- ‘Tis the (tax refund) season – Part II
- Flood rule could ruin your HPML escrow exemption
- Compliance management: basic thoughts
‘Tis the (tax refund) season – Part II
By Pauli D. Loeffler
Federal and Oklahoma state income tax refunds payable to a deceased account holder. Although who actually said: “In this world nothing can be said to be certain, except death and taxes” is subject to some dispute, the truth of the statement is not. Unfortunately, the inevitability of death and taxes when they combine and an income tax refund check enters the picture can cause banks and their customers problems. There are several possible situations when these problems arise, and we will look at various examples and offer ways for banks and their customers to deal with each. The Oklahoma Tax Commission (“OTC”) debit cards issued for income tax refunds will be discussed separately.
Scenarios with a surviving spouse filing joint return
Scenario #1: William and Mary Stone file their joint return in January 2016 for the 2015 tax year, and Mary dies in February before the federal and Oklahoma income tax refund checks are received or deposited. The income tax refund checks are issued payable to William Stone and Mary Stone, and William wants to deposit the checks into what was a joint account. Can the bank accept these checks for deposit?
As far as the Treasury check for the federal income tax refund goes, the answer is an unequivocal “no.” William will need to file IRS Form 1310 found at this link https://www.irs.gov/pub/irs-pdf/f1310.pdf, check box “A” in Part I and return the check with Form 1310 to the local IRS office or the Internal Revenue Service Center where the return was filed. A new check will be issued in William’s name and mailed to him.
With regard to the Oklahoma income tax refund check, William does not need to file any form with the Oklahoma Tax Commission; in point of fact, there is no available OTC form for a surviving spouse. He may simply deposit the tax refund check into his account by providing a copy of the Oklahoma income tax Form 511 and a copy of Mary’s death certificate if required by your bank.
Scenario #2: The surviving spouse may file a joint return for the prior year as well as the year of death on or before the due date and any extension or for the year in which the return is due. The surviving spouse will receive the deceased spouse’s refund. However, if a probate is filed, the personal representative of the estate may revoke the joint election by filing a separate return for the decedent within 1 year of the due date of the return including any extensions. This will not have any effect on the bank with regard to any checks deposited made payable to the surviving spouse.
Bogie and Lauren Humphrey are married. Bogie dies in 2016 prior to filing federal and Oklahoma income tax returns for 2015. When Lauren files the joint return for 2015, if she writes “Deceased, Bogie Humphrey” and the date of death across the top of the federal income tax return, and signs the return on Bogie’s behalf, then her name and “Filing as surviving spouse,” the federal income tax refund check will be issued as indicated in Scenario #1 without the need for her to file the IRS Form 1310.
The first page of the Oklahoma income tax Form 511 has a box next to each filer’s name that is to be checked if the filer is deceased and space in the “Filing Status” part of the form to write in the date of death. There are no instructions with regard to how Form 511 should be signed, but I presume it would be the same as for the federal income tax form. The Oklahoma income tax refund check may be deposited by Lauren into an account owned by her using a copy of the Oklahoma income tax return if necessary.
As long as Lauren does not remarry during 2016, she would also file a joint 2016 federal and Oklahoma income tax forms in 2017.
Scenarios with no surviving spouse or no joint return.
Scenario #3: Albert (“Bert”) Smith is married to Ernestine (“Ernie”) Smith, and Bert files his 2015 tax returns in January 2016 as “married filing singly.” Both federal and state income tax forms require the name and SSN of the non-filing spouse. Unfortunately, for all involved, Bert departs this life before he receives or deposits his tax refund checks. Ernie wants to deposit these checks. For the federal tax refund, Ernie will have to return the check with IRS Form 1310, check box “C” in Part I and answer the following “Yes” or “No” questions in Part II to have the check reissued.
1 Did the decedent leave a will?
2a Has a court appointed a personal representative for the estate of the decedent?
2b If you answered “No” to 2a, will one be appointed?
If you answered “Yes” to 2a or 2b, the personal representative must file for the refund.
3 As the person claiming the refund for the decedent’s estate, will you pay out the refund according to the laws of the state where the decedent was a legal resident?
If you answered “No” to 3, a refund cannot be made until you submit a court certificate showing your appointment as personal representative or other evidence that you are entitled under state law to receive the refund.
Part III of IRS Form 1310 is the signature and date block. It contains the following language: “Under penalties of perjury, I declare I have examined this claim, and to the best of my knowledge and belief, it is true, correct, and complete.” Notarization is not required. By responding “No” to both questions 2a and 2b and “Yes” to question 3, signing and dating the form, a check will be issued payable to Ernie, and deposited into an account owned by her. If Ernie is not the sole heir under intestate succession if Bertie left no Will or under his Will if there is one, it is not the bank’s problem.
As far as the Oklahoma tax refund check is concerned, OTC Form 507 is used. The form is available at this link: https://oklahoma.gov/content/dam/ok/en/tax/documents/forms/individuals/current/507.pdf. It is identical to IRS Form 1310 other than the fact that it has no box for a surviving spouse who filed jointly to check in Part I. The questions in Part II are identical to those contained in Part II of IRS Form 1310 and the Part III, the signature/date section is the same as well. OTC Form 507, unlike IRS Form 1310, requires Ernie to submit the check issued with the form plus a copy of the death certificate or formal notification of death from a government office, such as the Department of Defense. The instructions to IRS Form 1310 indicate the claimant must have one of these documents but does not require it to be submitted with the form.
It should be noted, if Bert died without a Will, any heir entitled to a share by intestate succession could file the IRS and OTC forms and have the refund checks reissued in his or her name. This would also be true for those named in Bert’s Will if no probate is pending or anticipated. For example, if Bert died intestate with one or more children, and the child had the checks and the requisite documents filed the forms before Ernie did, the checks would be reissued payable to the child.
Scenario 4: Donna Deceduta, who is single, files her 2015 federal and Oklahoma income tax returns for 2015, and goes softly into that good night while watching Interstellar before her refund checks have been deposited. Donna’s sister, Trixie Cutoria is appointed by a court as personal representative of Donna’s estate. Trixie must submit a certified copy of the order appointing her as personal representative with Form 1310 unless she has already submitted it with another IRS form such as Form 1040X (amended income tax form). In that case Trixie writes “Certificate Previously Filed” on the bottom of Form 1310. The federal refund check will be reissued. Trixie will also file Donna’s federal and Oklahoma income tax returns for 2016.
Trixie does not have to file OTC Form 507 in order to deposit Donna’s 2015 tax refund. If Donna had been married and filed jointly with her spouse, Trixie might file Form 507 to claim Donna’s refund for the estate. Oklahoma’s estate tax was repealed effective January 1, 2010.
Oklahoma Tax Refund Debit Cards
Banks will rarely see checks issued for Oklahoma personal income tax refunds. Refunds for overpayment of Oklahoma income tax are made either by direct deposit to an account with a U.S. financial institution or by issuance of the “Way2Go Card” (a MasterCard branded debit card) to the tax payer. The most common situations when a tax refund would be issued by check are if the tax payer filed as non-resident of Oklahoma, his current mailing address was outside of the U.S., or the direct deposit is returned as account closed.
Only one debit card is issued when a joint return is filed. It is embossed with the names of both spouses and either spouse may use it to obtain a cash advance without the other, and the bank is protected if it makes a cash advance and obtains ID. If one of the spouses dies prior to or after receipt of the debit card, the surviving spouse will not be required to have the debit card reissued, and the bank would still be protected for a cash advance with ID. Note that the bank has no exposure to liability if an Oklahoma tax refund debit card is used at its ATM using the PIN regardless of what name is embossed on the card.
If a debit card for a deceased taxpayer is received, the person wishing to obtain the refund will need to call ACS, the vendor of the Way2Go Card, at 1-888-929-2460. After he activates the card with a PIN number (this presumes the person has certain required information regarding the deceased, to select the PIN, is honest rather than just using an ATM with the PIN number he created while avoiding any cameras), he will select option 6, then select option 3, and will be transferred to a service representative. The service representative will open a service ticket. Instructions will be sent on how to obtain the refund. In order for ACS to process the request for disbursement of funds, a certified Death Certificate will be required and a certified copy of with signature stamp or seal on one of the following: Letters of Probate, Identification of the Estate Executor/Administrator, Letters of Administration, Letters Testamentary or Small Estate Affidavit. (This information is found on the OTC website in the FAQs for Tax Refund Debit Cards Question #21 https://www.ok.gov/tax/faqs.html.)
Flood rule could ruin your HPML escrow exemption
By John S. Burnett
Ceiling on flood escrow rule spells trouble
Suppose that your bank has been able, so far, to qualify for the exemption from the HPML tax and insurance escrow requirements by meeting all four of the exemption criteria – (1) more than half your first-lien covered transactions on properties in rural or underserved areas in the previous calendar year; (2) no more than 2,000 first-lien covered transactions sold, assigned or otherwise transferred in the prior calendar year; (3) total assets (with affiliates that regularly make covered transactions) of less than $2 billion (adjusted for inflation to $2,052,000,000 for loans made in 2016) at the previous year-end; and (4) neither you nor an affiliate maintains an escrow account for an extension of consumer credit secured by real property or a dwelling that you or an affiliate services other that those established for first lien HPMLs established on or after 4/1/2010 and before 1/1/2016, or escrow accounts established after closing as accommodations to distressed consumers.
Now, suppose that your bank makes a consumer-purpose 25-year non-HPML first-lien closed-end mortgage loan on property with a residential structure located in a special flood hazard area, and that your bank’s total assets at the end of the two prior calendar years were $1.05 billion and $1.25 billion, respectively. What happens?
First, since the new loan is subject to flood insurance requirements, and, since it’s now 2016, it’s subject to the new flood insurance escrow requirements, and your bank’s assets are too high for an exemption from the flood escrow rule. So your bank dutifully imposes on this borrower an escrow requirement for flood insurance premiums. And that’s it, right?
Wrong! If you go back and look at the 4th criterion you had to meet under the HPML escrow exemption requirements, you’ll see that if you maintain an escrow account for “any extension of consumer credit secured by real property or a dwelling that the creditor or its affiliate currently services” and that escrow was established on or after 1/1/2016, you no longer meet that 4th criterion and you become ineligible for the escrow exemption for any HPML you make going forward.
There’s one “out” — If your institution doesn’t service the flood-zone loan at least through the due date of the second periodic payment (in other words, if you’ve transferred the loan or its servicing before the due date of the second payment), the flood insurance escrow will not affect your HPML escrow exemption. [Comment 35(b)(2)(iii)(D)-1.iv.]
If you make, increase, renew or extend a consumer mortgage loan that’s subject to flood insurance escrow requirements, and don’t qualify for the small creditor exemption under the flood escrow rules (or get rid of the loan before the due date of its second payment), the impact on your HPML escrow exemption is immediate. Each first-lien HPML from that point forward will be subject to the HPML escrow requirement, unless it’s (1) secured by shares in a cooperative; (2) a transaction to finance the initial construction of a dwelling; (3) a temporary or bridge loan with a loan term of 12 months or less; or (4) a reverse mortgage transaction.
Be prepared to change
Make sure you know whether your institution qualifies for the small creditor (under $1 billion in total assets as of either 12/31/2014 or 12/31/2015) exemption from the flood insurance escrow requirement. If you are exempt as a small creditor under the flood insurance escrow rules, you’re OK on this issue until at least the end of this year.
If your total assets as of the end of both 2014 and 2015 were $1 billion or more, have plans in place to set up escrow accounts for any non-exempt mortgage loan for which flood insurance will be required.
If your institution’s total assets at the end of both 2014 and 2015 were $1 billion or more but you meet the four criteria for an exemption from HPML escrows, be prepared to drop that exemption swiftly once you’ve set up an escrow for flood insurance premiums. You will need to alert your lending staff of the loss of the HPML escrow exemption, and start imposing tax and insurance escrow requirements on all new HPMLs beginning with those for which you receive applications after you’ve started maintaining flood insurance premium escrows.
Compliance Management: Basic Thoughts
By Andy Zavoina
I was recently assisting a banker with a situation that was not unusual based on other compliance officers I have spoken with. They had what they thought was a huge problem, but in the end it was not. We tend to become gun shy. “The sky is falling. File a SAR. We need to search three years of HMDA files and see if this happened before.” Then we envision ourselves at our own funerals because we worked ourselves to death, and when the 21-gun salute is taking place (we deserve that, right?), we know the shots are going to happen, but we flinch anyway. We don’t have to be this way.
While there are record enforcement actions for noncompliance and there are more and more articles on bank officers, including compliance officers, being held personally responsible for what happens in the bank, we need to use common sense and our attention to detail to know what should happen, what did happen, figure out why if it was incorrect, the extent of the problem, and how to fix it. Then we ensure the fixes actually worked. That is a successful compliance program in a nutshell.
In this example, the compliance officer was doing a fair lending audit. Sample adverse action notices were pulled and there was one that appeared to have an error. The compliance officer was afraid this was a fair lending issue that might need to be written up as such. Because the description of what happened and the forms used were vague at points, we exchanged several emails before arriving at a conclusion. I’ll skip the blow-by-blow and give you the pertinent details.
The lender reviewed an application and denied it for lack of credit history. Because this was an unsecured request, he noted that a counteroffer of a secured loan should be made. There were no specifics such as the collateral type, equity position, purchase money or any other terms, just that a secured request is required.
In this bank the adverse actions are prepared by certain staff. The staff member in question used a combined adverse action notice and counteroffer form. But the counteroffer terms were not marked in any way, leaving it at “no credit history” and “your loan application was denied.” After this preparation the application went to a reviewer for quality control but that person also missed that the lender wanted to counter, but it was not marked as such.
The compliance officer selected the application for review. It was believed there were several reasons the request could have been denied and little reason to make a counteroffer. Still, the lender indicated it should be, it wasn’t, and this could be a fair lending issue.
I wanted to step back and make some observations. The lender made a credit decision, first, to deny the request. The adverse action notice was completed correctly to deny the request that was made. Next he wanted to make a generic counteroffer. There were no specific terms offered, just that a secured request would be reviewed more favorably than this unsecured request. The compliance officer felt there were better reasons to deny the loan than “no credit history” but this is somewhat a judgment call. Reg B provides (in the Interpretations at 9(b)(2)) that the principal reasons should be stated and that while there is no specific number of reasons required, more than four is generally not helpful.
What this means is that you should list the major reasons for denial first, that is, the problems hardest to overcome. If the lender listed “other-collateral required” and the applicant then came back offering some form of collateral, and was again denied because they were in bankruptcy which was also listed on the prior request, the applicant and the banker just wasted a lot of time and effort. In our case it was limited or no credit and that meant to the lender that collateral might overcome that shortcoming. While we don’t know what amount was requested here, I have seen applications for $10,000 unsecured walk out with a $1,500 unsecured loan and they were happy. We also don’t know the use of the funds and that could influence the decision, too. But the reason and the counteroffer support one another so it doesn’t matter that the compliance officer thought there were better reasons to deny the request as the intent was to salvage the application if possible.
The checkbox for a counteroffer was not marked. As far as the consumer knew there was no counteroffer. There was nothing added about “with collateral” added to the notice either. So the effect is that if there was any prohibited discrimination it would not have been on the part of the lender, but on the staffer who was supposed to complete the adverse action notice.
The compliance officer spoke with the person who completed the form. He claimed he just missed the annotation and took responsibility. But the reviewer also missed it. Perhaps it was not annotated well enough? Is there a systemic or forms issue? Could either of these two persons be discriminating individually or in concert with one another?
The compliance officer spoke with both persons and then reviewed similar loan applications. There were no other findings where counteroffers were ignored and only the denial was communicated. There appeared to be nothing on this one application that indicated it may have been from a minority populated area – so red lining didn’t appear to be an issue. There was nothing in the borrower’s name or application information to indicate this was a minority or female or someone who may otherwise be a member of a protected class. It simply appeared to be a single mistake.
The largest issue to address here is the way the lender communicates the desire to counteroffer a request. While the problem has not been seen before