March 2017 Legal Briefs

  •  Blunder Report
    • A Visit to the Bank of Blunders (Operations)
    • A Visit to the Bank of Blunders (Lending)
  • Labor’s Fiduciary Rule Likely Delayed

Blunder Report

By Mary Beth Guard and Pauli D. Loeffler

For February 2017 OBA Legal Briefs Pauli and Mary Beth provided readers with scripts reflecting compliance requirements as they exist as of early February, 2017.  Pauli tackled the Operations side, while Mary Beth had fun with lending.  This month they are providing the answers. How many did you spot? 

A Visit to the Bank of Blunders (Operations)

KARA:  How was your weekend?

MEAGAN:  It was terrific! I ran into that handsome Bill Stranger who just moved here from River City. He was at “Brews ‘N Billiards” Saturday night with a couple of other guys, and I managed to get up the nerve to go talk to him after my second beer. I went right up to him and said: “I don’t know if you remember me, but I work for Bank of Blunders, and I helped you open your Super NOW account a couple of weeks ago. Are you enjoying our little town of Blunders?” He said he loved how friendly everyone here is, asked me to sit down with the group, and bought me a beer. Oh, and I reminded him that we still need a copy of the lease or a utility bill to document his address since his driver’s license showed his old River City address and was expired. George said he’d been busy with getting settled in from the move, but he’d come by the bank this week, or better yet, just have me over to his place for dinner! 
Meagan’s compliance mistakes at the “Brews ‘N Billiards” Saturday are more than a small brouhaha. By introducing herself to handsome Stranger in front of his buddies saying: “I don’t know if you remember me, but I work for Bank of Blunders, and I helped you open your Super NOW account a couple of weeks ago,” she violated Reg P §1016.3(q) with regard to personally identifiable information: 
(2) Examples. (i) Information included. Personally identifiable financial information includes:
(C) The fact that an individual is or has been one of your customers or has obtained a financial product or service from you;
(D) Any information about your consumer if it is disclosed in a manner that indicates that the individual is or has been your consumer…
Depending on the Bank of Blunder’s CIP policies and procedures, address verification can be handled in several ways. The Oklahoma Department of Public Safety does not require you to get a new DL if you move from one location in Oklahoma to another location in Oklahoma.  You must simply notify DPS of your new address:
If River City (the place Bill moved from) was in another state, he would be required to transfer his out-of-state driver’s license and obtain an Oklahoma license after becoming an Oklahoma resident.
Here is an excellent discussion regarding addresses from the BOL Forums:  
KARA:  What about you, Deidra…  Anything good to share?

DEIDRA: As a matter of fact, “yes!” Everyone at church was talking a about how George caught Peggy Sue with Richard Norvick on Friday night parked out by the lake! Rumor has it, the windows of Richard’s crew cab were pretty fogged up, and the truck was rocking, if you know what I mean.

WILLIS: (passing by from the breakroom on his way back to the drive thru):  I guess they smoothed things over. George came through the drive thru when we opened at 7 a.m. with his and Peggy Sue’s income tax refund check. I had to send the check back over to him to get her to indorse it since he was depositing it into his business account. Peggy Sue sure is a stunner with that red hair of hers. 

DEIDRA:  Gee, I am pretty sure Peggy Sue is a blonde.

KARA:  Men can’t distinguish colors. I bet he meant strawberry blonde. Your story is proof that blondes have more fun.  But I guess Willis doesn’t realize that due to Section 4-205 of the UCC, you never have to have an indorsement on a check anymore.
Willis ‘ failure to confirm that Peggy Sue was the passenger who indorsed the Treasury check for the jointly payable tax refund deposited into George’s solely owned account may well make the Bank of Blunders liable for some or all of the amount of the check, and the statute of limitations  on U.S. Treasury checks is seven years. It is not uncommon for an estranged spouse to forge the other spouse’s signature, but I have heard this scenario so many times I cannot even give you an accurate number.  When a check is presented to the drawee bank, the bank of deposit warrants that the check was paid in cash or deposited into an account of the named payee(s). Even if Peggy Sue is a customer of the bank, so it has her signature on another account, this is still a third-party indorsement which requires the bank employee confirm the identities of the joint payees before cashing or depositing it. 
Kara’s remark regarding §4-205 regarding a missing indorsement is entirely misplaced in this instance since Peggy Sue’s indorsement is a forgery. (Plus, 4-205 should not be relied upon if a check is payable jointly.)  I would also warn that a bank should be suspicious when the check is deposited into a recently opened joint account with only one indorsement. A common ploy when a couple has recently separated or divorced is for the one who receives the check to fraudulently open a joint account in the names of both parties in order to deposit the joint check without the knowledge or consent of the other payee and gain sole access to the proceeds. IRS checks are very specifically payable to both parties, and have the word "and" between the names. It is entirely possible for one of your joint account holders to get the IRS check with the other payee on the check having no knowledge of its receipt.  Also be aware that the same type of deception can be done with a rarely used older joint account.
JERRY GUPSUM: “I need $500 cash back from this check for customer change when I make deliveries” (hands Slim check from insurance company payable jointly to Bank of Blunders and “Shuck and Jive, Inc.” and indorsed using the Shuck &Jive, Inc.’s rubber signature stamp). 

SLIM: Sure, Jerry. How do you want that? 

JERRY: Give me $200.00 in fifties and the rest in twenties.

SLIM: Sure thing, Jerry. 
Slim made the same error with regard to the check from insurance company payable to “Shuck and Jive, Inc.” and Bank of Blunders, but compounded it by giving Jerry cash back. Even if Shuck and Jive, Inc. was the only payee on the check, giving “cash back” on a check payable to an entity instead of deposing the check and then making a withdrawal is never a good practice.  Although Jerry says the $500.00 is for customer change, the bank has no way to confirm this and could be liable if Jerry is converting assets of the corporation. Jerry may have stolen the check from the mailroom.  Even if Jerry is the sole shareholder of the corporation, allowing Jerry this should not be allowed, since it can allow creditors of the corporation to "pierce the corporate veil" and go after Jerry’s personal assets as the sole shareholder which is something he can confirm with his attorney if he complains about it.   Since the insurance check was made payable jointly to the bank and the company, it probably related to property mortgaged to the bank and Slim should have checked to make sure the loan payments were current.
JILL MERRIWEATHER, wife of the bank’s president at drive through:  Hello, Willis, how’s Monday treating you?

WILLIS: It’s always a good day when you come to my window Mrs. Merriweather. What can I do for you today?

JILL: I had a bit of luck at the casino this weekend, and I need to make a deposit. (Puts $10.251.00 and a deposit slip in the canister, pushes the send button – Whoosh!)  

WILLIS: (Retrieves canister, counts the money). Nice! Mrs. M.! I’ll have your receipt right out to you as soon as I fill out this Cash Transaction Report.

JILL: Darn! I’m running late for my hair appointment! My husband told me about these CTRs the last time one had to be filed, and I forgot. Just send me back the $251.00, and I’ll send you another deposit slip, so I can get to my appointment on time, and that will save you from filling out that form.

WILLIS: Okay, I wouldn’t want you to be late for your appointment.

While I have no idea why Willis needed to delay Mrs. Merriweather while he filled out a CTR since he would already have the necessary information, this is definitely structuring, so instead of a CTR, a Suspicious Activity Report will have to be filed on both Mrs. Merriweather and Willis.  What about Mr. Merriweather, the bank president?  There is nothing to indicate he has done more than tell his wife that cash transactions exceeding $10,000 require a CTR. If Jill had said, “Darn, my husband hates the time it takes you guys filling out these silly reports,” we would have a different situation.
(MRS. BUTTERWORTH and KARA coming out of KARA’s office) KARA: Now you’ve heard for yourself that the bank didn’t issue that cashier’s check. It’s a counterfeit.

MRS. BUTTERWORTH:  Is your bank going to do anything about this?

KARA:  After I see you out, I am going right back into my office and file a Suspicious Activity Report. 
Kara committed a major BSA violation by announcing in the lobby that she is going to file a SAR.   The fact that a SAR has been filed must be disclosed only on a need-to-know basis to avoid it being indirectly communicated back to the subject.
DEIDRE: Kara, I’m really glad you were able to calm down Mrs. Butterworth and convince her she was being scammed. However, we have another problem. I took a deposit yesterday from that nice Mr. Hyde who runs the hardware store. It turns out that two of the $20 bills are counterfeit. 

KARA: Well, I’ll contact Mr. Hyde, tell him of the counterfeit bills, and see if he knows who gave them to him. Meanwhile, debit the account $40.00. Give me the counterfeits, and I’ll take care of the report.

DEIDRE: I’m afraid I can’t give you the bills. I felt so bad about Mr. Hide losing money, I put in $40.00 of my own money and destroyed them.
Deidre’s destruction of the counterfeit $20.00s is going to make it a busy day for SARs at the Bank of Blunders. When a bank receives counterfeit bills, there are specific procedures that must be followed in notifying and submitting the bills to the Secret Service.. The counterfeits are evidence of a crime.

Bank of Blunders (Lending)

LIBBIE LINDER: Carl, I know you were concerned about the size of your flood insurance premiums.  Since the guest cottage on your property that your son and his family are living in is not attached to your main house, we don’t have to have it covered with flood insurance.  There is a special exception that applies and that will save you a bundle!  
Not so fast.  The detached structure exemption to flood insurance comes into play only if the detached structure does not serve as a residence.  The rule says ‘‘Serve as a residence’’ shall be based upon the good faith determination of the bank that the structure is intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities.
CARL KUSSTUMUR:   Great!  When I came in last week to refinance the mortgage on my house, I expected it to be a big deal, but since it’s on a large acreage, you were able to get around lots of red tape.  What did you call it – TRID?
LIBBIE LINDER:   Yep, TRID.  It would have required you to have a waiting period before we closed your loan and all kinds of other things, if we hadn’t had the exception.  
Gone are the days when there was an exception from compliance requirements based upon the property consisting of 25 or more acres.  That used to be in RESPA.  It’s not even a RESPA exemption anymore and TRID doesn’t care about anything other than whether it is a closed end consumer credit transaction secured by real property.  If it meets those criteria, TRID applies, regardless of the number of acres.
NOAH NAWNCUMP:  Sam, What can I do for you today?  
SAM SUCCESSFUL:  I assumed we could close today on that loan I’m getting for my business – you know, the one where I am putting up one of my rent houses that I own free and clear as collateral, but your assistant is telling me that the appraisal didn’t come in until late yesterday, so we have to reschedule.  I don’t want to wait!!
NOAH NAWNCUMP:  No worries, Sam.  There is this waiver I can have you sign and we can go ahead and close tomorrow.  In fact, we could close today, if you’d like.
Too late for a waiver of the appraisal timing requirement, Noah!  Under Reg B, the waiver must be made before entering the three business day period prior to consummation or account opening. 
NOAH NAWNCUMP: (comes back in after conferring with his assistant.)  Here is a waiver of the appraisal copy timing rule requirement, Sam.  I need you to sign it and backdate it to Monday.  
SAM SUCCESSFUL:  Whatever you say, Noah.
Never, never backdate a bank document, particularly a notice or disclosure.  If you have a contract and the contracting parties want to specify that the contract will be deemed effective as of a particular date, that’s doable.  But putting a false date is something else, and it calls into question the validity of all your bank’s documents.
NOAH NAWNCUMP: Oh, and after we close, I’ll get you a copy of the appraisal, if you really want one.  There’s just a small charge for the copy.
Lay off on the fee income, Noah.  Section 1002.14(a)(3) says “A creditor shall not charge an applicant for providing a copy of appraisals and other written valuations as required under this section, but may require applicants to pay a reasonable fee to reimburse the creditor for the cost of the appraisal or other written valuation unless otherwise provided by law.”
KARLA KUNSUMER: (speaking to Peggy Preggers, who wants to get a HELOC)  I’d love to be able to help you, Peggy, but we just need to wait and see how things shake out.  I know you think you will want to go back to work after the baby is born, but trust me, you won’t.  Almost nobody actually returns to work.  I took twenty years off after the birth of my first child!  It just isn’t feasible for us to loan you money right now because your income situation is too uncertain.  If you do decide to stick your baby in day care and go back to your job, you come see me.
PEGGY PREGGERS:  Well, we really need the loan.  I’ll be back.  Maybe I’ll only take three weeks off, instead of six, so we can qualify for the loan sooner.
You need some fair lending training, Karla.  What you’ve said is clearly illegally discriminatory under the Fair Housing Act which prohibits discrimination on the basis of familial status and there have been numerous enforcement actions brought against lenders for similar behavior.    Applicants on maternity leave should not be required to return to work status as a condition for acting on their mortgage loan application.  A 2014 Wells Fargo settlement with HUD provides insight into how the underwriting should be done.
LEROY LONERMAN: (speaking to his assistant) Don’t give me any more of these credit reporting error claims from individuals.   We don’t have to deal with these.  They have to go through the credit bureau and THEN come to us.  We have enough work to do!  Boy, I’m sure glad some things have gone away, like that Protecting Tenants at Foreclosure stuff.
Leroy was evidently napping when Regulation V changed, as a result of the FACT Act, paving the way for consumers to make direct disputes to furnishers of information.  The consumer may direct the dispute to the CRA or the furnisher.   If a dispute is made directly with the furnisher, the furnisher must respond directly to the consumer.  (There is also a red herring/non-issue here.  The Protecting Tenants at Foreclosure Act really did sunset and has not been reborn.) 
RALPH RILLEST:    So, you’re borrowing money for eighteen months to pay for a lawyer to defend your son on charges he vandalized the Porky’s sign and you’re giving us a first mortgage on your home as collateral.  Got it.  Listen, I’m really sorry the rate is so high, but let me make you a copy of your credit report and you’ll see why.  But don’t worry.  Since this is a first mortgage, the escrow requirement doesn’t apply.  And because this is a short-term loan, we really don’t need much paperwork and we can close the loan in just a couple of days.
Ralph!  What are you thinking?  The loan would be a closed end consumer credit transaction secured by real estate (in this case, the borrower’s principal dwelling).  Despite the short term of the loan, it would be covered by TRID, so there will be a lot of paperwork and there will be waiting periods before consummation.  Plus, if the rate is high enough to trigger the HPML escrow requirement, an escrow will be needed, since the bank is acquiring a first mortgage lien on the principal residence and this would not qualify as temporary financing.  As for making someone a copy of their credit report – don’t do it.  Direct the customer to and have him obtain copies from the three nationwide CRAs there.  Also, the Risk-based Pricing Notice should help the customer understand how his credit report negatively impacted him.
SARGE SLIPPERY:  Thanks, Ralph.  When I get out of the army, I hope I can get my finances in order.  I’ve been distracted.  I know I can do it.   You’re my inspiration.  For you to have served time for embezzlement, then turn your life around and become a real estate lender at a prestigious bank, it’s amazing.
Uh oh.  It is highly unlikely that Ralph (who is obviously making consumer mortgage loans) would meet the loan originator qualification standards in Regulation Z (or the SAFE Act, if he needs to be registered).  The bank has a problem here.
LEROY LONERMAN:  (speaking to Libbie Linder.)  Hey, Libbie.  I saw you meeting with Ken Kooties this morning and he was filling out a loan application.  You might want to think long and hard before you make a loan to him.  I was working the pancake breakfast fundraiser the other day and overheard some people talking about him.  Apparently, he has a terminal case of Tickdoodleroo.  If he dies, that loan will never get repaid.

LIBBIE LINDER:  Wow.  Thanks, Leroy.  I’ll ask him about it and see how much time his doctor thinks he has.
The FACT Act strictly prohibits discrimination on the basis of a medical condition or medical history or even a rumor about medical matters and the bank is not allowed to inquire about it either.
LEROY LONERMAN:  I had to call an applicant’s doctor the other day.  The applicant’s income is from disability payments, so, I needed to know how long the disability was likely to continue.  It’s so interesting to read other people’s medical files!
Get your nose out of the applicant’s medical files, Leroy.  Here’s what the CFPB says in its Bulletin 2014-03:  To verify income for Qualified Mortgage debt-to-income ratios under the Ability-to-Repay rule, lenders are required to look at whether the Social Security Administration benefit verification letter or equivalent document includes a defined expiration date for payments. Unless the Social Security Administration letter specifically states that benefits will expire within three years of loan origination, lenders should treat the benefits as likely to continue. 
KARLA KONSUMER:  (talking to Noah Nawncump)  I was so glad to see Heza Former in here today.  You know,  when his ex-wife started working here, he paid off his loans and closed all his accounts.  Now that she has retired, he’s back.  I got a loan application from him today for a boat loan and he think he will reopen his deposit accounts, too.  Said it was such a hassle when he set them up elsewhere.  They wanted him to provide identification and since he is our former customer, we don’t have to do any of that.
The rules and your program may allow you to skip doing CIP on existing customers opening new accounts or obtaining new loans, but it does not allow you to skip CIP on former customers.
RALPH RILLEST: (turning to Leroy Lonerman.)  What a pain.  I’m so glad we fired that loan assistant, Curly.  On several of the Loan Estimates he prepared and sent, he forgot to put things like Lender’s title insurance and appraisal fees.  Can you imagine?  Now I have to go back through and issue revised Loan Estimates for all of them.
There is no changed circumstance, so a new Loan Estimate can’t be issued.  Ralph is stuck with the violations for the inaccurate LE.
LEROY LONERMAN:  I know what you mean.  I had to redo some Closing Disclosures, too.  He was putting the wire fee and the courier fee on separate lines.  The fee amounts weren’t large, but splitting them out made it look like we were nickel and diming borrowers to death.
Sorry you don’t like it, Leroy, but that’s the way it is supposed to be done.
RALPH RILLEST:  I’m look at another one he apparently screwed up, too.  The customer was getting a loan to buy a home and he put the purpose down as “Home Equity,” instead of purchase just because the customer was pledging another dwelling that he owns as collateral, rather than the property he is buying.  How stupid is that?  From the consumer’s standpoint, though, it doesn’t matter.  I’m not going to try to change it.
The purpose field on TRID is hierarchical.  You go through one at a time.  If the property being purchased is not the property that will be collateral for the loan, it is not a purchase loan.  It needs to be accurate.
RALPH RILLEST:  Don’t you think most settlement service provider costs are likely to be the same in Branson, Missouri as they are around here?  Our customer is purchasing a vacation home in Branson and has asked us to do the financing.  I’m trying to swag the estimates for the LE.
No swagging allowed.  You must make a good faith estimate – and that requires doing your homework in the area where the service provider is to determine what the fees are there.
LEROY LONERMAN: (talking to the other loan officers.)  FYI, Guy Gunner got out of the Air Force yesterday.  We can finally pursue our foreclosure now.
Maybe not.  If the mortgage originated before the period of the servicemember’s military service and the servicemember is still obligated on it, the current version of the SCRA allows a foreclosure proceeding to be stayed upon the court’s own motion or upon an application by the servicemember not only during the period of military service but for one year thereafter.
KARLA KUNSUMER: (to all the other loan officers.)  Heads up.  We don’t want to be seen as dragging our feet when we have loan applications from applicants who may be part of a protected class.  Senior management just decided upon a new policy.  Any time we get an application for a loan from a female applicant or a minority applicant, a decision should be made on the application as quickly as possible – no more than two weeks in any case, so we can document the action taken and keep going.  Don’t spend too much time with the applicants or you’re not going to be able to stay within the new timeframe.  This should help us cut down on complaints by customers to regulators.
Bad idea, senior management.  Here’s some required reading:  the June 2016 enforcement order involving Bancorp South Bank from June 2016.
LIBBIE LINDER: (talking to Karla.)  Leroy said he doesn’t mind taking all of the calls from consumer applicants that you and I hate.  He can sometimes just be really chatty – ask them about their family, their church, clubs they belong to, things like that, and end up getting referrals for other mortgage business.  Let’s put his name and NMSLR ID on all the apps we get, up until the closing documents, so he will get the calls, instead of us.
Two problems here.  The NMSLR ID put on a document should reflect the identifier of the loan originator actually working on the transaction at that time.  Putting another individual’s NMSLR ID on documents for a loan they aren’t actually working on is a violation.  The second problem relates to what Leroy is chatting about.  Inquiring into matters such as kids, marriages, religion, etc. could lead to the appearance of discriminating on a prohibited basis.  

Labor’s Fiduciary Rule likely delayed

By John Burnett

Request for comments on proposed delay

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) published in the March 2 Federal Register a proposal to extend for 60 days the April 10, 2017, applicability date of the “Fiduciary Conflict of Interest” rule defining who is a “fiduciary” under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code of 1986 (Code). The proposal would also push back the applicability date of related prohibited transaction exemptions, including the Best Interest Contract Exemption and amended prohibited transaction exemptions. The proposed delay would be to afford EBSA time to examine whether the fiduciary rule may adversely affect the ability of Americans to gain access to retirement information and financial advice, and to prepare an updated economic and legal analysis concerning the likely impact of the final rule as part of that examination, all as required by President Trump’s February 3, 2017, memorandum to the Secretary of Labor. 
The comment period on the proposal to delay the applicability date will run for 15 days, through Friday, March 17, 2017. EBSA is also inviting comments on whether a 60-day delay (to June 9) or a shorter or longer delay is appropriate. 
The status of the Fiduciary Rule itself is unknown. The outcome of the renewed analysis of the rule could be a determination to let the rule become effective on some future date, a decision to amend the rule (which would trigger another proposal for comment and a new final rule), or rescission of the rule. The immediate challenge for EBSA, though, is to finalize the proposal to extend the applicability date before April 10.