Saturday, July 13, 2024

June 2011 Legal Briefs

By John S. Burnett

  • Federal Garmishment Regulation Update

By Andy Zavoina

  • Exam Procedure Changes:  SCRA and Tenants in Foreclosure Act

By Pauli Loeffler

  • You asked for it…Combined GFE/TIL
  • Reg Z Exemption Amount Increased/Reg Z and Oklahoma’s Uniform Consumer Credit Code("U3C") Coverage Compared
  • Consumer Loan Dollar Amounts Adjust on July 1

June 2011


Compliance Roundtable Meeting – June 14, 2011
It is not too late to sign up for the OBA Compliance Roundtable discussion group that will be held June 14, 2011 at the OBA’s Harris Education Center from 11:30 a.m. to 1:30 p.m. The cost is $20 and lunch is included. You’ll have the opportunity to access the combined wisdom of other compliance officers and OBA’s compliance crew. More than 50 bankers attended the first roundtable, and we are looking forward to seeing an equal number to participate not only in group discussion but also the networking afterwards with direct chats with individual peers. Register online or call the OBA and ask for Nancy or Janis: 405.424.5252.

Oklahoma U3C Loan Dollar Amounts Adjust – July 1, 2011
See article and chart below.

Reg CC $200.00 Next Day Funds Availability – July 21, 2011
Next day availability increases from $100.00 to $200.00 under the Dodd-Frank Act (DFA). You will need new initial disclosures for new accounts opened on and after July 21, 2011, and you must notify current customers of the change no later than August 20, 2011.

Interest on Demand Deposit Accounts Allowed – July 21, 2011
The Dodd-Frank Act provides that interest may legally be paid on demand deposit accounts regardless of account ownership, i.e., corporate, LLC, partnership and other entities that have been ineligible for NOW accounts will be eligible to have interest bearing checking accounts.

Reg Z Exemption Amount Increased/Reg M Exemption Amount Increased – July 21, 2011
See article below.

By John S. Burnett


The Treasury Department helped clear up some of the confusion surrounding the new Garnishment regulation – Garnishment of Accounts Containing Federal Benefit Payments (31 CFR Part 212) – with its issuance of an FAQ document. Here are some of the highlights of that document.

Garnishment fees
If a garnishment order is subject to the regulation, a garnishment fee can be charged or collected only on the date of the account review. No fee can be imposed against the protected funds, and a fee that, if charged, would create an overdraft in the account cannot be imposed (because it would be collected after the date of the account review when the overdraft is presumably cured by the depositor).
Observation: If the order is not subject to the regulation, an institution’s standard procedure on garnishment fees (if permitted for the type of legal process being handled) would be acceptable.

Tax Levies
IRS and state tax levies issued directly by a taxing authority are not subject to the rule, because they are not issued by a court or state child support enforcement agency and therefore are not “garnishment orders” as defined in the regulation. Treasury carefully notes in the FAQ that it was “seeking public comment on all aspects of the rule, including whether Levies should be included in the definition of ‘garnishment order.’” The comment period on the Interim Final rule ended on May 24. A similar answer was given about other levies issued by a state agency or division without a court order.

Institution policies
Some institutions apparently have policies not to act on certain types of garnishment orders (such as out-of-state orders) or orders against certain accounts (such as accounts held jointly by the debtor and a non-spouse). If a financial institution will not be freezing or removing funds from an account pursuant to a garnishment order, the bank should not apply the regulation’s steps for account review to establish a protected amount.
Observation: Any institution with a policy not to act on certain types of orders or on orders against certain accounts should ensure that the policy was adopted with guidance by bank counsel or reviewed by bank counsel to avoid potential legal problems.

Which balance to use?
References in the rule to account balance mean the account’s ledger balance. That does not mean, however, that protected funds must be fully available to the depositor if they are subject to funds availability restrictions.
Observation: Even if all Regulation CC holds have been released, if a deposited check is returned unpaid, it can be charged back to the account, thus reducing what remains of the protected amount. If there are insufficient funds in the account for the charge-back and the frozen or removed funds have not yet been released to the court or creditor, the amount to be forwarded to the court or debtor can be reduced (subject to any law or regulation to the contrary), or the account can be charged into overdraft.

Brokerage accounts
If federal benefit payments are directly deposited to an account at a brokerage firm, the protections of the regulation would apply only if the federal benefits are directly routed to an account, including a master account or sub account, maintained at a financial institution (a bank, savings association, credit union or other federally or state chartered entity engaged in the business of banking).

New Garnishment Orders                                                                                                   Many questions were raised about the “one-time review” concept, specifically concerning what is meant by a “new or different garnishment order.” It simply means that the creditor gets one dip at the well per court order, and has to go back to court to get another order in order to tap the well (the account) again. If a garnishment order is received by a bank and the bank does its account review that day, sets up any protected amount and establishes the amount to be frozen or removed for the order, the bank has satisfied the order and should not do any subsequent account review, etc., under that order. If the order was issued by a state child support enforcement agency, a new order from that agency would be required before the bank would again perform an account review, etc., under the regulation.
Observation: Think of a garnishment order that meets the regulation’s requirements as a one-time order that affects the debtor’s accounts at a single point in time. But what if an institution is served a state tax levy that is not subject to the regulation, and the levy (and state law or regulation) calls for it to reach all sums in the account on the date of service plus those added within 30 days of service? In that case, because the levy is not subject to the regulation, you follow the requirements of the levy.

By Andy Zavoina



It should not be a surprise to anyone that the regulatory agencies have issued enforcement actions against some lenders because of their foreclosure practices. As the economic crisis took hold and unemployment rose, homeowners were unable to repay their mortgages. Foreclosures were posted in record numbers and lenders went from a jog, to a run, to an all out sprint. And when you are sprinting as fast as you can and you get pushed from behind, you tend to fall. That is what happened in the mortgage industry. As the media published stories where lenders foreclosed on homes they didn’t have the legal rights to, and servicemembers returned from the war to find themselves homeless, the industry as a whole was embarrassed and those empowered to do so said the system needed to be fixed. Last December Julie Williams, Chief Counsel and First Senior Deputy Comptroller at the Office of the Comptroller of the Currency testified before the House of Representatives – Judiciary Committee. She stated “The occurrences of improperly executed documents and attestations that have come to light raise concerns about the overall integrity of the foreclosure process. Laws in each state establish the requirements and process by which that action may be taken. When that due process is not followed, it is not a technicality; it goes to the propriety of the foreclosure itself.” The OCC, along with the Federal Reserve Board, The Federal Deposit Insurance Corporation and the Office of Thrift Supervision released enforcement actions on April 13, 2011 against twelve banking organizations, fourteen banks and savings associations and two third-party service providers.
In a BOL Special Briefing the corrective actions were summarized so that all mortgage lenders could learn from the direction others have been instructed to take:

1. Lenders must improve communication with borrowers by designating for each borrower, a person to act as the borrower’s primary point of contact in order to try and work out a resolution. Lenders should always seek to resolve the defaulted loan before they consider foreclosure. What is the cause of the default, unemployment, reduced income, reduced property value, etc.? Some of these challenges are easier to overcome than others. Loan modifications can temporarily or permanently reduce the payment due. But a borrower wanting to walk away from a depreciated home may seek only a short sale as a means of “protecting” their credit. Your bank should review any available programs and options you would consider to avoid taking property into Other Real Estate. Recognize that as foreclosures go on, it is more and more a buyer’s market. Not only are you having to price your ORE against normal sellers, you are having to fight for the same buyer as other lenders with ORE and the Troubled Asset Relief Program (TARP) and other foreclosure sales are listed on the web for any interested buyer.

2. Lenders must ensure that foreclosures are not pursued once a mortgage has been approved for modification, unless payments on the modified loan go unpaid. . Examiners saw many loan modifications from loans that contributed to the crisis, re-defaulting. Now they are closely monitoring these types of loans and are seeing lower payments on new modifications, and lower default rates. Once a bank enters into an agreement with a borrower, consider immediately instituting a 90-day stay from foreclosure.

3. Lenders must establish robust controls and oversight over the activities of third-party vendors of various residential mortgage loan servicing, loss mitigation, or foreclosure-related support, including attorneys in foreclosure or bankruptcy proceedings. If you use third parties, due diligence should be documented to ensure the vendor is representing your bank well, and is following all legal precautions. Just as you do, any third party that assists you in mortgage collections and foreclosures should review your documentation to ensure that you are the lien holder, that your disclosures were all made as required for content as well as timing. Do more than lip service as these steps are taken. If you think foreclosing on a property is a lot of work, consider what is needed to try and reverse this process in the case of an error. Double and triple check that your borrower is not protected under the Servicemembers Civil Relief Act. They may be entitled not only to rate protections, but from foreclosure protection as well.

4. Lenders need to provide remediation to borrowers who suffered financial losses as a result of wrongful foreclosures or other deficiencies identified in a review of the foreclosure process.

5. Lenders should review and improve programs to ensure compliance with state and federal laws regarding servicing, generally, and foreclosures, in particular.

If you are participating in any modification programs or other activities to reduce mortgage delinquencies, ensure your customers are aware of this. Many that are facing foreclosure are slow to contact their lender. If they get involved in a foreclosure prevention scam, they’ll have even less cash or time to work with you.

Finally, as you read about these enforcement actions, please do not shake your head and assume this is a big bank problem that affects only large volume lenders. As a “lesson learned” we can expect that when your examining team walks through your door, they will ask how many foreclosures you have recently completed, how many you anticipate in the near future, and what your policy and procedures are to address the requirements.


SCRA and Tenants in Foreclosure Act

As we listen to incoming questions from bankers, we have heard more than once that in exam request letters, the examiners want to know how you are handling requirements under the Tenants in Foreclosure Act. Briefly, this rule protects tenants from eviction because of foreclosure on the properties they occupy. If you are foreclosing on property that is rented you must provide at least ninety days’ notice for the tenants to vacate, if that is what you want to happen. If you have not addressed the Tenants in Foreclosure Act and its other requirements which were extended through 2014, you should do so now.

In May, new exam procedures were released addressing your requirements under Tenants in Foreclosure and the SCRA. Each of these requires review by your bank. Use the examiner workpapers for a self-audit, as a checklist to ensure your policy and procedures include what is necessary, and as a review tool before your next exam starts. Even before your examiners walk through your front door they will be asking you the questions on these workpapers. They were published May 4, 2011 and are linked in the BankersOnline Top Stories for that date, if you don’t have a copy already.

By Pauli Loeffler


One bright spot in the promised deluge of regulatory reform under the Dodd-Frank Act (“DFA”) and the creation of the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) is that there is an opportunity to fix some problems that have long plagued and confused both lenders and consumers. The classic example of this is that for umpteen years lenders have been required to give and consumers have been forced to receive RESPA and Truth-in-Lending (Reg Z) disclosures that tended to confuse rather than enlighten while billions of trees have died in the process.
The last round of changes to the GFE pointed out the problem: if the lenders who worked with the forms every day could not understand the disclosures, how the heck were the consumers to make sense of the GFE and the TIL. For instance, after the change in the RESPA forms, I had to respond to several lenders and compliance officers who were requiring that the itemizations on the TIL and GFE had to match. Quite frankly, in Okie parlance, that ain’t never gonna happen. This due to the fact that the GFE/HUD-1 is more detailed than the TIL. While the “amount financed” must match, the answer to the itemization issue is found in the relevant Reg Z sections and Commentary, which state: 1) itemization is entirely unnecessary when there is a GFE, and 2) itemization really isn’t required to be stated on the TIL as long as the TIL states that itemization will be provided upon request AND the lender does provide it IF requested. Now explaining this to lenders is one thing, but how they in turn explained the discrepancy in itemizations to consumers (if by chance they managed to notice it in the ream of papers provided), is something else.
As published in the Federal Register on April 5, 2011 (76 FR 18827), the CFPB proposed to combine the GFE and TIL into a single unified disclosure. This will be done at six sites in five rounds to allow for changes in disclosure between rounds. On May 9, 2011, the Bureau requested lenders, brokers and consumers to sign up to receive information and be a part of the “Know Before You Owe” project. By signing up online at to be part of the process in designing what the Bureau hopes will be a single, simpler disclosure. The two prototype disclosures are accessible from the webpage cited above. The Bureau indicates that it received more than 10,000 comments since April 5th, and, it is revising the drafts and will be asking for more feedback in late June. The Bureau is asking everyone to spread the news by email, Facebook and Twitter.
While the phrase “too many cooks spoiling the broth” whirling around in my head, on May 27, 2011, the American Bankers Association posted its own survey to find out whether bankers are participating in the feedback effort of the CFPB.
Please note that the Bureau has until July 21, 2012, to propose the model rules and disclosures. The prototype disclosures really tantalize me on the questions of if and how HUD’s Reg “X” (RESPA) and Reg Z may be combined.



More loans will be covered by Truth in Lending under Reg Z due to revisions that take effect on July 21, 2011 resulting in the expansion of the coverage limit.
The Federal Reserve Board published the Final Rule revising the threshold for exemption from Reg Z’s Truth in Lending coverage pursuant to the Dodd-Frank Act (, with an effective date of July 21, 2011.
Under the current version of Reg Z, consumer loans exceeding $25,000.00 or those with an express written commitment to extend credit in excess of $25,000.00 are exempt from coverage under Section 226.3(b) unless the loan is secured by real property or by personal property that is used or expected to be used as the principal dwelling of the consumer. Private education loans subject to Subpart F of Reg Z do not qualify for the exemption regardless of amount.
Contrast Reg Z’s coverage with that under Oklahoma’s Uniform Consumer Credit Code (“U3C”): Section 3-104 of the U3C defines a "consumer loan" as one made to a person "primarily for a personal, family or household purpose." A "consumer loan" also must either (1) be for $45,000 or less, or (2) be secured by an interest in land. However, a loan made by a bank to enable the debtor to build or purchase a residence, or to refinance such a loan, is excluded from the U3C by Section 1-202. Section 3-105 provides that any "loan primarily secured by an interest in land" is not a "consumer loan" if at the time the loan is made the value of this collateral is substantial in relation to the amount of the loan and the loan finance charge (APR) does not exceed 13%. You should note that one very big difference between U3C and Reg Z is that a consumer loan exceeding $45,000 secured by a mobile home is exempt from coverage under the U3C but falls squarely under Reg Z.
Finally, one distinction between the UCCC and TILA/Reg Z is that while the U3C requires virtually the same disclosures as Reg Z, the U3C additionally limits certain terms and practices with respect to both consumer credit sales and consumer loans made in Oklahoma.
Until July 21st, if the bank makes a consumer loan that exceeds $25,000 without real estate or a dwelling as collateral, the loan will be exempt from Reg Z, however it will still be subject to the U3C in Oklahoma. On July 21, 2011, however, the amendments to Reg Z take effect as follows:

• Initially the exemption as an extension of credit in excess of $50,000.00 through December 31, 2011, or an express written commitment to extend credit in excess of that amount.
• Provides for annual adjustments of the threshold amount based upon the CPI-W.
• Provides transition rules for open-end credit in excess of $25,000.00 existing prior to July 21, 2011 to remain exempt until December 31, 2011 provided that the creditor neither reduces the express written commitment to extend credit to $25,000.00 or less nor takes a security interest in real estate of the personal property used or expected to be used as the principal dwelling.

As usual, the “meat” of these changes is in the Commentary, and yes, this is new Commentary.
The Rule with regard to closed-end credit is relatively easy to grasp. The loan is exempt if the extension of credit at consummation exceeds the threshold amount at that time even if the amount is subsequently reduced below the threshold amount. If a loan commitment to extend credit exceeds the threshold in effect at consummation, the credit will remain exempt even if the total amount of credit actually extended does not exceed the threshold amount (e.g., actual advances did not exceed threshold). If an exempt loan is refinanced (satisfied and replaced) by a new loan, that loan must exceed exemption threshold at time of consummation.
The Rule for open-end credit is quite a bit more complicated. There are distinctions between “initial extensions of credit” and “firm commitments.” The rules are different for purposes of the transition rule. “Initial extension” means the first extension of credit on a new account while “firm commitment” means the credit limit.
To qualify, the initial extension of credit must exceed the threshold amount in effect at the time the extension is made regardless of whether it occurs at account opening. Additionally, if the initial extension of credit exceeds the threshold amount, the account remains exempt regardless of a subsequent increase in the threshold amount as a result of adjustment in the CPI-W. This is true whether or not there are subsequent extensions of credit or the account balance is reduced such as by repayment or the credit limit is subsequently reduced. Conversely, if the initial extension of credit does NOT exceed the threshold amount, the account is NOT exempt and the applicable account disclosures under §§ 226.6, 226.7, 226.52 and 226.55, must be given at or before the account was opened. This is the case even if the account balance later exceeds the threshold amount.
An exempt firm written commitment to extend open-end credit requires the creditor commit to extend credit in excess of the threshold in effect at the time the account is opened with no requirement of additional information other than as permitted under § 226.2(a)(20). However, if the creditor subsequently reduces the firm commitment below the current threshold, the account would no longer qualify for the exemption. But even here, there is an exception: If the initial extension is taken as a single advance that exceeds the threshold, the account will remain exempt even if it is reduced below the threshold thereafter.
The rules regarding subsequently taking a security interest in real estate or a dwelling also differ between closed-end and open-end credit. With closed-end credit, if the a security interest in real estate or a dwelling is taken after consummation, this does NOT negate the exemption, and the extension of credit REMAINS exempt, but the right to rescind the security interest in the dwelling must be given. If, however, using the same scenario the loan is refinanced (satisfied and replaced), the extension of credit is no longer exempt.
In open-end credit, when a security interest in real property or personal property used or expected to be used as the principal dwelling is taken AFTER account opening, the account is no longer exempt, and the creditor is required to comply with applicable disclosures within a reasonable period of time, including the right of rescission. No, there is no indication what IS a reasonable period of time to do this.
As indicted in the bullet points, there is a transition rule for open-end accounts exempt prior to July 21, 2011. If the account is based on a firm commitment (i.e., “credit limit”) to extend credit in excess of $25,000.00, (and the commitment is not reduced below $25,000.00 prior to December 31, 2011), it will remain exempt until December 31, 2011. However, the firm commitment must be increased on or before December 31, 2011, to an amount exceeding $50,000.00 in order to remain exempt. If this is done, then the open-end credit will remain exempt regardless of a subsequent increase in the CPI-W.


The Consumer Credit Administrator adjusts for inflation each year as of July 1st certain dollar amounts found in various sections of Oklahoma’s Uniform Consumer Credit Code (U3C).  A new set of increased U3C dollar amounts takes effect on July 1, 2011.

a. Increased Late Fees. A perennial question I am most often asked by banks is the maximum late fee for consumer loans and dealer paper. As of July 1, 2010, the maximum permitted late fee is the greater of $22.50 or 5% of the past-due unpaid installment. This formula will change on July 1, 2011 to the greater of $23.00 or 5% of the past-due unpaid installment.
Remember that before a bank can charge any late fee, the consumer must agree to it in writing. When a loan is originated, deferred or renewed, the signing of documents is an opportunity to get the borrower to consent in writing to the new $23.00 portion of the late-fee formula. However, if a loan is already outstanding and is not being modified or renewed, a bank has no good way to increase the amount of late fee that the consumer has previously agreed to pay.
Some banks’ loan documents have specifically pegged the “dollar amount” portion of their late fee formula at $22.50 (or whatever the lower amounts were for earlier years), so there may be no way to raise the late fee at July 1 for existing loans. Other banks have used an adjustable formula in the late-fee provision of their loans, allowing for the greater of 5% of the unpaid late payment or the maximum dollar amount established by rule of the Consumer Credit Administrator from time to time. (Banks using a formula that specifically allows for this type of inflation adjustment can now re-set their existing loans to charge the new, higher late fee as of July 1.)
b. “508B” and “508A” Loans. Some banks make small consumer loans based on a special finance-charge method that combines an initial “acquisition charge” with monthly “installment account handling charges,” and does not have a stated maximum annual interest rate. The requirements for such loans are outlined in Section 3-508B of the U3C.
The permitted principal amount for one of the small loans just mentioned has been$1,350.00-$4,500.00, but is adjusting to $1,380.00-$4,600.00 at July 1.
The specific fees chargeable on one of these “508B” loans depend on where the loan falls within certain dollar brackets. Both the dollar brackets and the fees chargeable within each bracket are adjustable for inflation, and the revised amounts as of July 1 are set out in more detail in the chart at the end of this article.
Lenders making “508B” loans should be careful to switch promptly to the new dollar amount brackets, and the new permissible fees within each bracket, as of July 1. Because of peculiarities in how the bracket amounts are adjusted, using a chart with the old rates after June 30 (without shifting to a revised chart) might result in excess charges for certain small loans. American Bank Systems 3-508-B pricing calculator for 2010 is found at this link: Please check back for the updated dollar amounts on or after July 1, 2011.
The chart that banks use to determine the “maximum rate of interest” allowable on small loans calculated by the other available finance charge method (under Section 3-508A) will also change somewhat because of adjustments for inflation at July 1. The maximum consumer-loan dollar amount on which a blended interest rate higher than 21% can be charged by the 3-508A method will increase from $4,500 to $4,600.
At there is an online chart showing the maximum interest rate chargeable on “508A” loans of various dollar amounts as of July 1, 2010, as well as a calculator for “508B” loans. A new chart and calculator, using the amounts taking effect on July 1, 2011, should be available there soon.
c. Dealer Paper “No Deficiency” Amount. Based on Section 5-103(2) of the U3C, if dealer paper is consumer-purpose and is secured by goods having an original cash price less than a certain dollar amount, and those goods are later repossessed or surrendered, the creditor cannot obtain a deficiency judgment if the collateral sells for less than the balance outstanding. This dollar amount was previously $4,500, and increases to $4,600 on July 1.