November 2017 OBA Legal Briefs

  • “Legalese” for non-lawyers
  • Required year-end housekeeping

“Legalese” for non-lawyers

By Pauli D. Loeffler

My grandfather, my father and his brothers, as well as my brothers and I are all lawyers, so I grew up knowing legal terms. The vast majority of the population is mystified, if not entirely confused, by legal terminology. A lot of legal terminology comes from Latin (“Latin is a language dead and rolling in the dust. First it killed the Romans, and now it’s killing us”). In addition to being spoon-fed legal terms with my Pablum, I also had two years of Latin in high school. This was helpful not only in being able to follow Catholic liturgy before it was changed to the vernacular (“language”) of the congregation, but also allowing me to read my father’s diploma from Harvard Law School (these are now written in English except for a few terms, although I understand Yale still uses Latin for its diplomas). In addition to the above history, I am a bit of a grammar Nazi, since my undergraduate degree is a Bachelor of Arts in English.

This article is mainly intended to help bankers understand some common legal terms encountered in documents and assist in understanding the baffling speech and letters from attorneys. But it starts with some of my and other members of the OBA Compliance Team’s pet peeves for which we apologize in advance.

Pet Peeves. Using “endorsement” in the context of financial instruments instead of the correct legal term “indorsement” makes me groan. Okay, I “get” that the area on the back of the check says “Endorse here.” We received this unfortunate legacy from the British who continue to spell it that way. On the other hand, if you try to search Reg CC, the UCC , or the OBA Legal Briefs spelling it using “endorsement,” you aren’t going to find what you are looking for. While you can certainly provide your “endorsement” of a person, a cause, or a plan, it would be totally inappropriate to give them your “indorsement” (unless it’s on a check). [Editor’s note: Legal terms like “indorsement” take longer to change than words in the living language. If “endorse” and “endorsement” continue to be used in place of “indorse” and “indorsement,” perhaps even the attorneys may have to “endorse” the change, however reluctantly.]

“POA” (Power of Attorney) is probably the term most often used improperly by the general population and a heck of a lot of bankers. A POA is a document, not a person. We know what you mean, but we cringe. A Power of Attorney is a written document executed by the “Principal” (the person giving another person the power to act on his behalf). The person granted the power to act on behalf of the Principal is the “Attorney-in-Fact” (feel free to leave out the hyphens or just use “AIF”) or “Agent.” S/he is NOT the POA.

“Deceased” is NOT a verb; it is a noun or an adjective. John Doe died, passed away, shuffled off this mortal coil, or departed this life, but “John Doe deceased June 20, 2015 and left no POD” is cringe-worthy.
I’ll get down from my soap box before going into a diatribe about the correct use of “effect” and “affect” and the proper use of “drank” and “drunk.”

Probate legal terms. The term “probate” as well as “prove,” “proof” and “approve” derive from the Latin word probare. In order for a Will to be accepted or the heirs determined when there is no Will, the court must have proof. Most of the other common terms associated with probate proceedings also come from Latin such as “testator” (the person who executes the Last Will and Testament), “testate” (meaning the person died leaving a Will), and “intestate” (meaning the person died without a Will).

The person appointed to handle the deceased’s estate. When I graduated from law school more than three decades ago, the generic term “Personal Representative” was rarely used, but nowadays, typically the person appointed to handle the deceased’s estate is referred to using that term, and bankers often have questions when other terminology is used. The terms explained below have specific legal meaning and even provide the gender of the person. I will be chauvinistic and give the masculine form first.

Executor/Executrix: If one of these terms is used, it means 1) the deceased had a Will, 2) the Will was admitted to probate, 3) the Will named a specific person or persons to act in administering the probate estate, 4) the person or persons were approved by the court, and 5) were willing to act.

Administrator/Administratix with Will Annexed: If one of these terms is used, it indicates 1) the deceased had a Will, 2) the Will was admitted to probate, 3) the Will named a specific person or persons to act in administering the probate estate, 4) none of the persons named as Executor or Executrix was willing to act or approved to serve, and 5) the court approved someone else, and 6) the approved person or persons were willing to act.

Administrator/Administratix: Use of either term means 1) the deceased died intestate, 2) a party interested in the deceased’s estate (usually an heir under intestate succession, but it could be a creditor of the deceased or even the bank holding a deposit when some but not all the heirs are known or are disputing each other’s rights), and 3) the court appoints one or more persons to administer the property of the estate. Preference to who is appointed is in the following order under Tit. 84 O.S. § 122: the surviving spouse or a person chosen by the surviving spouse, the children, the father or mother, the siblings of the deceased, the next of kin entitled under intestate succession, the creditors, or any person legally competent. A surviving partner if the decedent was a member of a partnership is prohibited from being appointed to administer the estate. Section 123 of Title 84 provides a preference to “relatives of the whole blood” over those “of the half blood,” so if you prefer your half-brother to administer your estate over your full sister, you really need to have a Will.

Special Administrator: It is usually when this term is used that I get frantic calls from bankers asking: “What the heck is this? Can we give the Special Administrator access to account information or the safe deposit box?” Provisions for appointment of a Special Administrator are contained in Tit. 84 O.S. § 211:

When there is delay in granting letters testamentary, or of administration, from any cause, or when such letters are granted irregularly, or no sufficient bond is filed as required, or when no application is made for such letters, or when an administrator or executor dies, or is suspended, suspended partially, or removed, the judge of the district court may appoint a special administrator to collect and take charge of the estate of the decedent, in whatever county or counties the same may be found, and to exercise such other powers as may be necessary for the preservation of the estate.

Until Letters Testamentary or Letters of Administration are issued to another person (at which point the authority of the Special Administrator ceases) the Special Administrator has the same powers as an Executor, Administrator with Will Annexed, etc., UNLESS the Letters of Special Administration provide restrictions or only grant specific powers. Otherwise, these powers include preserving and preventing damage, waste and injury to property of the estate, collecting income and debts, commencing, maintaining or defend suits and other legal proceedings, selling property or borrowing money as permitted by court order. Additionally, if an executor or administrator is not appointed within sixty (60) days following the appointment of a special administrator, upon application to and approval by the court, the special administrator may give notice to creditors and, upon receipt of creditor’s claims, may, with approval of the court, pay such claims.

Testamentary trust. This term usually means a trust is not created during the life of the grantor. Its provisions are set out in the Will of the deceased. Generally, the terms of the trust set out in the Will are only a couple of pages long. In order to set up an account, you will need a certified copy of the Will filed in the probate and a certified copy of the Final Decree (the name of the document will vary depending on the convention of the attorney drafting it). It will contain an order distributing some or all the property of the estate to the Trust. The account will require an EIN which will not be the same as the one used for the estate account. It will usually be styled in the name of the deceased followed by Testamentary Trust (e.g., Joe Smith Testamentary Trust. The term can also mean a trust that comes into being upon the death of the grantor of a revocable trust, such as a marital trust. In that case, the revocable trust will be the documentation for the trust provisions.

Affidavit. This word derives from Latin and literally means “he has stated upon oath.”

Alter ego. This term means “another I.” While Superman is the alter ego of Clark Kent, in law it is most often used with regard to when a creditor “pierces the corporate veil,” and the court finds the entity is simply the alter ego of the person owning it.

Amicus curiae. This is literally “friend of the court” and involves a non-party to the litigation providing information, generally by submitting a brief on a legal issue after obtaining permission of the court, in order to assist the court in reaching a decision.

De facto. It means “from fact.” The parent of a child is the de facto guardian, however, under many statutes only the de jure (“from law”) guardian who is appointed by a court has the ability to enforce the rights of a minor. One example can be found in Tit. 58 O.S. § 1219 of the UTMA statutes, subsection D.

Duces tecum. This means “bring with you” as in subpoena duces tecum.

Fiduciary. This is another word derived from Latin. It has its roots in “fidere” which means “to trust.” FUN FACT: “Fido” whether used generically or as the actual name of a dog, also derives from the same root.

In legal terminology it means a person to whom property or power is entrusted for the benefit of another. An attorney in fact (“AIF”) under Power of Attorney, directors and officers of a corporation, members of an LLC, trustees, custodians, guardians, executors, etc. are fiduciaries. Fiduciaries are charged with the highest standard of care and with the duties of loyalty, good faith, prudence and confidentiality. This is why we don’t allow an AIF to add himself as a joint owner or POD on the Principal’s account unless the Principal signs or the POA specifically provides the AIF the power. This is also why the custodian on a UTMA cannot pledge the account to secure a loan to buy herself a car. It is the reason all checks made payable to a corporation, LLC, partnership, etc. must be deposited into the entity account rather than cashed or deposited into the account of the authorized signer. NOTE: A check made payable to the John Doe Revocable Trust where John Doe is the Trustee may be cashed by him because no one other than John Doe himself can claim a breach of fiduciary duty.

Guardian ad litem. This Latin term means “guardian for the case.” It is a person appointed by the court to represent the interests of a person who cannot effectively represent themselves, such as a minor in a divorce or a disabled or elderly person in a guardianship. The guardian ad litem has no authority over either the person or property of the person on whose behalf he is appointed.

In personam. This literally means “in person.” When a borrower signs a note and defaults, the judgment is against the person. On the other hand, if a third-party who is not liable on the note or by way of a guaranty agreement pledges his collateral, as far as a judgment goes, it will be in rem (“about a thing”) against the collateral. Both of these terms are also in regard to jurisdiction in bringing and enforcing legal action.

Required year-end housekeeping

By Andy Zavoina

As we approach the year-end you would think it’s time to relax by the fire, put on those comfy slippers and slide through this last quarter into 2018. Before you reflect on all you accomplished and cuss those TRID and HMDA rules that cause so much stress, ask yourself if all the little things are done: the housekeeping items that could impact your 2018. You may have been preoccupied with all the other fires you were putting out while some small task was put aside or not done by that ex-employee who has moved on. It could happen. Maybe before you don the comfy slippers, it would be good to go through a quick list of “to-do” items that have to be done each year, to make sure they are done, or on your planning calendar.

Reg E § 1005.8 – If your consumer customer has an account to or from which an electronic fund transfer can be made, an error resolution disclosure is required. There is a short version that you may have included with each periodic statement, or the longer version that is sent annually. Electronic disclosures under E-SIGN are allowed here. This may also be a good time to review §1005.7(c) and determine if any electronic fund transfer services were added, and if they were disclosed as required.

In the September 2017 Legal Briefs, you read that Visa adjusted its criteria for zero liability from the customer being “grossly negligent” to just “negligent.” Without rehashing that article, this is a lower standard and may mean fewer electronic fund claims being paid one hundred percent by the bank. But this increased liability issue will need to be disclosed to your cardholders. As we approach the year-end, many banks will alter fees, terms and conditions of the deposit agreement. This is the perfect time to include these tweaked Visa debit card disclosures and save the bank some claims money next year.

Reg P § 1016.5 – Remember the requirements for the annual privacy notice were modified in late 2015. As a result, your bank’s procedure may have changed. The Fixing America’s Surface Transportation (FAST) Act, enacted on December 4, 2015, amended Title V of the Gramm-Leach-Bliley Act (GLBA). The law now provides an exception so that banks meeting certain conditions are not required to send annual privacy notices to customers.

On July 11, 2016, the CFPB published a proposal that would amend Regulation P to reflect this change. The proposal was truly academic as the change was effective with the change in the law, upon enactment. The Bureau has yet to publish a final rule, so ensure you follow the law, guided by the technical amendments proposed for the regulation itself as they alter Reg P to conform with the changes to the law. Criteria for the exception are “No” answers to two questions: (1) Does your bank share nonpublic personal information in any way that requires an opt-in under Reg P, and (2) have you changed your policies and practices for sharing nonpublic personal information from the policies and procedures you routinely provide to new customers? Not every institution will satisfy the criteria to take advantage of the exception, however. John Burnett wrote about the privacy notice conundrum in July’s Legal Briefs. That article has more details on this as well.

If you meet both criteria for an exemption from the annual privacy mailing requirement, skip the next three paragraphs and jump down to “BSA annual certifications,” below. If you don’t meet both criteria, continue reading here.
When your customer’s account was initially opened, you had to accurately describe your privacy policies and practices in a clear and conspicuous manner. Ensure that your practices have not changed and that the annual notice you are sending accurately describes your practices.

For Reg P and the Privacy rules, annually means at least once in any period of 12 consecutive months during which that relationship exists. You may define the 12-consecutive-month period, but you must apply it to the customer on a consistent basis, so this is not necessarily a December or January issue, but it could be. And each customer does not have their own “annual date.” If a consumer opens a new account with you in February, you provide the initial privacy notice then. That is year one. You can provide the annual privacy notice for year two at any time, up until December 31 of the second year.

It is important to note that unlike most other regulatory requirements, Reg P doesn’t require E-SIGN compliance for web-based disclosures. You can use e-disclosures on your bank web site when the customer uses the web site to access financial products and services electronically and agrees to receive notices at the web site, and you post your current privacy notice continuously in a clear and conspicuous manner on the web site. So, the demonstrable consent requirements and others in E-SIGN’s 101(c) section do not apply, but there must still be acceptance to receive them on the web.

Alternatively, if the customer has requested that you refrain from sending any information regarding the customer relationship and your current privacy notice remains available to the customer upon request this method is acceptable.

BSA annual certifications. Your bank is permitted to rely on another financial institution to perform some or all the elements of your CIP under certain conditions. The other financial institution must enter into a contract requiring it to certify annually to your bank that it has implemented its AML program.

OFAC reporting. Banks must report all blocked accounts to OFAC within ten days of the event and annually by September 30, concerning those assets blocked (see form TD F 90-22.50). Make sure that report is on your calendar.

IRAs, IRS Notice 2002-27 – If a minimum distribution is required from an IRA for a calendar year and the IRA owner is alive at the beginning of the year, the trustee that held the IRA on the prior year-end must provide a statement to the IRA owner by January 31 of the calendar year regarding the required minimum distribution.

Reg Z thresholds and updates – These changes are effective January 1, 2018. You should ensure they are available to staff or correctly hard coded in your systems:

The CARD Act penalty fees safe harbor amount in section 1026.52(b)(1)(ii)(A) will remain at $27.00;

The CARD Act penalty fees safe harbor amount in section 1026.52(b)(1)(ii)(B) will remain at $38.00;

The HOEPA total loan amount threshold that determines whether a transaction is a high cost mortgage is changed to $21,032,00;

The HOEPA total points and fees dollar trigger amount is changed to $1,052.00;

As of the effective date, a covered transaction is not a qualified mortgage unless the transaction’s total points and fees do not exceed 3 percent of the total loan amount for a loan amount greater than or equal to $105,158.00, $3,155.00 for a loan amount greater than or equal to $63,095 but less than $105,158.00; 5 percent of the total loan amount for loans greater than or equal to $21,032,00 but less than $63,095.00; $1,052.00 for a loan amount greater than or equal to $13,145.00 but less than $21,032.00; and 8 percent of the total loan amount for a loan amount less than $13,145.00.

Annual escrow statements § 1024.17 – For each escrow account you have, you must provide the borrower(s) an annual escrow account statement. This statement must be done within 30 days of the completion of the escrow account computation year. This need not be based on a calendar year. You must also provide them with the previous year’s projection or the initial escrow account statement, so they can review any differences. If your analysis indicates there is a surplus, then within 30 days from the date of the analysis you must refund it to the borrower if the amount is greater than or equal to $50. If the surplus is less than that amount, the refund can be paid to the borrower, or credited against the next year’s escrow payments.

Fair Credit Reporting Act – Affiliate marketing opt-out § 1022.27(c) – Affiliate marketing rules in Reg V place disclosure restrictions on you and opt out requirements. Each opt-out renewal must be effective for a period of at least five years. If this procedure is one your bank is using, are there any expiration dates for the opt-outs and have these consumers been given an opportunity to renew their opt-out?

Fair Credit Reporting Act – FACTA red flags report – Section VI (b) (§ 334.90) of the Guidelines (contained in Appendix J) require a report at least annually on your Red Flags Program. This can be reported to either the board of directors, an appropriate committee of the board, or a designated employee at the senior management level.

Regulation O, Annual Resolution §§ 215.4, 215.8 – To comply with the lending restrictions and requirements of Reg O § 215.4, you must be able to identify the “insiders.” “Insider” means an executive officer, director, or principal shareholder, and includes any related interest of such a person. An “affiliate” is any company of which a member bank is a subsidiary or any other subsidiary of that company. Your insiders are defined in Reg O by title unless the Board has passed a resolution excluding certain persons. You are encouraged to check your list of who is an insider, verify that against your existing loans, and ensure there is a notification method to keep this list updated throughout the year.

Reg BB (CRA), content and availability of public file § 228.43 – Your Public File is required to be updated and current as of April 1 of each year. Many banks update it continuously, but it’s good to check.

HMDA and CRA notices and recordkeeping – HMDA and CRA data are gathered separately by banks subject to the requirements, and both Reg C and Reg BB have reporting requirements for the Loan Application Registers (LAR). Each must be submitted by March 1 for the prior calendar year. National banks are currently required to update LAR data quarterly. The new HMDA rules will require all HMDA reporters to do so and the CRA Public File will be changing with HMDA as will signage. Regardless, if you are a reporter of either LAR you should start verifying the data integrity now to avoid stressing the process at the end of February. And start getting that new HMDA sign ready to post as well. 1003.5(e) has language in the Commentary and that should go up Jan. 1.

Training – An actual requirement for training to be conducted annually is rare, but annual training has become the industry standard and may even be stated in your policies. There are six areas that require training. (This doesn’t mean you don’t need other training, just that these regulations have stated requirements.)

• BSA (12 CFR §§ 21.21(c)(4), 208.63(c)(4), and 326.8(c)(4) Provide training for appropriate personnel.

• Bank Protection Act (12 CFR §§21.3(a)(3), 208.61(c)(1)(iii), and 326.3(a)(3) Provide initial and periodic training

• Reg CC (12 CFR §229.19(f)) Provide each employee who performs duties subject to the requirements of this subpart with a statement of the procedures applicable to that employee

• Customer Information Security found at III(C)(2) (Pursuant to the Interagency Guidelines for Safeguarding Customer Information, training is required. Many banks allow for turnover and train as needed, imposing their own requirements on frequency.)

• FCRA Red Flag (12 CFR 222.90(e)(3) Train staff, as necessary, to effectively implement the Program

• Overdraft protection programs your bank offers. Employees must be able to explain the programs’ features, costs, and terms, and to explain other available overdraft products offered by your institution and how to qualify for them. This is one of the “best practices” listed in the Joint Guidance on Overdraft Protection Programs issued by the OCC, Fed, FDIC and NCUA in February 2005 (70 FR 9127, 2/24/2005), and reinforced by the FDIC in its FIL 81-2010 in November 2010.

Security, Annual Report to the Board of Directors – (12 CFR §§ 21.4, 208.61(d) and 326.4) The Bank Protection Act requires your bank’s Security Officer to report at least annually to the board of directors on the effectiveness of the security program. The substance of the report must be reflected in the minutes of the meeting. The regulations don’t specify if the report must be in writing, who must deliver it, or what information should be in the report. It is recommended that your report span three years and include last year’s historical data, this year’s current data and projections for the next year.

Information Security Program part of GLBA – Your bank must report to the board or an appropriate committee of the board at least annually. The report should describe the overall status of the information security program and the bank’s compliance with these Guidelines. The reports should discuss material matters related to the program, addressing issues such as: risk assessment; risk management and control decisions; service provider arrangements; results of testing; security breaches or violations and management’s responses; and recommendations for changes in the information security program.

Annual MLO Registration § 1007.102 – Mortgage Loan Originators must go to the online Registry and renew their registration. This is done between November 1 and December 31. If this hasn’t been completed, don’t push it to the back burner and lose track during the holidays and year-end rush to complete tasks. This is also a good time to plan with management and Human Resources those MLO bonus plans. Section 1026.36(d)(1)(iv)(B)(1) of Reg Z allows a 10 percent aggregate compensation limitation on total compensation which includes year-end bonuses.

Miscellaneous – Some miscellaneous items you may address internally in policies and procedures include preparation for IRS year-end reporting, vendor due diligence requirements including insurance issues and renewals, documenting ORE appraisals and sales attempts, risk management reviews, records retention requirements and destruction of expired records, and a designation by the Board of the next year’s holidays. And don’t forget to determine whether there has been a review of those not yet extending vacation or “away time” to the five consecutive business days per the Oklahoma Administrative Code 85:10-5-3 Minimum control elements for bank internal control program.

Whew! If this list was completed or in the works and you kept up with all the regulatory changes in policies, procedures, software, training, implementation and auditing, you deserve that fire and comfy slippers. Take off half of this Saturday and all-day Sunday and enjoy yourself.