Wednesday, July 24, 2024

March 2015 Legal Briefs

  • Next compliance roundtable
  • Two phrases I hate to hear
  • Regulation Z changes
  • Lotteries are now OK — “It depends”
  • Help us help you
  • FAQs for direct deposits of IRS refunds

Next compliance roundtable

The next OBA Compliance Roundtable will be held Friday, March 27th at the OBA. There is lots to talk about in the compliance world. Join me and Pauli Loeffler from the BankersOnline compliance team for a great information exchange. Submit topic suggestions via email ahead of time to to get us focused.

Two phrases I hate to hear

By Mary Beth Guard

Many of you have heard me say that the phrase I like to hear most when a banker calls or emails is “We have a situation.” That signals to me that what I am about to hear is not a garden variety compliance question and I need to take a big swig of a caffeinated beverage and become “all ears”. Believe me, the scenarios described after those words are uttered are often real doozies.

On the flip side, there are two phrases that just flat make me cringe. These two phrases reflect a misguided approach to determining an appropriate course of action. They are “Well, what would the penalty be if we [didn’t do what’s required][did something that is prohibited]?” and “Other banks are doing it.”

The only time I want to discuss what penalties are is when you have already inadvertently incurred a violation. Then it is appropriate to talk about potential penalties and how to mitigate them. Asking on the front end, however, before action is taken, means you are contemplating willful noncompliance with a statute or regulation. My response would be “Don’t even think about it!”

Each banking day is filled with business decisions: Should we pay Rodney’s check or return it? Is ABC, Inc. a good credit risk? Should we believe XYZ, Inc.’s check was really forged and recredit the account? Should we close early due to the ice storm? Those matters – and thousands of others – are circumstances where you have discretion. There may be consequences to your decisions, but you weigh the pros and cons and proceed accordingly.

In some instances, laws and regulations have shades of grey (No, not that kind) and experts disagree about what the correct interpretation is. In those circumstances, you decide whether you want to take the most conservative approach and avoid potentially being cited for a violation, or you feel comfortable hanging out over the edge into the grey zone because you believe the chances of being held up as a poster child for a first-of-its-kind violation citation are slim enough that the risk is worth taking. I have absolutely no problem with that. Different banks have different risk tolerances, and if the statutes and rules lack clarity, testing the boundaries makes some sense.

But when you enter into a clear compliance violation with eyes wide open, you are asking to have the book thrown at you. Your bank’s credibility is damaged in the eyes of the examiners (and a court, should you end up in litigation). If you’re ignoring this law or this reg, what else are you doing wrong?

You want to do something. You’ve been told it is not permissible. You want to do it anyway. Your argument is “Well, other banks are doing it.” My compliance mentor, Lucy Griffin, once said “’Everybody else does it’ is the oldest line in the book. It is used by the bankers whose dogs ate their homework during their schooldays. First, it isn’t an excuse for a violation. Second, it usually turns out not to be true.”

Even if other banks are doing whatever it is you’re contemplating, don’t follow them down the primrose path to legal jeopardy. Here are just a few of the many ill-fated courses of action that we have been assured are being done by other banks that would land you in nothing but trouble:

  • Putting reasonable cause exception holds on all deposits of cashier’s checks or credit card convenience checks because you’ve had others returned unpaid in the past;
  • Requiring a customer to file a police report before you will process their claim for unauthorized debit card use;
  • Not checking ID before entry into a safe deposit box because you assume that if someone has the key, they must be authorized;
  • Putting a stop payment on a cashier’s check because your customer (the remitter) has an issue with the payee;
  • Using email to deliver disclosures without complying with ESIGN;
  • Allowing customers to make more than the required number of covered transfers or withdrawals on Money Market accounts without shutting them down or converting their account to a different type of account;
  • Permitting online banking transfers between owner and entities or between commonly-owned entities;
  • Waiting to get evidence of joint intent until closing;
  • Pulling credit reports on non-obligor signers (such as a corporate officer, for example,)without written permission;
  • Cashing checks payable to dead people;
  • Treating loans for personal investment purposes as business loans; and
  • Getting non-owner spouse signature on a promissory note for a business loan.

Following the crowd is not a success strategy for the banking business.

Regulation Z changes

By John S. Burnett

Although we are in a bit of a lull in regulatory change as we approach the “Next Big Thing” (the TILA/RESPA Integrated Disclosures, or “TRID” rules going into effect on August 1), there is some activity as the CFPB continues to “tweak” Regulation Z.

In February, the Bureau published one final rule and two proposals to amend the regulation. As it happens, each of these changes is mostly good news for bankers and other lenders.

Final rule affecting integrated disclosures

The final rule was published on February 19, 2015, at 80 FR 8767. Most of its changes affect the rules that will become effective on August 1, 2015, and consumer mortgage loans for which applications are received on or after that date. Here’s a summary of the “tweaks” the Bureau made, and you’ll be please to see that there isn’t anything negative in the changes from the lender’s perspective:

Rate-lock-related revised Loan Estimates. The Bureau got a lot of feedback on its original plan to require that the revised Loan Estimate that is required for a rate-lock event would have to be sent on the day the interest rate is locked (§ 1026.19(e)(3)(iv)(D)). The CFPB proposed that be extended to the first business day following the day of the rate lock, but was finally convinced to adopt the same third-business day deadline that applies to revised Loan Estimates for other forms of changed circumstances. That has the added benefit of being the same three-business-day rule that lenders are used to dealing with under current RESPA requirements.

Name and NMLSR ID on documents. We’ve known all along this change would eventually be made. The “placeholder” in the § 1026.36(g)(2) list of loan documents on which the name and (if issued) NMLSR ID of the loan originator organization and individual loan originator must be included has been updated to include, effective August 1, the “disclosures required by § 1026.19(e) and (f)” – the Loan Estimate and Closing Disclosure. As is the case with the other documents in that list, if the individual loan originator is not a Mortgage Loan Originator (MLO) under the SAFE Act regulation (CFPB Regulation G), he or she doesn’t have to register as an MLO to obtain an ID; the ID number is only required if he or she is, in fact, an MLO.

Loan Estimates for construction loans. New § 1026.37(m)(8) and Comment 37(m)(8)-1 were added to provide wording and placement instructions for a Loan Estimate disclosure that will preserve creditors’ ability to redisclose estimates for construction loans in transactions that involve a new construction, where there may be more than 60 days between the delivery of the initial Loan Estimate and settlement.

Disclosure of prepaid interest. The Bureau changed the wording of Comment 38(g)(2)-4 to clarify that the comment addresses the interest rate used to determine amounts of prepaid interest, but does not require the disclosure of the interest rate itself in the Prepaids portion of the Closing Disclosure.

Drafting error in Regulation X. There was a drafting error made in the § 1024.5(d) list of sections of Regulation X that won’t apply to loans covered by the TRID rule. A section that was eliminated was included in the list. The error was corrected in this final rule.

The change in the timing requirement for revised Loan Estimates triggered by rate locks is the most significant item in this list. The Bureau has acknowledged that its attempt to speed up the delivery of these revised estimates was not going to create enough consumer benefit to offset the added costs and risks of non-compliance for mortgage lenders. We can count it as a small victory. The other “win” in this rule is the added model language for the Loan Estimate when certain loans for new construction are involved. The other changes are simply clarifications and corrections of technical slips in the original TRID rule.

Proposal to expand small creditor definition

This proposal was announced by the Bureau on January 29 and published at 80 FR 7769 on February 11. It’s described as a series of changes to enhance the ability of small creditors to make mortgage loans. Without going into the minute details of the proposal (we’ll save that treatment for the final rule when it’s issued), here’s an overview, with a reminder we’re talking about the criteria for “small creditor” status that provides an exemption from HPML escrow requirements under Regulation Z § 1026.35(b)(2)(iii):

Higher loan origination limit. The proposal would change the current limit of 500 covered first-lien transactions in the prior year to 2,000 such loans originated by the creditor and its affiliates. And it would sweeten that even more by not including portfolio loans made in the prior year in the count.

A zinger added to the asset limit. The Bureau is concerned that the loan origination limit change will be tempting to some holding companies to create affiliates with lower assets to somehow abuse the restrictions. So they propose to change the total assets cap criterion (currently at $2.06 billion) to include the assets of any affiliate that originates covered transactions that would be included in the loan origination limit. For banks that have affiliates that also originate consumer mortgage loans, this change could have a negative impact on their ability to qualify as “small creditors.”

A return to the one-year look-back for the “rural” or “underserved” counties criterion. The Bureau never intended its change to this look-back criterion to be permanent. The proposal would take it back to the “prior year” criterion in place prior to January 1, 2014. The temporary three-year lookback was designed to smooth out any major upheavals in small creditor eligibility due to changes in the definition or “rural” or “underserved” as the Bureau reviewed those terms. A three-month grace period would be added for creditors that fail the “more than 50 percent” test for the prior year, so that they would have to start requiring escrows for HPMLs for which they receive applications on or after April 1, rather than January 1, assuming it met the “more than 50 percent” test for the next-to-last calendar year.

Changes to definition of “rural.” The proposal would expand the definition of “rural” to include not only the current counties that are neither in an MSA nor in a micropolitan statistical area adjacent to an MSA, but also additional areas classified as “rural” by the Census Bureau. The Bureau also proposes to develop a tool for its website that would allow creditors to enter property addresses to determine whether they are located in a rural or underserved area for the relevant calendar years.

Changes to QM rules. The small creditor QM rules under 1026.43(e)(5), (e)(6) and (f) depend upon two or three of the criteria for small creditor exemptions from the HPML escrow requirements. The Bureau proposes to incorporate the changes made to the escrow exemptions for small creditors – including the three-month grace period after failing the “more than 50 percent” requirement – into the small creditor QM qualifications. It would also delay the sunset of the temporary small creditor QM provision in 1026.43(e)(6) so that it would cover applications received before April 1, 2016, instead of the current sunset date of January 1, 2016.

There is some give and take in the proposal, but on balance, it would expand the number of creditors qualified as “small creditors” able to make small creditor QMs and balloon payment QMs, as well as qualified for the small creditor HPML escrow exemption.

And something for credit card issuers

The third Bureau proposal to amend Regulation Z that hit the Federal Register last month is found in the February 26 issue, at 80 FR 10417. It only benefits credit card issuers with portfolios of 10,000 or more open accounts.

Those issuers are subject to a requirement in section 1026.58(c) to make quarterly submissions of their credit card agreements to the Bureau, with certain exceptions, and to post each agreement sent to the Bureau on their publicly-available website.

The proposal would suspend the requirement for quarterly submissions to the Bureau for each of the quarters ending in 2015 (submissions that would be due one month after each of those quarter-ends). The posting of agreements on issuer’s websites would continue, notwithstanding the suspension of submissions to the Bureau.

The suspension is proposed to minimize disruptions while the Bureau investigates or develops an improved method for issuers to complete their quarterly submissions.

If your bank is one of those issuers that currently has to make those quarterly submissions, you’ll be glad to get the suspension and, hopefully, the improved transmission method that should be available when submissions resume in 2016. If your bank doesn’t have enough credit card accounts to be affected by the requirement, you can sit back and be thankful you don’t have to mess with this stuff.

Lotteries are now OK – “It depends”

By Andy Zavoina

Once upon a time when you said the word “lottery” to a compliance officer, the immediate response was unequivocally “No!” But have you heard of the American Savings Promotion Act? Before you get mis-information, here is the straight scoop on this new law that transforms the lottery rules. Yes, HR 3374, the American Savings Promotion Act, was passed and signed into law on December 18, 2014, and it will change the way banks can address lotteries. I don’t recommend you bet on beginner’s luck and bet the house right away. I’m willing to wager you want more information first, and that would be hedging your bets for the good of your bank. The odds are 3 to 1 you’re already groaning and want me to stop with the gambling jargon, so let’s talk facts.

So that you will understand the restrictions your bank still has even with the new law, it is important you understand some of the reasons it was passed. The annual savings rate in the U.S. is low. It was 4.1 percent in 2012. While a standard recommendation is that a person have enough money in savings to cover three months of basic expenses, more than 40 percent of Americans do not have that. Based on research, Congress believes that offering prizes will increase the savings rate. Michigan was the first state to allow prize-linked savings products in 2009 and since then seven other states have allowed it as well. In Michigan and Nebraska 42,000 individuals opened prize-linked savings accounts and deposited $72 million dollars doing it. That is an average of more than $1,700 per account. There may also be a correlation between getting more of the un-banked and under-banked to open new accounts as they are attracted to lotteries and games of chance. Prize-linked savings products statistically attract non-savers, those with fewer assets, and low-to-moderate income groups. So when you decide if a new lottery is right for your bank, those are some target market demographics. You might help yourself from a CRA perspective as well, if you can successfully offer such an incentive.

The rules that were in place before December 18, which prevented your bank from doing what you can now, include the National Bank Act, the Federal Reserve Act, the Federal Deposit Insurance Act and the Federal Savings and Loan Act, which all prohibited banks from conducting, promoting, advertising or participating in any way in a lottery. The only thing you really could do was accept deposits from those who were legally selling lottery tickets and cashing the checks of the winners. Other federal laws could also be used to enforce lottery prohibitions such as laws against racketeering and illegal gambling. They are officially amended too.

Remember that the term “lottery” includes any arrangement whereby three or more persons advance money or credit to another in exchange for the possibility or expectation that one or more but not all of the participants will receive by reason of their advances more than the amounts they have advanced. There is a little more to the definition than that, but that is the gist of it. How did banks get around these rules? First when such a contest was proposed it would be open to “the world” so long as “the world” could fill out your simple entry form and legally win the event based on other laws they are subject to. You had to say “no purchase necessary” and that included deposits because a deposit account is consideration or payment for a chance to win. Your lottery had to be free. Did your management want to hear that a non-customer might be the winner of that big-screen TV or vacation package? Absolutely not, but you told them that was the way it had to be – legally.

Let’s talk about the new law, what it allows and unanswered questions. For starters the incentive here is to increase the savings rate, so what is allowed is a “savings promotion raffle.” This is defined as “a contest in which the sole consideration required for a chance of winning designated prizes is obtained by the deposit of a specified amount of money in a savings account or other savings program, where each ticket or entry has an equal chance of being drawn, such contest being subject to regulations that may from time to time be promulgated by the appropriate prudential regulator (as defined in section 1002 of the Consumer Financial Protection Act of 2010 (12 U.S.C. 5481)).” Now, let’s slice and dice some of that to understand what you are facing.

First, for the chance to win a prize you can require a deposit into a savings account. Actually this is a “savings account or other savings program” and there seems to be a difference between the two so we need to know what fits the category of “other.” Since the intent is to build savings deposits, demand deposit accounts wouldn’t seem to fit and likely shorter term certificates of deposit wouldn’t either, but we don’t know. NOW accounts don’t promote savings so they may not qualify but MMDAs may, with the transfer restrictions imposed on these accounts. It does appear it will allow more than what we define as savings accounts now though.

Second, each entry has the same chance of winning. Will a bank be able to provide one entry per account, or can it be more creative and provide one entry for every $X, say $1,000, deposited? More guidance may be needed there as it relates to the deposit amount. What if the base deposit for a contest entry is $10,000 and the prize is $1,000? What is the value of the entry and is that a bonus under Reg DD? Assume 1,000 accounts enter the contest, the prize divided by the number of entries tells us each chance has a “cost” of $1. But if only 10 people make the deposit then each is worth $100 for that chance to win. Does that mean the value of that chance to win is a reportable bonus? Will there be tax implications and reporting requirements if the winner receives a total of $600 or more from the bank during the year? Would a 1099-MISC be filed on the winnings, or a W-2G for gambling winnings? If the lottery offered by the bank is defined as gambling, are there any state law risks? To some extent we may be able to look at what rules credit unions have followed, because they have not had the same lottery prohibitions as traditional banks, but I am not aware of any supporting cases that provide guidance.

Third, the law does say there may be guidance as each “contest being subject to regulations that may from time to time be promulgated by the appropriate prudential regulator…” I am not sure if the law has changed and the prohibition is gone, you can have a savings promotion raffle right away, and regulations may be forthcoming, or if regulations must be issued first before these can begin. “May” is sometimes read as “shall” or “must” and based on the several questions brought up here, a bank jumping out first with a savings promotion raffle may not be on the leading edge, but the bleeding edge. Certainly guidance is warranted in any case but we’ve heard little from the regulatory agencies even though this law is almost 90 days old now. If Congress wants savings deposits to increase and provides this mechanism, banks should know what the safe path is and have the questions answered whether in the form of a regulation or a guidance document.

Help us help you

By Pauli Loeffler

The members of your OBA Compliance Team are here to respond to compliance and legal questions of member banks and appreciate your need for timely replies to the emails you send us. We fully understand and appreciate that some of our member banks use secure emails to our team. The use of secure email does however slow down response time, and sometimes we cannot even open these messages in order to view an attachment you have provided or respond to your questions. When this happens, we cannot provide prompt responses.

In order to alleviate this problem and the risk of a delayed response to a secure email, either contact the OBA Compliance Team via telephone at 405-424-5252 (866-424-5252 toll free), or by regular email to with information regarding the subject area involved, e.g., subpoena, fraudulent check, HMDA, SAR, etc., and a Compliance Team member will be happy to assist you directly, have another Compliance Team member with specific expertise on the subject contact you, or provide you with the appropriate fax number to send documents when needed. The members of the OBA Compliance Team work in separate locations and each has his or her own private fax number. A fax sent to the OBA’s dedicated fax line requires OBA to then send it to the appropriate Compliance Team member. Please make sure the team member you want to fax is available (i.e., not on vacation or sick), before you send: please DO NOT fax anything prior to getting an affirmative verbal or email from the team member.

FAQs for direct deposits of IRS refunds

by Pauli D. Loeffler

This time of year, questions about direct deposits of IRS refunds to a person who is not an owner of the account ranks high in our top 10 most frequently asked questions. I have several stories about a non-owner of an account who has had his tax refund directly deposited to the account of a parent, spouse, boyfriend or girlfriend and then a garnishment or levy hits the account, and bye-bye refund. Rarely is the bank aware that the name on the payment and the account do not match when the direct deposit is first received, but once the bank discovers the mismatch, we field a ton of questions regarding due diligence in checking the name of the payee, liability to the payee and/or the IRS.

The IRS recently published Direct Deposit of IRS Tax Refunds Resource Page Frequently Asked Questions that can be accessed here. This publication provides a lot of useful information in addition to what is provided in the following summary. I suggest you download or bookmark the page.

Is the bank required to check whether the name on refund matches the name on the account? The FAQs specifically state that the RFDI is NOT required to perform a match between the name on the payment and the name on the account. Although Title 31 of the Federal Code of Regulation, Part 210 requires federal payments be sent to a deposit account in the name of the recipient, the RDFI is not obligated to ensure that IRS originates refunds in compliance with this requirement.

Is our bank liable if there is a name mismatch? The bank is not liable for an IRS tax refund sent through the ACH network if there is a name mismatch or if the refund is sent to an erroneous (or fraudulent) account, since the IRS provided incorrect account information for the ACH either through IRS error or from incorrect banking information supplied to the IRS by the taxpayer on his/her signed tax return which authorized Direct Deposit. The IRS may request the bank to return any funds available in the account, but the bank is not legally required to do so.

What should the bank do if it finds a name mismatch? If the bank learns of the name mismatch (or an IRS tax refund has been misdirected to the wrong account), the RDFI is required under 31 CFR Part 210 to notify the Government of the error. The bank can satisfy the error either by returning the original ACH credit entry to IRS with an appropriate return reason code, or if the account information is incorrect but the payment can be posted to the correct account, the bank may choose to originate a Notification of Change (NOC) with the correct account and/or routing and transit number. While the bank is not liable, once the bank is aware of the error, it is encouraged to return those funds still available in the account.

Is there an easy way to detect and reject direct deposit of refund payments that have a name mismatch or are misdirected or fraudulent? In January 2013 NACHA implemented an opt-in program at the request of IRS and Treasury Fiscal Service to allow RDFIs to more easily reject refunds if the name did not match the account number and/or if the financial institution suspected fraud. Under the opt-in program, once the refund with a mismatch or suspected fraud is identified by the program-participating bank, the payment is returned back to Treasury Fiscal Service which routes the payment back to IRS. The bank can get more information by contacting NACHA at 703-561-1100 or by email at The bank should reference the “R17 IRS Returns Opt-In Program” when it contacts NACHA.