Thursday, April 18, 2024

February 2019 OBA Legal Briefs

  • TILA-RESPA FAQs
  • Service member complaints
  • Authorized signers
  • 2nd Amendment Auditors

TILA-RESPA FAQs

By Andy Zavoina

In early February 2019 the Consumer Financial Protection Bureau (Bureau) released four Frequently Asked Questions pertaining to integrated disclosures under Truth in Lending and the Real Estate Settlement Procedures Act (TILA-RESPA or TRID). It starts with the standard disclosure that there is no substitute for reading and interpreting both the regulations, Reg Z for TILA and Reg X for RESPA as well as the official interpretations (Commentaries) that accompany each. These FAQs are clarifying the regulations and commentaries without being an official part of either. These may be considered official guidance from the owner of the regulation, the Bureau.

Question 1 addresses changes affecting the Closing Disclosure after it has already been delivered, and redisclosure with the possibility of a delay in the closing date.

“If there is a change to the disclosed terms after the creditor provides the initial Closing Disclosure, is the creditor required to ensure the consumer receives a corrected Closing Disclosure at least three business days before consummation?”

And the typical compliance answer is, “it depends.” The official answer is that there are three scenarios in which the consumer MUST receive the corrected Closing Disclosure at least three days prior to closing. In the event you have one of these three scenarios, you must be prepared to make a new disclosure and potentially to delay and reschedule the closing to ensure the redisclosure is received by the consumer at least three business days before the closing.

  1. If the change results in an inaccurate annual percentage rate.
  2. If loan product information which is required by TRID to be disclosed becomes inaccurate.
  3. If a prepayment penalty is added.

If your change is anything other than one of these three, you should redisclose to the consumer, no later than closing, but there is no need to delay the closing as the three-day advance disclosure requirement will not apply. (Review 1026.19(f)(2)(i).)

Question 2 helps provide guidance as to when the consumer’s overstated APR is going to decrease, is redisclosure necessary? This would seem to be advantageous to the borrower, but not necessarily if it means a delay in closing the loan. Some interpretations of the rule indicate redisclosure is required, even if the three-day waiting period to closing could be harmful to the consumer. The actual question is,

“Is a creditor required to ensure that a consumer receives a corrected Closing Disclosure at least three business days before consummation if the APR decreases (i.e., the previously disclosed APR is overstated)?”

And again, the Bureau tells us “it depends.” In this case it depends on whether, according to Reg Z, the APR which was previously disclosed on the consumer’s Closing Disclosure was accurate or not.

If the overstated APR is accurate under Reg Z:

  • the lender must provide a corrected Closing Disclosure,
  • the lender may, however, provide the revised disclosure at or before consummation and there is no requirement for a new three business-day waiting period. This generally means the closing need not be rescheduled.
    (Refer to 1026.19(f)(2)(i))

If the overstated APR is not accurate under Reg Z:

  • Because the APR is not accurate, the bank must ensure that a consumer receives a corrected Closing Disclosure at least three business days before consummation. Depending on how far in advance the correction was noted, the closing may have to be re-set.
    (Refer to 1026.19(f)(2)(ii))

The Reg Z rules for finance charge accuracy on mortgage loans may be found under 1026.18(d)(1): “In a transaction secured by real property or a dwelling, the disclosed finance charge and other disclosures affected by the disclosed finance charge (including the amount financed and the annual percentage rate) shall be treated as accurate if the amount disclosed as the finance charge:

(i) Is understated by no more than $100; or

(ii) Is greater than the amount required to be disclosed.

The Reg Z rules for APR accuracy on mortgage loans may be found under 1026.22(a)(4)-(5) which (of course) refer to other sections of Reg Z but I’ve condensed them in this explanation below:

“(4) If the annual percentage rate disclosed in a transaction secured by real property or a dwelling varies from the actual rate determined in accordance with paragraph (a)(1) of this section (which addresses how an APR is calculated), in addition to the tolerances applicable under paragraphs (a)(2) and (3) of this section (generally the APR for a regular loan is accurate if it is within .125 percent above or below a properly calculate APR, and an irregular loan is within .25 percent above or below the properly calculated APR), the disclosed annual percentage rate shall also be considered accurate if:

(i) The rate results from the disclosed finance charge; and
(ii)(A) The disclosed finance charge would be considered accurate under §1026.18(d)(1) (just recapped above) or § 1026.38(o)(2), as applicable; or
(B) For purposes of rescission, if the disclosed finance charge would be considered accurate under § 1026.23(g) or (h), whichever applies.

“(5) Additional tolerance for mortgage loans. In a transaction secured by real property or a dwelling, in addition to the tolerances applicable under paragraphs (a)(2) and (3) of this section, if the disclosed finance charge is calculated incorrectly but is considered accurate under § 1026.18(d)(1) or § 1026.38(o)(2), as applicable, or § 1026.23(g) or (h), the disclosed annual percentage rate shall be considered accurate:

(i) If the disclosed finance charge is understated, and the disclosed annual percentage rate is also understated but it is closer to the actual annual percentage rate than the rate that would be considered accurate under paragraph (a)(4) of this section;

(ii) If the disclosed finance charge is overstated, and the disclosed annual percentage rate is also overstated but it is closer to the actual annual percentage rate than the rate that would be considered accurate under paragraph (a)(4) of this section.”

Finance charge and APR accuracy are related but measured differently and are different for mortgages than other loans. The Bureau’s document refers to an older edition of the Consumer Compliance Outlook (CCO First Quarter 2011)  which makes understanding the rules easier with some examples. This CCO document refers to older citations of Reg Z using the Federal Reserve’s “226” reference. Simply substitute the current Bureau citation of “1026” if you want to review Reg Z directly. This means 226.23 is reviewed under 1026.23, as an example.

Question 3 asks if EGRRCPA changed the period between providing the Closing Disclosure and consummation of a mortgage loan. Specifically, “Does Section 109(a) of the Economic Growth, Regulatory Relief, and Consumer Protection Act affect the timing for consummating a transaction if a creditor is required to provide a corrected Closing Disclosure under the TRID Rule?”

Current TRID rules require a three-day waiting period between the delivery of the Closing Disclosures and the actual closing. If a redisclosure is required, the three-day period may have to be re-started (see the discussion of Questions 1 and 2). Section 109 of EGRRCPA will allow a waiver of this period if the annual percentage rate is decreasing. This could allow a timely closing and better loan terms for the borrower.

The Bureau provided an emphatic “No” and went on to clarify Section 109(a) titled, “No Wait for Lower Mortgage Rates,” amends Section 129(b) of the Truth in Lending Act (TILA). TILA Section 129(b) requires certain disclosures which must be provided for high cost mortgage loans (HCML) and the waiting periods required as a gap between disclosure and consummation of an HCML. (Refer to 15 U.S.C. § 1639 and Reg Z’s 1026.31, .32, and 34.)

If the APR is disclosed according to TRID and it becomes inaccurate, the bank must ensure that the consumer receives the corrected Closing Disclosure at least three business days before consummation of the mortgage loan. This requirement comes from 1026.19(f)(2)(ii) and is to comply with TILA Section 128, (15 U.S.C. § 1638,) and is separate and distinct from the waiting period requirement in TILA Section 129(b). This means Section 109(a) of EGRRCPA did not create an exception to the waiting period requirement under TILA Section 128. It does not affect the timing for consummating transactions after a creditor provides a corrected Closing Disclosure under the TRID Rule.

But all is not lost. Refer to question 1 again. An overstated APR is not inaccurate if it results from the disclosed finance charge being overstated, and a bank is not required to provide a new three business day waiting period. As a result, if the disclosed APR decreases due to a decrease in the disclosed interest rate, a bank is not required to provide a new three business day waiting period under the TRID Rule. So, this rule hasn’t changed, but the Bureau has reminded us of the three circumstances which do re-set the three-business day clock.

Question 4 (Model Forms). The Bureau added one question pertaining to the use of “older” model forms and a safe harbor when there are regulatory changes. “Does a creditor’s use of a model form provide a safe harbor if the model form does not reflect a TRID Rule change finalized in 2017?”

Possibly a surprise, the Bureau said “Yes.” The Bureau noted when finalizing the 2017 changes to the TRID Rule (sometimes referred to as “TRID 2.0”), that a bank is deemed to comply with the disclosure requirements associated with the Loan Estimate and Closing Disclosure if the bank uses the appropriate model form and properly completes it with accurate content.
Reg Z’s Appendix H includes model forms with headings, subheadings, and other fields required by Reg Z, at 1026.37 and 1026.38. These blank model forms for the Loan Estimate are H-24(A) and (G) and H-28(A) and (I). The Closing Disclosure model forms are H-25(A) and (H) through (J), and H-28 (F) and (J). Blank forms are also in Appendix H.

For example, the regulatory text provides that the percentage amount required to be disclosed on the Loan Estimate line labeled “Prepaid Interest (___ per day for __ days @__ %)” is disclosed by rounding the exact amount to three decimal places and then dropping any trailing zeros that occur to the right of the decimal point. (refer to 1026.37(g)(2)(iii) and (o)(4)(ii).) However, on page 2 of model form H-24(C), section F, the interest rate disclosed (4.00%) on the line for prepaid interest includes two trailing zeros that occur to the right of the decimal point. Thus, a creditor could claim the safe harbor by disclosing the interest rate on the “Prepaid Interest” line by including two trailing zeros, or otherwise could comply with § 1026.37(o)(4)(ii) by rounding the exact amount to three decimal places and dropping any trailing zeros that occur to the right of decimal point. For example, if the interest rate for the transaction being disclosed is four percent, the creditor could claim the safe harbor by disclosing “4.00%” (consistent with the model form) although it also could disclose “4%” (consistent with the regulatory text and commentary).

It is very likely that the bank has a vendor providing the software to generate both the Loan Estimate and the Closing Disclosure and that these forms can only be produced in accordance with the requirements set forth by Reg Z. But at least the Bureau has listened and possibly seen a few of these errors and dismissed them as inconsequential. There is no pass to violate Reg Z, but at least good faith efforts that meet them in part will be recognized.

Action Plan: The bank should consider developing a training session and or memo and circulating it to all loan, compliance, and audit staff who are involved in TRID loan closings. This will help ensure each person understands each of the four questions and answers. It is recommended that emphasis be placed on Closing Disclosures and their timing.

Ask yourself if amendments are needed to the bank’s loan procedures as a result of this, should this be incorporated into regular training and audit workpapers, has the bank agreed with these interpretations or could there be loans which, if reviewed today. would be in violation of Reg Z and RESPA? If so, is there any corrective action that could be taken? (In the case of most timing violations, these could not be completely corrected, but were new Closing Disclosures provided at all, and would this be an indicator that the training mentioned above is now more important?) Lastly, review the forms produced for the Loan Estimate and Closing Disclosure to determine if the forms meet Reg Z requirements with some new standards. Most banks have not been examined in detail for TRID requirements. This FAQ document may clarify issues for lenders and examiners alike, which may now increase digging into mortgage loan files.

Servicemember Complaints

By Andy Zavoina

In January, the Consumer Financial Protection Bureau (Bureau) released its “Annual Report” from the Office of Servicemembers Affairs. It covered April 2017 through August 2018 and while the Bureau logged nearly 49,000 complaints from servicemembers and the top three categories were credit reporting, debt collection, and mortgages, I want to review one item from the “Emerging issues and continuing trends in the financial marketplace for servicemembers” section. Servicemembers do not understand add-on products, which are optional, or the features and the limitations of these products they may purchase and finance, meaning they pay for them for several years.

Add-on products can easily cost hundreds and hundreds of dollars and, when financed, lower the equity in the car. But there is an add-on to help cover that event too. In particular, GAP insurance is becoming an issue. You know the sales pitch, “cars depreciate, and we are financing most of your cost, so GAP insurance fills the gap between what you owe and what the car is worth if this baby is stolen or totaled…” But one servicemember bought the GAP protection and was stationed overseas. This is very common with the military and he wanted to take his car. He had to get permission from the lender, in writing, to ship the car. It was totaled, and there was a gap. But the policy doesn’t cover a loss outside the United States. Based on this report we may anticipate more pressure on GAP insurance.

Under the Military Lending Act (MLA), a loan to purchase a vehicle is exempt from MLA restrictions when the vehicle purchased is the collateral for the loan, and there are no extra funds loaned – that is, it’s just to buy the vehicle. And that’s the rub. The Department of Defense rules include in the Military APR calculation “Any fee for a credit-related ancillary product sold in connection with the credit transaction for closed-end credit or an account for open-end credit; (Refer to 232.4(c)(ii)) If this fee is in the MAPR, it can disqualify the “no extra funds” exception and the GAP cost contributes to the 36 percent MAPR limit as well. Some banks believed GAP was excluded, and they would accept the risk of financing that. Other banks sought counsel’s opinion and believe that getting GAP insurance after the car is purchased allows the exception because the GAP isn’t a part of the original transaction.

In August 2018, the Trump administration was “testing the waters” to get a definitive clarification and allowance on the GAP insurance issue for the MLA. There was some initial resistance. One must ask, if they want a specific provision to allow GAP insurance, that is a good indicator that it is currently included. The DoD has not offered conclusive guidance. But with civil and criminal penalties in the MLA (232.9) which includes considering the loan contract void from inception, banks should carefully evaluate the risks of financing GAP and considering it a qualified exception under the MLA. The complaints servicemembers make and the lack of coverage will not help lenders.

Authorized Signers

By Pauli Loeffler

We get a lot of questions about authorized signers but for some reason, there hasn’t been a Legal Briefs article on the topic – until now.

Who is an authorized signer? An authorized signer is anyone who does not own a deposit account but has been received authorization of the owner to do so. Authorized signers include:

  1. Convenience signers on
    a) Consumer accounts
    b) Sole proprietorships
  2. Signers authorized to act for entities such as:
    a) Corporations
    b) LLCs
    c) General partnerships
    d) Limited partnerships
    e) Joint ventures
    f) Trusts
    g) Foundations
    h) Federal, state, county, and municipal government/agencies and their subdivisions
    i) Unincorporated associations such as: Churches, Little league teams, POM teams, Band parents, etc.
  3. Fiduciaries authorized to act by appointment as a/an
    a) Attorney in Fact (“AIF”)
    b) Representative Payee
    c) Federal Fiduciary
    d) Custodian (UTMA)
    e) Guardian
    f) Receiver
    g) Conservator
    h) Personal representative of an estate

This is not an exhaustive list. I also need to point out that authorized signers listed under number 2 owe fiduciary duties to the account owner just as do those listed under number 3, but other than an AIF, all those listed under number three have a duty to regularly report either to a court (Guardian, Receiver, Conservator, and Personal representative of an estate), the appointing agency (Representative Payee, Federal Fiduciary), or the account owner/parent (Custodian). For convenience signers listed under number 1, there is neither a specific duty nor any legal requirement to report to the account owner.

What can ALL authorized signers do? All authorized signers may make deposits and write checks. All authorized signers may obtain information on an account all the way back to the time that the account was opened if they remain authorized signers on the account. Once an authorized signer is removed, the only way s/he can obtain any information on an account is either by 1) obtaining consent of the owner or 2) by way of a subpoena.

An authorized signer may stop payments on a check or close the account as provided by the UCC, Tit. 12A O.S. §4-403. If the authorized signer closes the account, the check will ALWAYS be made payable to the account owner.

What things can’t an authorized signer do? With certain exceptions granted under bylaws, operating agreements, partnership agreements, trusts, etc., an authorized signer cannot add an authorized signer nor remove another authorized signer. Authorized signers, with a couple of exceptions, cannot add or change pay on death beneficiaries on an account that allows PODs (neither rep payee nor federal fiduciary accounts for VA allow PODs). I have seen a few Power of Attorney/Durable Power of Attorney documents that do permit this, but the document must specifically provide this power, and that is very, very rare. PODs named by the owner before being subject to the guardianship may remain on the account, but any change would require a specific court order. On the other hand, PODs (in Oklahoma) are allowed on all UTMAs not established by a court, and a custodian can add or change the POD. If it is a court-ordered UTMA, the court order will need to name one or more PODs for the account to have a POD.

Can authorized signer change the address for statements? The best practice is to confirm the address change with the account owner if the account is not a guardianship, rep payee, federal fiduciary, UTMA, receivership, conservatorship, estate, or custodian of a UTMA. For entities that are required to register with the Secretary of State (corporations, LLCs, and limited partnerships), a change of principal place of business will need to be filed. This can be confirmed online. Unincorporated associations are not required to file with the Secretary of State. Partnerships are not required to file anything with the SoS other than if they are operating under a fictitious name, so you need to confirm authority for the change. On the other hand, if you know the grantor of a durable power of attorney is now in the hospital or has dementia and in a nursing home, changing the address by the AIF does not require confirmation by the account owner. However, if a guardian who isn’t the AIF has been appointed, the bank should inform the guardian who must account to the court. Note the appointment of guardian does not automatically revoke a durable power of attorney, however, the guardian can choose to either leave it in place or revoke it.

If we have a joint account and one of the joint owners’ names “John Doe” as AIF, what can we do? The joint owner cannot deny the AIF access to information nor making transactions on the account. The bank can certainly inform the joint owner that an AIF has been added, but she/he cannot deny the authority granted, nor remove the AIF. The joint owner can close the account and open a new one as a sole owner. S/he cannot remove the AIF from the joint account any more than s/he could remove the owner that executed the POA.

A personal representative is asking for information on an account of a deceased owner that had a joint owner or POD. What information can the bank provide? The personal representative “stands in the shoes” of the decedent. Whatever information the deceased owner could have asked for until the time of death, the bank can provide to the personal representative.

When a new rep payee or federal fiduciary is named, can s/he have information on the former account? No. The only way the new rep payee or federal fiduciary can obtain this information is with the consent of the predecessor or through a subpoena of the records.

2nd Amendment Auditors

By Pauli Loeffler

Let’s start with a bit of background: Statutes permitting concealed carry of handguns with permits have been on the books for a long time in Oklahoma, since 1995 to be exact. “Open carry” statutes became effective November 1, 2012. Although the statutes have been amended since that time, for the most part, the rules remain the same. Title 21 O.S. §1277 covers certain places where both concealed and open carry are prohibited except for certain individuals. Title 21 O.S. § 1289.7a prohibits the property owner, tenant, employer, or business entity from maintaining, establishing, or enforcing any policy or rule prohibiting any person, except a convicted felon, from transporting and storing firearms or ammunition in a locked motor vehicle, or from and storing firearms or ammunition locked in or locked to a motor vehicle on any property set aside for any motor vehicle. Motorcycles are defined as a vehicle, but it would be impossible to lock a more than a handgun in one, and if it was a larger weapon, say a shotgun, or rifle, a thief will take both the bike and the weapon (unless he has bolt cutters).

These “2nd Amendment Auditors” have been posting videos on social media involving engagements with a variety of businesses including Bank of Oklahoma, courthouses, and a staged a rally at The Gathering Place, a privately-funded park that was assigned to Tulsa County’s River Parks Authority. Whether a bank chooses to allow handguns inside the bank by anyone who is not federal, state, or local law enforcement (“peace officers” under Sec. 1289.23 of Tit. 21) without regard to whether they are on or off duty, it is up to the bank to decide.

The bank should have policy on whether handguns permitted under the statute are allowed in the bank. If these are not permitted, the bank must post signage to that effect. Legally, the bank is free to refuse entry into the building to anyone other than as indicated previously. To avoid problems, the greeter at the bank needs to know whom to contact in the event someone disregards the notice (security, an officer of the bank) that is designated to deal with the person disregarding the notice.

Whether the bank permits handguns or not, if it becomes the target of a “2nd Amendment Audit,” it should have some protocol for dealing with the person or persons to get them out of the lobby and into a private office or conference room for the appropriate person to discuss the bank’s stance. There should be more than one knowledgeable officer of the bank that knows and understands the reasons behind the bank’s policy and, more importantly, can remain calm and composed in talking to these “auditors.”

If the bank prohibits handguns, the person dealing with the auditors will state that the bank is complying with the Oklahoma statutes and has chosen to prohibit handguns inside the bank by its policy. If asked to justify the bank’s policy (which is a question you can easily anticipate), certainly protecting bank customers and employees was part of the policy decision. You can anticipate the “auditor” retorting that law-abiding citizens with permits are there to protect these people. Rather than engaging in fruitless debate and asking for statistics to prove the “auditor’s” point, probably the strongest argument is that most law enforcement overwhelmingly hates open carry because in an incident it is very hard to tell the good guys from the bad guys. It makes containment infinitely more difficult for law enforcement (the “good guys” regardless of the “auditor’s” view of the “Right to Bear Arms.”)

Whether you are “Joe Public” or a 2nd Amendment Auditor, supporting law enforcement is inarguably a good position. I will add that while law enforcement officers and soldiers are well-trained on how to protect their weapon from someone grabbing it, this is not the case with the average permit holder. Also, while I enjoy hunting quail, pheasant and ducks, as a customer, having someone come into the bank lobby with a gun and two clips on his belt as happened in the BOK incident would make me very nervous, but that is my personal point of view.

The other and larger problem with 2nd Amendment Auditors is that they do not really seem to care what the state law is but rather jump to the U.S. Constitution and the Bill of Rights. Now you have two lay persons arguing Constitutional law for the entertainment of their followers on social media.

This brings us to the “no recording in the bank” issue in the BOK video. As far as recording conversations, it isn’t illegal to record a conversation without obtaining consent of other parties to the discussion. This is provided in 18 U.S.C. § 2511(d) which states: it “shall not be unlawful for a person not acting under color of law to intercept a wire, oral, or electronic communication where such person is a party to the communication or where one of the parties to the communication has given prior consent to such interception[.]” So while the law places certain conditions on persons acting under color of law — that is, acting on behalf of the government — to record conversations, federal law allows private citizens to do so unless it is for the purpose of any criminal or tortious act. Showing up to ask questions is neither a criminal nor a tortious act. The Oklahoma statute mirrors the federal statute.

The bank can have a policy of not allowing audio recordings which is applied to everyone. Such policy is very unlikely to hold up in a “whistle blower” suit against the bank, but that isn’t involved here.

Banks almost universally have prohibitions against filming video (or even taking photographs) inside the bank for security reasons. A bank wants to avoid paving the way for potential robbers, kidnappers, terrorists, etc. to plan to target the bank. Criminals can study photos and video to identify the location and angles of security cameras, determine how many employees there are, figure out vantage points from which they could control hostages, doorways through which to make their escape, etc.