February 2016 Legal Briefs

  • ‘Tis the (tax refund) season
  • Garnishment gotchas
  • Old POD designations
  • MLA – Clarity
  • You have questions, we have answers
    • Requests for customer infomration from other states
    • Purchase money mortgage, spouse not on deed
    • Safe deposit boxes
    • Trust as POD
    • Banning guns on premises

‘Tis the (tax refund) season

By John S. Burnett

It’s February and the season for tax refunds is in full swing. Here are some things you should be aware of:

1. The IRS and Treasury Department are asking banks to remind customers they can receive their tax refunds sooner and more securely using direct deposit to their bank accounts. Taxpayers can even have their refunds deposited into more than one account using appropriate IRS forms or options in tax preparation software. In a recent message circulated by Federal Reserve Bank Services, the IRS reported that 80% of taxpayers already receive their refunds via direct deposit, and each tax refund that’s sent via direct deposit rather than by check saves the government – and U.S. taxpayers – 90 cents.

2. Direct deposit is not without its challenges, however. There are still many direct deposits being sent out for credit to accounts not owned by the taxpayer(s) who are owed the refunds. Some of these “misdirected” refunds may be generated by fraudulent returns — tax refund ID theft is still a significant and profitable scam for crooks. The symptoms are one or more tax refunds direct deposited to an account not owned by the individual(s) named in the ACH record for the transaction. The IRS has started clamping down here by imposing a per deposit account limit of three refund payments.

3. There is no regulatory requirement that your bank search through its incoming ACH files trying to identify “mismatched” refunds. Treasury and the IRS won’t attempt to recover funds that are deposited as instructed by the IRS if the bank is unaware of the mismatch.

4. However, if the bank becomes aware of a mismatched direct deposit from Treasury, including a tax refund, in time to act on it before it’s posted, Treasury regulations (31 CFR Part 210, section 210.8(d)) require a bank to notify the sending agency (IRS in the case of tax refunds). The rule says that you can notify the agency by sending a Notification of Change (NOC) entry with the correct information (for recurring entries) or return the entry using an R03 (Account not found) code. The IRS will then send the refund in check form.

5. One of the reasons that tax refund fraud is so popular is that it often exploits a timing flaw in IRS regulations. Under current rules, employers and others aren’t required to submit W-2 and similar information until the end of February each year. Yet the IRS accepts and starts processing tax return filings in January. That means the IRS is sending out refunds based on income and withheld tax information it cannot confirm until early March. By the time wages and withheld taxes on individual tax returns can be compared with information from W-2 filings, millions of refunds may have already been sent, some of them fraudulent.

6. Congress recently passed legislation that will require that employers and others submit their W-2 (and certain 1099) files by the end of January beginning next year. And starting with next year’s tax filing season, certain refunds won’t be sent before February 15 following the tax year in question. That will give the IRS a better opportunity to cross-check taxpayer and employer information, greatly reducing the opportunity for fraud.

Garnishment Gotchas

By Pauli Loeffler

1.    Determine who the judgment debtor is. Always, always, always check the Garnishment Affidavit and the Garnishment Summons to determine who is named as the judgment debtor! A garnishment may name one or persons as judgment debtors, and your answer must reflect each person named as a judgment debtor. This may require additional pages in your Answer/Affidavit or filing more than one answer. Do not assume that the judgment debtor is always a defendant named in the case or even a defendant at all. If there were several defendants named, the judgment debtor may be part of the “et al.” (Latin meaning “and others”) which is used quite often after the petition is filed. Further, the plaintiff may have named John Brown as defendant when the case was filed but later added Jerry Black and Black’s Whistle Stop LLC as defendants. Once the petition is filed, the plaintiff and defendant fields are often set in stone, and the caption may not show all defendants. Under either scenario, if you fail to freeze the named judgment debtor, the bank faces liability. For instance, if Jerry Black is the judgment debtor, but you fail to freeze his account, the bank is liable for whatever funds were in Jerry’s account when the garnishment was served. On the other hand if you freeze John Brown’s account, he has an action against the bank for wrongful dishonor if any items are returned or his debit card transaction is declined. Occasionally, the plaintiff may end up as the judgment debtor either due to the defendant prevailing on a counter-claim in the lawsuit or for attorney’s fees owed to the defendant. The plaintiff may also be the judgment debtor when he owes money to his own attorney.

2.    A garnishment also attaches to a safe deposit box owned/leased by the judgment debtor. In conversations with various bankers, I have discovered that some banks totally disregard Sec. 1312 of the Banking Code (Title 6 of the Oklahoma Statutes):

“In any action wherein garnishment summons is served on the lessor or a party to an action seeks to subject a box or contents thereof to the garnishment or order of court, the lessor, upon being served with such garnishment or court order, shall seal the box and deny access thereto to all persons except as ordered by the court. A court of record may, in a proceeding wherein the lessee is a party, in aid of execution or for the purpose of enforcing its orders, direct the sheriff or marshal to enter a box, remove the contents therefrom and hold, deliver or sell such contents as permitted by law. Damages suffered by the lessor by reason of forcible entry as provided herein shall be assessed as costs and paid to the lessor by the garnishment creditor. If no court order directing entry into the box is served upon the lessor within thirty (30) days after a garnishment summons is received by the lessor, the box shall be unsealed and the lessor shall no longer be required to deny access to parties entitled thereto.”

When you receive a garnishment, seal the box and do not allow anyone (judgment debtor, joint lessee or deputy) access for 30 days after the receipt.

Old POD designations

By Mary Beth Guard

Sharp-eyed bank attorney Kathryn Ivey called after the last Legal Briefs came out to chat about the revocations of POD beneficiary designations that occur under 15 O.S. 178 in the event an accountholder designates a spouse as POD beneficiary and the couple subsequently divorce or the marriage is annulled. If the designation is reaffirmed after the divorce or annulment or the designation is made after the two people have already parted ways, the statute does not disturb the POD.   As Kathryn noted, however, there is yet another an exception to the rule, buried under subsection D.  If the depository agreement was made and entered into prior to September 1, 1994, the revocation does not apply!  When determining who gets what – and if a POD beneficiary designation is still valid after your customer’s death, check the date the contractual provision for POD was put on the account.  If it was before September 1, 1994, it doesn’t matter whether the accountholder and beneficiary are – or were ever – married.

MLA – Clarity

By Andy Zavoina

I wrote about the new regulations under the Military Lending Act last August and I’m sure many saw the compliance date of October 2016 (2017 for credit card accounts) and decided there were fires to put out before then. Back then there were 15 months to get ready and I would have agreed with you. Fast forward to last week and I was talking to a banker and asked what they’ve done now that there are only nine months to get everything in order? She basically said it must be good to work outside a bank because her bank was still making sure they got TRID right and they were not even close to dealing with the MLA rules yet. I also spoke with another person outside a bank and asked if he was raising MLA-rule red flags yet. His comment surprised me, as he said his clients were not making 36 percent loans and he didn’t think this would affect many banks. While parts of the MLA rule requirements are negated by avoiding a 36 percent Military Annual Percentage Rate loan, there are still some items that require your attention.

Let’s review. Many banks today avoid MLA compliance requirements by not making covered loans: payday loans, vehicle title loans and tax refund loans. If you don’t make these loans, you need not worry about compliance for them under current rules.
In October 2016 avoiding compliance by loan product will be nearly impossible. Reg Z applicable loans, except for residential mortgages and purchase money loans where the items purchased are your loan collateral, will be covered.
Under current rules, if you don’t have a covered product the borrower need not receive disclosures. Under the new rules, the menu of covered loans is much larger. There are conditions under the MLA rules that will apply because of the larger scope.
Here are the MLA regulation highlights and some quick analysis of each as to compliance implications:

1.    The MAPR is limited to 36%.
You must ensure that, based on the MAPR calculation, none of your covered loans reach the 36% ceiling. Remember the components in your MAPR include fees such as those for life and disability insurance, particularly on small joint borrower loans with more insurance options taken, you must ensure you know where the MAPR is. A bank with a strict guide on maximum rates and fees should be able to offer conforming products and terms, but software should be set to raise flags and stop loans that could be usurious.

2.    Certain oral and written disclosures are required on covered loans. This is not dependent on the MAPR.
These disclosures include the MAPR description, Reg Z disclosures and a model statement about protections for a covered borrower. Under the MLA rules, the MAPR description and the model statement have to be in writing, and also given orally. There are exceptions where a toll-free number can be provided for the oral disclosures, depending on how the loan is closed.

3.    DoD rules prohibit mandatory arbitration, waiver of legal rights, unreasonable notice requirements when legal action will take place, required allotment payments and prepayment penalties.

I’d bet most of these are not in your loan contracts now. If they are, they could be removed across the board, or the bank will have to maintain two sets of contracts, one for covered borrowers and one for everyone else. The latter choice would not be my recommendation as it sets the bank up for failure unless the two are clearly differentiated and processes are in place to prevent improper use.

4.    There are limits on rollovers and refinances of covered loans and the use of post-dated checks for account access. I don’t believe many banks will run afoul of these prohibitions as they are targeted at payday type lenders.

5.    If the borrower is not a covered borrower the restrictions of the MLA regulations will not apply.

The new MLA rule is all about expanding the definition of “consumer credit” to expand coverage of the Act, but this excludes from “consumer credit” loans made to non-covered borrowers. How do you know who a covered borrower is? There will be two ways to get a safe harbor. You check the DMDC database or employment on a credit report. There is a separate DMDC database for the MLA which includes dependent information. This information is not on the database used for years for SCRA verifications. The link to the new database is https://mla.dmdc.osd.mil/mla/news.xhtml  Dependents of servicemembers (SM) can be checked independently of the SM. The DoD is taking requests for immediate access to its database via an email request, but the period to request access expires February 15, 2016 unless it is extended again. That is for direct access. It appears direct access for verifications will be based on loan volume, otherwise there is an expected 24-hour turnaround time for single and batched requests. All that is required is that the bank email the DoD at “dodhra.dodc-mb.dmdc.mbx.mla@mail.mil” and indicate you would want direct access. There are no costs or conditions indicated currently and it may be that the bank is better off getting on this list now than regretting not being listed later. The response time is otherwise scheduled to be 24-hours. Consider the loan request that is received late Thursday afternoon. The DoD could have Friday, the weekend, potentially a Monday holiday and respond to you by Tuesday, or it may simply be that with even a response late Friday or on Saturday, the bank may not be open, and is unable to close a loan over the weekend. That’s quite a wait for a small loan.

We don’t know when the credit bureaus will begin getting this information from the DoD or if there will be any additional cost to users, but consider the reporting requirements for new and retiring servicemembers plus new and ex-dependents and both the procedures and personnel needed to keep this current at the DoD. We do know the DoD is working on its systems and procedures and including some in the industry to help them make this transition. So it appears for new MLA compliance that verification is necessary to determine if the applicant is covered and proper disclosures can be made regardless of the loan rate. The bank should consider revising the procedures required now.  The risk of not using a safe-harbor verification should be weighed. Incorrect conclusions could lead to a misdemeanor with a fine and a year in jail, the contract is voided, civil liability is a possibility including a minimum $500 fine per violation, punitive damages and court costs. The risk of civil liability could last for up to five years after the violation occurs.

If the borrower is not a covered borrower and the bank knows this, it won’t have a safe harbor if it makes the loan without verification. But assuming the bank is correct, if the borrower is not covered, then the MLA protections and requirements will not apply. This will be a risk decision the bank needs to make and address in its policy and procedures.

6.    As noted earlier, special disclosures are required on covered loans. If your contracts conform and disclosures are automatically built into processes, and you avoid the 36 percent MAPR ceiling, the new MLA rules won’t be an issue. They also won’t be an issue if a loan is not to a covered borrower. To have a safe harbor under the MLA rules, the DMDC database would need to be checked, (or the credit bureau if that service is later offered.) If you avoid the 36 percent MAPR alone, disclosures would still be required, so building them into standard procedures would be a safe bet if it is economical and practical for the bank.


You have questions, we have answers

The OBA compliance team receives and answers a lot of compliance and legal questions via email at compliance@oba.com. The following are a taste of a few questions we have received together with our responses.

Requests for customer information from other states
Q, The Kansas Department for Children and Families notified us that Accuity Asset Verification Services is their contractor to obtain financial information for applicants and recipients of public assistance and child support services in Kansas and would send us this information for us to check against our customer base. Are we obligated to do this and what is our liability?

A. This is the Kansas version of the Oklahoma Health Care Authority asset verification that banks have been receiving requesting 5 years of monthly account balances.  Financial privacy is not an issue since the customer has consented to provide the information, but…
The general rule is that unless you do business in Kansas, meaning have a branch in Kansas, its state courts and agencies have no jurisdiction over your bank. While you could provide the information without violating privacy, if you do, you open the door to accepting jurisdiction for all Kansas court and Kansas agency orders, subpoenas, levies, etc. as well as those from other states.

Unless a state has jurisdiction, federal law, or the there is a state compact conferring jurisdiction without any need to go through an Oklahoma court or agency, the state or its agency has no power to enforce the order or request. For instance, a subpoena issued by a Kansas state court must be processed through the district court in the county in which the Oklahoma bank is located when the bank has no branches in Kansas in order for it to be enforced. This also is true for Kansas child support levies that must be referred to the Oklahoma’s Child Support Services. I can find nothing under the federal Social Security Act that would give the Kansas agency administering this program jurisdiction over an Oklahoma bank that does not have a branch in Kansas.

Purchase money mortgage, spouse not on deed
Q. If a customer states they are married, and the spouse is not on the deed, would this spouse need to sign the mortgage? Does it matter if it is a same-sex marriage?  Would they have ROR rights too?

A. A spouse who is not in title to the property (not on the deed) must sign the mortgage unless it is a purchase, (Title Standard 7.3, below). Same-sex marriage is legal, and Oklahoma also recognizes common law marriage. I covered this in the January 2015 Legal Briefs.
Spouses (or others) who do not have an ownership interest in the property do not have right of rescission.

7.3 Marital Interests Purchase Money Mortgages.
The homestead interest of a spouse who is not in title to homestead property is inferior to the lien of a purchase money mortgage. Therefore, the validity of a purchase money mortgage is not affected by the failure of a non-title-holding spouse to execute a purchase money mortgage on homestead property.

Safe deposit boxes
Q. We have drilled safe deposit boxes with past due rental.  Normally, we hold on to these items and eventually report them to the state as unclaimed property.  I have a couple of situations where a member of Senior Management wants to do more in trying to help the owners of property to receive their contents.

Situation #1: One box has some U.S. Savings Bonds.  The bonds are held jointly with another person, who is not a lessee on the box.  Can we reach out to the co-owner of the bonds (not the lessee), to notify him that we have access to property with his name on it?

Situation #2: We sent a certified letter to the primary lessee on the box.  The box was drilled.  It was later realized that the joint lessee was not on the certified letter, therefore she was unaware.  We reached out to the joint lessee, she stated that she knows what is in the box (just a bunch of documents) and that we could just get rid of them.  If she just can’t make it to the bank, could we take the contents to her and have her sign for them?

A. It’s good that the bank wants to take a more active role in reuniting folks with their property.
I would caution you against contacting the other co-owner of the savings bonds, however.  You did not indicate whether the bonds were payable alternatively to the listed persons (“or” or “and/or” between the names), or payable jointly (“and” between the names).  If they are payable alternatively, the fact is that If the lessee is still alive, it is possible that he purchased the bonds in his name and the other person’s name and did not intend to reveal the existence of them until some future point in time.  If you contact the other individual, you are defeating the one safeguard the person who purchased the bonds had taken — he had possession of the bonds.  Once you alert the other named person and turn over the bonds, your lessee is left with nothing and the situation won’t have a happy ending.

Subsection C of Section 1308 of the Banking Code states:

C. All contents of a safe deposit box shall be presumed to belong to the lessee(s) of the safe deposit box, and the lessor may rely on that assumption unless and until it receives a court order to the contrary.
So, even though someone else’s name is also on the savings bonds, the contents of the box, including the bonds, are presumed to belong to the lessee.

Trust as POD

Q. When I came to the new accounts seminar we reviewed having a trust as a POD. All that I remember is that we reviewed it, and now I have a customer wanting to add their trust as a POD. Can you tell me what was said?

A. It is permissible for a deposit account owner to designate a trust as a POD beneficiary. The relevant section of law is Title 6 O.S. Section 901:

B. 1. When a deposit has been made or shall hereafter be made in any bank using the terms “Payable on Death” or “P.O.D.”, such deposits shall be payable on the death of the account owner to one or more designated P.O.D. beneficiaries, or to an individual or individuals named beneficiary if living and if not living, to the named estate of the beneficiary, notwithstanding any provision to the contrary contained in Sections 41 through 57 of Title 84 of the Oklahoma Statutes. Each designated P.O.D. beneficiary shall be a trust, an individual, or a nonprofit organization exempt from taxation pursuant to the provisions of the Internal Revenue Code, 26 U.S.C., Section 501(c)(3).

Banning guns on premises
Q. Does Oklahoma allow banks to ban guns from their premises?  If so, is there any special signage required?

A. A bank has the right to determine whether guns will be allowed on the property owned or rented by it other than for members of law enforcement. Most members of law enforcement who are in plainclothes are happy to openly display their badges when in the bank. The bank cannot prohibit guns locked in a vehicle not owned or in control of a convicted felon in its parking lot.

Title 21 O.S. Sec. 1290.22
A. Except as provided in subsection B of this section, nothing contained in any provision of the Oklahoma Self-Defense Act shall be construed to limit, restrict or prohibit in any manner the existing rights of any person, property owner, tenant, employer, place of worship or business entity to control the possession of weapons on any property owned or controlled by the person or business entity.

B. No person, property owner, tenant, employer, place of worship or business entity shall be permitted to establish any policy or rule that has the effect of prohibiting any person, except a convicted felon, from transporting and storing firearms in a locked vehicle on any property set aside for any vehicle.

C. A property owner, tenant, employer, place Title 21 O.S. Sec. 1290.22 (eff. Nov. 1, 2013) of worship or business entity may prohibit any person from carrying a concealed or unconcealed firearm on the property. If the building or property is open to the public, the property owner, tenant, employer, place of worship or business entity shall post signs on or about the property stating such prohibition.

D. The carrying of a concealed or unconcealed firearm by a person who has been issued a handgun license on property that has signs prohibiting the carrying of firearms shall not be deemed a criminal act but may subject the person to being denied entrance onto the property or removed from the property. If the person refuses to leave the property and a peace officer is summoned, the person may be issued a citation for an amount not to exceed Two Hundred Fifty Dollars ($250.00).

E. A person, corporation, place of worship or any other business entity that does or does not prohibit any individual except a convicted felon from carrying a loaded or unloaded, concealed or unconcealed weapon on property that the person, corporation, place of worship or other business entity owns, or has legal control of, is immune from any liability arising from that decision. Except for acts of gross negligence or willful or wanton misconduct, an employer who does or does not prohibit their employees from carrying a concealed or unconcealed weapon is immune from any liability arising from that decision. The provisions of this subsection shall not apply to claims pursuant to the Workers’ Compensation Code.

Signage is required but there are no specific requirements as to the language or placement of the sign. Obviously, the sign should be in a location the person will see before entering. Certain practical issues in enforcing the prohibition are present, and the provisions I have italicized are the ones that cause me heartburn. Without a court construing them, it is impossible to know the impact.

Looking at the provisions in C. and D. together, if there ARE signs, the person carrying the weapon is stopped at the door, asked to leave, lock the gun in the car and come back. If he refuses, says he has a license (and even shows it), and he is “enlightened” regarding his options: you will call the police who may issue a citation for an amount not to exceed $250.00.

Here’s the problem: The statute specifically states being on the posted property is not a crime. It provides that entry may be denied or the person may be removed which seems to require more than simply requesting: “I’m sorry, but we do not allow weapons here. Please lock the gun in the car and come back.” Even if that is sufficient, the arms bearer must refuse to leave. The police are called, and… the statute does NOT state that this shall be a misdemeanor punishable by a fine of $250. If it is not a misdemeanor, then it is falls into the same category as a traffic offense, such as speeding or running a stop sign or reckless driving with no injury to person or property, it must be committed in the presence of an officer. If that is the case, unless the person carrying the gun is still there when the police arrive, he cannot be prosecuted or fined. Additionally, Paragraph D. may be susceptible to a constitutional challenge for vagueness due to the way it is written.