- Correcting Social Security ACH errors
- Lessons from the PATCO ruling
- Abandoned foreclosures proceeding
- Oh, no! My customer is in bankruptcy!
- Q&As on OREO
- Complaint Responses
- FDIC Insurance Fees
- ATM Notices
- Biggert-Waters: Flood Insurance Reform Act
- Servicemembers Civil Relief Act – Renewed Importance?
By John S. Burnett
Correcting Social Security ACH errors
There were reminders this month from FRB Services and Treasury that financial institutions who receive federal agency ACH payments should be using Notification of Change (NOC) entries through the ACH to advise the agencies of certain needed corrections. It is appropriate to use NOCs to notify federal agencies of a change in routing number resulting from a merger, for example, to correct an account type from savings to checking (and vice versa), or to correct an error in the account number being used. Apparently, some institutions have worked in the past directly with local Social Security offices to correct some errors. SSA has advised Treasury that it cannot continue that sort of "handholding" exception process, so it’s important that your operations staff brushes up on correct use of the NOC process to get payments handled efficiently.
By John S. Burnett
Lessons from the PATCO ruling
The U.S. Circuit Court of Appeals for the First Circuit created a stir with its July 3 ruling in the PATCO case. The district court’s ruling (that Ocean Bank’s security procedures, which had been in tune with regulators’ guidelines at the time, were reasonable) was tossed out by the appeals court and found to not be commercially reasonable under UCC Article 4A. The case was sent back to the district court for further deliberations on the responsibilities of the bank and PATCO in the absence of commercially reasonable security procedures. So, what are the take-aways from the appeals court decision?
First is a reminder that banks cannot assume that following the interagency guidance documents (Authentication in an Internet Banking Environment (FFIEC, 2005) and its Supplement (FFIEC, 2011)) is sufficient to protect them from liability for fraudulent funds transfers. While the appeals court gave a nod to the guidelines, it based most of its reasoning on the requirements of UCC Article 4A for security procedures that are "commercially reasonable."
Second is that having a security system in place and not using it buys you nothing in a court action. In the PATCO case, the appeals court found that Ocean Bank (now part of Peoples United Bank) had purchased a fairly robust security product, but failed to implement key components, among them customer alerts of high-risk transactions.
And finally, be wary of the unintended consequences of your actions. Ocean Bank apparently adjusted the parameters of its security system so that any ACH transaction initiated by a customer for more than $1 would be flagged to require the customer to respond to security questions. Instead of increasing security, that change (said the court) increased the chances that the crooks who had taken over PATCO’s computer would be able to intercept and steal the security question answers.
We’ll be watching to see whether the parties to this suit settle (as the appeals court suggested) or push for a court decision on liability. Given the costs of continuing the litigation and the $345,400 approximate loss from the fraudulent transfers, we think that a settlement will be announced.
By John S. Burnett
Abandoned foreclosure proceedings
The Federal Reserve Board issued a combined Supervision and Regulation and Consumer Affairs advisory, "Guidance on a Lender’s Decision to Discontinue Foreclosure Proceedings," on July 11. It’s directed to state member banks and bank or savings and loan holding companies.
Covered institutions with residential mortgage servicing operations should make sure they address four key concepts in their policies and procedures on abandoned foreclosures:
Notification to borrowers: Borrowers should be notified when a decision is made not to pursue a foreclosure action, and the notice should advise the borrowers of their (1) rights to occupy the property until a sale or other title transfer action occurs, (2) financial obligations regarding the outstanding loan balance and the payment of applicable taxes and insurance premiums, and (3) property maintenance responsibilities.
Communications: Affected loan servicing banks should go to whatever lengths necessary to communicate the information above to borrowers who may have vacated their homes based on earlier communications about the foreclosure. At minimum, use the extensive methods used to contact borrowers whose loans are in collection.
Notices to local authorities: Make reasonable efforts to notify appropriate state or local government authorities of the decision not to pursue the foreclosure, including complying with applicable state or local notification requirements. The local entities may include tax authorities, courts or code enforcement departments.
Collateral values: Have a process for obtaining the best practicable information on the collateral value of a residential property that may be subject to foreclosure, obtaining the information on a regular basis and using current information when deciding whether to initiate, continue, or abandon a foreclosure proceeding.
Examination procedures for reviewing an organization’s abandoned foreclosure process were attached or linked to the Fed Board’s letter.
Other institutions should familiarize themselves with SR 12-11/CA 12-10 because it includes common-sense guidance on this topic.
By Pauli D. Loeffler
Oh, No! My Customer is in Bankruptcy!
There is a past due loan at your bank or you have recently received a garnishment or tax levy attaching to the customer’s deposit account. The next thing you know, the customer is calling the bank to tell you that he has visited a bankruptcy lawyer and filled out the papers to file his petition for bankruptcy. What do you do now?
Ways to Confirm Filing
The first thing you will want to do is confirm that the customer has actually filed. The simple fact that the customer says he has visited an attorney to file for bankruptcy relief does not mean that it is true. As much as this may shock you, customers have been known not only to stretch the truth a little, but to tell outright lies. So before you hot card the Visa debit card, turn off automatically generated notices of late payments and reports to credit reporting agencies, let’s confirm that the customer has actually filed.
One way is to have the customer or his attorney fax you the Petition. Another method is to call the Bankruptcy Court’s Voice Case Information System (VCIS). The toll-free number for the Western District of Oklahoma is 866-222-8029, then press 13, or you may follow the voice prompts. You will also use that number for cases filed in the Northern and Eastern Districts. You are allowed 5 searches per call, and you may search by name, SSN/TIN or case number. Additionally, your bank may sign up for Public Access to Court Electronic Records (PACER). This service allows access to cases filed in Federal courts including appellate, district and bankruptcy courts. Most but not all federal courts are accessible through PACER. The cost is $.10 per page.
Another service the bankruptcy courts offer is Electronic Bankruptcy Noticing (EBN). This is a free, nationwide service that allows bankruptcy court notices to be transmitted electronically. The notices are sent via email or fax the same day they are produced by the court, and the notices may be accessed on your computer 24 hours a day, 7 days a week. Notices that would normally be mailed to multiple locations can be directed to one centralized address by using EBN. To find out more about EBN, call 877-837-3424, or visit this website to learn more and sign up at: http://www.ebnuscourts.com/
Once you confirm that the customer has filed bankruptcy, you need to be to be aware that bankruptcy has its own particular terminology or jargon or “bankruptcy speak.” If you are talking to the bankruptcy attorney for your customer, a bankruptcy trustee, an Assistant U.S. Trustee or a clerk in the bankruptcy court, it is useful to know a few terms.
Once your customer has filed his “Petition for Relief,” he is known as the “Debtor,” or the “Debtor-in-Possession” (“DIP”) if it is a case filed under Chapter 11 (more about that later). The bank, as a creditor, has a “Claim” against the bankruptcy estate. Once the Debtor files his petition, the Court enters an “Order for Relief,” and very shortly, the bank will receive a copy of the “Combined Notice and Order” which will set out the date and time for the “First Meeting of Creditors” (a/k/a “§341 Meeting”) as well as setting deadlines for filing objections to discharge/dischargeability, lien determination, and more.
The Bankruptcy Chapters
To avoid having your eyes glaze over, to a large extent, I am going to ignore eligibility requirements for the various bankruptcy chapters. Individuals with consumer debts as well as businesses may file for protection under various chapters of Title 11 of the United States Code (“Bankruptcy Code”). Chapter 7 is the chapter for liquidation cases. This means that any non-exempt asset that is not subject to a properly perfected security interest will be converted to cash for the benefit of the creditors according to priorities set out in Title 11 U.S.C.A § 507 of the Bankruptcy Code. Most chapter 7 cases are determined by the trustee to be “no asset” cases with no distributions to creditors. There will always a trustee in place. Unless it is a specialized liquidation, it will be one of the Chapter 7 panel trustees.
Chapter 9 is the Adjustment of Debts of a Municipality
Chapter 11 is the reorganization chapter. It is mainly for businesses but an individual, or individual and spouse may file under chapter 11 when the debts exceed the chapter 13 limitations. A trustee will not be appointed by the court in most cases but instead the debtor will continue to run the business after the bankruptcy is filed and is known as the “Debtor-in-Possession.” When there is a “Debtor in Possession,” a “Debtor in Possession” account will have to be established with the name of the person or entity followed by “Debtor in Possession” or “DIP.” If the Chapter 11 debtor is a legal entity, it will need a new EIN for the account.
Chapter 12 is Adjustment of Debts of a Family Farmer of Fisherman with Regular Annual Income. Inclusion of fisherman in chapter 12 is one of the amendments that became effective July 1, 2005. The Chapter 12 trustee will handle these cases. There is one Standing Chapter 12 trustee for each of bankruptcy courts in Oklahoma.
Chapter 13 is Adjustment of Debts of an Individual with Regular Income more commonly known as the Wage Earner Bankruptcy. In 2005, the Bankruptcy Code was amended to include, among other things, a “means testing” which will prevent debtors who could make significant payments to unsecured creditors from filing for liquidation under Chapter 7. There are certain dollar limitations on the amount of secured and unsecured debts that may prevent filing under this chapter or conversion from chapter 7, and the debts involved must to a large extent be consumer debt to be eligible for this chapter. The case will be under the Standing Chapter 13 trustee for the particular bankruptcy court.
The Automatic Stay and Property of the Estate
The filing of the Petition for Relief invokes the automatic stay. The automatic stay protects the Debtor personally against the commencement or continuance of any court or administrative or other action against the Debtor, with a few exceptions. Criminal proceedings against the Debtor may be started or continued, so feel free to file that SAR. A wide range of domestic relations proceedings may be started or continued including proceedings to collect child support from property that is not part of the estate.
The automatic stay also serves to protect preserve the property of the bankruptcy estate. Creditors are prohibited from any act to obtain possession or exercise control over property of the estate. This means that you need to call off the repo man and forget exercising the right of set off against that deposit account. Creditors are prohibited from any act to collect, access or recover for a debt that arose before the filing of the bankruptcy. The commencement or continuation of a proceeding before the United States Tax Court for liability for a taxable period will be subject to the automatic stay since the bankruptcy court may be called upon to determine the amount of the debt.
This affects how you respond to the summons and what happens to those funds you segregated upon receipt of the pre-bankruptcy garnishment summons. Because the funds become property of the estate, they are not remitted to the creditor. You will still need to answer the garnishment with a statement that the debtor has filed Bankruptcy including the case number. You will contact the trustee to be advised whether you may release the funds to the customer or remit them to the trustee.
A creditor’s action to perfect or maintain or continue the perfection of a security interest in property are not subject to the automatic stay to the extent that the trustee’s rights and powers are subject to perfection under the bankruptcy code or to the extent the act may be accomplished within the time frame permitted under the bankruptcy code. This provision allows the bank to file the lien entry on the certificate of title after the debtor files. While the Bankruptcy Code provides that it must be done within 30 days of the time when the security interest attached, creditors will only have the 25 days allowed pursuant to Oklahoma law to accomplish this.
The creditor may request relief from the stay to commence or continue an action, either with or without requesting abandonment of the property of the estate. Note that the statute of limitations for commencement of actions against property of the estate is tolled (legal term for suspended) during the period the automatic stay is in effect. The automatic stay dissolves at the earlier of dismissal of the bankruptcy or closing of the case.
Discharge of the Debtor
With regard to the debtor, the automatic stay is replaced by the discharge of the debtor in bankruptcy. Unless the debtor has reaffirmed the debt with court approval, is denied a discharge or the debt owed the bank is excepted from the discharge, the bank cannot collect from the debtor.
By Pauli D. Loeffler
Q&As on OREO
Other Real Estate Owned
The ownership of real property is one of the powers granted to banks under Federal and state statutes but for limited purposes. Title 12 U.S.C.A. §29 establishes the authority of national banks to hold real estate while Title 6 O.S. § 414 establishes this authority for Oklahoma banks. Both have time limitations on retaining OREO. What follows are some Q & As we have received regarding OREO.
Q: Are you aware of any restrictions on the bank taking title to the land in order to lease-purchase it to the school?
A: Since the Oklahoma Constitution prohibits loans to counties, school boards, etc. when the term of the loan will exceed the fiscal year, leases are used to facilitate the purchase of equipment, busses, building schools, etc. State Banks are permitted to do this by the Banking Code in Title 6 O.S. § 414:
5. A state bank may purchase or construct a municipal building, such as a school building, or other similar public facility and, as holder of legal title, lease the same to a municipality or other public authority having resources sufficient to make payment of all rentals as they become due. The lease agreement shall provide that upon its expiration the lessee will become owner of the building or facility.
It is likewise permitted for National Banks in 12 C.F.R. § 7.1000:
(d) Other real property–
(1) Lease financing of public facilities. A national bank may purchase or construct a municipal building, school building, or other similar public facility and, as holder of legal title, lease the facility to a municipality or other public authority having resources sufficient to make all rental payments as they become due. The lease agreement must provide that the lessee will become the owner of the building or facility upon the expiration of the lease.
Q: We use an approved appraiser list on commercial loans as well as on consumer loans. Our policy says our Loan Review Dept. will order all appraisals and that they must be on the approved list. Our policy doesn’t specifically mention OREO appraisals. The loan officer states the FIRREA guidelines don’t apply to OREO property. (I don’t know). Since he’s not following loan policy by picking someone on our list, we’ll just have to argue that the policy wasn’t meant to include OREO. Is it was ok for us to do whatever we want regarding OREO appraisals?
A: Unfortunately your loan officer is incorrect regarding FIRREA’s application to OREO. Subpart C cited in Title 12 U.S.C.A. § 34.85 IS FIRREA:
(a) General. (1) Upon transfer to OREO, a national bank shall substantiate the parcel’s market value by obtaining either:
(i) An appraisal in accordance with subpart C of this part; or
(ii) An appropriate evaluation when the recorded investment amount is equal to or less than the threshold amount in subpart C of this part.
(2) A national bank shall develop a prudent real estate collateral evaluation policy that allows the bank to monitor the value of each parcel of OREO in a manner consistent with prudent banking practice.
(b) Exception. If a national bank has a valid appraisal or an appropriate evaluation obtained in connection with a real estate loan and in accordance with subpart C of this part, then the bank need not obtain another appraisal or evaluation when it acquires ownership of the property.
(c) Sales of OREO. A national bank need not obtain a new appraisal or evaluation when selling OREO if the sale is consummated based on a valid appraisal or an appropriate evaluation.
Additionally, we have this from the Federal Reserve Board, SR 95-16 (SUP) recently cited in Questions and Answers For Federal Reserve-Regulated Institutions Related to the Management of Other Real Estate Owned (OREO) Assets (June 27, 2012):
In the course of monitoring OREO assets, financial institutions should have appropriate policies and procedures in place to help determine when a new appraisal or evaluation should be obtained. An institution may be required to substantiate the valuation of the OREO asset for financial reporting purposes. If an institution determines that an appraisal or evaluation should be obtained, the appraisal or evaluation must conform to the requirements of the agencies’ appraisal regulations or guidelines.
Finally, Title O.S. § 414 applicable to State banks provides:
4. Banks or trust companies shall be required to keep current appraisals on file to substantiate their other real-estate-owned property book values. A full appraisal or a supplement which updates a full appraisal, not more than twelve (12) months old, shall be considered current for purposes of this paragraph. Provided, however, if a bank has begun writing down the book value of the property pursuant to paragraph 3 of this subsection, the bank need not update an appraisal if the book value of the property is fifty percent (50%) or less than the bank’s most recent appraised value.
Retention and Write Down
Q: I had a question about the disposal of OREO. If a bank determines that they will not be able to sell a piece of OREO within the 5 year time frame, is it allowable to remove the piece of property from OREO by charging down the value of the property to $0?
A: Writing down the value to $0 does not remove it from OREO, and although I am not an accountant, I don’t think this would comport with GAAP. For what it’s worth, if you are unable to sell the property within the first 5 years, you may seek approval of the Banking Commission for an additional 5 years per Title 6 O.S. § 414 provides:
3. A bank or trust company must begin to write down the book value for each property held as other real estate owned a minimum of ten percent (10%) each year during the additional extension period. The bank or trust company shall then be required to write off the remaining balance of the other real-estate owned property at the end of the additional extension period.
By Andy Zavoina
We wrote last March about the Consumer Financial Protection Bureau’s (CFPB) collection of complaints against banks. That article describes the basic response measurements banks must take and the timeframes which apply. If this is news to you, please refer back to the March, 2012 Legal Briefs.
We have long known the CFPB was assembling this complaint information into a database and that it would eventually release that information to the public. On June 19, 2012 the CFPB posted that it was making its Consumer Complaint database available to the public. The current files available address credit card complaints. Initially those available are for June 2012 forward, but complaints filed before that will be added as time progresses. Complaints are added to the database only after the company to which the complaint is about, verifies that it has been correctly identified. It is not verifying the complaint, just the two parties involved.
As of June 19 there were 137 credit card complaints logged. Since inception of the program there have been 17,000. Other data that will be released will include mortgage complaints of which there are 19,000 and checking accounts, of which there have been 6,500.
The intent is to make this data available to the public so these consumers can see what the complaints are and why. Information available includes the type of complaint, the date of submission, the consumer’s zip code, and the company that the complaint pertains to. It also includes response information, such as whether the company’s response was timely, how the company responded, and whether the consumer disputed the company’s response. Remember there is data about more than banks here.
For banks over $10 billion in assets, the CFPB is the primary regulatory and who complaints go to for these larger banks. There are four possible outcomes when a complaint is received by a company, which may include your bank, through the CFPB.
1. The complaint could be closed with monetary relief.
If the bank had over-charged a consumer (as an example), a refund would be indicated in this outcome. As of June 19, 2012, 44 of the 137 complaints had this result. (Comparisons below are provided and are as of this same date.) Going back to December 2011, more than 2,000 complaints were on billing disputes and the median amount of relief provided was $130 with $25 being the most common.
2. The complaint could be closed without monetary relief.
Closing a complaint without monetary relief may include those where terms are changed or a credit report is corrected. This accounts for 15 of the 137 complaints.
3. The complaint could be closed with an explanation.
This could mean an explanation was provided to the consumer that met the desired response/outcome, or explains why no further action is necessary. This accounts for 60 of the 137 complaints. This accounts for 60 of the 137 complaints.
4. The complaint could simply be closed.
This means the file was closed without relief to the consumer or any explanation. This accounts for 2 of the 137 complaints.
One complaint was categorized as having an untimely response and 15 were still pending.
The database offers several ways anyone can review the complaints, by ZIP code (and as of June 19 only one report from Oklahoma has been logged), by the response, the volume, and the issues themselves.
The top five common complaints about credit cards start with billing disputes and then move to interest rates, problems cancelling or closing an account and credit card protection problems.
A snapshot of other complaints was also provided apart from the actual database release. Mortgage complaints are reported when the borrower is having a problem making payments. Complaints evolve from the modification, collections and foreclosure processes. In these complaints 600 received monetary relief with the $410 being the median payment. Of the complaints pertaining to checking accounts (grouped as being about products and services) the median amount of monetary relief reported was approximately $100 for the more than 1,000 cases where monetary relief was paid.
To provide encouragement and to justify these complaint procedures the CFPB is reporting “success stories” such as Nelda who had a collection agency after her for credit card purchases she never made. After she contacted the CFPB, the card issuer accepted that the charges were fraudulent and Ronald who overpaid his mortgage for more than three years because he could not find the right paperwork. When the CFPB contacted the bank, it reimbursed him $30,000.Complaints aC
While we anticipate the release of other data, the CFPB is seeking comment on extending the database to financial products other than credit cards. The comment period will be open until July 19. If you are interested in commenting, please review the Federal Register for the specifics. http://files.consumerfinance.gov/f/201206_cfpb_notice-of-proposed-policy-statement_disclosure-of-non-credit-card-complaint-data.pdf
The takeaway lessons here are to ensure your complaint procedure is up to date regardless of who your prudential regulator is. You may also use the information provided by the CFPB for comparisons to your bank’s complaint resolution results.
By Andy Zavoina
FDIC Insurance Fees
The FDIC issued FIL-33-2012 (http://www.fdic.gov/news/news/financial/2012/fil12033.html) on July 9, 2012. Some banks are taking a lead from the airline industry and itemizing fees for items like peanuts and pillows. In this case banks are disclosing to consumers that there is a fee for FDIC deposit insurance. The FDIC doesn’t say that a bank cannot charge a fee for this, but the FDIC does not want it to appear as though it is the FDIC charging for that coverage. Banks should not disclose any fee as "FDIC Fee," "FDIC Assessment," "FDIC Insurance Premium," "FDIC Insurance Charge," or any similarly described fee for deposit insurance. The FIL indicates that by disclosing this fee the bank may reveal information that could be used to determine an institution’s confidential supervisory ratings.
We encourage banks to review their fee disclosures, and verify that the disclosures are in compliance with FIL-33-2012.
By Any Zavoina
You’ve read about and perhaps even feared getting that call, “the bank is being sued by a person saying there was no fee disclosure on one of the ATMs.” Yes, there is an on-screen notice and this is redundant, but it is what is required. It would take an Act of Congress to change it. Well, that Act is in progress. The House passed its version with a vote of 371-0. The Senate has its version (S. 3394) pending.
By Andy Zavoina
Biggert-Waters: Flood Insurance Reform Act
It seems like every year we get down to the expiration date of flood insurance availability or even past it. That won’t happen again, at least for five years. On July 6, 2012 the President signed into law the Biggert-Waters Flood Insurance Reform and Modernization Act of 2012.
This new Act will trigger many changes. We have bullet pointed some of them below.
1. The National Flood Insurance Plan is reauthorized through September 30, 2017.
2. This Act was combined with others in the Moving Ahead for Progress in the 21st Century Act (MAP-21). While there is an effective date in the Act, it is for certain sections which do not include the flood changes. This means that technically the flood changes took effect when the Act was signed into law. Banking organizations are trying to get clear answers on the expectations now. We’ll keep you informed.
3. Civil Money Penalties (CMP) increase from $350 per violation, to $2,000. The $100,000 cap that was in place is removed. Through July 25, 2012 there have been 37 banks charged with flood CMPs for a total of $387,455. That is approximately 1,107 individual violations assuming each was charged the maximum at the current $350 limit. Under the new rules this amount would be $2,214,000. Based on the effective date, only those penalties after July 6, 2012 should be at the higher rate. But with the 471 percent increase in the penalty amount, lenders and those involved in the loan process must ensure the flood requirements are met. This is no longer a nuisance penalty. The average CMP charged to a bank will go from $10,472 to $60,000.
4. Section 200209 requires flood insurance premiums to be escrowed under the same payment terms as the loan is scheduled for repayment. There are exceptions and allowances for state laws and the asset size of the bank. Exceptions as to asset size exempt banks under $1 billion if the bank was not already required to escrow for flood insurance, and the bank did not have a policy requiring the escrow of taxes and insurance as of the enactment date. This provision does allow the regulatory agencies to issue regulations and does not take effect until July 6, 2014. It does apply to new and existing applicable loans.
5. Under section 100210 minimum deductibles will be in place. There are two sections and two categories in each. The two categories are pre-FIRM, which is defined as A building for which construction or substantial improvement occurred on or before December 31, 1974, or before the effective date of an initial Flood Insurance Rate Map (FIRM). Pre-FIRM structures receive a subsidized rate because they were built before floodplain management standards were established. Pre-FIRM properties will require $1,500, if the flood insurance coverage for such structure covers loss of, or physical damage to, such structure in an amount equal to or less than $100,000; and $2,000, if the flood insurance coverage for such structure covers loss of, or physical damage to, such structure in an amount greater than $100,000. For post- FIRM properties, this is $1,000, if the flood insurance coverage for such structure covers loss of, or physical damage to, such structure in an amount equal to or less than $100,000; and $1,250, if the flood insurance coverage for such structure covers loss of, or physical damage to, such structure in an amount greater than $100,000.’’
6. The Consumer Financial Protection Bureau will have to revise RESPA to allow for new disclosures. Section 100222 will require the borrower to receive ‘‘An explanation of flood insurance and the availability of flood insurance under the National Flood Insurance Program or from a private insurance company, whether or not the real estate is located in an area having special flood hazards.’’.
7. The rules on force-placed insurance will have to change. Clarification is made that while the bank may not force-place for 45 days, it may charge a fee for coverage back to the lapse of the prior policy. A force-placed policy will have to be canceled within 30 days of receipt of a new policy and the premium cost during the period of double coverage refunded.
8. Proof of insurance will include “an insurance policy declarations page that includes the existing flood insurance policy number and the identity of, and contact information for, the insurance company or agent.”
9. “Private flood insurance” will be defined and lenders, as well as Fannie and Freddie will have to accept these policies when the defined parameters are met. The borrower will also have to receive a notice explaining that private coverage in the same level is available and encourage them to comparison shop for the policy.
By Andy Zavoina
Servicemembers Civil Relief Act – Renewed Importance?
First there was a GAO report, and then a record setting settlement with a bank. The Government Accountability Office released a study that may trigger enhanced review of the Servicemembers Civil Relief Act (SCRA) at your next exam. The focus of the GAO’s review was on mortgage foreclosures. While they recognize that not all protections are effective for all servicemembers, there were at least 15,000 instances where a servicemember’s interest rate was not reduced on pre-service mortgage debt. More than 300 foreclosures occurred which should not have.
The GAO estimates that from 2007 through 2011 banking regulators reviewed only 48 percent of all banks and credit unions for SCRA compliance. Of these institutions that were reviewed for SCRA compliance, only about half of them received examinations that involved testing for compliance by actually reviewing loan files. The report also noted that the files reviewed were those the bank (or credit union) had identified as being subject to the SCRA. The report found fault in that files were not independently tested to find any that the bank had not, in error, identified as SCRA protected. (This is important in the Capital One settlement below.)
The results of this report may result in an increased scrutiny of SCRA applicable loans in your next review. Additionally, ensure your foreclosure practices include verification for SCRA applicability.
After the GAO released its report, Capital One settled an SCRA case for $12 million. What was the bank doing wrong, that you should ensure your bank is doing right? The Capital One settlement alleges the bank:
1) wrongly denied certain written requests made by SCRA-protected service members to have the interest rate on their credit cards and motor vehicle finance loans lowered to 6 percent per year;
2) provided insufficient interest rate benefits on certain accounts that were enrolled after written requests were received from SCRA-protected service members;
3) foreclosed on the mortgages of certain SCRA-protected service members without court orders;
4) repossessed certain SCRA-protected service members’ motor vehicles without court orders; and
5) obtained default judgments on certain debts owed on credit cards, mortgage foreclosures, and/or motor vehicles without filing accurate affidavits of military service.
The penalty includes:
– $7 million in damages to service members for SCRA violations, including
– at least $125,000 in compensation for any lost equity (with interest) to each servicemember whose home was unlawfully foreclosed upon, and
– at least $10,000 in compensation for any lost equity (with interest) to each servicemember whose motor vehicle was unlawfully repossessed
– establish a $5 million fund to compensate servicemembers who did not receive the appropriate amount of SCRA benefits on their credit card accounts, motor vehicle finance loans and consumer loans. (Any portion of the $5 million that remains after payments to servicemembers will be donated to one or more charitable organizations that assist service members.)
The bank has also agreed to ongoing independent audits that may be warranted, it has already adopted new policies and will not only lower rates to 4 percent instead of the SCRA required 6 percent, but it will extend that rate period for a year beyond the normal termination date.
The servicemembers who are to be compensated need to do nothing. The bank will identify and compensate them going back to 2006. Capital One will recognize a request for a reduced rate across all the accounts it has for that servicemember. So a request for a rate reduction on a credit card will now apply to an existing auto loan, as an example.