Thursday, December 8, 2022

January 2018 OBA Legal Briefs

  • Deceased customer accounts
  • Don’t sweat the HUD-SCRA expiration, part 2
  • Military Lending Act Guidance Update
  • Managing risk in mobile deposits (Revised)

Deceased customer accounts

By Pauli Loeffler

Funeral expenses

There are a couple of situations when a customer dies without a joint owner or pay-on-death beneficiary where paying the funeral home is a very good option to close the account. Often the relatives want to use the money to pay for the funeral, or the customer didn’t have any known relatives, and the funeral home wants to be paid.

The bank does not want to expose itself to liability but would like to accommodate the relatives’ request and/or expeditiously terminate an account. While there is no statute that directly authorizes the bank to take this action, a bank may make a business decision to make the payment anyway as there is limited risk in doing this.

Under Section 594 of Title 58, the executor, administrator or personal representative of the decedent’s estate is required to pay the funeral expenses and the expenses of the last illness as soon as sufficient funds are available:

The executor or administrator, as soon as he has sufficient funds in his hands, must pay the funeral expenses, and the expenses of the last sickness, and the allowance made to the family of the decedent. He may retain in his hands the necessary expenses of administration, but he is not obliged to pay any other debt or any legacy until, as prescribed in this chapter, the payment has been ordered by the court.

Additionally, Section 591 of the Probate Code provides the order in which debts of the estate must be paid:

The debts of the estate must be paid in the following order:

1. Funeral expenses.

2. The expenses of the last sickness.

3. Funds necessary for the support of the family and allowed by the court pursuant to the provisions of this chapter.

4. Taxes to the United States or the state, county, or city.

5. Debts having preference under the laws of the United States and of this state.

6. Judgments rendered against the decedent in his lifetime, which are liens upon his property and mortgages in the order of their date.

7. Demands or claims which are presented to the executor or administrator for an allowance or proved within two (2) months after the first publication of notice to creditors.

8. All other demands against the estate except those set forth in paragraph 9 of this section.

9. Interest resulting from the extension of time for payment of federal estate or transfer taxes. Such interest shall be a cost of administration but shall not be deductible in arriving at the Oklahoma net taxable estate under Section 808 (g) of Title 68 [68-808]. [Editor’s Note: The second sentence no longer applies since the statute cited was repealed effective January 1, 2010, as was Oklahoma estate tax.]

Since it is clear the funeral expenses are given absolute priority over all other claims against the estate, a suit against the bank for paying these expenses has little, if any, likelihood for success. However, case law requires that the funeral expenses must be reasonable based upon the decedent’s circumstances and social station in life, and the bank needs to make sure that the funeral costs have not been satisfied by a pre-need burial trust or policy.

Offset and deceased customer

Often a bank has a loan customer die with an outstanding loan and wants to offset the loan against the deposit account owned by the deceased customer. The loan agreement usually states that death is an event of default, and the account agreement provides the account is security for any outstanding amounts owed the bank, so there should be no problem just using offset, right?

Sec. 901 of the Banking Code provides: “B. 2. A deposit account with a P.O.D. designation shall constitute a contract between the account owner, (or owners, if more than one) and the bank that upon the death of the last surviving owner of the account, and after payment of account proceeds to any secured party with a valid security interest in the account, the bank will hold the funds for or pay them to the named primary beneficiary or beneficiaries if living.”

This provision will apply, for instance, if the there was a CD secured loan or a formal control agreement preventing the customer from withdrawing funds from the DDA to secure the loan. Neither of these exist, so what is left is the right of offset which is NOT a true security interest.

If there is a POD or joint tenant not obligated on the loan (co-borrower, guarantor), offset cannot be used since as soon as the borrower dies, the customer no longer has an interest in the account nor would his estate. If there is no POD or joint owner, offset is a tricky proposition due to the order in which claims must be paid by the estate (Sec. 591 of the Probate Code, above). Funeral expenses, expenses of the last illness, necessary support of the family, taxes, etc. all come before the right of offset in priority for payment.

Don’t sweat the HUD-SCRA expiration, part 2

By Andy Zavoina

In December I wrote about the HUD-92070. It is often referred to as the HUD-SCRA notice and you should be sending it out early in the delinquency process with many types of mortgage loans. You can get the background information about this form in last month’s Legal Briefs.

The intent of the form is to provide mortgage loan counselling information to borrowers protected under the Servicemembers Civil Relief Act (SCRA). The HUD form refers to a portion of the SCRA which extended foreclosure protections from 90 days to one year. That extension was due to sunset (expire) at the end of 2017. If that happened, the content of the HUD-92070 would be incorrect. The form itself also has an expiration date which coincides with the sunset date of the foreclosure extension.

The good news is that on December 12, 2017, the president signed into law the National Defense Authorization Act for Fiscal Year 2018 (H.R. 2810). Section 557 of the Act extends for two years, until December 31, 2019, the sunset on the temporary

change of “90 days” to “one year” in § 303(b) and (c) of the SCRA (50 U.S.C. § 3953.
For another two years, servicemembers will remain entitled to the foreclosure protections in § 303 for one year beyond the end of their active duty service. This, of course, means that the wording of the current HUD-SCRA delinquency notice HUD-92070 for past-due mortgage payments will remain correct for the next two years, and the current notice can be used past its December 31, 2017, expiration date since the content of the notice is again in sync with the law. Unless and until HUD updates the expiration date on the form, just ignore the 12/31/17 date.

 

Military Lending Act Guidance Update

By Andy Zavoina

Without warning on December 13, 2017, the Department of Defense (DoD) published amendments to the Interpretive Rule (think guidance in the form of questions and answers) it had previously published on August 26, 2016. The previous Interpretive Rule answered some questions lenders had pertaining to the Military Lending Act (MLA) but created more questions than it answered. This update is intended to answer some of those questions. It is clearly stated this does not alter the MLA in any way. These interpretations are intended to be used immediately.

Where there were questions in the past, bankers had to decide based on their appetite for risk, what did they feel the spirit and intent of the MLA meant, and how would they apply the MLA based on the August 2016 interpretations. Some banks made assumptions, that GAP insurance could be financed as a part of an auto purchase loan and the loan would still fall under the MLA exemption. Other banks took a conservative approach and believed GAP (in this example) would void the exempt status. You should review your current practices against the new interpretations. In particular questions 2, 17 and 18 are provided with clarifications and a new question, number 20, has been added. Now let’s get into some details.

Here is the original question and answer number 2 to refresh your memory:

2. Does credit that a creditor extends for the purpose of purchasing personal property, which secures the credit, fall within the exception to “consumer credit” under 32 CFR 232.3(f)(2)(iii) where the creditor simultaneously extends credit in an amount greater than the purchase price?

Answer: No. Section 232.3(f)(1) defines “consumer credit” as credit extended to a covered borrower primarily for personal, family, or household purposes that is subject to a finance charge or payable by written agreement in more than four installments. Section 232.3(f)(2) provides a list of exceptions to paragraph (f)(1), including an exception for any credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased. A hybrid purchase money and cash advance loan is not expressly intended to finance the purchase of personal property, because the loan provides additional financing that is unrelated to the purchase. To qualify for the purchase money exception from the definition of consumer credit, a loan must finance only the acquisition of personal property. Any credit transaction that provides purchase money secured financing of personal property along with additional “cash-out” financing is not eligible for the exception under § 232.3(f)(2)(iii) and must comply with the provisions set forth in the MLA regulation.

The sticking point causing much controversy is what is considered “greater than the purchase price” and that “a loan must finance only the acquisition of personal property”. So, what if a car dealer took a trade-in and that trade-in had negative equity? The negative equity is financed in with the new car loan if there is equity in the new vehicle being purchased, as an example, or GAP insurance (which is more common) is being financed in with the purchase of the new car. Some banks were taking the position that it was all part of the purchase, and others were not. We haven’t heard from examiners as they were following the established exam guidelines and in many cases, have the same questions as bankers, with official answers.

Here is how the DoD expanded that answer:

A credit transaction that finances the object itself, as well as any costs expressly related to that object, is covered by the exceptions in § 232.3(f)(2)(ii) and (iii), provided it does not also finance any credit-related product or service. For example, a credit transaction that finances the purchase of a motor vehicle (and is secured by that vehicle), and also finances optional leather seats within that vehicle and an extended warranty for service of that vehicle is eligible for the exception under § 232.3(f)(2)(ii). Moreover, if a covered borrower trades in a motor vehicle with negative equity as part of the purchase of another motor vehicle, and the credit transaction to purchase the second vehicle includes financing to repay the credit on the trade-in vehicle, the entire credit transaction is eligible for the exception under § 232.3(f)(2)(ii) because the trade-in of the first motor vehicle is expressly related to the purchase of the second motor vehicle. Similarly, a credit transaction that finances the purchase of an appliance (and is secured by that appliance), and also finances the delivery and installation of that appliance, is eligible for the exception under § 232.3(f)(2)(iii).

In contrast, a credit transaction that also finances a credit-related product or service rather than a product or service expressly related to the motor vehicle or personal property is not eligible for the exceptions under § 232.3(f)(2)(ii) and (iii). For example, a credit transaction that includes financing for Guaranteed Auto Protection insurance or a credit insurance premium would not qualify for the exception under § 232.3(f)(2)(ii) or (iii). Similarly, a hybrid purchase money and cash advance credit transaction is not expressly intended to finance the purchase of a motor vehicle or personal property because the credit transaction provides additional financing that is unrelated to the purchase. Therefore, any credit transaction that provides purchase money secured financing of a motor vehicle or personal property along with additional “cashout” financing is not eligible for the exceptions under § 232.3(f)(2)(ii) and (iii) and must comply with the provisions set forth in the MLA regulation.

The test, which may seem subjective to some, is what is needed to purchase the property, and what is an add-on? Put another way, is it related to the object being purchased, or to the loan? In this case the negative equity is needed for the debt to be retired in order to get the new car, but GAP insurance is an add-on (as would be credit life and disability), so the first example retains the MLA exemption while the latter does not. The MLA itself separates vehicles from other personal property in two different sections for some reason. They have the same wording with a variance for the property in question, but the exemption in question number 2 originally was specific only to vehicles for some reason. It’s nice to see this explanation include both product types. If your bank is accepting dealer paper, you should be sure there is an understanding as to what will and will not be allowed.

It is important to point out that the MLA is not saying a lender cannot make a car loan with GAP or credit insurance or some other add-on. It simply will not have the MLA exemption and will require disclosures and adherence to the 36 percent MAPR limit. Remember the Military Annual Percentage Rate is essentially an “all-in” calculation.

17. Does the limitation in § 232.8(e) on a creditor using a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower prohibit the borrower from granting a security interest to a creditor in the covered borrower’s checking, savings or other financial account?

Answer: No. The prohibition in § 232.8(e) does not prohibit covered borrowers from granting a security interest to a creditor in the covered borrower’s checking, savings, or other financial account, provided that it is not otherwise prohibited by applicable law and the creditor complies with the MLA regulation including the limitation on the MAPR to 36 percent. As discussed in Question and Answer #16 of these Interpretations, § 232.8(e) prohibits a creditor from using the borrower’s account information to create a remotely created check or remotely created payment order in order to collect payments on consumer credit from a covered borrower or using a postdated check provided at or around the time credit is extended.

Section 232.8(e)(3) further clarifies that covered borrowers may convey security interests in checking, savings, or other financial accounts by describing a permissible security interest granted by covered borrowers. Thus, for example, a covered borrower may grant a security interest in funds deposited in a checking, savings, or other financial account after the extension of credit in an account established in connection with the consumer credit transaction.

There were some questions as to whether the MLA prohibited using a deposit account as loan collateral. This clarification indicates that so long as it is not prohibited elsewhere, the MLA will not prevent it, either. This is often the most cost-effective means of borrowing funds if the borrower does not want to exhaust the savings account or pay an early withdrawal fee on a certificate of deposit. The loan is not exempted from the MLA, so requirements must still be met, including the 36 percent MAPR cap.

This clarification also provides that banks will be treated as others will be and remotely created checks are still prohibited.

18. Does the limitation in § 232.8(e) on a creditor using a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower prohibit a creditor from exercising a statutory right to take a security interest in funds deposited within a covered borrower’s account?

Answer: No. Under certain circumstances federal or state statutes may grant creditors statutory liens on funds deposited within covered borrowers’ asset accounts. For example, under 12 U.S.C. 1757(11) federal credit unions may “enforce a lien upon the shares and dividends of any member, to the extent of any loan made to him and any dues or charges payable by him.” As discussed in Question and Answer #16 of these Interpretations, § 232.8(e) serves to prohibit a creditor from using the borrower’s account information to create a remotely created check or remotely created payment order in order to collect payments on consumer credit from a covered borrower or using a postdated check provided at or around the time credit is extended. Section 232.8(e)(3) describes a permissible activity under § 232.8(e). However, the fact that § 232.8(e)(3) specifies a particular time when a creditor may take a security interest in funds deposited in an account does not change the general effect of the prohibition in § 232.8(e). Therefore, § 232.8(e) does not impede a creditor from exercising a statutory right to take a security interest in funds deposited in an account at any time, provided that the security interest is not otherwise prohibited by applicable law and the creditor complies with the MLA regulation, including the limitation on the MAPR to 36 percent.

The ability to setoff payments was questioned but number 18 now tells us that setoff is acceptable so long as the bank has a valid security interest and the ability to take those funds. This is typically allowed for in both the bank’s deposit agreement and loan contract with a covered borrower.

Added to the Interpretive Rule is a new question 20:

20. To qualify for the optional safe harbor under 32 CFR 232.5(b)(3), must the creditor determine the consumer’s covered borrower status simultaneously with the consumer’s submission of an application for consumer credit or exactly 30 days prior?

Answer: No. Section 232.5(b)(3)(i) and (ii) permit the creditor to qualify for the safe harbor when it makes a timely determination regarding the status of a consumer at the time the consumer either initiates the transaction or submits an application to establish an account, or anytime during a 30-day period of time prior to such action. Therefore, a creditor qualifies for the safe harbor under § 232.5(b) when the qualified covered borrower check that the creditor relies on is conducted at the time a consumer initiates a credit transaction or applies to establish an account, or up to 30 days prior to the action taken by the consumer. Similarly, the timing provisions in § 232.5(b)(3)(i) and (ii) permit a creditor to qualify for the safe harbor when it conducts a qualified covered borrower check simultaneously with the initiation of the transaction or submission of an application by the consumer or during the course of the creditor’s processing of that application for consumer credit.

This was added to confirm that safe harbor for military verifications was not afforded only at the time of application, or for up to 30 days prior to that loan. The timing requirement for the safe harbor requires completing the status verification at the time the covered borrower either initiates the transaction or submits an application, or anytime during a 30-day period prior to consummation. The bank may also qualify for the safe harbor when it checks the status during the course of processing the application for credit.

Obviously, the verification has no weight if done after consummation as the time for disclosures has passed. The bank may still conduct verifications after that, but it has no bearing on the safe harbor.

[Editor’s Note: The full updated DoD Interpretive Rule Questions and Answers can be found in the BankersOnline Regulations pages at
https://www.bankersonline.com/regulations/32-232-qa. ]

Managing risk in mobile deposits

By John S. Burnett

[Editor’s Note: There was an error in this article when it was included in the December 2017 OBA Legal Briefs. We are re-running it this month with the correction.]

The number of banks and credit unions offering their customers or members the convenience of mobile check deposits continues to grow, and with that growth the incidence of duplicate presentments has climbed.

While it was not unheard of for a check to be presented for payment a second time (without first having been returned unpaid) before the advent of remote deposit capture (RDC) and mobile RDC (mRDC), it was extremely rare. After the Check 21 Act made RDC possible, the risk of a check being processed for payment more than once was increased somewhat. That risk was mitigated by the fact that most significant users of RDC (including depository institutions themselves) were businesses that marked original checks to indicate their images had been captured for forward payment processing, and retained those original checks securely for short periods until they were carefully destroyed.

The first deployment of RDC to consumers was fast on the heels of early merchant RDC (one of the first deployers started by accepting faxed check images). Soon afterward came the introduction of mRDC via as a feature in mobile banking apps, which has now snowballed into the wide acceptance of mobile deposits in today’s environment. The lack of any automatic check marking process to identify mRDC-imaged checks as deposited has vastly expanded the potential for multiple presentments of the same check via a combination of mRDC images and the original paper check.

Whether these duplicate presentments result from innocent errors or fraudulent intent, they can result in losses to inattentive issuers of the checks, to the paying bank or to the depositary banks involved.

The Fed’s new Regulation CC indemnity

One of the new provisions added to Regulation CC in the Federal Reserve Board’s recent amendments (effective July 1, 2018) is an indemnity that will apply to RDC and mRDC items. It is based on the premise that depositary institutions that accept check images for deposit in lieu of the original checks increase the risk of duplicate presentments by allowing original checks to remain in the hands of their depositors. Therefore, the Fed reasoned, it’s appropriate for an institution that accepts an image for deposit to indemnify a depositary bank that accepts the original check for deposit for losses when the check is returned to the latter bank unpaid because it was paid previously. Under an indemnity agreement, the indemnifying party agrees to reimburse the indemnified party for a loss under specified circumstances.

The Fed’s indemnity provision includes an exception—a depositary bank may not make an indemnity claim under the RDC indemnity provision “if the original check it accepted for deposit bore a restrictive indorsement inconsistent with the means of deposit.”

Under the Regulation CC indemnity provision for RDC items, the depositary bank can make a claim only if it is charged-back for a check it accepted for deposit due to the check’s having been previously paid, and the depositary bank is unable to collect from its depositor. In addition, when the check was accepted for deposit, it cannot have had a restrictive indorsement “inconsistent with the means of deposit.” In other words, the check can’t include an indorsement such as “mobile deposit” or “for mobile deposit.” A “restrictive” indorsement is one that specifies how the check is to be applied. The typical example is “for deposit only,” which would prevent the depositary bank from applying the check to the depositor’s loan account. “For mobile deposit” in an indorsement would not be consistent with a deposit being made in person with a teller or at an ATM.

What all banks should be doing NOW

All banks should be training their employees who accept deposits in person or process deposits made at an ATM to look for signs that checks may have been previously image-captured for deposit, such as indorsements identifying another bank as the new holder and, in particular, indorsements including the words “mobile deposit.” For example, tellers at Last National Bank of Eau Clair should be able to recognize that an indorsement reading “for mobile deposit ….” means the check may have been deposited already, and the deposit should not be accepted by Last National. Why? Because if the check has been deposited via mobile banking at Wauwatosa State Savings Bank and is returned to Last National as “previously paid,” Last National won’t be able to claim an indemnity payment from Wauwatosa State Savings if it can’t recover the funds from its depositor, because the restrictive indorsement put Last National on notice, and Last National ignored that notice.

If your bank accepts mobile deposits…

Banks that have deployed mobile deposit services should start training (or retraining) their mobile deposit customers NOW to use a restrictive indorsement naming the bank as the depositary. The indorsement should ideally read “For mobile deposit to [name of bank],” followed by the depositor’s signature. Why? Reread the paragraph above on “What all banks should be doing NOW.” If your customer mistakenly (or deliberately) tries to deposit the same check at another bank (or at your bank a second time) you want (1) the indorsement to alert tellers that the check has already been mobile deposited at your bank, and (2), avoid the possibility that another bank can make an indemnity claim against your bank if that other bank loses money due to double depositing.

You may have noticed that check printers (at least some of them) have started printing a check box and the words “Check here if mobile deposit,” “Mobile deposited,” or a similar phrase. That’s meant to remind the payee of a check that it’s already been deposited; but it does not meet the requirement of a restrictive indorsement to prevent an indemnity claim from a bank that takes the paper check for deposit after your bank has accepted an image of the check via mRDC. It can be, however, a good indicator that the check has already been mobile deposited.

If your bank wants to require the restrictive indorsement on mRDC deposited checks, it must be able to review images of pending deposits as they are made and before they are approved. That will require that someone at the bank (or its service provider) reviews incoming mRDC images to ensure the appropriate indorsement appears, and reject for deposit any images without the appropriate indorsement. For example, the bank that holds my checking account provides two messages when I submit an image of a check in a mobile deposit. The first is a confirmation that it has received the image. The second is a notice that the image has been accepted (or rejected).

Some banks have analyzed the risks and decided to check for the indorsement only for items over a threshold amount. That’s a business decision that your bank may consider as mobile deposit volume grows.

And finally, if you become aware that one of your mRDC customers has “double deposited” a check, will you revoke that customer’s mRDC access? Now is the time to decide what your policy will be so that you can take prompt action when it happens.