Monday, September 26, 2022

January 2015 Legal Briefs

  • Progress in the subpoena wars
  • IRA rollover rules
  • Common law marriage
  • Keeping track of annual inflation adjustments
  • HUD-SCRA required notice

Progress in the subpoena wars

By Mary Beth Guard

If you have ever had someone in law enforcement get huffy with you when you refuse to accede to a request to turn over customer records or information until and unless they supply the proper paperwork and go through the proper procedures, you understand what an uncomfortable and unsatisfying situation it is for all those involved. We’ve heard of a local sheriff who threatened to close down a bank’s branch and seize its records. More than one banker has been threatened with the promise of a night in the pokey. In the immortal words of Rodney King, “Can’t we all just get along?”

In that spirit, OBA’s Elaine Dodd and I jumped at the opportunity to speak for the statewide District Attorneys Council on the subject of how to work effectively with financial institutions. The resulting meeting was eye-opening. Here’s why: You know how sometimes you will go to look for something in the statutes or regulations? Your tendency is, of course, to look in the logical place. You don’t look for deposit-related provisions in Reg Z; you don’t search for anything having to do with fair lending in Reg DD. So, you know that if you want to find the law that governs requests by non-federal authorities for customer financial records you look in state law, and you know that the relevant state law is the Oklahoma Financial Privacy Act. It’s real handy, too, because it’s tucked away in Title 6 of the Oklahoma Statutes, just as the State Banking Code is. Well, it is apparently not handy for everyone.

The OBA worked hard to get the legislature to make important changes to that act back in the 90s to make the procedures more workable, so we had a difficult time understanding why sheriff’s, police officers, and other parties kept showing up at banks and asking for records without having subpoenas or search warrants. Our speaking engagement presented a perfect opportunity to get to the bottom of this perplexing situation.

I explained to those present that the Financial Privacy Act carefully balances the goal of preserving the privacy of customer financial information against the fact that, in some instances, there is a legitimate and lawful need for a third party, such as a government authority, to have access. The law doesn’t totally prohibit access by the government authority; instead it specifies methods and procedures for getting there. A subpoena or a search warrant may be used.

If a subpoena is used, the customer is to be given notice on or before the time the subpoena is served on the financial institution, and the customer is given a period of time to challenge the subpoena before records may be turned over. If both the entity seeking the records and the customer whose records are sought are parties to the court proceeding, then the regular notice and challenge procedures do not apply because the customer, as a party to the civil or criminal proceeding, will be getting notice under the rules of civil or criminal procedure.

We had been told in the past that the problem with the subpoena provisions was that sometimes the information or records were needed prior to any case being filed. During the investigatory stage, before there is a court case with plaintiffs and defendants, the subpoena provisions simply don’t fit. No problem. That’s why we had the legislature build in a separate procedure for obtaining information and records via a search warrant.

With a search warrant, the government authority can obtain customer information or records without having to first notify the customer and without the customer having the opportunity to challenge.

After I had explained all that, I was ready to ask the $64,000 question: “Are search warrants too difficult or burdensome to obtain? Is the procedure outlined in the statute simply not workable?” We waited, in suspense, for an answer that we truly didn’t see coming. The brave second in command at the OK County DA’s office raised his hand and said, “No, they are not difficult or burdensome to obtain. The procedure is workable. It’s great. The problem is that the majority of people in this room don’t even know those statutes are there because when we need to know the law relating to subpoenas or search warrants, we look over in Titles 21 and 22. We never go over to Title 6.”

Oh….my….gosh. Could it be true? These folks weren’t following the procedures and weren’t coughing up Certificates of Compliance because they simply were not aware that the law applicable to financial institutions required them to do so? Apparently, yes. It was a giant “Aha!” moment.

Your OBA compliance team here at BankersOnline is putting together a packet for you to download and have ready next time someone with a badge stops by for a look-see that will enable you to say “We would like to be able to assist you. Of course, there are Oklahoma laws that prohibit us from giving out any information or any records until you follow the procedures outlined in the Financial Privacy Act and provide us with a Certificate of Compliance. We realize this is different from getting records from other types of businesses, but you can probably understand why the legislature gave special protection for financial records. Congress did the same thing with a federal law that governs customer financial information requests made by federal government authorities. We have this handout that will familiarize you with the options and a blank Certificate of Compliance form, ready for you to complete and sign.”

We will let you know how to request a packet.

IRA Rollover Rules

By Pauli D. Loeffler

The IRA Rollover Rule Prior to January 1, 2015. Title 26 U.S.C.A. § 408(d)(3)(B) limits taxpayers to one IRA-to-IRA rollover in any 12-month period. An IRA owner does not have to include in gross income any amount distributed to him from an IRA for the amount distributed when deposited within 60 days of withdrawal into another eligible plan (including an IRA) per Title 26 U.S.C.A § 408(d)(3).Proposed Treasury Regulation § 1.408-4(b)(4)(ii), published in 1981, and IRS Publication 590, Individual Retirement Arrangements (IRAs) interpreted this limitation as applying on an IRA-by-IRA basis, which would allow a rollover from one IRA to another without affecting a rollover involving other IRAs of the same individual. For example, Barney Fyfe has 4 traditional IRAs: IRA #1 at Bank A, IRA #2 at Bank B, IRA #3 at Bank C, and IRA #4 at Bank D in 2010. Mr. Fyfe could take $10,000 from IRA #1 and deposit it into IRA #2 without affecting his ability to rollover funds from IRAs #3 and #4. [Note: The transfer of funds from one IRA trustee directly to another is NOT considered a rollover per Revenue Ruling 78-406, 1978-2 C.B. 157, and the one-rollover-per-year rule § 408(d)(3)(B) applies only to rollovers.]

What Changed. In Bobrow v. Commissioner, T.C. Memo. 2014-21, the Tax Court held an IRA owner CANNOT make a non-taxable rollover from one IRA to another if he has already made a rollover from ANY of his IRAs in the preceding 1-year period. Beginning in 2015, only one rollover from an IRA to another (or the same) IRA will be permitted in any 12-month period, regardless of the number of IRAs owned. Simply stated: all of an individual’s IRAs will be aggregated including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit. There are two exceptions to this rule:

  • Trustee-to-trustee transfers between IRAs are not limited
  • Rollovers from traditional to Roth IRAs (“conversions”) are not limited

The Transition Rule. IRA distributions rolled over to another (or the same) IRA in 2014 will not prevent a 2015 distribution from being rolled over provided the 2015 distribution is from a different IRA than the ones involved in the 2014 rollover. For example, in on October 1, 2014, Mr. Fyfe took a distribution from IRA #1 and rolled it into IRA #2. Fyfe cannot rollover funds from either IRA #1 nor IRA #2 into either IRA #3 or #4 in 2015, but he could rollover IRA #3 into IRA #4, or vice versa. Note trustee-to-trustee transfers or conversion to Roth IRAs would be available with regard to IRAs #1 and #2.

Tax Consequences. Beginning January 1, 2015, unless The Transition Rule applies, when the IRA owner receives a distribution from an IRA of previously untaxed amounts, the owner will have to:

  • include the untaxed amount in gross income, and
  • may be subject to the 10% early withdrawal tax on the amount included in gross income

If the distributed amounts are paid into another (or the same) IRA, the amounts may be:

  • treated as an excess contribution (2015 contribution limit is $5,500.00, $6,500.00 for age 50 and older), and
  • taxed at 6% per year as long as they remain in the IRA

Common law marriage

By Pauli D. Loeffler

What it is. I get quite a few questions regarding opening deposit accounts for parties who are married but don’t have a marriage license, stating that they are married by common law (the term is often hyphenated). Black’s Law Dictionary defines common-law marriage as:

A marriage that takes legal effect, without license or ceremony, when two people capable of marrying live together as husband and wife, intend to be married, and hold themselves out to others as a married couple. The common-law marriage traces its roots to the English ecclesiastical courts, which until 1753 recognized a kind of informal marriage… which was entered into without ceremony. Today a common-law marriage, which is the full equivalent of a ceremonial marriage, is authorized in 11 states and in the District of Columbia. If a common-law marriage is established in a state that recognizes such marriages, other states, even those that do not authorize common-law marriage, must give full faith and credit to the marriage.

This article deals with what constitutes a common law marriage under Oklahoma case-law which means the customers must be residents of Oklahoma. While the Oklahoma legislature has attempted to ban common law marriage numerous times, it remains alive and well. According to case law, in order for there to be a marriage at common law, the parties:

  1. must have capacity and agree to be spouses;
  2. in a permanent, exclusive relationship;
  3. cohabitate as spouses (there is a split of authority on this aspect); and
  4. hold themselves out publicly as spouses.

The 10th Circuit Court of Appeals found Oklahoma’s statutes banning same-sex marriage unconstitutional, and the U.S. Supreme Court denied certiorari leaving the 10th Circuits opinion in place. This means persons of the same sex can be married at common law. Same-sex couples should be treated in the same manner as male and female couples. While this article will only deal with establishment of common law marriage from the deposit-side aspects of CIP, banks must be mindful of Reg B and the Equal Credit Opportunity Act with regard to same-sex marriage as well.

Each of the elements mentioned above must be met in order for a court to hold a marriage at common law exists. Both parties must agree to be spouses and have capacity to marry. For instance, if either of the parties is a minor (under the age of 18), married to another person or is legally incompetent, then even if the parties agree to be spouses, this requirement is not satisfied. The second element regarding a permanent, exclusive relationship negates a common-law marriage when, for example, high school seniors sign a motel register as spouses on prom night.

As indicated above, the “cohabitation” requirement is not clear under Oklahoma case law. Cohabitation means “living together” suggesting sexual relations, but many couples live together for decades without being married while others meet the other elements, but due to circumstances, such as military service may not live together. This is not the same as “consummation” which means having sexual relations. One can have marriage certificate, never consummate the marriage and still be legally married (although this is a grounds for annulment or divorce).

The final element, “hold themselves out publicly as spouses” seems to be the determinative element. Case law indicates that this can be established by joint income tax returns, joint financial accounts, jointly held assets (e.g., a deed conveying real estate to them as spouses), joint credit (e.g., a mortgage reciting the spousal relationship executed by the parties), medical records, introductions and comments to third parties, and any number of other sources.

As indicated previously, if a couple has a common-law marriage, they will have to file a petition in a court to obtain a divorce or annulment just like a couple who has a marriage license. There is no such thing as “common law divorce.”

Surnames, Addresses and CIP. I know many banks use the name and address on the driver’s license when opening an account. If the last names of the couple are not the same, but the address on their unexpired driver’s licenses is, probably the bank won’t delve further if the couple claims to be married. If the couple driver’s licenses have different addresses, it is another matter. While I cannot speak regarding the laws of other states, Oklahoma does NOT require the DL be reissued to show the name change nor a change in address. Title 47 O.S. §6-116 requires that people with Oklahoma DLs notify the Oklahoma Department of Public Safety within 10 days and provide documentation in person for change of name. Change in mailing or residential address is also required to be done within 10 days, but this can be done either in person at a tag agency (in which case the person will probably go ahead and get a new DL), by mail or online. Most students move often but do not bother to get a new DL showing the current address which is where getting a copy of a lease, utility bill or other documentation of address is needed.

In order to change one’s name with DPS, the person(s) must appear at DPS rather than a tag agency) and present a certified copy of a divorce decree, a certified copy of decree for change of name, a marriage license or an Affidavit of Common Law Marriage signed by both spouses. Keep in mind, however, even if the name is changed on the DL, the name on the account needs to match the name on the social security card. This requires the person whose name has changed to provide similar documents to the Social Security Administration to obtain issuance of a new social security card.

While one of the parties to a marriage generally changes last name to that of the spouse, there is no legal requirement that this occur whether the parties had a ceremonial marriage or are married at common law. About 30 years ago, it was the “in” thing for a woman to keep her maiden or birth name after marriage or for both spouses to hyphenate last names. These choices are less common today, but many people who had children from a previous marriage do choose to keep the ex’s last name when they remarry, so banks need to keep an open mind.

If the customers claiming to be spouses have the same last name, it is unlikely the CSR opening the account will question whether they are married or not, nor will they be asked for a marriage certificate or other proof of marriage. If they have different last names, the bank’s policy might require additional proof of marriage, but it is highly unlikely that customers will bring along a marriage license to open an account nor even be able to readily lay their hands on one, and those married at common law simply will not have one to provide!

Ways to prove marriage. Although Reg B does not come into play with deposit accounts, in the interest of treating Oklahoma residents married ceremonially the same as those married at common law, I recommend some alternatives to presenting a marriage license as proof. If the couple is setting up a sole proprietorship account, this requires the parties be married without a formal partnership, use of an Affidavit of Sole Proprietorship stating that the parties are legally married whether or not a license issued in Oklahoma, by another state or country, or by common law takes care of the problem. I have drafted a template that can be used. Please email compliance@oba.com for the template. If the couple is opening an account other than a sole proprietorship, an affidavit signed by both parties establishing residency and marriage will work.

Another method to establish marriage in lieu of requiring a marriage license is obtaining recent tax returns. If the parties have filed jointly or each has filed a separate return showing the other as spouse, the return(s) would be satisfactory proof of marriage. Other alternatives to providing a marriage license – this list is not exclusive of other means — would be providing a copy of a recorded legal document such as a deed or mortgage evidencing the parties are married. A joint trust reciting that the grantors are spouses will also suffice.

Keeping track of annual inflation adjustments

By John S. Burnett

Every January brings change

In the BDF (before Dodd-Frank) era, bankers looked for only a few annual “tweaks” to key dollar amounts in regulations that were linked to inflationary changes. One of the more significant annual changes was the old HOEPA $400 points and fees trigger amount in section 1026.32 of Regulation Z that began to creep upward in 1996 as the Consumer Price Index (CPI) changed, and actually dropped $4 one year (it went from $583 in 2009 to $579 in 2010). Another is the annual change in CRA small bank asset brackets under Federal Reserve Regulation BB (and “clone” rules of other regulators). And a third is the asset-size exemption from HMDA reporting requirements.
With the enactment of the Dodd-Frank Act, however, a number of other key amounts in the regulations that bankers regularly deal with were made adjustable with inflation, making it more important than ever that bankers keep current on the latest levels as they change from year to year. Fortunately, the changes all take effect annually on January 1, but they are announced at various times during the year.

Here’s a run-down of the key changes that became effective on January 1, 2015:

HMDA

The Regulation C asset-size exemption threshold for HMDA data collection for calendar year 2015 is $44 million. To qualify for the exemption, a financial institution’s total assets as of 12/31/2014 must be $44 million or less. The threshold amount is established under the definition of “financial institution” in section 1003.2 of Regulation C, and is found in Comment 2 on that definition. Changes in the threshold are based on the year-to-year change in the CPI for each twelve month period ending in November, with rounding to the nearest $1 million.

CRA

For calendar year 2015, a small bank under CRA regulations is a bank that, as of December 31 of either of the prior two years, had assets of less than $1.221 billion. An intermediate small bank means a small bank with assets of at least $305 million but less than $1.221 billion on December 31 of either 2013 or 2014. For calendar year 2014, those numbers (as of 12/31/2012 or 12/31/2013) were $1.202 billion and $300 million, respectively. Annual changes in the asset amounts are based on the same criterion as the HMDA exemption threshold changes. Changes are found in the definition of small bank in section ____.12(u) of 12 CFR Part 228 (FRB Reg. BB), 12 CFR Parts 25 and 195 (OCC) and 12 CFR Part 345 (FDIC).

Key Regulation Z amounts

Several amounts in Regulation Z are now subject to inflation adjustments under Dodd-Frank changes to the Truth in Lending Act, each of the adjustments effective January 1. Here are the changes that became effective January 1, 2015:

“Threshold amount” for Regulation Z coverage. A year after enactment of the Dodd-Frank Act, the old fixed $25,000 threshold amount for Regulation Z coverage was doubled and made subject to annual adjustment. Extensions of credit in which the amount of credit extended exceeds the threshold amount or in which there is an express written commitment to extend credit in excess of the threshold amount are exempt from the regulation, unless they are secured by any real property (or personal property used or expected to be used as the principal dwelling of the consumer) or they are private education loans as defined in § 1026.46 of Regulation Z. For calendar year 2015, the threshold amount is $54,600, up from $53,500 in 2014. This amount is adjusted each January 1 by any annual percentage increase in the CPI as of June 1 of the preceding year, with the threshold change rounded to the nearest $100 increment. See § 1026.3(b) and comment 3(b)-1. The same dollar changes are made in Regulation M (Consumer Leasing), § 1013.2(e) and comment 2(e)-9.

High-Cost Mortgage Loan (HOEPA) points and fees triggers. There are two dollar amounts involved in the two-tiered points and fees trigger for High-Cost Mortgage Loans (HCMLs), often called HOEPA or Section 32 loans. Those amounts are stated in section 1026.32(a)(ii)(A) and (B) as $20,000 and $1,000, each subject to annual adjustment. For calendar year 2015, those amounts are $20,391 and $1,020, respectively. These adjustments are also linked to increases in the CPI as of June 1 of the preceding year, but rounded to the nearest whole dollar. See Regulation Z comments 32(a)(1)(ii)-1 and -3.

“Small creditor” HPML escrow exemption amount. There are four criteria that a creditor must meet to qualify for an exemption from the escrow requirements for higher-priced mortgage loans (HPMLs). The asset-size criterion, as stated in § 1026.35(b)(2)(iii)(C), is that at the end of the calendar year prior to consummation of a mortgage loan, the creditor must have had total assets of less than $2 billion. That amount is adjusted annually based on the change in the CPI from November to November, rounded to the nearest $ 1 million. For loans closed in 2015, assets must have been less than $2.060 billion as of 12/31/2014 (up from $2.028 billion the previous year). See comment 35(b)(2)(iii)-1.iii.

This “small creditor” asset criterion is also one of the criteria for the making of small creditor portfolio qualified mortgages under Regulation Z section 1026.43(e)(5) and small creditor balloon loan qualified mortgages under sections 1026.43(e)(6) and (f).

Threshold for exemption from HPML appraisal requirements. In general, higher-priced mortgage loans (HPMLs) are subject to stricter appraisal requirements than other consumer mortgage loans. There are, however, a number of exceptions, one of which is an exemption for extensions of credit equal to or less than an annually adjusted threshold amount. When the HPML appraisal requirement became effective on January 18, 2014, and for the rest of that year, the threshold amount was $25,000. For 2015, it was increased to $25,500. These adjustments are based on a June 1 to June 1 change in the CPI, and made effective the following January 1, with changes rounded to the nearest $100. See comment 35(c)(2)(ii)-1.

HUD-SCRA Required Notice

By Andy Zavoina

Confusion over the expired form. There has been a lot of confusion over the HUD-SCRA Notice because of the forms expiration and the sunsetting provision of a law that triggered the forms last major revision. We want to clear up any confusion and provide you with the recommended actions you need to take to be in the best position for compliance with this requirement and the sluggish changes that come your way.

First, some background. This is a HUD requirement and not one required under the Servicemembers Civil Refief Act. It originated in 2006 when HUD issued Mortgage Letter 2006-28. This provided information regarding the legal requirement to notify homeowners in default of the mortgage and foreclosure rights of servicemembers and their dependents under the SCRA and the Homeownership Counseling Act (12 U.S.C. §1701X(c)(5)(A)).There are three requirements you must meet with this notice. It must:

  1. Be sent to all homeowners who are in default on a residential mortgage;
  2. Include the contact information for the designated counselor, Military OneSource in this case; and
  3. Be made within 45 days from the date a missed payment was due, unless the homeowner pays the overdue amount before the expiration of the 45-day period.

Because you will not know in real time if your borrower is subject to the SCRA, this notice should be sent to all borrowers. If the loan is subsequently paid current, and then falls to 45-days past due, a new notice should be sent.

The Housing and Economic Recovery Act of 2008 (HERA) changed the stay, adjustment, sale, foreclosure, and seizure provisions from 90 days to 9 months following the end of the servicemember’s period of military service. This section was to sunset, but was renewed in 2012 and then renewed again in December 2014. As a result the SCRA notice from HUD was rewritten because it refers to this date. Providing incorrect time frames could be considered misleading or even deceptive. There was confusion over the notice in years past because a contact telephone number was incorrect. HUD initially corrected the number but in a later revision removed it, referring instead to the Military OneSource (the contracted counselor) web site. The form then included the web address and telephone. HUD was posting corrected notices but was not sending notifications to those actually sending them so many banks were unaware of the change. This happened again in January 2015. HUD posted a new notice, but reverted to the 90 days instead of the one year of protection the recently signed law extended. HUD’s online version has the incorrect protection period as of January 6th.

The current form requires customization on the part of the sender. HUD Form 92070 (the letter itself) now has an expiration of December 31, 2017. Because of the recent extension of the protection period, the text of the letter does not need to change, just the expiration date. We recommend you continue use the (old) HUD Form 92070 following the same compliant process you have been using and monitor the OBA for any change notices. There is still a typographical error on the HUD version that has not been corrected. Without significantly altering the content of the letter the Word version available on BankersOnline (in the Banker Tools section) has the corrections so you as the sender do not risk criticism for spelling and grammatical errors by others.