- UTMA accounts
- Loans to minors
- SCRA update
- FCRA credit freeze update
By Pauli Loeffler
In the September 2018 OBA Legal Briefs, I wrote about deposit accounts that can be opened for a minor as owner or co-owner. This month, we look at the other important account offering for minors, accounts opened under the Oklahoma Uniform Transfer to Minors Act (UTMA).
The UTMA statutes are located in Title 58 (the Probate Code), §§ 1201 – 1224. A UTMA will have language stating the funds are held by “_________________ (name of custodian) as custodian for __________________ (name of minor) under the Oklahoma Uniform Transfers to Minors Act.” Unlike the minor accounts described last month, the minor has no transactional authority. Further, the minor, at least during the term of the UTMA, cannot receive information about the account without the consent of the custodian or an order of a court.
Here are some pertinent points regarding UTMAs:
- Once funds are transferred to a UTMA, the transfer is irrevocable. If Grandma gets mad at Johnny, or he doesn’t live up to her expectations, she cannot take the funds back.
- The custodian is a fiduciary and must use the funds solely for the benefit of the minor. S/he cannot pledge the UTMA account for security to make improvements to the house s/he owns even if the minor resides there, or to purchase a car titled in the custodian’s name used to take the minor to school, football practice, etc. On the other hand, the UTMA account could be pledged to buy a car titled in the minor’s name provided s/he has a driver’s license.
- There can be only one custodian and one minor and one UTMA created. Court-ordered UTMAs do not necessarily follow this rule.
- The UTMA account can be a CD, MMDA, savings account, NOW account, or DDA. Court ordered accounts generally must be interest-bearing.
- There is no prohibition on allowing the custodian to have a debit card. This is up to bank policy. Since the minor does not have transactional authority on the account, if the custodian requests a debit card for the minor, it is problematic. However, since the funds will be used by and for the benefit of the beneficiary, this is also up to the bank.
- PODs are allowed on UTMAs. If it is a court-ordered UTMA, the court will have to specifically name a POD beneficiary, which is rarely done.
- The transferor of the funds creating the UTMA or the custodian may designate successor custodians. If s/he does not, the custodian may name a successor other than the transferor. If neither the transferor nor the custodian names a successor and the beneficiary is at least 14 years of age, s/he may name a successor who is an adult member of the minor’s family, a guardian of the minor, or a trust company. But, if this is not done within 60 days of the ineligibility, death, or incapacity of the custodian, a guardian (a person appointed by a court) becomes the successor. If there is no guardian or the guardian declines, the transferor, the legal representative (e., the personal representative of the estate, guardian, or conservator) of the transferor or custodian, an adult member of the minor’s family or any other interested person (e.g., the bank) can petition the court to designate a guardian.
- The custodian shall pay the funds to the minor when the minor reaches the age of 18 unless at the time of transfer of funds a time is specified after the minor reaches the age of 18 but not later than when the minor reaches age 21. In other words, if no age is mentioned, the custodian is required to disburse to the minor at age 18.
Courts routinely order the establishment of a UTMA for minors when the minor is entitled to money under a settlement for injuries in an accident, when entitled to death benefits under a worker’s compensation death claim or as beneficiary of a life insurance policy, and similar situations. The court order will establish who is the custodian and will control the transactions allowed. Most such court orders will require a further order of the court for the custodian to make any withdrawals during minority, and the bank needs to lock down the account to prevent withdrawals without such an order.
On the other hand, most if not all these court-ordered UTMAs specifically give the bank the power to pay the minor directly as soon as s/he attains the age of 18 which avoids “the custodian who just won’t let go” problem. This comes up quite frequently. Grandma who established and is the custodian of the UTMA isn’t pleased with how the grandson has turned out and won’t disburse the funds. We know of instances where the “minor” is now in his mid- or late twenties and even one who was 35 years old, and the funds were still in the UTMA.
So, the age for disbursement arrives and the custodian does not disburse. The bank reminds the custodian that the time has come, and the custodian has the duty to pay the funds, but the custodian balks and says the kid is irresponsible, and s/he is going to hold on to the funds. I have no problem with the bank notifying the aged-out minor of the UTMA and informing him of § 1221 procedures that allow the bank to release the funds directly to him. Here’s the statutory language:
C. To the extent the custodial property consists of deposit accounts held at a financial institution, if the minor reaches the age for release and the custodian does not make a timely transfer of the property to the minor, the minor may make a request for the account-holding financial institution to intervene. The request from the minor shall be signed, dated and in writing, and shall state that the minor has reached the age for release and the custodian has refused to distribute the remaining funds to the minor after being asked to do so by the minor after the minor was entitled to them. Upon receiving the minor’s request, the financial institution may send a written demand to the custodian to transfer to the minor the funds in any Oklahoma Uniform Transfers to Minors Act deposit account. If the custodian does not make the distribution within thirty (30) days from the date of the financial institution’s demand, the financial institution shall have the authority to close the account and pay out the funds directly to the minor without any liability or recourse from any parties.
The minor starts the ball rolling, by giving the bank a signed, dated, written request stating that the minor (or former minor) has reached the age for release and the custodian has refused to distribute the funds to the minor after being asked to do so.
Then the bank sends a written demand to the custodian to transfer the funds to the minor, giving the custodian 30 days to do so. A template for the letter is accessible on the OBA Legal Links webpage here.
If the custodian comes in to close the account at some point before the 30 days have past, the custodian cannot do a cash withdrawal, and the check must be payable to the named minor ONLY. If the minor is present and wants to open a joint account with the custodian, that’s fine.
Loans to minors
By Pauli Loeffler
I have “borrowed” some of the following from Charles Cheatham, former OBA General Counsel who wrote on this subject for the OBA Legal Briefs nearly two decades ago, but that article is no longer accessible online.
As I indicated in the 2018 September Legal Briefs, Title 15 covers contracts and Sections 11 and 12 contain the provisions about a minor’s capacity to enter into them. Sec. 11 states: “All persons are capable of contracting, except minors, persons of unsound mind, and persons deprived of civil rights…” § 12 provides: “Minors and persons of unsound mind have only such capacity as is defined by the statutes of this State.” Further, § 19 of Title 15 allows the guardian of a minor to disaffirm a contract during his minority, and allows the minor to disaffirm a contract for one year after reaching majority UNLESS (per §21) a statute has relieved him of the disability of minority to enter into the contract.
The question of loans to minors most often comes up when Dad wants to buy a car for the minor and wants to jump start junior’s credit history by having the child as a co-borrower. The problem is that such a loan is not legally enforceable against the child, and the bank can report neither good nor bad payment history to the credit bureaus. A debt that the minor can disaffirm such that it is void from the beginning is a debt that the minor never owed; and therefore, the minor’s payment, nonpayment or late payment of such a debt cannot be counted against his credit history.
So when can a minor enter into a loan and be legally bound?
15 O.S. § 33 allows a minor to obtain an educational loan and to be bound by the contract (disaffirmation will not apply) provided he is:
- At least sixteen years of age, and either
- has written approval of his parent or guardian, or
- is not residing with a parent or guardian.
The educational loan must be for the purpose of directly furthering the minor’s education at an educational institution. Any college, high school, technical, vocational, or professional school meets the definition of “educational institution.” Before making the loan, the bank must obtain certification in writing that the minor is enrolled, or accepted for enrollment, at the educational institution. If the requirements are met, an educational loan is binding upon both the minor and any guarantor or co-maker.
Let’s consider an example: A 17-year-old high school student applies for a loan to buy a calf for an FFA project. The student’s vo-ag teacher, who is the FFA sponsor, offers to be either a co-maker or a guarantor on the loan. The minor lives at home under the care of his parents. The loan to buy the calf is “for the purpose of furthering the minor’s education” if his vo-ag class requires he have a livestock project as part of his grade. Provided that the student gets a) written approval from his parents to apply for the loan, b) a letter from his high school verifying his enrollment, and c) a letter stating that raising the calf is a requirement for his vo-ag class, then the bank can make the loan and fall within the parameters of § 33., and the loan would be binding on both the minor and the vo-ag teacher whether s/he is a co-maker or a guarantor.
An example with the opposite result occurs if the bank fails to obtain written verifications from the high school or parental permission since the minor lives with the parents. There is another problem if the minor is the only direct debtor and the vo-ag teacher is a guarantor. The minor would not be legally bound, nor would the teacher be. An early Oklahoma court case states that disaffirmance of a contract by a minor nullifies the contract and renders it void from the beginning; and after the minor has disaffirmed the contract, anyone can take advantage of such disaffirmance. The promissory note signed by the minor is deemed void from the beginning if it is disaffirmed, and so the vo-ag teacher’s guaranty agreement will be treated as void from the beginning. He has guaranteed a note that is no longer binding, and it is if neither the note nor the vo-ag teacher’s guaranty ever existed.
On the other hand, if the vo-ag teacher or another adult is a co-maker/cosigner on the note the result is different. S/he will be liable on the note regardless of whether it is an educational loan with proper certifications or a loan to buy a car, a motorcycle, a PS-4, etc. because s/he has direct liability on the note not extinguished by the minor’s disaffirmance.
Contracts for necessities.
Under 15 O.S. §20, a minor can enter into a binding loan not subject to disaffirmance when it is “…to pay the reasonable value of things necessary for his support, or that of his family, entered into by him when not under the care of a parent or guardian able to provide for him or them.” There is very little case law under this statute other than minors’ contracts to pay attorney’s fees to obtain or preserve assets of the minor AREN’T necessary for the minor’s support, but if the contract is to pay an attorney to defend the minor in a criminal prosecution, they are.
Let’s say the minor has a job, is not living with his parent or guardian, and the parents/guardian cannot support him. He needs a loan to pay for utilities or rent or medical care. Presumably, such a loan is binding. Or a loan to a young married couple, both 17, not living with their parents would be an “enforceable loan” if made for the specific purpose of buying “necessaries.”
10 O.S. § 91 gives the district courts the authority to confer the “right of majority” upon a minor to enter into binding contracts as if he had already reached the age of 18. Emancipation makes the minor an “adult” for purposes of making contracts, but s/he is not an “adult” for all purposes. For instance, s/he is still required to attend school if s/he has not graduated. Note that marriage of a minor does not in and of itself emancipate a minor in Oklahoma although this is the case in other states.
By Andy Zavoina
Here is an SCRA update most of us almost missed. H.R. 5515, the John McCain National Defense Authorization Act for Fiscal Year 2019 became Public Law No. 115-232 on August 13, 2018. Of key importance to us is section 600 which amended the proof of military service in order to qualify for the interest rate reduction afforded in section 207 of the Servicemembers Civil Relief Act (50 U.S.C 3937). This article will explain the changes, as well as provide a refresher for certain SCRA requirements.
Here is how SCRA § 207(b)(1) now reads, after the Sec. 600 amendment:
(1) PROOF OF MILITARY SERVICE.—
(A) IN GENERAL.—Not later than 180 days after the date of a servicemember’s termination or release from military service, in order for an obligation or liability of the servicemember to be subject to the interest rate limitation in subsection (a), the servicemember shall provide to the creditor written notice and a copy of—
(i) the military orders calling the servicemember to military service and any orders further extending military service; or
(ii) any other appropriate indicator of military service, including a certified letter from a commanding officer.
(B) INDEPENDENT VERIFICATION BY CREDITOR.—
(i) IN GENERAL.—A creditor may use, in lieu of notice and documentation under subparagraph (A), information retrieved from the Defense Manpower Data Center through the creditor’s normal business reviews of such Center for purposes of obtaining information indicating that the servicemember is on active duty.
(ii) SAFE HARBOR.—A creditor that uses the information retrieved from the Defense Manpower Data Center under clause (i) with respect to a servicemember has not failed to treat the debt of the servicemember in accordance with subsection (a) if—
(I) such information indicates that, on the date the creditor retrieves such information, the servicemember is not on active duty; and
(II) the creditor has not, by the end of the 180-day period under subparagraph (A), received the written notice and documentation required under that subparagraph with respect to the servicemember.
What Section (1)(A) is telling us is that a servicemember now has 180 days from the date they are released from the service to make a claim for the reduced interest rate of 6 percent. It also states the request must be in writing, must include a copy of the servicemembers orders calling them to active duty and if applicable, orders extending the original so the creditor will have a better understanding of the time served. The servicemember should also have a final set which will define the date they were released. These dates often vary from the prior set because the servicemember has to out-process from their duty station and possibly travel to a final location for out-processing from the service itself. Those arrangements could not be controlled perhaps years earlier when a prior set of orders was issued. The Defense Manpower Data Center (DMDC) database is an excellent control mechanism for verification of military service dates.
A substitute for copies of the servicemember’s orders (Sec. (1)(A)(ii)) is a certified letter from the servicemember’s commanding officer. This term “certified letter” is not defined but in its purest United States Postal Service form would be “a special USPS service that provides proof of mailing via a receipt to the sender.
In the SCRA context, “certified letter” could also mean a letter certifying the servicemember’s status.
The prior SCRA language in § 3937(b)(1) already included the 180-day period, but the certified letter from a commanding officer is a new alternative for invoking the rate reduction.
As a refresher, the application of the cap becomes retroactive to the date the servicemember was placed on active duty. Even if the debt was paid in full before the servicemember invoked their rights, a re-amortization and refund could be owed based on the date they were under protection of the Act until their release.
These requirements apply to an obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent —
(A) during the period of military service and one year thereafter, in the case of an obligation or liability consisting of a mortgage, trust deed, or other security in the nature of a mortgage; or
(B) during the period of military service, in the case of any other obligation or liability.
The “obligation” is most commonly a loan but can also be an overdraft. Overdraft fees generally exceed 6 percent but are not expressed in that manner. It is more cost effective to waive those fees than to compute and collect 6 percent interest on them.
A pre-service credit card balance today of a servicemember must be reduced if it exceeds 6 percent. Charges made tomorrow (or at any time during or after military service) are not pre-service and thus not subject to the cap. Once the borrower is in military service, the borrower knows what their debt service capacity is, and they are not expected to overextend themselves.
Interest also includes fees under the SCRA, including late fees. If a valid request is made and the bank has to re-amortize a debt, if the rate is reduced to 6 percent, there is no room for any fee, so all should be waived. The fees should also be waived going forward. If the bank opts to reduce the interest rate lower than 6 percent, there may be room for fees but verify your effective rate.
Section 3937(b)(1)(B) is new. It now authorizes what many banks adopted as a best practice after so many enforcement actions against other banks. In the last few years when a bank was cited for violations of the SCRA, the corrective actions put in place were intended to do more than was required by the law. This included not waiting for a servicemember to make a claim for the interest rate reduction and proactively looking for signs that they may qualify. One way to accomplish this is verification through the DMDC database mentioned above. It has been fine-tuned more and more for accuracy and to reduce update latency. Banks can verify servicemembers individually or in batches. Many banks adopted the batch processing method and check the banks CIF records against the database on a monthly basis. New hits could be shown active duty immediately on bank records or contact and verifications would be initiated with the customer.
Section (B) reinforces the confidence in the DMDC database and says officially that these records may be used in place of military orders or the commanding officer’s certified letter. A bank using this will have a safe harbor so long as the database record shows the date the bank inquired and that the customer is not shown on active duty, and the bank has not received a copy of the orders or certified letter by the end of the 180 day period.
The biggest takeaway in this revision to the law is the safe harbor and confidence in the DMDC database. This is essentially a variation of the database used for Military Lending Act verifications your bank does or the credit bureau you use for such verifications. The credit bureaus update files once daily against the database, but those records are updated by the DMDC more often than that. The MLA database has more information on dependents than the SCRA database. Once, when speaking with the DMDC I inquired as to why a bank could not use just the MLA database and keep it simple. I was cautioned that the two are different and SCRA inquiries should go to that database, and MLA inquiries to that specific database. Regardless of which database you are using for its intended purpose, you must retain your records so that you always have proof of verification in the event there is ever any doubt. And ensure that when a positive match is found, it is noted on a central file as the SCRA status can affect loans, overdrafts and safe deposit boxes. Always check the database prior to a foreclosure or repossession.
Recent SCRA enforcement action
Last November, the U.S. Department of Justice (DOJ) filed a lawsuit in U.S. District Court for the Western District of Washington. The DOJ alleged that Northwest Trustee Services, Inc. violated the SCRA in its foreclosure processes. The complaint alleges that since 2010, Northwest completed foreclosures on at least 28 homes owned by servicemembers without obtaining the required court orders in advance.
(Northwest is now a defunct company which had described itself as a full-service trustee company providing foreclosure services to mortgage lenders in the Western United States. Last December it closed and is in the process of liquidation in a state court.)
Section 303 of the SCRA (50 U.S.C. 3953) affects pre-service obligations only and states that a court may stay proceedings involving mortgages and trust deeds if the action is filed while the person is in military service or within one year after such service. Sale, foreclosure or seizure of property isn’t valid except with a court order if made during military service or one year thereafter.
Marine veteran Jacob McGreevey of Vancouver, Washington, submitted a complaint to the DOJ’s Servicemembers and Veterans Initiative in May 2016. Northwest had foreclosed on McGreevey’s home in August 2010. That was than two months after he was released from active duty in Operation Iraqi Freedom. McGreevey sued his mortgage servicer, PHH Mortgage, and Northwest in 2016 but a U.S. District Court Judge accepted PHH and Northwest’s argument that McGreevy had waited too long to file his case. McGreevey had been unaware of his SCRA protections until shortly before filing his suit. It was dismissed because of that six-year gap. The DOJ’s investigation indicated McGreevy was not the only SCRA foreclosure without a court order and the investigation went as far back as 2010.
In addition to monetary damages for affected servicemembers, the SCRA provides for civil monetary penalties of up to $60,788 for the first offense and $121,577 for each subsequent offense of this section.
On September 27, 2018, the DOJ announced it has finally reached a settlement in this case. Under the terms of the settlement, service members who had their homes illegally foreclosed may get compensation of up to $125,000. The company’s total required payout to service members is $750,000, according to DOJ.
FCRA Credit Freeze Update
By Andy Zavoina
The Economic Growth, Regulatory Relief, and Consumer Protection Act’s (EGRRCPA) Section 301 required consumer reporting agencies to provide consumers with free credit freezes and to notify them of this availability. It established provisions for placement and removal of freezes.
This new rule was effective September 21, 2018, and added a new paragraph to the FCRA, § 605A(i). (The updated FCRA is available at https://www.bankersonline.com/regulations/fcra-605a)
A “security freeze” on a credit report prevents new creditors from accessing the credit file and others from opening accounts in the consumer’s name until the consumer lifts the freeze. Because most businesses will not open credit accounts without checking an applicant’s credit report, a freeze can stop identity thieves from opening new accounts in that consumer’s name. Note that this applies to new creditors, so if a consumer has an existing credit relationship with your bank. Your bank will have access to the file. If you have a new customer applying for credit, asking if they have placed a freeze for any reason would be a good practice, because it must be lifted for you to check that credit file. That lift could slow down the application processing time. Now that this is a free service, expect more freezes from consumers who are proactively preventing identity theft.
After the Equifax data breach many consumers wanted to put a freeze on their credit files. There were reports that the consumer may have been charged for this, when placing it was necessitated by the credit bureau’s lax security. Then placing it initially became free but lifting and reinstating the freeze may have triggered a fee. Amendments to the FCRA have changed this.
The EGRRCPA requires that whenever the FCRA requires a consumer to receive either the “Summary of Consumer Rights” or the “Summary of Consumer Identity Theft Rights,” a notice regarding the new security freeze right must be included. The “Summary of Consumer Rights” is a summary of rights to obtain and to dispute information contained in the consumer’s report and to obtain credit scores. The “Summary of Consumer Identity Theft Rights” is a summary of rights of identity theft victims. Both are available at consumerfinance.gov in English and Spanish.
EGRRCPA also extended the duration of fraud alerts on a consumer’s credit report from 90 days to one year. The fraud alert requires your bank to get the consumer’s approval before opening a new account.
This section of EGRRCPA was effective September 21 Most of the burdens here are on the credit reporting agencies, but the effects may be felt in your bank, and not only when a consumer who has frozen his credit file applies to you for credit. Your bank’s Human Resources department is required to provide a copy of the “Summary of Consumer Rights” when they turn down an application for employment based on information in a consumer report from a credit reporting agency. Those notices need to be updated to the most current version.