- Update on the Foreign Remittance Transfers Rule
- Updated CFPB Exam Manual and Supervision Findings
- IRA Time of Year
- Qualified Mortgages
By John Burnett
Update on the Foreign Remittance Transfers Rule
As we get closer to the February 2013 effective date of the Remittance Transfers Rule in subpart B of Regulation E, questions on its applicability continue. There are also some glimmers of hope from the Bureau that one of the rule’s most onerous provisions might be “re-thought.”
First, let’s talk a bit about PayPal transactions. Are they subject to the rule, and who is responsible for disclosures, error resolution and the other compliance issues for these increasingly popular payment transactions? Traditional PayPal entries are initiated by consumers through PayPal itself, and they often show up in your financial institution as incoming ACH debits without a lot of information attached other than they come from PayPal. They may be old-school domestic ACH debits or they could arrive in an IAT wrapper as international ACH entries (IATs). Whether an ACH entry from PayPal is an international transfer or not, your bank is the Receiving Depository Financial Institution (RDFI), and that means the Remittance Transfers Rule won’t be your institution’s concern. That’s because any ACH transfer for which you need to comply with the Remittance Transfers Rule has to be an outbound IAT credit entry (your bank would be the ODFI), and these PayPay entries are inbound debit entries. If they are subject to the Remittance Transfers Rule at all, PayPay itself would be the remittance transfer service provider that’s responsible for compliance. Your institution will, of course, be subject to subpart A of Regulation E as you have always been, if the PayPal debits involve consumer accounts.
There is another type of PayPal transaction you might have to be concerned about, though. If your institution offers PayPal P2P transactions to its consumer depositors, it could be a remittance transfer service provider. That’s because PayPal P2P transfers can be received in foreign countries in (currently) 24 different currencies. All that’s needed is the recipient’s email address, and PayPal takes care of getting the funds delivered. If PayPal P2P is a service provided by your institution itself (using PayPal as the third-party service provider), you may need to comply with the Remittance Transfers Rule beginning in February, at least when you accept remittances to be delivered in foreign currencies, since that’s sufficient information to know that the payment will likely be received outside the U.S. On the other hand, if you’re acting only as a PayPal agent, or simply providing your customers a link to the PayPal site for these transfers, it may be PayPal that has the onus of compliance.
That means you need to add an item to your “To Do” list: Find out whether your institution offers or promotes the PayPal P2P service, and whether consumers obtain the service from you or from PayPal.
That glimmer of hope
When the CFPB presented its recent webinar on the Remittance Transfers Rule, Director Richard Cordray offered a ray of hope in his introductory remarks that could mean that a favorable change will be made to one of the rule’s most troublesome requirements. As currently written, if a Sender provides incorrect account number information, the remittance transfer service provider could be “on the hook” for the amount of the transfer. For example, if Susie Sender arranges with your bank to send $1,000 to her aunt Sophie in Bucharest, and gives you Sophie’s account number at her bank as “1234567” instead of “1234568,” and the bank in Bucharest credits the funds to account “1234567” as instructed, it’s entirely possible that whoever that account belongs to will spend those funds and the Bucharest bank may not be able (or inclined) to recover the erroneous payment. When Susie makes an error claim 5 months later (she has 180 days!) and provides the correct account number (1234568), you’ll have to refund the amount Susie paid you for the transfer or re-send the transfer with the correct information, and Susie won’t have to pay anything other than any third-party fees and taxes. Just to rub salt in your wounds, you’ll also have to refund your fee that Susie originally paid for the errant transfer. [12 CFR Part 1005, § 1005.33(c)(2)(ii)] Director Cordray told those listening to the Bureau’s webinar that the agency shares industry concerns about this provider liability provision when the sender has provided erroneous information, and that the Bureau expects to “take action shortly” to address this situation. We don’t know yet what that action will be, but we can suggest what would be fair. It would be reasonable, I think, if the provider will still be required to attempt to correct the erroneously-directed payment, but if good faith attempts fail, may have to refund the transaction fee, but not the transfer amount. In exchange for that shifting of liability, we might expect that providers would have to “clearly and conspicuously” alert senders that if they provide erroneous payment routing information and the transfer is sent in good faith reliance on that information, the provider will be responsible only for a good faith attempt to recover misrouted funds and a refund of fees and, where permitted, taxes collected by the provider for the errant transfer.
By John Burnett
Bureau Posts Supervision Findings and Updated Exam Manual
Even if you’re not a $10 billion bank, you can find something instructive in the CFPB’s Fall 2012 Supervisory Highlights, released on Halloween. As the release announcement says, no specific institution is mentioned (other than those already revealed in public enforcement action documents), but the document “signals to all institutions the kinds of activities that [the Bureau believes] should be scrutinized carefully for compliance with the law.” The Fall 2012 report covers highlights of problems the Bureau has identified from July 21, 2011 (the Bureau’s “opening day”) through September 30, 2012. Some of those included in the Bureau’s news release were (1) inappropriate increases to credit lines of credit cardholders under the age of 21; (2) inaccurate reporting of consumer account information to credit bureaus; and (3) violations of federal consumer financial protection laws by financial institutions, including problems with RESPA and TILA disclosures.
The report, which is a concise 14 pages long, is a great source for “frequent violations” information that can help your bank avoid similar problems. It can be downloaded from the Bureau’s website (http://files.consumerfinance.gov/f/201210_cfpb_supervisory-highlights-fall-2012.pdf).
On a related note, the Bureau also released its most recent edition of its Examination Manual. It incorporates individual sections that were added to “version 1” of the Manual since its release. It’s another excellent resource for audit checklists and ideas for policies and procedures involving consumer financial protection laws. The Manual (version 2) is available in a single PDF file, from the Bureau’s webpage at http://www.consumerfinance.gov/guidance/supervision/manual/. Separate exam procedures the Bureau will apply to large non-bank debt collection firms, released after version 2 of the Manual was finalized, are also available on that webpage.
By Pauli D. Loeffler
Planning for an Employee’s Absence Series: Garnishments
Cross-training of personnel keeps everything running smoothly, particularly at a small bank. When the person who is in charge of a particular process is out either for vacation or unexpectedly due to illness, if there is one or more employees with at least a basic knowledge of the steps required, it will relieve everyone’s anxiety. Modify the check list as needed to follow your standard procedure.
1. Garnishment is stamped received with date and time.
2. Information is entered in garnishment log.
3. ____ Is the garnishment issued by an Oklahoma court?
Yes. Proceed to next step 4.
No. Does your bank have a branch it the state where issued?
____Yes. Contact the appropriate person for at the out of state branch for assistant; proceed to the instructions stated in the summons.
No. Send letter to the attorney or to creditor if no attorney garnishment is
not enforceable due to no jurisdiction. (see below).
4. What type of garnishment is it?
a. Wage garnishment: Is the judgment debtor an employee or contract laborer?
Yes. Proceed according to Step 5.
No. File Non-Continuing or Continuing Garnishee’s Answer/Affidavit with the Court and mail copy to the attorney or the creditor if no attorney.
b. ____ Pre-/Post Judgment Garnishment:
i. Do the bank’s records indicate the judgment debtor is a current customer of the bank?
____Yes. Proceed according Step 6.
____No. File Non-Continuing or Continuing Garnishee’s Answer/Affidavit with the Court and mail copy to the attorney or the creditor if no attorney.
5. ____ You must:
a. ____ Immediately mail by first class mail a copy of the notice of garnishment and exemptions, and the application for hearing to the last known address of the judgment debtor, or they you may be hand delivered.
b. ____ In the case of a Noncontinuing Earnings Garnishment, within the EARLIER of 7 days after the end of the judgment debtor’s present pay period or 30 days from the date of service of the garnishment, file the Noncontinuing and General Garnishee’s Answer/Affidavit with the Court and mail copy along with funds to the attorney or the creditor if no attorney.
c. In the case of a Continuing Earnings Garnishment you within 7 days of the end of each subsequent pay period, file the Noncontinuing and General Garnishee’s Answer/Affidavit with the Court and mail a copy along with funds to the attorney or the creditor if no attorney until the EARLIER of:
i. Total funds withheld equals the total balance due,
ii. The employment relationship is terminated,
iii. The judgment is vacated, modified or satisfied in full,
iv. The garnishment summons is dismissed, or
v. 180 days have elapsed since service of the summons.
6. ____ You must:
a. ____ Immediately mail by first class mail a copy of the notice of garnishment and exemptions, and the application for hearing to the last known address of the judgment debtor, or they you may be hand delivered.
b. ____ Seal any safe deposit box leased to the judgment debtor for 30 days.
c. Within two business days of service of summons follow the procedures required under 31 CFR Part 212 with regard to account review of protected benefits directly deposited into any account owned by a the judgment debtor, determine the protected amount of funds, if any, and freeze/segregate unprotected funds.
d. Provide The Notice to Account Holder if necessary under 31 Part 212 within 3 business days of the account review.
e. File the Noncontinuing and General Garnishee’s Answer/Affidavit with the Court no later than 10 calendar days following service and mail copy along with funds to the attorney or the creditor if no attorney.
IMPORTANT NOTE: A Federal Court outside of Oklahoma may have jurisdiction over your bank even if you don’t have a branch in that state. Consult legal counsel when a federal garnishment is served.
• Determine who is the judgment debtor. This is generally the defendant, but not always.
• Garnishments against individuals as judgment debtors do NOT reach accounts where the individual is an authorized signer. This applies whether the individual is simply a convenience signer on a personal account or the authorized signer for a corporation, limited liability company (even if the individual is the sole member and is using the SSN of the member), partnership, limited partnership or limited liability partnership. The garnishment will not reach trusts where the individual is NOT the grantor even if he is trustee, nor will it reach an account where the individual is the guardian, executor, conservator, custodian, rep payee or agent for a special fund (fiduciary) such as an IOLTA, lottery account or a premium trust account of an insurance agent.
• A garnishment against an individual will reach all accounts on which he is an owner. It will reach a revocable trust where the individual is the grantor as well as sole proprietorship accounts.
Responding to a Garnishment from a State Where the Bank Does Not Have a Branch:
If the bank does not have a branch in the state where the garnishment summons was issued, there is no jurisdication. If the bank complies with a garnishment where there is no jurisdiction, it will be liable to the customer. The bank does not need to file anything nor respond to the attorney or creditor, but to preclude a further attempt from that court as well as letters or phone calls, I suggest sending a letter to the attorney/creditor using the following language:
We received the garnishment summons in the case of [name of plaintiff v. name of defendant], Case No. [ ] filed in the [name of court, name of county, state of ]. The [name of bank] does not have a branch and does not do business in the state of , so the court lacks jurisdiction to enforce this garnishment. Proceedings to collect the judgment will require use of the Oklahoma courts.
Yes, you may send a copy of the garnishment to the customer along with a copy of the letter.
It’s That IRA Time of the Year, and Yes, Virginia, You Do Need to Withhold Oklahoma Taxes
By Pauli D. Loeffler
While banks are aware of the IRS requirements regarding withholding when the IRA owner makes withdrawals, many banks are not aware that Oklahoma has similar rules. These provisions are contained in the Administrative Code for the Oklahoma Tax Commission:
710:90-1-13. Pensions, annuities, and certain other deferred income
(a) Treatment of designated distributions. Designated distributions, as defined by the Internal Revenue Code (IRC), Section 3405, whether periodic or non-periodic, should be treated as if they were a payment of wages for Oklahoma Income Tax Withholding purposes. The payor of any periodic or non-periodic payment should inform recipients who are or become Oklahoma residents of the need to withhold if:
(1) The recipient has not chosen the election of “no federal withholding,” provided by Sections 3405(a)(2) and (b)(3) of the Internal Revenue Code, or
(2) The recipient elects to have Oklahoma Income Tax withheld irrespective of any election to not withhold federal income tax.
(b) Treatment of periodic payments. The amount to be withheld from a periodic payment is determined as if it were a payment of wages. The marital status and number of withholding allowances an employee may claim in determining the tax to be withheld shall be the same as that claimed on Form W-4P, Withholding Certificate for Pension or Annuity Payments, or a similar form provided by the payer.
(1) If the recipient has not provided a withholding certificate, tax will be withheld as if the recipient were married and claiming three (3) withholding allowances.
(2) The recipient can choose not to have tax withheld, regardless of how much tax is owed for the previous year, or is expected to be owed in the current year.
(c) Treatment of non-periodic payments. Tax will be withheld at a five percent (5%) rate on any non-periodic payments.
(1) The recipient cannot use Form W-4P to determine the amount to be withheld, since withholding allowances or marital status are not taken into consideration.
(2) The recipient can use For W-4P to specify an additional amount to be withheld.
(3) The recipient can also use Form W-4P to choose not to have tax withheld.
(d) Employer contributions. Employer contributions to qualified cash or deferred arrangements are not subject to Oklahoma Withholding Tax.
[Source: Added at 10 Ok Reg 3873, eff 7-12-93; Amended at 11 Ok Reg 3529, eff 6-26-94; Amended at 16 Ok Reg 2674, eff 6-25-99]
Here are the rules in a nutshell: If the bank withholds for federal taxes, the bank must withhold for the state as well. If the IRA chooses not to withhold for federal taxes, he may choose to withhold for the state but it is not required.
The form used to submit the amount withheld to the OTC is the Oklahoma Wage Withholding Tax Return WTH 10001. It may be accessed at this link:
By Mary Beth Guard
Do the qualified mortgages provisions of Dodd-Frank impact your bank? If you’re making mortgage loans, the answer is yes.
Sections 1411, 1412, and 1414 of the Dodd-Frank Act create a new section 129C of the Truth in Lending Act, which, among other things, establishes new ability-to-pay requirements and provides a presumption of compliance with those requirements if the mortgage loan is a “qualified mortgage.”
Under Dodd-Frank, creditors are prohibited from making mortgage loans without regard to the consumer’s repayment ability. What that means is that a creditor is prohibited from making a mortgage loan unless the creditor makes a reasonable and good faith determination, based on verified and documented information, that the consumer will have a reasonable ability to repay the loan, including any mortgage-related obligations (such as property taxes).
The above-referenced parts of Dodd-Frank require amendments to Regulation Z to implement them. A proposed rule was initially published by the Federal Reserve Board. Rulemaking authority for this was subsequently transferred to the CFPB. The CFPB subsequently extended the comment period until July 9, 2012 and we are awaiting finalization of the rule.
Remember how I said in the above article how important it is to consider context? Consider it here – these requirements are part of the Truth in Lending Act and modifications to Reg Z. That means they only apply in a consumer purpose loan context.
The Federal Reserve Board issued proposed amendments to Regulation Z on May, 11, 2011 to implement statutory changes made by the Dodd-Frank Act that expand the scope of the ability-to-repay requirement to cover any consumer credit transaction secured by a dwelling (with certain exclusions).
The proposal would also:
• establish standards for complying with the ability-to-repay requirement, including by making a “qualified mortgage”
• implement the Dodd-Frank Act’s limits on prepayment penalties; and
• require creditors to retain evidence of compliance with this rule for three years after a loan is consummated.
If this sounds familiar, it is probably because the Dodd-Frank Act’s underwriting requirements are substantially similar but not identical to the ability-to-repay requirements adopted by the Federal Reserve Board for higher-priced mortgage loans in July 2008 under the Home Ownership and Equity Protection Act.
Unlike the Board’s 2008 HOEPA Final Rule, this proposal is not limited to higher-priced mortgage loans nor is it limited to loans secured by the consumer’s principal dwelling. (Context, people, context!)
This proposed rule would apply the ability-to-repay requirements to any consumer credit transaction secured by a dwelling, with some exceptions.
The proposal would not apply to:
• an open-end credit plan
• timeshare plan
• reverse mortgage or
• temporary loan.
The Dodd-Frank provisions underlying this rulemaking reflect continuing concerns that have been raised about creditors originating mortgage loans without regard to the consumer’s ability to repay the loan. Beginning in about 2006, these concerns were heightened as mortgage delinquencies and foreclosures rates increased dramatically, caused in part by the loosening of underwriting standards. The background information published with the proposal recites the detailed history of previous legislative and regulatory provisions which have attempted to address these concerns.
In terms of a bullet-point summar, amended Section 129C of TILA now:
• Expands coverage of the ability-to-repay requirements to any consumer credit transaction secured by a dwelling, except an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan.
• Prohibits a creditor from making a mortgage loan unless the creditor makes a reasonable and good faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay the loan according to its terms, and all applicable taxes, insurance, and assessments.
• Provides a presumption of compliance with the ability-to-repay requirements if the mortgage loan is a “qualified mortgage,” which does not contain certain risky features and limits points and fees on the loan. It is therefore likely that lenders will want most of their consumer mortgage loans to meet the test for being qualified mortgages.
• Prohibits prepayment penalties unless the mortgage is a prime, fixed-rate qualified mortgage, and the amount of the prepayment penalty is limited.
Why does all this matter? What happens if your loans are not qualified loans (or haven’t otherwise satisfied the presumption of compliance with the ability to repay rules)? The Act creates special remedies for violations of TILA Section 129C, as follows:
• Section 1416 of the Dodd-Frank Act provides that a consumer who brings a timely action against a creditor for a violation of TILA Section 129C(a) (the ability-to-repay requirements) may be able to recover special statutory damages equal to the sum of all finance charges and fees paid by the consumer (often referred to as “HOEPA damages”), unless the creditor demonstrates that the failure to comply is not material. TILA Section 130(a).
• This recovery is in addition to actual damages; statutory damages in an individual action or class action, up to a prescribed threshold; and court costs and attorney fees that would be available for violations of other TILA provisions.
• Plus, the statute of limitations for an action for a violation of TILA Section 129C is three years from the date of the occurrence of the violation (as compared to one year for other TILA violations). TILA Section 130(e).
• AND — Section 1413 of the Dodd-Frank Act provides that a consumer may assert a violation of TILA Section 129C(a) as a defense to foreclosure by recoupment or set off. TILA Section 130(k). There is no time limit on the use of this defense.
The Act and the proposal provide four options for complying with the ability-to-repay requirement.
To comply, a creditor can:
• Originate a covered transaction under the general ability-to-repay standard;
• Refinance a “non-standard mortgage” into a “standard mortgage”;
• Originate a “qualified mortgage,” which provides a presumption of compliance with the rule; or
• Originate a balloon-payment qualified mortgage, which provides a presumption of compliance with the rule.
The general ability-to-repay standard is all about underwriting requirements.
Limits on loan features, term, and points and fees. Under the general ability-to-repay standards, there are no limits on the loan’s features, term, or points and fees, but the creditor must follow certain underwriting requirements and payment calculations.
Underwriting requirements. In terms of underwriting requirements, the proposal requires the creditor to consider and verify the following eight underwriting factors:
• Current or reasonably expected income or assets;
• Current employment status;
• The monthly payment on the covered transaction;
• The monthly payment on any simultaneous loan;
• The monthly payment for mortgage-related obligations;
• Current debt obligations;
• The monthly debt-to-income ratio, or residual income; andShow citation box
• Credit history.
The Dodd-Frank Act provides an exception to the ability-to-repay standard’s underwriting requirements if:
(1) The same creditor is refinancing a “hybrid mortgage” into a “standard mortgage,”
(2) the consumer’s monthly payment is reduced through the refinancing, and (3) the consumer has not been delinquent on any payment on the existing hybrid mortgage.
This provision appears to be intended to provide flexibility for streamlined refinancings, which are no- or low-documentation loans designed to quickly refinance a consumer in a risky mortgage into a more stable product.
Oh, joy, more new terminology!
The Act uses the term “hybrid mortgage.” The proposed rule uses the term “non-standard mortgage” instead (for reasons they explain in the rulemaking).
“Non-standard mortgage” means (1) an adjustable-rate mortgage with an introductory fixed interest rate for a period of years, (2) an interest-only loan, and (3) a negative amortization loan. (A “standard mortgage,” on the other hand, is defined as a covered transaction which, among other things, does not contain negative amortization, interest-only payments, or balloon payments; and limits the points and fees.)
After you review the remedies available to a borrower when the ability to repay standards are not adhered to by a creditor, it’s pretty clear that obtaining a presumption of compliance with the repayment ability requirement is vital.
Dodd-Frank provides special protection from liability for creditors who make “qualified mortgages.”
The Act defines a “qualified mortgage” as a covered transaction for which:
• The loan does not contain negative amortization, interest-only payments, or balloon payments;
• The term does not exceed 30 years;
• The points and fees generally do not exceed three percent of the total loan amount;
• The income or assets are considered and verified;
• The total debt-to-income ratio or residual income complies with any guideline or regulation prescribed by the Board; and
• The underwriting: (1) Is based on the maximum rate during the first five years, (2) uses a payment schedule that fully amortizes the loan over the loan term, and (3) takes into account all mortgage-related obligations.
If a creditor satisfies the qualified mortgage criteria, the consumer can not assert that the creditor had violated the ability-to-repay provisions. The consumer can only show that the creditor did not comply with one of the qualified mortgage safe harbor criteria.
The proposed rule, however, offers two alternative definitions of a “qualified mortgage” because of a perceived ambiguity in the Act. The statutory ambiguity in Dodd-Frank regards whether a “qualified mortgage” provides either a safe harbor or a presumption of compliance. As a result, the proposed rule contains two alternative definitions of a “qualified mortgage.”
Alternative 1 defines a “qualified mortgage” based on the criteria listed in the Act (as outlined above), and the definition operates as a legal safe harbor and alternative to complying with the general ability-to-repay standard. Alternative 1 does not define a “qualified mortgage” to include a requirement to consider the consumer’s debt-to-income ratio or residual income. Because of the discretion inherent in making these calculations, such a requirement would not provide certainty that the loan is a qualified mortgage.
Alternative 2 defines a “qualified mortgage” to include the requirements listed in the Act, as well as the other underwriting requirements that are in the general ability-to-repay standard (i.e., employment status, simultaneous loans, current debt obligations, debt-to-income ratio, and credit history). The definition provides a presumption of compliance that could be rebutted by the consumer.
To make a qualified mortgage that provides for a balloon payment, the creditor must meet certain qualifications. Under TILA Section 129C(b)(2)(E)(iv) , the conditions are that the creditor:
(1) operates predominantly in rural or underserved areas;
(2) together with all affiliates, has total annual residential mortgage loan originations that do not exceed a limit set by the Board;
(3) retains the balloon-payment loans in portfolio; and
(4) meets any asset-size threshold and any other criteria as the CFPB may establish.
The test: During the preceding calendar year, the creditor extended over 50% of its total covered transactions with balloon payment terms in counties that are “rural” or “underserved,” as defined in § 226.43(f)(2). The CFPB or the Board determines annually which counties in the United States are rural or underserved and publishes on its public Web site a list of those counties to enable creditors to determine whether they meet this criterion.
Don’t get confused into thinking that “qualified mortgages” are the same thing as “qualified residential mortgages” (QRM). The QRM requirements are different. They are the “skin in the game” requirements, and we’ll explore them next time.