- Where to find what you’re looking for
Where to find what you’re looking for
By Mary Beth Guard
When I was new to banking law, I found the biggest challenge was figuring out where to go to look for answers to the seemingly endless questions that arose in the course of daily work in the banking trenches. Sure, for some research projects the relevant law or regulation was readily apparent; for others, however, the path was far less clear and the search for just the right provision was frustrating.
Perhaps you have faced the same difficulties. If so, this edition of Legal Briefs is for you! It’s aimed at helping you determine where all kinds of requirements, prohibitions and important provisions are found. It synthesizes what I’ve learned about “how to find it” over the course of nearly three decades.
It’s not all compliance either. Many of the laws and regulations you are affected by, either directly, or in the course of dealing with customers, are in areas that have nothing to do with regulatory compliance. This article captures those, too.
Before we drill down to specifics, let’s sketch out some general principles about the laws and regulations that impact your business, one way or another. First, we’re going to talk about the two sources for laws. Then we’re going to explore where the statutes leave off and rules take over. Then we will point the way to specific laws and rules, particularly those that can be difficult to locate.
Federal vs. state
The first thing to understand is that some matters are addressed exclusively in state law. Other matters are addressed exclusively in federal law. And a few subjects are dealt with by both our state legislature and Congress. In addition, there are some laws and rules that apply only to nationally-chartered banks, while others apply only to state-chartered institutions. [To throw in a curve ball, within state-chartered institutions, there are state member banks and nonmember banks. Nonmember banks have some specialized FDIC provisions to deal with.]
This article will focus primarily on state law.
Statute vs. Rule
Some things are found in the law itself (statutes), while other matters are discussed solely (or with much more detail) in the regulations (rules).
Statutes are the product of Congress or the state legislature. Basically, they can enact anything they dream up, but if a law violates some part of the Constitution (either federal or state), you can be sure someone is going to step forward to file a lawsuit to challenge it. If a provision of a statute is found to be unconstitutional, it will be struck down by a court. The specter of having a law they’ve enacted struck down as unconstitutional is usually enough to cause legislators to toe the line and refrain from writing and passing legislation that will end up in the judicial trashcan.
Rules/regulations, on the other hand, are promulgated by administrative agencies. At both the federal and state levels, there are steps an agency must take before it can issue a final rule. Under the state or the federal administrative procedures act, rulemaking is transparent and virtually always must involve notice to the public and an opportunity for comments. In rare occasions, rules are adopted on an “emergency” basis without the typical acceptance and review of comments. The comment process assists the agency proposing the rule to understand the practical consequences of the proposal, and provides the agency with encouragement, criticism, suggested changes, reasons for backing off or doing something differently, feedback about the timeframe needed to modify businesses practices, etc.
Rules are intended to “flesh out” details of bare bones statutes. In order for there to be rules in connection with a particular law, the law has to give an agency the authority to promulgate rules on the subject. There are many laws which stand alone; in other words, they do not have implementing regulations. An example would be the Servicemembers Civil Relief Act (SCRA). There are no rules under the SCRA. Everything is in the statutes.
By way of contrast, the Biggert-Waters Flood Insurance Reform Act of 2012 has numerous provisions which will not take effect until certain administrative agencies adopt final rules to provide the necessary additional details for compliance. The same was true of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Some of its provisions were self-effectuating, they went into effect immediately upon enactment of the law, while others (such as the collection of data on loans to small businesses, female-owned businesses, and minority-owned businesses) still have not taken effect, despite the fact that the law mandating the data collection has been around since July 21, 2010, because rulemaking is required and nearly four years later it hasn’t even been started on that particular subject. (Not that we’re complaining!)
Think of rules and statutes like pairs. Where there is a rule, there must always be a statute to which the rule is tied. Conversely, however, where you see a statute, there is not always a corresponding rule. Statutes can stand alone. Rules cannot.
We have the Home Mortgage Disclosure Act; it is implemented through the CFPB’s Regulation C. We have the Truth in Savings Act, implemented by Regulation DD. We have the E-SIGN Act, on the other hand. It has no implementing regulations.
In terms of parameters, when an agency adopts a regulation, it must do so within the scope of its authority. An agency cannot “legislate” or go beyond the rulemaking authority granted by the authorizing legislation. Usually, if a proposed rule is overly broad or exceeds the scope of the agency’s authority, that will be pointed out during the comment process and the final regulation will be modified accordingly. Occasionally, however, an agency will dig in its heels and assert that it has the authority to do whatever it might be trying to do and a challenge to the action must be filed in court.
So, what won’t you find in rules? Penalties. Only Congress or the state legislature can make something a crime or give a private right of action for some kind of a violation. And only Congress or the state legislature can specify which violations will result in a fine.
Sometimes someone will read a regulation and think “Well, it doesn’t say what will happen if we don’t do what it says to do.” No, it won’t say what the consequences are. That will be spelled out in a statute, not a rule. Wondering what would happen if you didn’t register your Mortgage Loan Originatorss? The SAFE Act spells out the penalties. Can’t find that new special right to sue for damages that an aggrieved consumer has if the consumer believes a lender did not comply with the Ability to Repay requirements? You aren’t going to find it in Regulation Z. Those kinds of provisions are only found in statutes, so you would go to the underlying law – the Truth in Lending Act in this case, to obtain the information about when a consumer can sue and what they can sue for.
What to find in federal law
In terms of knowing whether something is addressed by federal or state law, it’s just something you have to learn and become familiar with. There’s no particular trick to it, just creating two pigeonholes in your mind – one for federal and one for state, and putting the laws in the proper pigeonholes.
Here illustrative examples of some of the areas of federal law that financial institutions have to contend with:
Equal Credit Opportunity Act, which prohibits discrimination in any aspects of credit on the nine prohibited bases. It affects everything from product offerings and advertisements to deadlines for acting upon an application for credit and for communicating action taken on the application. It is implemented through the CFPB’s Regulation B.
The Home Mortgage Disclosure Act requires government monitoring information to be gathered, recorded, and reported on home purchase, home improvement, and refinanings in order for the government to more easily spot evidence of potential lending discrimination. It is implemented by CFPB’s Regulation C.
The Electronic Fund Transfers Act provides protections in connection with electronic fund transfers made to or from a consumer account. The protections include initial disclosures, receipts at ATMs, periodic statements, restrictions on the issuance of access devices, mandatory error resolution procedures and timeframes, surcharge disclosures, limitations of liability for unauthorized transfers, stop payment capabilities on some EFTs, opt-in requirements for overdraft fees arising from ATM transactions and one-time debit card transactions, gift card disclosures, and special safeguards for individuals who receive payroll cards. Reg E from CFPB implements it.
What to find in state law
State law is where you are going to find many provisions that affect your institution on a daily basis. While federal law has the majority of compliance-related provisions, state law has the bulk of everything else.
In this edition of Legal Briefs, I am highlighting some of the things you will find in state law, and where you’ll find them. My list is extensive and my word count is limited, so I’ll return to this topic again in the future if you let me know you find it helpful.
Title 15. Contracts
Contract law is always a matter of state law – although if you have an issue involving a contract your bank has entered into with a vendor, for example, you will need to read the document to see what state’s law will apply. Particularly if the contracting parties are in different geographic locations, the contract will say that it is to be construed under the laws of “such and such state.” Never assume it is going to be construed under our laws unless it says so. Generally, the Oklahoma statutes on this topic are found in Title 15, but note that provisions that relate to specific contracts, such as safe deposit leases, for example, are found in other areas of the law.
Within the Title 15 contracts statutes, you will find provisions that relate to the following:
- Capacity of minors to enter into a contract – and what happens if a minor enters into a contract he lacks capacity to enter into
- When the validity of a contract can be challenged based upon fraud, duress, mistake and other factors
- What constitutes valid consideration for a contract
Title 15 is also where you will find a vital provision that says “No lender or borrower may maintain an action to enforce or seek damages for the breach of any term or condition of credit agreement having a principal amount greater than Fifteen Thousand Dollars ($15,000.00), unless such term or condition has been agreed to in writing and signed by the party against whom it is sought to be enforced or against whom damages are sought.” That’s part of Section 140.
Don’t miss Section 178. That’s the one that essentially nullifies a naming of a spouse as beneficiary for a death benefit if, after naming the spouse as beneficiary, there is a divorce or annulment and the person doesn’t reaffirm that’s still what he or she wants. Our Payable on Death statute in the Banking Code expressly makes POD designations subject to 15 O.S. Section 178.
And that’s just the tip of the Title 15 iceberg. In that same Title of Oklahoma law, you also find the Oklahoma Consumer Protection Act (beginning at Section 751), Oklahoma’s equivalent of the Do Not Call Act, the Telemarketer Restriction Act, beginning at Section 775B.1, a law on Unlawful Electronic Mail, at Section 776.1 – 776.7, the Anti-Phishing Act beginning at § 776.8, and our Gift Certificate and Gift Card Disclosure Act (who knew?!), beginning at Section 801.
Oklahoma’s Uniform Statutory Form Power of Attorney Act (wouldn’t it be great if that were the only kind customers ever used?) starts at Section 1001. (Right before a relic from the past – the Y2K Protection Act. Those were the days!) It’s odd they placed the USFPAA in Title 15, because that’s not the Title that any of Oklahoma’s other power of attorney statutes are found in.
State Banking Code. Title 6
Presumably, you are quite familiar with the provisions of the State Banking Code. If you aren’t, you should be. It is divided into subject matter sections referred to as “Articles,” each with its own roman numeral. I find it helpful from time to time to just go through and look at the headings of the different articles to remind myself of how the Code is organized and what all is covered.
There are sixteen articles designated, but Article XV is repealed, so there are really just fifteen substantive articles contained in 1-XVI. Here is a quick rundown on the fifteen that still exist and, briefly, what you will find in them:
Article 1 is where you find general provisions and some of the key definitions. It’s short, but before you read any other section of the Code, you need to know which terms are specially defined up front in Section 201.
Article II describes how the Banking Department works and it details the powers of the Banking Board and the Commissioner.
Article III deals with the chartering of banks and trust companies.
Article IV is titled Powers. It refers not to the powers of the Department, but powers of state-chartered banks and trust companies. This is where you will look for authority to pledge assets to secure the uninsured portion of public deposits, the authority to do signature guaranties, to have an ESOP, pay dividends, establish a military banking facility, run an LPO or DPO, or serve as trustee of a bond issue.
Article V is where you find all of the provisions relating to branch banking.
Article VI is where you look if you are contemplating an emergency closing or trying to figure out what the restrictions are on your hours and days that you are open for business.
Article VII addresses the corporate functions of banks and trust companies. It’s the place you look when you want to research an issue relating to director meetings, director duties, and various matters relating to bank stock. It spells out the type of indemnification you can provide to officers, directors, and employees and specifies requirements for fidelity bonds and other insurance.
Article VIII is titled Regulation of Banks. This is where you find lending limits, reserve requirements (although it pretty much points to what the federal authorities require), restrictions on real estate lending. Plus, this is where you get the restrictions on employing money in trade or commerce. Section 805 spells out how you can be the owner and lessor of personal property for the use of a customer. In Article VIII, you also find guidance on participations, prohibitions against the bank making political contributions, and the prohibition against preference to depositors or creditors through a pledge of assets.
Article IX is at the heart of all deposit accounts in Oklahoma banks, regardless of whether a bank is state-chartered or nationally-chartered. It provides the authority for several variations of payable on death beneficiary designations, removes the disabilities of minority in order for a minor to have a deposit account in his own name, addresses Totten trusts and revocable trusts and documentation for each, and tells you what type of adverse claims to deposits you have to recognize. There’s the squirrelly “Husband and Wife Sole Proprietorship” provision in Section 907. Section 906, which has been extensively amended in recent years, is where you look for your power to pay out decedent funds to heirs. And even though this Article is titled “Deposits and Collections,” amendments made recently to Section 906 deal with turning over safe deposit box contents to the heirs of a deceased renter. Good to know, so you won’t be wasting time looking for that over in the Article which deals with all of the other safe deposit matters.
Article X relates to trust companies. There are some provisions of this Article that specifically address banks having trust powers, so if your bank has a trust department you need to know what this Article has to say about it.
Article XI is devoted to merger, consolidation, conversion, and sale of assets. If you are a nationally-chartered bank thinking of converting your charter, read up! Section 1107 provides guidance. It also addresses conversion from state bank to national. Want to sell off one of your business lines, such as your credit card department? Section 1109 deals with sale of all assets of the bank or just a department of the bank. Mergers of state banks are addressed in Section 1111.
Article XII is something we wish we never have to look at again, because it deals with liquidation, dissolution, and reorganization. Let’s assume you will never need to know what it says.
Article XIII is where you get your marching orders in the safe deposit box arena. From specifying who you can lease to, to describing the search procedure that can take place on a box after death to find a copy of a will, a trust, a deed to a burial plot, you will find it all in this article. You will also find guidance on access by fiduciaries, when a deputy can be appointed, and what types of contract provisions you need to have.
Article XIV has the title “Offenses, Violations, and Penalties.” This is where persons are prohibited from transacting business using a name with a derivation of the word “bank” unless they are a bank, or unless the Commission determines their use of the word is not going to deceive the public into believing the person is engaged in the banking business. (Think Tree Bank and Blood Bank.) There’s another section that takes the same position with derivations of the term “safe deposit.” This Article has a long laundry list of legally objectionable conduct, but if your bank has a confusingly similar name to another institution, you need to make sure you have read and studied Section 1417 to understand the steps you must take to help the public avoid confusion.
Article XVI (remember, Article XV was repealed, but we still have XVI) is the International Bank Act. Although it has been part of the Banking Code since 1992, I will confess (just to you – this will be our little secret) that I have never read it. I suspect you have never had the need either.
When I was general counsel for the State Banking Department in the 80s, a money order issuer from Arkansas, NWFX, Inc. went bankrupt. Until that moment, I had never considered the fact that when an entity is licensed to issue money orders, it’s not a whole lot different from being allowed to come up with alternative money. A money order is a piece of paper that people give value for and they anticipate it will be accepted just like cash.
When NWFX failed, folks who had used their money orders to pay rent, pay fines down at the Police Department, pay child support, and all kinds of other payments were left holding the bag. The underlying debts weren’t discharged and they had very little recourse. Oklahoma’s Sale of Checks Act under Title 6, beginning at Section 2101, provides requirements for licensing, bonding, recordkeeping, net worth, and reporting, for these types of entities in order to protect those who purchase and accept money orders.
There are two financial privacy acts. One is the federal Right to Financial Privacy Act. It comes into play only when “customer” records, as that term is narrowly defined, are being sought by a federal governmental authority. Other types of requests for customer records or financial information, are typically going to be governed by Oklahoma’s Financial Privacy Act, which is found in Title 6, beginning at Section 2201. For reimbursement of your expenses for providing records under the federal RFPA, you look to the Federal Reserve Board’s Regulation S for rates. When you provide records under the Oklahoma Financial Privacy Act, your fees for search and processing costs, reproduction costs, and related expenses are subject to Section 2206 of Title 6.
After being buried in paper for decades, financial institutions have readily embraced the digital revolution imaged records like crazy, but have worried just a bit about whether they could encounter trouble if an imaged document became the subject of controversy. Section 3001 of Title 6 allows you to rest easy, because it provides the authority to store and reproduce records electronically and still have them be admissible in evidence. It says “Any financial institution may cause any or all records, including its records as a fiduciary, at any time in its custody to be stored and reproduced electronically or by the microphotographic process, and any reproduction made or an electronically or microphotographically stored record shall have the same force and effect as the original thereof and be admitted in evidence equally with the original.”
Protection against discovery
Section 3002 of Title 6 is innocuously titled “Compliance Review.” Perhaps you have never heard of it, but, trust me, you will want to know all about it. It says that if you have a compliance review committee, which is either an audit, loan review or compliance committee appointed by your board, or any other person who acts in an investigatory capacity at the direction of a compliance review committee, and documents are prepared for or created by the compliance review committee which is working on evaluating and seeking to improve loan underwriting standards, asset quality, financial reporting to federal or state regulators, or the committee is evaluating and seeking to improve compliance with regulatory requirements, there is really good news found in this statute. It provides that compliance review documents are confidential and are not discoverable or admissible in evidence in any civil action arising out of matters evaluated by the compliance review committee. Plus, compliance review documents delivered to a federal or state governmental agency remain confidential and are not discoverable or admissible in evidence in any civil action arising out of matters evaluated by the compliance review committee.
There is an exception for documents which reflect evidence of fraud committed by an insider of a depository institution, to the extent those documents are otherwise discoverable or admissible.
Negotiable Instruments. Title 12A
Negotiable instruments [checks, promissory notes, money orders, etc.] are addressed by the Uniform Commercial Code Article 3, which is found in Title 12A of the Oklahoma Statutes. Every bank employee who deals with checks or promissory notes or any other type of negotiable instruments should get a cup of something good-tasting, settle back in a comfortable chair, and look through the eight separate Parts (and many sections) of Article 3. It is where you find guidance on everything from negligence contributing to forged signature or alteration of instrument to what you do about a lost, stolen, or destroyed cashier’s check
Bank Deposits and Collections, Title 12A
After you have completed your review of at least the titles to the various parts and sections of Article 3 of the UCC, keep plowing ahead to Article 4, which deals with Bank Deposits and Collections. This UCC Article contains crucial provisions dealing with everything from stop payments to encoding warranties. An employee who has a true mastery of these provisions can save his or her bank endless headaches – and losses.
Funds Transfers, Title 12A
I will admit frustration with the title to this part of the UCC. When I hear the term “Funds Transfers,” I automatically think of federal law, the Electronic Fund Transfer Act and its implementing regulation, Reg E. Instead, Section 4A-108, specifically says “This Article does not apply to a funds transfer any part of which is governed by the Electronic Fund Transfer Act of 1978 (Title XX, Public Law 95-630, 92 Stat. 3728, 15 U.S.C. Section 1693 et seq.) as amended from time to time.”
What does that mean? It means that a consumer account-related EFT is not covered by Article 4A. On the other hand, there are many types of transactions (including all business EFTs) that are not covered by the EFTA and Reg E. There are even some consumer transactions that are not covered As the Oklahoma Code Comment notes: “For example, under Regulation E § 205.3(e) a transfer of funds that is initiated by a telephone conversation between an individual and an employee of a financial institution and which is not under a prearranged plan for periodic or recurring transfers is not covered. Thus Article 4A could cover such a transfer even though its design is for large dollar transfers by businesses and financial institutions.” If a fund transfer is not covered by the EFTA, it’s likely it would be covered by Article 4A.
On transactions that are covered by Article 4A, you get guidance on how duties are assigned to the various parties to the transaction, where the risks of liability lie, and how losses are allocated when problems, such as improper execution of the payment order or misdescription of the beneficiary, occur.
Secured Transactions, Title 12A
Ah, yes. Article 9. The “bible” for how you perfect a security interest in most types of collateral other than real property. This is an area your lending staff must thoroughly understand. It’s lengthy, it’s complex, but it attempts to address virtually any situation you might encounter involving security interest perfection.
UETA, Title 12A
The Uniform Electronic Transactions Act is like the strange cousin to ESIGN. You can find UETA beginning at Section 15-101 of Title 12A of the Oklahoma Statutes. For information on the complex issue of what is governed by ESIGN, vs. what is governed by UETA, consult the legal articles on uetaonline.com. Keep in mind that ESIGN (which is federal) was designed for consumer matters.
Real estate matters, Title 16
Wouldn’t you think that’s what they would call it – real estate, or real estate matters? Naaaa. The real name for Title 16 is Conveyances. It’s like code. But I’m breaking the code to tell you that this is the area of the Oklahoma Statutes you will be looking in when you want to research questions like whether it is legal for someone who is an attorney-in-fact to make an instrument (such as a deed or mortgage) affecting real estate, or what needs to be included in a Sheriff’s deed, and all kinds of other real property-related matters. Plus, in the Appendix, you will find the Title Examination Standards. Those are an absolute treasure trove of information about everything from mortgages to tax liens.
Right of offset, Title 42
It’s actually called the banker’s general lien, and it is found it Title 42, Section 32. It’s a simple, but powerful, one sentence provision that reads, “A banker has a general lien, dependent on possession, upon all property in his hands belonging to a customer, for the balance due to him from such customer in the course of the business.”