New Same-Day FedACH Service Available August 2, 2010
Beginning August 2, 2010, Federal Reserve Banks will offer a new same-day settlement service for certain ACH debit payments through the FedACH service. Banks who wish to take advantage of this service must opt in by completing a participation agreement. Participating banks may choose the extent of their participation, choosing (i) to send only, (ii) to receive only, or (iii) to send and receive same-day debit items.
Eligible ACH Transactions
The same-day service will be limited to transactions arising from (i) consumer checks converted to ACH and (ii) consumer debit transfers initiated over the Internet and phone. Internet and phone transfers include only origination of non-government debit payments and includes (1) Point-of-Purchase Entry (POP), (2) Telephone Initiated Entry (TEL), (3) Represented Check Entry (RCK), (4) Internet-Initiated Entry (WEB), (5) Accounts Receivable Entry (ARC), and (6) Back Office Conversion Entry (BOC).
Transmission and Posting Deadlines
Forward same-day debit transfers must be transmitted to FedACH by 2:00 p.m. Eastern Time in order to be processed same-day. FedACH will process the forward items and send them to the receiving institution by 4:00 p.m. Eastern Time, and these items will settle the same day at 5:00 p.m. Eastern Time.
Depository institutions will have until 4:30 p.m. Eastern Time to return same-day debit items for same-day settlement. NOTE: Although banks have the option of returning same-day items by 4:30 for same-day return settlement, they are not required to do so. Banks will have until the generally applicable return deadline specified under NACHA rules to return items. Same-day return items will be sent to the originating institutions by approximately 5:00 p.m. Eastern Time and those items will settle the same day at 5:30 p.m. Eastern Time.
For more informationabout enrolling in or the features of this service, visit: www.frbservices.org.
Avoiding Potential Pitfalls With Motor Vehicle Liens
Byron’s Quick Hit: Lenders should have systems in place to make sure that they properly and timely complete their paperwork when making motor vehicle loans to purchasers. Under the Oklahoma Vehicle License and Registration Act, lenders must file a vehicle lien entry form with the Oklahoma Tax Commission or a registered tag agent within 25 days of the creation of the lender’s security interest (i.e., the date the loan documents are signed). Further, the lien entry form should be dated the same day of the security interest. Failure to properly and timely file the lien entry form could result in a lender losing its security interest if its borrower files bankruptcy, resulting in the lender being treated as an unsecured creditor in the bankruptcy.
Unlike most non real-estate collateral, motor vehicles have certificates of title. While automobiles are considered inventory in the hands of the car dealer, once the automobile is sold to the consumer, obtaining and perfecting a security interest in a motor vehicle is not subject to the usual rules prescribed by Article 9 of the Uniform Commercial Code (“UCC”) (NOTE: For a discussion of obtaining an maintain a security interest in car dealership inventory, see the April 2010 Legal Update). Rather, obtaining and perfecting a security interest for motor vehicles is controlled by the Oklahoma Vehicle License and Registration Act [47 Okla. Stat. §§ 1101, et seq.]
As opposed to lenders who finance the inventory of a car dealership (commonly referred to as “floor plan lending”), the bank that is making a loan to the vehicle purchaser must file a lien entry form, as provided by 47 Okla. Stat. § 1110. The heart of the perfection requirements is stated as follows:
[A] security interest in a vehicle as to which a certificate of title may be properly issued by the Oklahoma Tax Commission shall be perfected only when a lien entry form, and the existing certificate of title, if any, or application for a certificate of title and manufacturer’s certificate of origin containing the name and address of the secured party and the date of the security agreement and the required fee are delivered to the Tax Commission or to a motor license agent.
As important as the means of perfecting a security interest is the TIMING. As discussed below, the failure to timely file the lien entry form can result in a lender losing its priority in its collateral and becoming an unsecured creditor. The timing requirement is set out at Section 1110(A)(2) as follows:
Whenever a person creates a security interest in a vehicle, the person shall surrender to the secured party the certificate of title or the signed application for a new certificate of title, on the form prescribed by the Tax Commission, and the manufacturer’s certificate of origin. The secured party shall deliver the lien entry form and the required lien filing fee within twenty-five (25) days as provided hereafter with certificate of title or the application for certificate of title and the manufacturer’s certificate of origin to the Tax Commission or to a motor license agent. If the lien entry form, the lien filing fee and the certificate of title or application for certificate of title and the manufacturer’s certificate of origin are delivered to the Tax Commission or to a motor license agent within twenty-five (25) days after the date of the lien entry form, perfection of the security interest shall begin from the date of the execution of the lien entry form, but otherwise, perfection of the security interest shall begin from the date of the delivery to the Tax Commission or to a motor license agent.
There is a lot of information in the above paragraph, so let’s break it down. First, upon creating a security interest in an automobile, the person who creates the security interest (the purchaser) is required to surrender either the existing certificate of title (in the case of a used car) or the signed application for a new certificate of title (in the case of a new car) to the lender. When is a security interest created? The security agreement is normally part of the loan agreement, i.e., the loan documents state that the borrower is agreeing to give the lender a security interest in the vehicle in exchange for the loan.
Second, the lender is REQUIRED to file the certificate of title (or application for certificate of title), along with the lien entry form within 25 days of the creation of the security interest, i.e., the date of the loan. So long as the lender files the documents within 25 days, the statute provides that the lender’s lien will RELATE BACK to the date of the lien entry form. If the lender takes longer to file the documents, the lender will only have a perfected lien as of the date the lien entry form is filed.
At first glance, there appears to be little downside to taking a little bit of extra time in getting the lien entry form filed. After all, the statute provides that the lender’s lien will be effective upon filing, even it is after 25 days. Further, the statute provides that the borrower is required to deliver the existing title or application for new title to the lender as soon as the loan documents are signed. Importantly, the only way to perfect an interest in an automobile is to file the certificate of title, along with the lien entry form with the Oklahoma Tax Commission. Thus, the lender who is in possession of the vehicle’s title can be assured that no other party can create a security interest until its lien in recorded. So what’s the rush, right? The short answer is that despite the fact that no other party can create a superior security interest while the lender is possession of the title, if a lender allows there to be a lapse in the perfection of its security interest, it risks losing its security interest altogether and becoming an ordinary unsecured creditor if the borrower files for bankruptcy.
The Bankruptcy Trustee’s Ability to Avoid a Preference
Preference actions generally permit the bankruptcy trustee to avoid any transfer of the debtor’s property that benefits creditors that occurs within 90 days of the date of the bankruptcy. For example, if a debtor has a debt to a friendly creditor and a debt to an unfriendly creditor, and pays the friendly creditor, and then declares bankruptcy one week later, the trustee may be able to recover the money paid to the friendly creditor under 11 U.S.C. § 547. While this "reach back" period typically extends 90 days backwards from the date of the bankruptcy, the amount of time is longer in the case of "insiders," typically one year. Insiders include family and close business contacts of the debtor.
Section 547 of the Bankruptcy Code provides:
(b) Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property–
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if–
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
(c) The trustee may not avoid under this section a transfer–
(1) to the extent that such transfer was–
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange;
There is an enormous amount of case law and legal analysis interpreting and explaining the concept of the avoidable preference. In the case of the Oklahoma vehicle lien provisions, there is precedent for the concept that where a secured creditor delays in timely filing the vehicle lien entry form, the bankruptcy trustee may avoid the secured party’s lien and treat it as an unsecured creditor.
For example, in In Re Reynaldo De Los Angeles, 101 B.R. 722 (Bank. E.D. Okla. 1989), the Bankruptcy Court held that where a secured party did not file the lien entry form within the period prescribed by 47 Okla. Stat. § 1110(A) [the filing period in 1989 was 10 days, as opposed to the current 25 days], the collateral could be sold by the trustee free and clear of any interest on the part of the lender. The relevant dates in the Reynaldo case were as follows: (i) retail installment contract was dated October 24, 1988; (ii) lien entry form dated October 24, 1988; (iii) borrower filed bankruptcy on October 27, 1988, (iv) lien entry form filed on November 9, 1988 (13 days after sales contract). Under these circumstances, the lender lost its security interest in the vehicle and was treated as an unsecured creditor. Here is why: the lender’s security interest arose on October 24. The borrower filed for bankruptcy 3 days later. Since the lien entry form was late filed, the perfection of the security interest did not relate back to October 24. Thus, the date of perfection was post-bankruptcy petition, and was avoided by the bankruptcy trustee.
What About the Bankruptcy Stay?
Most of the readers here are familiar with the concept of the automatic bankruptcy stay. Generally, the Bankruptcy Code provides that as soon as a person files for bankruptcy protection, an automatic stay arises and halts all actions by creditors, with certain exceptions, to collect debts from the debtor. Under section 362 of the United States Bankruptcy Code (11 U.S.C. § 362), the stay begins at the moment the bankruptcy petition is filed. Among the categories of actions that are prohibited by the automatic stay is any effort of a creditor to obtain or perfect a lien. Further, if a creditor takes an action that would violate the automatic stay, such action is void and of no effect. So, what happens if a car purchaser files bankruptcy after a car is purchased, but before the lender can file the lien entry form?
Fortunately, an exception to the automatic stay applies to the filing of a lien entry form, as provided under Oklahoma law. Section 362(b)(3) of the Bankruptcy Code states that the automatic stay does not prohibit “any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b) of this … ”. Section 546(b) of the Bankruptcy Code provides:
(b)(1) The rights and powers of a trustee under sections 544 [Section 544 is what is commonly referred to as the “Strongarm Power”], 545, and 549 of this title are subject to any generally applicable law that–
(A) permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection; or
(B) provides for the maintenance or continuation of perfection of an interest in property to be effective against an entity that acquires rights in such property before the date on which action is taken to effect such maintenance or continuation.
Where, as in Oklahoma, there is a statutory provision that permits perfection of an interest to relate back to a date prior to the filing of the perfecting instrument, the Bankruptcy Code provides (i) an exception to the automatic stay; and (ii) that such filing will be effective against the trustee in bankruptcy.
Completing the Lien Entry Form
A paramount issue is how to complete the vehicle lien entry form. Among the information required on this form is (i) the date of the security agreement; and (ii) the date of execution of the lien entry form. As explained below, it is important that these dates match. If they do not, the filing of the lien entry form may again cause the lien to be considered an avoidable preference, as a transfer on account of an antecedent debt, even if the lien entry form is filed within the 25 day statutory period. A case that illustrates this point is In Re Barragree, 159 B.R. 43 (Bank. W.D. Okla. 1993).
The relevant facts in Barragree are as follows: (1) the lending credit union made an automobile loan on October 24, 1992; (2) the lender completed the lien entry form and dated it November 23, 1992; (3) the borrower filed for bankruptcy on January 5, 1993. While the facts in Barragree are clearly based upon an instance of late filing (at the time of the Barragree decision, the statutory filing period in order to relate back was 15 days, rather than 25), the discussion in Barragree arguably leads to the conclusion that if the lien entry form is not dated the same day as the security agreement, then the lien is avoidable, even if filed within the 25 day filing period allowed by 74 Okla. Stat. § 1110(A). In reaching its decision, the Barragree court stated:
In the instant case the lien entry form and the security agreement were executed on different dates… [T]he creation of the indebtedness and the transfer of the security interest were not contemporaneous and the transfer was thus made on account of an antecedent debt.
See Barragree, at 44-45.
Given this discussion, let’s take the following scenario: (1) security agreement signed on day 1; (2) lien entry form dated day 5; (3) lien entry form filed day 6; (4) borrower files bankruptcy day 80. Where does this leave us? Despite the fact that the lien entry form was filed within 25 days of the security agreement, the language of 47 Okla. Stat. §1110(A) provides that the date of perfection “shall begin from the date of the execution of the lien entry form.” Thus, in the above scenario the date of perfection is day 5. Arguably, this invokes the avoidable preference language of Section 547 of the Bankruptcy Code, as set out in the Barragree decision. Although I have found no case making this holding directly, I believe a bankruptcy court could make this finding under these facts. The only way to assure avoiding this horrible result is to ensure that the security agreement and the lien entry form share the same date.
Maintaining Priority in Secondary Advances
I was asked recently whether it was necessary to file a new lien entry form for a secondary advance of funds using a car for which the bank already has a valid lien as collateral. Again, it would seem that because the bank is already listed as a lien holder on the certificate of title, that any other lender will be on notice to contact the lien holder before lending on the same automobile. While correct in practice, this scenario does not address the possible rights of a bankruptcy trustee should the borrower file bankruptcy. It would seem that the $10 filing fee required for a new lien entry form is cheap insurance against a potential claim by a bankruptcy trustee that the lien on a secondary advance is an avoidable preference.
However, in one case it is clear that it is not necessary to file a new lien entry form: where the original loan documents contemplate secondary transfers. In U.S. v. One 1982 Oldsmobile Cutlass, 709 F. Supp. 1542, 1547 (W.D. Okla. 1989), the court held that:
… it is unnecessary to file additional lien entry forms to perfect security interests in future advances if a security interest in a vehicle is perfected by the proper filing of a lien entry form and the security agreement granting that interest contains a future advances clause.
Thus, where a security agreement contains a future advances clause, it appears that a lender should not be required to file a new lien entry form for a secondary advance related to the same vehicle.
Perfecting a Security Interest in Indian Titles
I am not going to attempt to cover how to perfect a security interest in a vehicle which is registered by one of the federally recognized tribes that title cars within the boundaries of the State of Oklahoma. Oklahoma law however recognizes that a security interest that is validly perfected under the applicable tribal law is valid under Oklahoma law. In this respect, 47 Okla. Stat. § 1110(G) states:
A security interest in vehicles registered by a federally recognized Indian tribe shall be deemed valid under Oklahoma law if validly perfected under the applicable tribal law and the lien is noted on the face of the tribal certificate of title.
In practice, lenders must ensure that they are following each tribe’s perfection requirements. Otherwise, a security interest will be subject to the same attacks by a bankruptcy trustee as an avoidable preference. [Note: Oklahoma’s recognition of the validity of a properly perfected security interest has been recognized as appropriate in In Re Snell, 329 B.R. 753 (Bank. N.D. Okla. 2005) (holding that where bank complied with law of the Cherokee Nation by noting its lien upon the certificate of title issued by the Cherokee Nation).]
Liability for Failure to Timely Release Lien
Not unexpectedly, the statutory lien provisions require that once a security interest is fully satisfied, the secured party must provide a release of lien to the borrower in a timely fashion. 47 Okla. Stat. § 1110(B)(1) provides:
A secured party shall, within seven (7) business days after the satisfaction of the security interest, furnish directly or by mail a release of a security interest to the Tax Commission and mail a copy thereof to the last-known address of the debtor. If the security interest has been satisfied by payment from a licensed used motor vehicle dealer to whom the motor vehicle has been transferred, the secured party shall also, within seven (7) business days after such satisfaction, mail an additional copy of the release to the dealer. If the secured party fails to furnish the release as required, the secured party shall be liable to the debtor for a penalty of One Hundred Dollars ($100.00) and, in addition, any loss caused to the debtor by such failure.
Two important points from this provision: (1) a lender has just 7 business days to deliver or mail a release of lien upon satisfaction of the lien; and (2) failure to do so will lead to a penalty AND damages for any loss caused thereby. Much more important than the $100 penalty is the provision for actual damages. A lender has no way to predict how a borrower will be damaged if a lien release is not timely provided.
In order to avoid potential pitfalls when making motor vehicle loans in Oklahoma, banks should have procedures in place to ensure that these rules are followed:
1. Ensure that the loan documents and the lien entry form are dated the same (ideally executed on the same date).
2. Ensure that the lien entry form is filed within 25 days of the security agreement.
3. If your borrower files bankruptcy prior to your filing the lien entry form, proceed to file the lien entry form (this action is not stopped by the automatic stay).
4. In the instance where you make secondary advances on the same vehicle, the safest route is to file a new lien entry form, unless the original security agreement contains a future advances clause.
5. Make sure that you carefully follow lien filing requirements of the Indian tribe for tribal titles and that your bank’s name is shown on the title issued by the tribe.
6. Make sure that procedures are in place to deliver or mail a lien release within seven (7) business days once a vehicle lien is satisfied.
Oklahoma Department of Consumer Credit Updates Statutory Dollar Amounts Effective July 1, 2010
The Uniform Consumer Credit Code (UCCC) contains several statutory dollar limits that are indexed to inflation. The Oklahoma Department of Consumer Credit is the government office that is charged with updating these statutory amounts. 2009 was a unique year in that the amounts were not increased from 2008. The Department of Consumer Credit recently published an update, increasing the statutory amounts that apply under the UCCC. This complete list is available at: www.ok.gov/okdocc/documents/2010-dollarchanges.pdf. These statutory dollar amount changes are effective July 1, 2010. Among the more common applications that may be affected by these changes is an increase in the maximum late fee for a consumer loan or dealer paper. The statutory amount has increased from $22.00 to $22.50. Under the applicable provision, the new maximum late fee is now the greater of $22.50 or 5% of the past-due payment. NOTE: Before you may increase a late payment fee under this provision, your loan documents must allow you to do so.
Regulators Issue Final Guidance on Correspondent Concentration Risks
Byron’s Quick Hit: On April 30, 2010, the four federal regulators issued additional guidance relating to correspondent concentration risks. This guidance is offered to supplement the existing regulatory framework of Regulation F regarding Limitations on Interbank Liabilities. Principally, banks that enter into correspondent agreements with other financial institutions should develop written policies and procedures that very specifically identify (i) what may constitute a correspondent concentration risk, (ii) the manner of monitoring correspondent arrangements, (iii) the manner of managing risks that are identified and (iv) appropriate procedures that will be used when entering into correspondent agreements.
In banking parlance, a correspondent relationship exists when a financial institution provides another financial institution any of a variety of deposit, lending, or other financial services. A bank’s relationship with a correspondent may result in (i) credit (asset) or (ii) funding (liability) concentrations. On the asset side, a credit concentration represents a significant volume of credit exposure that a bank has advanced or committed to advance to a correspondent. On the liability side, a funding concentration exists when a bank must depend on a small number (even as few as one) of correspondents for a large share of its total funding. In regulatory terms, wherever there is a concentration, there is some level of increased risk due to lack of diversification. As an extreme example of what this risk is about, a company can be quite profitable having only one client if the client is big enough. However, if you only have one client and that client goes out of business, there is a significant risk to the survival of your business.
On April 30, 2010, the FDIC, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision (the “Regulators”) jointly published guidance on correspondent concentration risks. A copy of this guidance is published as Financial Institution Letter 18-2010 (“FIL-18-2010”). NOTE: Importantly, this guidance does not supplant Reg F (Limitations on Interbank Liabilities), which applies to all FDIC insured depository institutions.
The guidance begins with the identification of concentration levels that have generally been considered substantial concentrations: On the asset side, credit exposures greater than 25 percent of total capital has been considered to be a concentration. While the Regulators do not specifically identify a liability concentration threshold, they point out that in some instances funding exposure of as little as 5 percent of an institution’s total liabilities has posed an elevated liquidity risk.
Procedures for Identifying Correspondent Concentrations
The guidance states that “Institutions should implement procedures for identifying correspondent concentrations.” These procedures should not only look at the whole of the institution’s credit and funding concentrations to each correspondent, but should also include the exposures of the institution’s affiliates.
Among the factors that should be considered in identifying CREDIT CONCENTRATION risk are the aggregate of all exposures from (i) amounts due from bank accounts (demand deposit accounts and certificates of deposit); (ii) federal funds sold on a principal basis; (iii) any over-collateralized amount on a repurchase agreement; (iv) any under-collateralized portion of a reverse purchase agreement; (v) the net current credit exposure on derivatives contracts; (vi) any unrealized gains on unsettled securities transactions; (vii) any direct or indirect loans to or for the benefit of a correspondent (excluding loan participations purchased without recourse from a correspondent); and (viii) investments in the correspondent (including trust preferred securities, subordinated debt and stock purchases).
As it relates to FUNDING CONCENTRATION risk, the guidance points out several factors that may lead to increased risk, including (i) the credit sensitivity of advanced funds; (ii) the financial condition of the party advancing the funds; (iii) the type and maturity of the funding; and (iv) the structure of the recipient’s sources of funds.
A bank’s procedures for evaluating correspondent concentration risk should include calculations using both gross and net exposures to each correspondent (including the correspondent’s affiliates). Concentrations can be netted out to the extent that there exists valid and enforceable netting agreements or in other circumstances where a bank can easily obtain proceeds as a result of an offsetting obligation.
Monitoring Correspondent Relationships
Banks should establish and maintain written policies and procedures to prevent excessive correspondent concentration risks. In this regard, banks should specify parameters, including specific information, ratios, or trends that will be reviewed for each correspondent on a go-forward basis. Among the factors listed that a bank should consider monitoring for each correspondent, the guidance specifies: a correspondent’s (i) capital; (ii) level of problem loans; (iii) earnings; (iv) deteriorating trends in capital or asset quality; (v) reaching of target ratios; (vi) increasing level of other real estate owned; (vii) reaching undesired levels of “volatile funding sources” (e.g., large certificates of deposit or brokered deposits); (viii) experiencing a downgrade in credit rating (for publicly traded entities); and (ix) being placed under a public enforcement action. Such policies and procedures should specify when a correspondent concentration risk issue will be brought to the attention of the board of directors or other appropriate management committee. Banks should establish internal concentration limits and ranges or tolerances for each identified factor for each correspondent.
Development of Plans for Managing Concentration Risks
Once a correspondent concentration has been identified, a bank’s policies and procedures should specify actions to be taken to alleviate the identified risk. Generally, these procedures should assist in the orderly reductions of correspondent concentrations that exceed parameters identified in advance. Actions that banks should consider include: (i) reducing the volume of uncollateralized or uninsured funds; (ii) transferring excess funds to other correspondents (assuming this will not cause similar issues with the other correspondents); (iii) requiring the correspondent to serve as agent, rather than as principal, for Federal funds sold; (iv) establishing limits on asset and liability purchases from and investments in correspondents; and (v) specifying reasonable timeframes to reduce identified risk exposures.
Good Practices for Correspondent Agreements
Whenever a bank maintains or contemplates entering into a correspondent agreement, the bank should have written investment, lending, and funding policies and procedures (including stated limits when appropriate). Among the procedures that are specified in the guidance include: (i) conducting an independent analysis of credit transactions prior to entering into such agreements; (ii) the terms of all correspondent agreements should be entered into on an arm’s length basis; and (iii) the avoidance of potential conflicts of interest.
Compliance Dates Roundup
6/22/2010 – Deadline to Post Notice of Employees Right to Organize Under NLRA (for banks that have “government contracts”) (See June 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)
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)
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)