- HEMP, CBD
- Do cashier’s checks expire?
- Mandatory vacation for bank employees
- Inform your borrower (Post-confirmation rate reduction)
- Two regulation amendments, two errors
by Pauli Loeffler
In April 2018, Oklahoma enacted legislation to permit cultivation of hemp under the federal Farm Bill of 2014 for research of hemp under pilot programs. In December 2018, the federal Agriculture Improvement Act of 2018 (“the Act”) became law. During the 2019 planting season, states, tribes and institutions of higher education may continue operating under authorities of the 2014 Farm Bill until 12 months after USDA establishes the plan and regulations required under the Act. The USDA’s website says the agency intends to have regulations in effect by the fall of this year, but that remains to be seen. The USDA’s Agricultural Marketing Service Specialty Crops Program has oversight and approval of state programs.
During Oklahoma’s 2019 legislative session, the 2018 statutes were amended. The Oklahoma Industrial Hemp Program statutes can be found in Title 2, Sections 3-401 to 3-411, inclusive. The Oklahoma Department of Agriculture, Food, and Forestry (“the Department”) is required to promulgate rules to implement the Oklahoma Industrial Hemp Program. This will probably not happen until the USDA proposes and finalizes regulations.
Marijuana and industrial hemp are derived from the same plant and don’t let anyone tell you otherwise. This is true under both federal and Oklahoma law. The crucial difference between marijuana (illegal under federal law but legal for medical and/or recreational use in the majority of states including Oklahoma for medical). and hemp is definitional.
“Industrial hemp” means the plant Cannabis sativa L. and any part of the plant, including the seeds thereof, and all derivatives, extracts, cannabinoids, isomers, acids, salts and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol [THC] concentration of not more than three-tenths of one percent (0.3%) on a dry-weight basis… (§ 3-401).
This is same as the federal Act’s definition. Both the Act and our statute require that the person growing, cultivating, handling, or processing the hemp must file an application for a license, submit all required reports, and grant access for inspection and testing. The Act legalizes the transportation of hemp across state lines.
Once all the moving pieces are in place, i.e., USDA rule, Oklahoma’s Department issues rules for the Industrial Hemp Program approved by USDA, etc., then all the bank needs are a copy of the license and periodic checks that the customer/licensee is complying. Since hemp is legal under both federal and state law, none of the problems attendant to banking MRBs are present. Until then, your customers will be operating under the Farm Bill of 2014 and have a license for research.
Cannabidiol (“CBD”) is one of more than 80 biologically active chemical compounds found in the Cannabis sativa plant. Oklahoma has absolutely no requirements that those selling CBD products have to be licensed, but that is not true in other states. While the OCC has previously stated CBD business are MRBs (requiring MRB SARs), unless the business is selling products that do not meet the definition of hemp or marketing products with unsubstantiated health claims, it is unlikely any criminal or civil action will be taken against them. I wish I could say there is no risk under at all, but I can’t. CBD is being sold by retailers (convenience stores, Walmart, doctor’s offices, etc.) pretty much everywhere in Oklahoma.
Do not confuse the CBD products being sold by your customer with the FDA approved prescription drug Epidiolex (approved June 2018). This is a Schedule V drug (September 2018) approved for the treatment of seizures, and the FDA found it safe and effective for its intended use. It requires a prescription. That is not what your CBD customer is selling. I suggest you read the Final Rule issued by DOJ and DEA reclassifying Epidiolex from a Schedule I (no currently accepted medical use in the United States, a lack of accepted safety for use under medical supervision, and a high potential for abuse) to Schedule V (substances with low potential for abuse… and consist primarily of preparations containing limited quantities of certain narcotics).
If the customer is selling a product that has been tested that meets the definition of “hemp” set out above, it is similar to over the counter medication (aspirin, Nytol), but there is still a risk even though it is very unlikely local police or the FBI is going to swoop in. Let’s look at Footnote 11 to the Final Rule:
- Nothing in this order alters the requirements of the Federal Food, Drug, and Cosmetic Act that might apply to products containing CBD. In announcing its recent approval of Epidiolex, the FDA Commissioner stated:
[W]e remain concerned about the proliferation and illegal marketing of unapproved CBD-containing products with unproven medical claims. . . The FDA has taken recent actions against companies distributing unapproved CBD products. These products have been marketed in a variety of formulations, such as oil drops, capsules, syrups, teas, and topical lotions and creams. These companies have claimed that various CBD products could be used to treat or cure serious diseases such as cancer with no scientific evidence to support such claims.
In other words, even though the product may by definition be “hemp,” it can run afoul of FDA provisions with unsubstantiated claims, non-compliance in labeling for dietary supplements, or an adulterated food product. The FTC looks closely at advertising for food, over-the-counter drugs, and dietary supplements, too. Both agencies can enter cease and desist orders and/or seize the product and assets derived from it.
Do cashier’s checks expire?
by Pauli Loeffler
Q. We had a non-customer who recently found an old cashier’s check in a file from November 1997. The bank the cashier’s check is drawn on doesn’t exist anymore as we merged with another institution. My cashier says that at the 5-year mark, they would have either reissued the check with the new bank information, or turned it over to the state, but since the check is so old, there is no way for us to tell what happened. The presenter stated he would hate to have to file a lawsuit. Does this person have a leg to stand on?
A. Unfortunately, cashier’s checks don’t expire. Due to the merger, your institution assumed the obligation to pay the cashier’s check. Unless you can find some record of an Affidavit of Loss, Stolen or Destroyed Cashier’s Check provided, the check was replaced, and the second check was cashed, your bank is liable to the payee. Yes, he can sue the bank. The bank cannot unilaterally reissue a cashier’s check to avoid reporting and remitting it as unclaimed property. If the bank has reported and remitted funds to the Oklahoma Treasurer, it pays the cashier’s check and then submits an Affidavit for Reimbursement.
Mandatory vacation for bank employees
By Pauli Loeffler
Q. I have a question regarding the Oklahoma State Banking rule found in the Administrative Code Sec. 85:10-5-3 Minimum control elements for bank internal control program requires 5 consecutive business days of vacation for employees each calendar year.
Our vacation policy reads: First year of employment with a start date prior to July 1st of that year the employee/officer gets 6 vacation days. Does the employee/officer have to take 5 consecutive banking days in a row of that 6 days they get? They are eligible for the 6 days.
Does it matter when in the year they are hired as to if they are required when eligible (after their 90 day probation is up) to take the 5 consecutive banking days off?
A. 85:10-5-3. Minimum control elements for bank internal control program
All internal control programs adopted by banks shall contain as a minimum the following:
(1) A requirement that each officer and employee, when eligible for vacation, be absent from the institution at least five consecutive business days each calendar year, unless otherwise approved in writing by the bank’s bonding company for bank officers and employees generally and then each officer and employee who may be excepted from this requirement must be specifically approved by the bank’s board of directors and it shall be recorded in the board of directors minutes, that the officer or the employee may be absent less than the five consecutive banking days. During the absence of an officer or employee, the duties of the absent officer or employee must be performed by other bank officers and employees…
If the employee is not eligible for vacation under the bank’s vacation policy, then it is not required. If your policy is no vacation days allowed during the 90 day probation period, and the employee is hired less than 95 days before the end of the calendar year, then approval by the board is not required nor by the bonding company. Note that holidays (Christmas, New Years, etc.) when the bank is closed do not count as a “business day.”
The FDIC’s recommendation is two weeks, but offers alternatives. (See link below.)
The objective is that employee shall not have direct nor indirect have control (i.e., the substitute should not call or email the employee on vacation) over his/her duties for a consecutive period as a matter of internal control to ferret out wrong-doing such as embezzlement and the like, including an employee who was putting loan applications into his/her drawer without processing. The employee who is on vacation could still be working at the bank but cross-training with duties unconnected with his or her usual duties. I applaud cross-training particularly for smaller banks since I get a ton of calls when the employee in charge of garnishments, subpoenas, CTRs, etc. is off, and the employee filling the gap has little or no training.
Inform your borrower
By Andy Zavoina
Post-consummation rate reduction
Recently, I have answered the same question from a number of bankers. The scenarios involve a closed loan that the bank later determines the borrower was eligible for a lower rate or some form of discount,and the bank wants to apply now. The question posed: “Is redisclosure required?” The answer is: “It depends.”
But there is a much bigger question to be asked. At face value, this sounds like a good thing. The borrower gets their rate lowered, and no one will object to that. Or will they? I have my auditor’s hat on for this, and there are many red flags raised when you do this. That is where bigger questions come into play.
If you think that reducing a borrower’s loan rate after closing can only be a good thing, I disagree by reviewing one large bank’s recent penalty of $25 million for this same practice. The bank in question paid a small penalty, if you call $25 million small, because it discovered the problem and self-reported it while immediately beginning remuneration to as many as 24,000 borrowers from as far back as 2011. This wasn’t just a recent issue, and the examiners found fault with the problem, rather than the cure.
Disclosing the cost of credit
First, we must explore the purpose of Regulation Z, which implements the Truth in Lending Act (TILA). Reg Z states at § 1026.1(b), “The purpose of this part is to promote the informed use of consumer credit by requiring disclosures about its terms and cost, to ensure that consumers are provided with greater and more timely information on the nature and costs of the residential real estate settlement process, and to effect certain changes in the settlement process for residential real estate that will result in more effective advance disclosure to home buyers and sellers of settlement costs.” Neither TILA nor Reg Z is designed to dictate the terms of a loan to a consumer for personal, family or household use, but rather to ensure adequate disclosures are made so that a consumer-borrower can make an informed choice about a loan that is being offered to them. In many cases, the consumer is then encouraged to seek a similar loan from another lender who will then offer similar disclosures, allowing the consumer to shop for the best deal for them before they become obligated on the loan.
There are important takeaways here. The consumer can find out the terms of a loan before becoming obligated and can compare terms those offered elsewhere. Even in the case where the loan is not a real estate secured requiring an early Loan Estimate disclosure, the lender should be using terms orally and in advertising that describe the Annual Percentage Rate (APR), the Total Interest Paid, Total of Payments and the interest rate. These are what will be on a consumer contract, and a lender can easily tell a borrower these amounts if asked which allows a consumer to shop for a loan.
None of this matters, if weeks or months after a loan is closed, the consumer is offered a modification or refinance to lower the interest rate or another component of the finance charge giving them a more affordable loan. You may ask, “Well the consumer didn’t find a better deal, or the loan wouldn’t be here, so this is icing on the cake, right?” Will the consumer object? I do not see that happening, but although the bank is trying to do the right thing, there are problems in these scenarios.
Refinancing or modification?
Often, questions concern the lesser issue on what has to be done to reduce this rate. Often the bank will have the option to modify the loan rather than refinance it. That can make a big difference since a refinance is a new loan and, with a consumer-borrower, this means new disclosures will be required. If this is a real estate loan that can be a cumbersome, time consuming, and an expensive endeavor. If it is a modification, the terms can be adjusted without the event being considered a new loan under Reg Z. I will refer you to an article Pauli Loeffler wrote for the Legal Briefs in June 2016 — “Is it a Refi?” Two questions must be answered “No” for a loan to qualify as a modification. These are: “Is there any new money” and “Is a variable rate feature being added has not been previously disclosed?” Reviewing the entire article is always recommended any time the refi or modification question comes up. https://www.oba.com/2016/06/12/june-2016-legal-briefs/ (you will need to register by clicking My Member Portal and filling in the information in order to access the Legal Briefs archives).
Back to the auditor’s questions on these reduced rate loan: “Why wasn’t the consumer offered the best deal in the first place?”” Does the bank know if it lost loans to its competitors because it failed to offer discounts originally?”” Could this reduction in cost after the fact be a smokescreen to lower the borrowing costs for a protected class?”” What is the cost to the bank to modify or refinance the loans after the fact?” And last but not least, “Which loans were not caught in the subsequent review and remain at a higher rate?”
If your bank offers some form of relationship loan pricing, it should be firmly ingrained in the lenders and underwriters who determine and discuss these rates with the borrowers. It should be annotated on all rate sheets if it is an established program. Your customers should be aware the program exists so they develop the relationship and take advantage of it when they can, and will invite your bank to compete for their loan when they have a borrowing need. Such programs are often based on the customer’s having one or more deposit products in good standing with the bank, the time they have had those accounts, and potentially their borrowing history with you.
Let’s first look at the harm that is done to the borrower. The moment the loan is closed, harm is done. If a discount was available and not offered, the borrower has been harmed. When the bank realizes there was an error, it has a choice to make. It can refinance or modify the existing loan, or it can choose to do nothing other than try harder in the future. After all, the borrower accepted the loan terms and did not feel slighted, so this is more profit for the bank, right? We’ll hold that question for consideration when we discuss the bank that was penalized.
Auditing the closed loans can help a bank find errors. While you cannot go back in time and avoid the error, the bank can make it right. Through the use of additional manpower, hours of work, and analysis the bank can determine what the interest rate and other costs should have been, and bring the loan down to that using a modification or refinancing strategy. Some banks suggested they could program the loan at the discounted rate, notify the borrower of the lower payment and move forward. That’s a bad idea on many fronts. What is programmed will not agree with what was disclosure and violates the key purpose of TILA and Reg Z. What if the borrower has a question years later, the bank sees the discrepancy and wants to revert to the contracted terms? What if the loan is sold to another lender or serviced by another entity which cannot reconcile what is being charged and what was contracted for? There must be documentation to support the terms of the credit, or loan administration will not know what to program or why. This sloppy procedure demonstrates a lack of controls and casts a shadow on the bank’s procedures in general. Yes, amending and adjusting the loan is the right thing to do, but it must be documented and supported by a paper trail. It is a better option than ignoring the problem and doing nothing, but it pales in comparison to doing it right the first time.
The fair lending problem
Let’s explore a fair lending aspect. Jane Doe applies for a loan and is approved. This is a reportable loan under the Home Mortgage Disclosure Act, and it is correctly and completely recorded on the Loan Application Register. John Doe applies for a similar loan with qualifications similar to Jane’s. The good news is John’s loan is also approved. It is recorded on the LAR, and all is right with the world. John’s loan is flagged for a quality control audit, and John is found eligible for a rate discount on his loan. The bank reacts quickly and modifies John’s loan to bring his rate and corresponding APR down. Is all still good in the world? No, because Jane was similarly qualified, but her loan was not reviewed. Jane has a higher borrowing cost. The result is a pricing difference worth reporting to the Department of Justice because Jane is female, John is male, and there is a disparity in treatment between the two. The protected basis could be sex, color, religion, etc., but it doesn’t really matter. It also does not matter whether intentional or not; the effect is the same. If other comparisons are found and the protected basis is the same, there is a real problem that will be very expensive to work through.
What controls are in place to regulate which loans get a reduced rate after consummation? In the example above, assume a biased lender goes to Loan Administration after the loan closing and points out his lack of a relationship pricing discount for John’s loan. The corrections are made and now more obviously there is different treatment for the two borrowers. Fair lending analysis often starts with the Loan Application Register, and Jane Doe’s loan at 3.5% looks the same as John Doe’s loan at 3.5%, except that John is now actually paying less than that and is saving thousands in finance charges over the life of the loan. This is discrimination behind a smoke screen that conceals it. This indicates a need for yet another set of controls that will increase the bank’s costs in managing the portfolio. Who can set a loan rate, who can re-set a loan rate, and under what conditions may a loan’s rate be changed?
When a rate is changed because a relationship discount was called for, is the bank calculating the adjustment back to inception of the loan or just from the current date forward? The borrower may not object in either case, but it requires yet more controls, math, and verifications, and is one more thing to do wrong since the rate was not correctly set when made. To this auditor’s pencil, the adjustment must go back to inception, which requires not only a payment adjustment, but a refund of some charges paid from closing forward.
Another audit issue that would be prompted here is a review of loans closed, loans closed with the relationship discount, the demographics of all those borrowers, and a comparison to the demographics of those loans the bank adjusted after the fact. This is a continuation of the fair lending red flags raised by potential loans to the likes of Jane and John in the earlier example. Again, this is one more detailed fair lending review that is needed but is certainly not free of charge.
A $25 million penalty
You may be asking if these hypotheticals really come to the attention of a regulator. This is where we get to the case of the bank that was penalized. Let’s review the enforcement action between the Office of the Comptroller of the Currency (OCC) and Citibank, N.A. This action, #2019-009, was made public in March 2019. Citibank initiated a Relationship Loan Pricing Program (RLP) in August 2011. This program was designed to provide better pricing on mortgage loans. A qualified borrower could receive either a credit to closing costs or an interest rate reduction. But the bank discovered in 2014 that the RLP program rates were not being applied to all qualified borrowers. In 2015, the bank self-reported the problem to the OCC. In 2018, the OCC determined this was a violation of the Fair Housing Act. It recognized that the bank found the problem, identified the applicable accounts and initiated refunds and corrective actions on approximately 24,000 accounts averaging $1,000 each for total reimbursement of hard costs at $24,000,000, and it added a $25,000,000 civil money penalty on top of that.
The OCC’s enforcement action says that from August 2011 until April 2015, the bank did not train its lenders to offer the RLP. This would appear to be inception of the program until the deficiency was detected. The order further noted that from August 2011 until November 2014, the bank’s own written guidelines did not instruct its lenders to offer the RLP to all qualified borrowers nor to document any reasons a borrower rejected the offer. And lastly, from August 2011 until January 2015, lenders were not required to even notify borrowers that they may be eligible for a discount under this RLP.
What we see here is that the bank had a program but neither trained lenders to offer it nor told borrowers they may be eligible for it. Was there any harm to the consumer borrowers? The OCC obviously thought so.
What is not evident in this six-page enforcement order is any mention whatsoever that there was any bias, real or through the effects test, nor that any protected class was disadvantaged. The order only said that some disadvantaged borrowers would have belonged to a protected class. If all applications are mismanaged equally, is there any discrimination? You can assume that in 24,000 cases there were minority and majority borrowers as well as a mixture of other protected groups. What the action said was that the bank showed ineffective risk management and control weaknesses and that certain borrowers were adversely affected “on the basis of their race, color, national origin and/or sex.” Nothing in the order evidenced this conclusion in any way. But the order includes common text such as, “…in the interest of cooperation and to avoid additional costs associated with administrative and judicial proceedings with respect to the above matter, the Bank, by and through its duly elected and acting Board of Directors (“Board”), consents to the issuance…” meaning it was not going to be cost effective to dispute the findings. Remember, this had already been in the works for three years. I referenced the reimbursements and penalty as hard costs. Consider the soft costs: the manhours required to create the routines to review all the loans made back to 2011 that may have been subject to the RLP, which were borderline and denied, and which were approved. Then you also need to know what the finance charges paid on the account were, compared to what they would have been with the RLP. You also need to include the paid loans and may need to track down those borrowers to explain what happened and why they are getting a refund. These are the soft costs, and they are no small amount, I’m sure.
Yet in some bank president’s office even today, lenders are still making a case that “these borrowers are already getting a good rate, and if they didn’t know they might qualify for a reduction there is no sense, no feeling, no harm, no foul,” or that “we can review the loans after they close, maybe within a month or two, and correct problems we find, so we are OK.” But at the end of the day, if the bank has a program to provide a lower cost of borrowing on mortgage (or other) loans for certain qualified borrowers, it has to manage the program, to train its lenders to apply the program, and to advise borrowers they may qualify for a lower cost loan. And without specific evidence to the contrary, this bank may be deemed to have a risk management and internal control failure and a Fair Housing Act violation if it does not do all those things.
Correcting a problem found is always a good idea. Preventing the problem in the first place is a much better idea.
(For more on the Citibank case, see https://www.bankersonline.com/penalty/160944.)
Two regulation amendments, two errors
By John S. Burnett
I’ve had occasion to contact the CFPB twice in the last two months concerning errors in their final rules amending key regulations. In both cases, an attorney at the Bureau called me to thank me for pointing out the glitch (in the second case, I wasn’t the first to note the error), and to assure me that a “fix” would soon be published. My purpose in this short article isn’t to pat myself or BankersOnline on the back for calling the Bureau to task. Rather, it’s just to note the two errors and explain how one of them appears to have occurred.
A Reg CC comedy of errors
On June 24, the Bureau and the Federal Reserve Board announced a final rule amending Regulation CC to make inflation adjustments to certain dollar amounts in the regulation and to adopt three changes to definitions made by the Economic Growth, Regulatory Reform, and Consumer Protection Act of 2018. The inflation adjustments involved changes to the text of both the regulation and the Official Commentary.
The document submitted to the Office of the Federal Register (OFR) for publication appears to have been written by Federal Reserve staff and approved by the Board and the Director of the Bureau (the CFPB must sign off on any amendments to the subparts of the regulation addressing funds availability or disclosures). In the “amendatory instructions” at the end of the document (the part of the rule that instructs the OFR how to change the official version of the regulation in the Code of Federal Regulations (CFR)), an instruction to amend the Commentary was inserted in the middle of the instructions for amending the body of the regulation. That appears to have created a problem for the OFR staff, since the standard they work with deals with amendments in the order the regulation appears in the CFR, where the Commentary appears as Appendix E, after the regulatory text and a couple of other appendices.
This is where things got confusing, and someone attempted to reconfigure the amendatory instructions to put the changes to the Commentary at the end, and botched it in the July 3 publication of the rule in the Federal Register, adding an incorrect instruction to change the $100 amount in section 229.21(a)(2)(i) to $250. I credit a BankersOnline user with calling that error to my attention.
The Federal Reserve rectified the error when it published a correction in the August 29 Federal Register. We have verified that Regulation CC as it appears on BankerOnline’s website has been updated correctly.
(Ironically, the July 3 Reg CC amendments document also included corrections of several 2011 typographical errors in Regulation DD that we called to the CFPB’s attention three or four years ago.)
A ‘High Cost’ error in Regulation Z
The other glitch also involved inflation adjustments, this time in Regulation Z. On August 1, the Bureau published annual threshold inflation adjustments for 2020 under the CARD Act, HOEPA and the Dodd-Frank Act. The HOEPA (High-Cost Mortgage Loans) adjustments are always made to the Official Commentary, and this year was not an exception. However, the amendment as published included an error. When the Bureau added comment 32(a)(1)(ii)-1.vi. to prescribe the adjusted $1,000 points and fees cap applicable to non-high-cost-mortgages of an adjusted $20,000 or less, it listed the amount as $21,980 instead of the correct $1,099 (the $21,980 amount was correctly inserted in comment 32(a)(1)(ii)-3.vi, also added by these amendments).
The Bureau attorney I spoke with on this error said their staff was aware of the mistake and is determining how to fix it. While they figure that out, we have annotated the BankersOnline Regulation Z page for section 1026.32 to flag the error and provide the correct amount.