Thursday, May 23, 2024

March 2018 OBA Legal Briefs

  • OBA website update, Legal Briefs and Legal Links
  • Without the App, you can’t comply with HMDA
  • A Revised USA PATRIOT Act/CIP Sign?
  • HMDA Signage Correction
  • Spirit and Intent, SCRA and BMW
  • The Beneficial Ownership Rule
  • UBO:  How low do you go?


OBA website update, Legal Briefs and Legal Links

By Pauli D. Loeffler

It has been more than a decade since the OBA last updated its website, and I hope you are enjoying the recent changes as much as I am. I know that we all hate change because it takes getting used to, but I am sure that in a short amount of time, you will have that “ah ha” moment when you realize that the site is so much better than before.

When I was hired as OBA’s assistant general counsel in June 2004, the OBA Legal Briefs, as I recall, did not require a username and password for access. That was changed when the website was updated within a year of my employment. With the 2005 website update, a login was required, but it was simple since everyone who was an employee of an OBA member bank, an OBA Partner or Endorsed Vendor as well as OBA’s employees used the same login credentials (“community” as username and “strong” for the password).  When a banker would call me wanting the login, I would joke that it was the same for all OBA member bank employees so feel free to share it with other employees, and I supposed that if they left employment, Guido would be sent to rub them out. The deathless prose we wrote wasn’t really protected other than by the fact that most former employees would easily forget the login if they weren’t using it.

The OBA updated its website in February, and to access the monthly Legal Briefs as well as the Legal Links page — which has numerous links to other websites as well as useful Templates, Forms and Charts (more about these later), — you will need to register with OBA by providing your business email and a password. To access the Legal Briefs or the Legal Links page, you will have to login to the site with your individual credentials for access.

Prior to the website update, the Legal Briefs from January 2005 to the most recent appeared from newest to oldest and were searchable using “find in page” (control+F) and a keyword. They are still in reverse chronological order, but with different pagination, and you cannot use “find in page.” However, if you use the search box in the upper right corner, you will get results for the keywords you enter. (I do miss “find in page” but am adjusting to the loss.)

Things change over time, and some of the links in the Legal Briefs may no longer work. If you discover a bad one, please shoot us an email at, and we will provide you with the correct link and edit the article to alleviate the issue for others.

Note that Legal Briefs is a four-page pull-out in the middle of the Oklahoma Banker, the monthly newspaper sent to our member banks. It is also available via email subscription which is sent usually within a couple of days of our submission. To subscribe to the email edition, you will need to go to this link for purchase:  The online Legal Briefs monthly editions are posted on the website about two weeks after the print versions are received.

I highly recommend taking some time to explore the Legal Links page. There you will find links to compliance news links, state regulatory agencies, Oklahoma law-related links, various regulatory resources, regulations and statutes, as well as our newest addition: Templates, Forms, and Charts!

We get a lot of questions from bankers dealing with deceased customers, guardians, trusts, and other topics and have drafted some useful templates, forms, and charts to help deal with these. Here is a list of currently available offerings for download:

Deceased customers

  • Affidavit of Heirs Flow Chart – Deposits
  • Affidavit of Heirs Template – Banking Code Sec. 906 (Deposits)
  • Affidavit of Heirs Template – Probate Code Sec. 393 (Deposits & Safe Deposit Boxes)
  • Affidavit of Heirs Template – Banking Code Sec. 906 (Safe Deposit Boxes)
  • Appointment of Agent by Heirs Template – Banking Code Sec. 906 (Safe Deposit Boxes)
  • Authorization for Access on Death Deputy Appointment for Safe Deposit Box & Revocation Templates
  • Affidavit of Access on Death Deputy for Safe Deposit Box Template
  • Oklahoma Intestate Succession Laws Chart
  • Co-Personal Representatives of Estate

Guardians, conservators

  • Co-guardian Authorization Template


  • Certificate of Trust Template
  • Co-trustee Power of Attorney Template


  • No Jurisdiction Letter Template for Out of State Subpoenas, Levies, and Garnishments


Without the App, you can’t comply with HMDA

By Andy Zavoina

One hundred and ten.  That is the number of data fields the current Loan Application Register (LAR) has for banks subject to the Home Mortgage Disclosure Act (HMDA). Contrast that to the 26 fields many lenders had problems with on the older LAR and we have a recipe for disaster. Data entry questions aside, and we know there are many, what banks are having issues with now are fast loan decisions. Yes, this is turning out to be a problem and here is why:

A lender receives an online real estate application or perhaps a drop-off and it is quickly scanned. An in-file credit report is pulled and for any number of reasons, poor credit, no credit, low credit score, the application is immediately denied. The lender wants the adverse action sent and moves on to income generating work.

Here is where the problem comes in. The application is incomplete for one or more reasons. Perhaps the reason for the loan is unclear; an applicant indicates they are currently renting, but they are applying to refinance a mortgage loan; the applicant is applying for a manufactured home loan, but there is some indication that land will come with it, but the facts are incomplete; or simply personal information was omitted, such as the applicant’s date of birth.

Now that the application has been received and a credit decision finalized, the adverse action notice is sent and days later the application is handled by the person having to enter data for the HMDA LAR. But the information is incomplete. Banks have asked if they can enter NA for not applicable. That does not work in many or most cases. It may not be a valid entry. As an example, assume the applicant omitted their age. That field entry calls for a numeric answer such as 24, or 8888 for not applicable. If the applicant for the loan is not a natural person, 8888 is appropriate, but if it is a natural person, that person’s age is the only acceptable entry. One bank indicated that it anticipates many such problems. Remember that the HMDA LAR is a foundation for a fair lending exam and that is a foundation for a Community Reinvestment Act exam. If there are numerous “holes” such as this in the HMDA LAR, they become violations of Reg C and HMDA, and make fair lending and CRA impossible to grade because there is doubt as to the accuracy of the foundations needed to arrive at sound conclusions. If age or racial demographics are omitted repeatedly, there could be a valid fair lending problem and the missing data could be viewed as a coverup. It just does not work.

What can the bank do? Either the individual completing the HMDA LAR or the lender will have to get answers for the omitted data. I assure you, neither one wants to call the applicant who has just been told no, they do not qualify for a loan from your bank and ask the applicant for additional application information. You may have some information on file or available from a credit report that you can use as a source. Without the data fields being completed, edit checks on the LAR will continually be listed and the data noted as absent or incorrect.

Prevention is better than a cure

Correct these problems at the source. Online applications should be reviewed. Each field on the HMDA LAR that the applicant provides should be accounted for. Is it on the online application? Is it shown as a required field? Is that field properly coded such that the application cannot be submitted without providing the data required? Once these questions can be answered with a “Yes,” these issues will begin to be non-issues.

Next, the bank must reinforce in lender training that loan decisions cannot be made until the same data fields identified above are completed. While the lender may not see these fields as necessary to make a credit decision, and many are not, the bank needs the information to complete the application process. This process extends beyond what the lender needs to make a decision. If the necessary information is not requested prior to the credit decision being made the entire process will take more time and cost the bank more money in the long run, plus lead to potential violations and increased scrutiny in an exam.

Who is best equipped to ask for the complete information? The lender should complete an interview process and not only get all the necessary data for HMDA, but ensure the bank understands the request and can determine if there is some other way to grant a loan or counteroffer for the applicant if a denial seems likely. Any other person can call the applicant, but they would likely just be asking for data. Again, the applicant will be in no mood to assist them, and that person will not be able to salvage the application for the mutual good of the bank and the applicant if a denial has already been communicated to the applicant.

If the applicant does not yet have property in mind, and the bank does not do prequalifications or preapprovals, interview the prospective applicant and show an expression of interest for the loan for when there is a known property. If your bank sees the potential for these HMDA problems, it is best to address the issues now and not when LAR entries are rejecting and will be difficult to resolve, and someone’s workload has just increased.

A Revised USA PATRIOT Act/CIP Sign?

By Andy Zavoina

The USA PATRIOT Act mandated your bank’s Customer Identification Program and financial institutions asked that the CIP regulations include the notice requirement found at 1020.220(a)(5)(i). This is the lobby or application notice starting with, “To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain…” There are rumors circulating that this notice must be changed with the impending May 11, 2018, “applicability date” for implementation of the Beneficial Ownership requirements added by FinCEN. The new rules have not required any change in the required signage. This does not mean signage cannot be posted to better explain the Beneficial Ownership rules. But some vendors incorrectly say that new signs must be purchased and displayed. That is simply not the case.


HMDA Signage Correction

By Andy Zavoina

In the December 2107 edition of Legal Briefs, I recommended posting the new required HMDA signage in addition to leaving your existing signage up for HMDA reports the bank already has. The new 2017 data will be available online later this year from the CFPB and to avoid confusion I had made the recommendation so that 2016 and prior years could be obtained in paper format, as has been done in the past. It has come to our attention that the CFPB does now have the prior years’ disclosures statements available, online. This means that if the bank wants to remove the old HMDA availability sign, it may, because the new requirements (a referral to the CFPB) will meet all the HMDA requirements.

There is a new caveat, however. Referring to 1003.5(c)(1), “A financial institution shall make available to the public upon request at its home office, and each branch office physically located in each MSA and each MD, a written notice that clearly conveys that the institution’s loan/application register, as modified by the Bureau to protect applicant and borrower privacy, may be obtained on the Bureau’s Web site at” Note that this is what the notice must convey; there is not specific language recommended. And 1003.5(d)(1), “A financial institution shall make the notice required by paragraph (c) of this section available to the public for a period of three years and the notice required by paragraph (b)(2) of this section available to the public for a period of five years. An institution shall make these notices available during the hours the office is normally open to the public for business.” (b)(2) is a written notice of availability of the disclosure statement. It would be easiest to provide the same information as it posted for the new HMDA, though Reg C has suggested text (in the Commentary to section1003.5), it is not required meaning your bank has flexibility in the content.

So, in addition to a posted notice, anyone requesting the LAR or disclosure statement must receive a written notice.  The notice requirements under 1003.5(b)(2) and (c)(1) may each be provided in written or electronic form. Because the provision for electronic disclosure is explicit and there is no reference to E-SIGN, E-SIGN appears to not be a requirement. It is recommended that branches have preprinted notices available for distribution when a request is made in person, and an electronic version that can be used if a request comes in electronically. Don’t waste money on a huge supply. Ask yourself how many times in the last year you have been asked for your HMDA disclosure statement and modified LAR (probably very few, if any), and add 10 or 20 to that and you should have an adequate supply on hand. Mark the last form in your stack as “Use this form to copy 10 more, and place on top of this.” Train staff on your new procedure and they can hand them out, or send the notice electronically in response to an emailed request. While it is not necessary to have a receipt or signed request, the bank should have a procedure which is trained for and periodically tested.

Spirit and Intent, SCRA and BMW

By Andy Zavoina

A recent and first-of-its-kind case between the Department of Justice (DOJ) and BMW AG exemplifies why the spirit and intent of a law or regulation is important when defining how to comply with that law or regulation.

BMW leases autos to servicemembers. These lease programs allow for an upfront payment, often several thousand dollars, which then reduce the monthly lease payment itself. BMW considered these capital cost reduction payments as down payments and not subject to a refund in the case of an early lease termination. This has been their policy and practice since at least 2011.

As servicemembers are being called to active duty, the SCRA allows lease terminations in some cases. These protections apply whether the lease agreement was entered into pre- or post-service. A servicemember may terminate a motor vehicle lease when that servicemember enters the military or receives PCS (permanent change of station) orders or a deployment order. For motor vehicles, the time requirement is 180 days or more and the PCS/deployment will take them outside the continental United States. (Residential leases vary from this.) The lease may be for personal or business purposes.

Cited in this case particularly were two Air Force sergeants deployed to Afghanistan for six months and then reassigned to Japan for a three-year tour. While BMW cancelled the leases, it would not refund the initial payment. If the initial payment was to lower the monthly payment, one could conclude that an early termination would trigger an amortized refund of that payment based on the months remaining in the lease. If the payment was intended to reduce a residual cost at the end of the lease, that may differ. In any event, without admitting any fault BMW has agreed to pay $2.17 million to compensate 492 servicemembers (that’s $4,400 each) and to pay $61,000 to the U.S. Treasury to settle the case.

“Men and women who serve in the armed forces have made enormous sacrifices while selflessly protecting our nation from danger,” U.S. Attorney Craig Carpenito in New Jersey said in a statement. “We must honor their sacrifice by ensuring that their rights are protected when duty calls for their relocation or deployment overseas.” For many purposes a servicemember is quite similar to a protected class under Reg B and it is best to operate with the spirit and intent of consumer protection when handling a servicemember’s account.

And just to clarify that servicemember protections reach beyond banks and other lenders, last month the City of Honolulu came to a settlement on a dispute it was involved in pertaining to the sale of abandoned vehicles. The City had, between 2010 and 2016, auctioned three vehicles belonging to active duty servicemembers without court approvals or a waiver allowing the sale. The City will now pay almost $56,000 to the three, pay a civil money penalty to the U.S. Treasury of $61,000 and create a $150,000 fund to allow for additional claims.

The City has been inundated with abandoned vehicles, many owned by servicemembers, and has run out of storage lots. Regardless of the reasoning, the SCRA protections apply.

The Beneficial Ownership Rule

Questions and Answers from the Top Gun Conference

By John S. Burnett

Even though almost two years have passed since the final Customer Due Diligence rule was issued by FinCEN, the substantial portion of the rule that adds requirements for obtaining and verifying the identity of beneficial ownership of legal entity customers is still generating lots of questions, as we confirmed at BOL Conferences’ recent Top Gun BSA/AML Conference in Scottsdale.

Here are several of those questions and answers, in an FAQ format:

Q1. What accounts are subject to the rule?

Answer: The definition of “account” is the same as the one used under the CIP rules. It is “any formal banking relationship established to provide or engage in services, dealings, or other financial transactions including a deposit account, a transaction or asset account, a credit account, or other extension of credit. It also includes a relationship established to provide a safe deposit box or other safekeeping services, or cash management, custodian and trust services.”

Q2. Can you give examples of products or services that are NOT accounts?

Answer: Any product or service where a formal banking relationship isn’t established, such as check-cashing, wire transfer, or sale of a check or money order. Also excluded are accounts that the bank acquires through an acquisition, merger, purchase of assets, or assumption of liabilities. Also excluded is an account opened for the purpose of participating in an employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA).

Q3. Is a loan purchased as “dealer paper” from an auto dealer considered an account under the rule?

Answer: If the dealer extended the credit and your bank purchased it after the loan was consummated by the borrower and the dealer, it would be considered a purchase of assets, and not an account under the rule. However, if the bank underwrites a loan extended by the bank through a dealer/agent, the loan would be an account and subject to the rule.

Q4. This rule requires that we obtain information on beneficial ownership when a new account is opened. What is a “new account” under the rule?

Answer: A new account is any account opened at a covered financial institution by a legal entity customer on or after May 11, 2018. A new account is opened on or after that date when a legal entity customer:

  • Opens a new operating checking account
  • Opens a new payroll account
  • Opens a new IOLTA account
  • Purchases a new auto-renewing time deposit (certificate of deposit)
  • Signs a new safe deposit box lease
  • Obtains, and signs paperwork for, a new revolving line of credit
  • Obtains a new commercial mortgage loan with a balloon payment
  • Obtains a new extension of credit for inventory purchase, signing a 90-day note
  • Signs an agreement for trust services with your bank’s trust department

Those are just examples; it’s not an exhaustive list.

Q5. Is the automatic rollover of a time deposit at maturity a new account? How about “subnotes” that are sometimes used for individual advances under a formal, advised line of credit?

Answer: The regulation doesn’t even mention such arrangements, as common as they are. I don’t think the time deposit rollovers are new accounts, and I am hoping that FinCEN will clarify this issue and others in its updated FAQ, which we were told FinCEN wants to issue before May 11, 2018. In the absence of guidance from the agency, you have to make a risk-based decision on how to treat them. The “subnotes” aren’t new accounts, because the new account event is the bank’s commitment to lend, i.e., extend the line of credit.

Q6. If an entity customer has a non-interest-bearing checking account with our bank and wants to have it changed to an interest-bearing checking account (assume we offer such accounts), will the change of the account status be a “new account event”?

Answer: If the change is accomplished by making changes to the existing account (such as a new class code, setting an interest payment flag, activating account analysis, etc.), there is not a new account event. However, if the old account is closed and a new interest-bearing DDA is opened, you would have a new account event.

Q7. If we open two accounts simultaneously for a business entity (e.g., a checking and a savings account), must we obtain two certifications of beneficial ownership?

Answer: That question is not addressed in the regulation or the current FinCEN FAQ. But given the purpose of the regulation – to obtain information on the beneficial ownership of the legal entity customer at a point in time, a single certification should be enough, particularly if your bank can index back to that certification from each of the accounts opened in that session with the customer’s representative.

Q8. What good is a photocopy of a driver’s license if the individual isn’t here so that we can compare the photo with the face or compare signatures?

Answer: A photocopy of someone who’s not present is certainly of less value that an original license brought in by the licensee. It can be used for verifying some of the identifying information included on the certification.

Q9. How should we handle IOLTA accounts, which are owned by the attorney or law firm’s clients and the state bar association? How can we get beneficial ownership information on these accounts, or should we?

Answer: Start by understanding who your customer is. The attorney’s clients do not own the account even though they may beneficially own (some of) the funds in the account. And the bar association doesn’t own the account, either. The account is owned by the attorney (in the case of a sole practitioner) or law firm. If your customer is a sole practitioner, there is no legal entity involved and the rule can’t apply. But if the customer is a law firm, a partnership, limited liability partnership (LLP), limited liability company (LLC), professional corporation (PC), etc., it is a legal entity, and you will apply the regulation just as you would for any other legal entity customer.

Q10. For established, low-risk legal entities, must financial institutions obtain beneficial ownership certifications with every future account opened by the entity?

Answer: Yes. Unlike the CIP rule, where you are verifying the identity of your customer at a point in time (account opening) and that identity doesn’t change, under the beneficial ownership rules you are looking at the ownership of the entity, which can change. The point of the rule is to identify ownership interests.

Q11. If we have obtained a beneficial ownership certification from a legal entity customer, should we look through documentation (articles of incorporation, tax returns, etc.) provided to us to ensure the correct information has been provided on the certification?

Answer: You can accept as correct the beneficial ownership certification unless you have reason to doubt its accuracy. For example, if your bank recently investigated pubic records to determine ownership of the entity for a loan under consideration, and become aware that the information obtained is at odds with the information provided on the certification, you would have to follow-up on the certification, requiring that the inconsistency be resolved.

Q12. A legal entity customer wants to open a new deposit account, but the individual opening the account doesn’t have all of the information needed for the beneficial ownership certification, nor does he have copies of photo IDs that we require for new legal entity accounts. Can the account be opened without the required information, and for how long can it remain open without the information/certification?

Answer: The beneficial ownership rule does not provide any such leeway. The beneficial ownership certification must be obtained by the time the account is opened. Verification of the identity of any individuals listed as beneficial owners (or as the control individual) can be completed by the bank after the account is opened, but the bank’s procedures must have a limit on how long that can take, and provide for the closing of the account if the bank cannot verify the identity of each individual named in the certification.


UBO:  How low do you go?

By Mary Beth Guard

When determining the Ultimate Beneficial Owners of a legal entity customer for purposes of the new Beneficial Owner/CDD rule, exactly how far do you need to drill down? Lower than you might think.

I had concluded one of my presentations at our recent Top Gun AML conference on the subject of Layers of Ownership. My husband, Michael, was in the audience, and while I was speaking, he charted out an ownership scenario he remembered from a case where he represented a bank chasing assets of a deadbeat borrower. There were multiple layers of entities that owned parts of the legal entity that had received the extension of credit and because they were essentially all shells, he was able to successfully pierce the corporate veil of each and get to the assets of the individuals behind them.

As I approached my seat, he asked “Do you aggregate ownership interests of individuals when you are determining UBOs?  If Entity A is owed by B Corp. and D Corp., and B Corp. owns 76% of Entity A and D Corp. owns 24% of Entity A, do you really not have to look at who owns D Corp.? Then he showed me his chart. Sam Smith owned 28% of B Corp (which owned 76% of Entity A — our new account customer).  Looks like Sam is not a Beneficial Owner of A, right? (28% of 76% is just over 21% indirect ownership of Entity A.)  Not so fast.  Turns out that Sam also owns 95% of D Corp, which owns 24% of Entity A. That’s another 22.8% indirect ownership of Entity A.

Sam indirectly owns more than 25% of Entity A!  Sam is a Beneficial Owner, as defined in the regulation.

So, the bottom line is that if it looks like an entity owns less than 25%, that is not the end of your inquiry.  You must look at whether, as you continue to go down through the layers, there is any common ownership by natural persons among the companies that own the new customer.

The complexities continue to emerge.