expensive upgrades whereby ATM and debit card transactions will post immediately upon presentment.
Other Changes
                Several other clarifications were made by the new final rule. These modifications to the Official Staff Interpretations include:
(1) a change to reflect that margin credit is exempt from the definition of “overdraft service” under Section 205.17(a)(3);
(2) a change to reflect that overdraft fees may only be charged AFTER the bank has mailed or delivered confirmation of a customer’s opt in;
(3) a clarification to the application of the new rule to situations where a bank charges different overdraft fee amounts based upon the amount of the outstanding negative balance. In this regard, the rule reflects that although a bank is prohibited from charging an escalating fee where ALL of the charges relate to ATM and one-time debit card transactions for which the customer has not opted in, where an outstanding negative balance relates to a combination of both allowed overdraft fees (for example, for checks and ACH transactions) and non-allowed ATM and one-time debit card transactions, the bank may include the negative balance from the ATM/debit card transactions when calculating the allowable fee for allowable overdraft charges (on checks, ACH transactions, etc.);
(4) similar to the previous point, for banks that charge a per diem late charge, banks are not prohibited from including the negative balance from ATM/debit card transactions if such amounts are combined with chargeable transactions, such as checks and ACH transactions; and
(5) revisions to the commentary regarding the format of the Model Form A-9.
HIRE Act Provides Tax Incentives to Employers to Hire in 2010
Byron’s Quick Hit: In an effort to stimulate the U.S economy, Congress recently passed the HIRE Act. The Act provides two tax incentives for employers (including banks) to hire previously unemployed people. The incentives include an exemption for payment of the employer’s portion of a qualified employee’s social security tax (6.2% of wages) and a tax credit in 2011 for up to $1,000 for each qualified employee that is retained for 52 consecutive weeks.
                Congress has recently made various efforts to stimulate the U.S. economy. On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act into law. The HIRE Act provides direct incentives to employers to hire previously unemployed workers. These incentives include an exemption from payment of the employer’s share of social security taxes owed for every qualifying employee in 2010. In addition, employers that retain qualified employees for at least 52 weeks, may qualify for a tax credit of up to $1,000 in 2011. Banks may be surprised to find out that they may enjoy these tax advantages for employees they have already hired. In addition, this credit may offer an incentive to hire employees during 2010.
Who Are Qualified Employees?
                For purposes of the HIRE Act, “qualified employees” are individuals who (i) begin employment with a “qualified employer” between the dates of February 3, 2010 and January 1, 2011; (ii) who have been unemployed or employed for less than a total of 40 hours during the 60-day period ending on the date the new employment begins; (iii) who are not employed by the employer to replace another employee, unless the departing employee separated from employment voluntarily or was terminated for cause; and (iv) are not family member of or related in certain other ways to the employer. Taxable businesses and tax-exempt organizations are “qualified employers” under the HIRE Act.   Generally, federal, state and local government employers are not. “Qualified employees” include recently graduated students, so long as they have not been employed more than the threshold amount provided above.
Payroll Tax Exemption
                The payroll tax exemption is an exemption for the employer’s 6.2 percent share of social security tax on all wages paid to a qualifying employee from March 19, 2010 (the day after enactment of the HIRE Act) through December 31, 2010. The employee’s 6.2 percent share of social security tax and the employer and the employee’s shares of Medicare tax still apply to all wages. NOTE: The payroll tax exemption and the Work Opportunity Tax Credit (WOTC) cannot be claimed for the same employee. Employers who qualify for the WOTC can determine on an employee-by-employee basis which credit they wish to claim. 
                In order to claim the payroll tax exemption for any employee, employers must obtain a signed affidavit from each qualifying employee, stating under penalty of perjury, that he has not been employed for more than 40 hours during the 60-day period ending on the date his employment started. The IRS has issued a model affidavit in the form of IRS Form W-11 for this purpose, although employers are not required to use this form. The employer must have the signed affidavit by the time the employer files an employment tax return (IRS Form 941) applying the payroll tax exemption. If an employer has failed to claim an exemption for which it qualified (and obtained an employee affidavit in a timely manner), it can file a corrected return.
                As alluded to above, employers will claim the exemption on a newly modified IRS Form 941, Employer’s Quarterly Federal Tax Return. 
Credit for Retention of Qualified Employees Hired in 2010
                In addition to the payroll tax exemption described above, the HIRE Act also provides a business credit to encourage the retention of newly hired employees. A qualified employer may claim the credit for each qualified employee who remains an employee for 52 consecutive weeks, provided that the employee’s pay does not decrease significantly in the second half of the 52 week period. The amount of the credit is the LESSER of (i) $1,000, or (ii) 6.2% of wages paid by the employer to the retained qualified employee during the 52 week period. The credit cannot be carried back but can be carried forward. The new hire retention credit will be claimed on the employer’s 2011 income tax return.
FDIC Issues Guidance for Periods of Lapse of Flood Insurance Authority
                The National Flood Insurance Act and the Flood Disaster Protection Act of 1973, as amended (the “Flood Act”), prohibits lenders from making, increasing, extending or renewing loans secured by improved real property or a mobile home located in a special flood hazard area where federal flood insurance is available, unless the building or mobile home is covered by flood insurance. When Congress does not reauthorize the National Flood Insurance Program (NFIP), the Federal Emergency Management Agency (FEMA) cannot issue new or renewal flood insurance policies or increase coverage on existing policies. 
                Between March 28 and April 16, 2010, FEMA’s authority to issue flood insurance policies lapsed. We received several panicked calls from lenders during this period asking what to do with loans that were scheduled to close or renew. Without guidance, our default advice was generally that the letter of the law was that lenders could not close a loan for improved property in a flood zone until policies could again be issued. Following this lapse, the FDIC issued informal guidance on how to handle a future lapse of FEMA authority to issue flood insurance policies on May 7, 2010, through Financial Institution Letter 23-2010.
                Loans Can Be Made During Lapse. The FDIC answered the fundamental question of whether lenders can close on loans that are located in flood zones or renew such loans during such a lapse in flood insurance authority in the affirmative, stating “lenders are not precluded from making loans due to the lack of coverage.”
                Lenders Must Still Make Flood Determinations. During a flood insurance authority lapse, lenders must continue to make standard flood determinations and give borrower the notice of special flood hazards.
                Reauthorization of Flood Insurance May or May Not Be Retroactive. The FDIC notes that depending upon the actions of Congress, when there is a flood insurance authority lapse, when coming out of the lapse period, Congress may or may not cure the lapse of coverage retroactively to the beginning of the lapse period. The FDIC notes that lenders should ensure that borrowers understand this risk. In addition, if lenders and borrowers wish to have any hope of having retroactive coverage, they should apply for AND pay for the flood coverage during the lapse period. In the latter instance, FEMA has stated that if Congress provides retroactive flood coverage authorization, a flood insurance policy that is applied for and paid for during the lapse period will be deemed effective as of the date of application and payment. FIL-23-2010 also clarifies that flood policies that are paid for but not issued prior to the lapse of authority will have retroactive effect.
                FIL-23-2010 also notes that there may be practical issues for lenders that may affect a decision of whether to close on a property in a flood zone during an insurance authority lapse. These include (i) whether the lender is willing to take the risk of uninsured flood damage during the lapse period, (ii) whether the lender is able to sell loans on the secondary market that do not have flood insurance coverage, and (iii) whether FHA, VA and other federally guaranteed or insured loans can be made without flood coverage at closing (lenders must consult with the FHA, VA, or other federal guarantee agency to determine eligibility to close on a loan).
                Finally, if a lender closes on a loan during a flood insurance authorization lapse and coverage is not pre-purchased by the borrower at closing, the lender must ensure that flood insurance is obtained after such insurance is reauthorized. Lenders must force-place such coverage if necessary.
Executive Order 13496 Requires Posting of Notice of Employees Right to Organize by June 21, 2010 – Affects Some Banks
                President Obama signed Executive Order 13496 on January 30, 2009. This Order requires federal contractors and subcontractors to inform employees of their rights under the National Labor Relations Act (NLRA), the primary law governing relations between unions and employers in the private sector. This Executive Order is a continuation of the pro-union actions of the Obama Administration. The Order reverses Bush Administration policies that required government contractors to notify employees of their rights not to join unions. On May 20, 2010, a final rule was published at 75 F.R. 28368 by the Department of Labor (the “Final Rule”), implementing Executive Order 13496. 
Applicability to Banks
                Many banks arguably fall under the purview of the Executive Order, as interpreted by the Final Rule. This is due to the extremely broad definition of the term “government contract”, as follows:
Government contract means any agreement or modification thereof between any contracting agency and any person for the purchase, sale, or use of personal property or non-personal services. … The term “non-personal services” … includes … fund depository. …
According to a recent publication of the American Bankers Association, “employment law experts believe this rule will apply to banks that have Treasury Tax & Loan accounts with federal government agencies or that provide services related to U.S. savings bonds, or that have other types of government contracts.”
Notice Requirements
                For banks that fall within the definition of government contractor, they are required to post notices to their employees of their right to organize under the NLRA by June 21, 2010. Banks who post notices to employees electronically must also post the required notice electronically via a link to the Department of Labor-Management Standards’ Website. Whether electronic posting is required or not, all banks that are subject to the Executive Order are required to post the poster that can be downloaded at If a significant portion of employees do not speak English, the poster must also be provided in languages spoken by employees.
Penalties and Sanctions for Noncompliance
                Sanctions and penalties for noncompliance with these new requirements include (i) possible termination or suspension of the government contract; and (ii) issuance of an order of debarment, providing that one or more government agencies must refrain from entering into further government contracts, or extensions or other modifications of existing contracts.
Using a “Mark” as a Signature, What Is Required and What Risks Are There to the Bank?
                I recently received an interesting question from one of our members concerning a customer who is confined to a wheelchair and is unable to make a signature. The banker was asking what is required in order for a person’s “mark” to represent a valid and binding signature on the person. I was a little bit surprised by the results of my research.
                In the past, it was much more common for adults to be illiterate and incapable of having a regular signature. There is a long history of using a person’s mark as an effective signature. However, as the question I received indicates, this issue can have application beyond those who are illiterate.
Oklahoma’s statute on what is necessary to constitute a valid mark actually predates statehood and has remained unchanged since 1910. 25 Okla. Stat. § 26 provides in pertinent part as follows:
"signature" or "subscription" includes mark, when the person cannot write, his name being written near it, and written by a person who writes his own name as a witness. …
This statutory definition applies generally to the meaning of terms as used in the Oklahoma statutes. According to this definition, in order for a mark to be valid, the following requirements must be met: (1) the “signer” must make his mark, (2) a witness must write the name of the signer near the mark, and (3) the witness must write his own name as a witness. There is ample case law in Oklahoma for the proposition that a document that is not executed in this fashion by a person wishing to make his mark is not validly executed, even if the person making the mark intended to sign the document. In some cases, marks that were signed and notarized have been found to be effective has well. 
                However, there are more recently added provisions under the UCC that affect the validity of a mark used as a signature. 12A Okla. Stat. § 1-201(b)(37) provides:
“Signed” includes any symbol executed or adopted with present intention to adopt or accept writing.
This provision applies to the entire Uniform Commercial Code (Title 12A). Further, there is a specific provision in the UCC relating to signatures on instruments. Instruments include notes and checks. 12A Okla. Stat. § 3-401 states:
(a) A person is not liable on an instrument unless (i) the person signed the instrument, or (ii) the person is represented by an agent or representative who signed the instrument and the signature is binding on the represented person under Section 12A-3-402 of this title.
(b) A signature may be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including a trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with present intention to authenticate writing.
                On their face, the UCC provisions relating to signatures do not appear to require the more formal witness requirements of 25 Okla. Stat. § 26. The Oklahoma Comments to UCC § 3-401 recognize this change, but at the same time, raise some questions, stating:
This Section also incorporates the definition of “signed” in subsection 1-201[(b)(37)], as any “symbol executed or adopted by a person with present intention to authenticate a writing.” Notably, prior Oklahoma law required that a signature be attested by a witness, and a person who signed for an illiterate maker also had to write the signer’s own name as a witness. … Subsection [1-201(b)(37)] and Section 3-401 clarify that a complete signature is not necessary. The crucial question will be whether the person who signs using a symbol or mark has “a present intention to authenticate writing.” … However, the practitioner is cautioned to comply, when applicable, with the provisions of 25 Okla. Stat. § 26 (1910) … which require[s] a … mark to be witnessed by another. See Official Comment 2, which cautions that this Section is not intended to contradict state law in this regard.
Huh? This is quite confusing. On the one hand, this commentary indicates that at least for purposes of the UCC signature requirements by mark should be relaxed. Then it concludes by stating that the UCC provisions were not intended to contradict existing state requirements. These statements don’t really jive. So where does that leave us? Read on.
Practical Advice
1.     Typical Contracts Executed By Mark Must Be Witnessed or Notarized. One contract that banks will always enter into with its customers is the account agreement. Although the rights and obligations of the parties under the UCC may be affected by the account agreement, the agreement itself is generally not interpreted by the UCC. Thus, for account agreements, where a customer must execute by mark, a bank should make sure that the formal requirements of 25 Okla. Stat. § 26 are satisfied. A bank may, but need not necessarily, also have the customer’s signature notarized. In addition, where a disabled or illiterate customer signs other agreements that may fall within the UCC definition of an instrument (notes are a common example), it is advisable to follow the more formal requirements laid out above. This will ensure that there is no doubt concerning the customer’s signing of a note.
2.     Signature on Checks. As stated above, there is an argument that as it relates to instruments (including checks), there is not a need to have a customer’s mark witnessed. Also as noted above, there is an argument that the reverse is true and a customer’s mark is invalid unless witnessed. I personally believe the former is more likely, i.e., that a check would be deemed signed so long as the person making the mark intended to execute the check.
Checks present a challenge because the likelihood of getting a check formally witnessed is small. Banks must decide whether they are willing to live with the risk that a customer’s signature will be called into question (by the customer) because it was not properly witnessed. This risk is mitigated by a customer’s short time-frame to question items presented on his account. However, one check can represent a large potential loss to the bank.
                In addition to the possibility of a customer claiming his mark is invalid, another potential issue related to signature of checks by mark is whether the mark can be more easily forged. Forged items present a large risk of loss to a bank.
3.     Use of POAs and Authorized Signers. One practical solution to the issues raised by an illiterate or disabled customer, is the use of a power of attorney and/or appointment of an authorized signer. Having a person authorized to transact business on the account who will use a regular signature may mitigate several of the risks outlined above. Importantly, the document whereby an attorney-in-fact or authorized signer is appointed must be dully executed by the formal requirements of 25 Okla. Stat. § 26 and/or notarized.
Compliance Dates Roundup
5/20/2010 – Deadline for banks participating in TAG Program to update in-bank notices relating to TAG Program extension (See May 2010 Legal Update)
6/1/2010 – Compliance Deadline for new Reg GG (Unlawful Internet Gambling Enforcement Act (“UIGEA”) mandatory (delayed from December 1, 2009) (See November 2009 and December 2009 Legal Updates)
6/22/2010 – Deadline to Post Notice of Employees Right to Organize Under NLRA (for banks that have “government contracts”) (See This Issue)
6/30/2010 – TAG Program Expiration for Banks that Opted Out (See May 2010 Legal Update)
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 and June 2010 Legal Update)
7/1/2010 – Deadline to comply with new Reg Z Changes to Open-End Credit (See March 2010 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)
7/1/2010 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.
8/22/2010 – Certain TILA/Reg Z Credit Card Act Provisions Become Effective (including reasonableness/proportionality of penalty fees/charges and re-evaluation of rate increases) (See January 2010 Legal Update)
8/22/2010 – EFTA/Reg E Credit Card Act Provisions Restricting Certain Fees for Prepaid Gift Cards and Prohibiting Expiration Dates of Less than 5 Years Become Effective (See January 2010 Legal Update)
10/1/2010 – Deadline to Escrow for HPML Loans on Manufactured Housing (See September 2009 Legal Update)
12/31/2010 – FDIC TAG Program Expires (for banks that did not opt out in April 2010, unless program is further extended by FDIC) (See May 2010 Legal Update)