Wednesday, July 24, 2024

October 2019 OBA Legal Briefs

  • Residential appraisal threshold raised
  • 2019 Oklahoma legislation
  • Watch for new CTR filing instructions

Residential appraisal threshold raised

By John S. Burnett

Agencies issue joint rule

The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have adopted a final rule that increases the threshold for residential real estate transactions requiring an appraisal from $250,000 to $400,000. The appraisal threshold was last  changed 25 years ago.

For transactions exempted from the appraisal requirement, the final rule requires institutions to obtain an evaluation to provide an estimate of the market value of real estate collateral.

The rule also incorporates the appraisal exemption for rural residential properties provided by the Economic Growth, Regulatory Relief, and Consumer Protection Act and similarly requires evaluations for these transactions. The rule also requires institutions to review appraisals for compliance with the Uniform Standards of Professional Appraisal Practice.

The $400,000 threshold doesn’t apply to loans fully or partially insured or guaranteed by the FHA or VA or loans qualified for sale to Freddie Mac or Fannie Mae. Such loans are already exempted from the agencies’ appraisal rules because they are subject to the appraisal requirements of the FHA, VA, Freddie or Fannie.

Important new definition

The $400,000 threshold applies to a “residential real estate transaction,” which is newly defined under the rule as “a real estate-related transaction that is secured by a single 1-to-4 family residential property.” That is a significant change, and residential mortgage loans of less than $400,000 secured by more than one property – for example, a bridge loan secured by a borrower’s current residence and a new residence, to be paid off. or refinanced upon sale of the current residence – will require an appraisal by a state certified or licensed appraiser, unless the rural residential exemption applies. The agencies believe that the former $250,000 threshold similarly applied only to transactions secured by a single 1-to-4 family residential property but have added the “residential real estate transaction” definition to clarify the regulation.

Effective dates

The rule amends 12 CFR Part 34 (OCC), 12 CFR Part 225 (Federal Reserve) and 12 CFR Part 323 (FDIC) effective the day after publication in the Federal Register, except for the evaluation requirement for transactions exempted by the rural residential appraisal exemption and the requirement to review appraisals for USPAP compliance, both of which will be effective January 1, 2020.

2019 Oklahoma legislation

By Pauli Loeffler

I have previously covered amendments to Title 47 with regard to “Take Your Tag” (effective July 1). I have also covered amendments to Title 2, the Oklahoma Industrial Hemp Program, in preparation for approval by USDA once its rules are promulgated under the 2018 Farm Bill. There was a lot of legislation enacted this legislative session. Some of the changes were minor such as making statutes more gender neutral. If you have a taste for trivia, I would suggest you look in Title 25 (Definitions and General Provisions) will fascinate and entertain you. Effective November 1, 2019, the official state steak for Oklahoma is the ribeye. Other than that legislative gem, changes to existing statutes and new legislation with greater impact will be covered here. The Oklahoma Statutes are accessible on the Oklahoma State Courts Network. You will find all the statures under “Legal Research.” Choose “Statutes” and then the Title. Titles are in alphabetical order.

Title 18 – Corporations.

Nonstock and charitable nonstock corporations. Effective November 1, 2019, in addition to for-profit and not-for-profit corporations, Oklahoma will have two new corporate entity types: nonstock and charitable nonstock. Neither of these nonstock corporations is authorized to issue capital stock but instead will have members. Charitable nonstock corporations are not-for-profit but required information in the Certificate of Incorporation makes a difference. Name requirements are identical to those for current corporations.

For profit nonstock corporations may be formed for a number of reasons. For instance, the corporation may be closely held, and the member has no interest in selling shares. Another possibility is that it was formed for a single, short-term purpose or a specific transaction such as construction project, or it may be formed solely for working with another company or individual for a joint venture. There can be certain tax advantages involved. Sec. 1006 provides:

A. The certificate of incorporation shall set forth:

4. … In the case of nonstock corporations, the fact that they are not authorized to issue capital stock shall be stated in the certificate of incorporation. The conditions of membership, or other criteria for identifying members, of nonstock corporations shall likewise be stated in the certificate of incorporation or the bylaws. Nonstock corporations shall have members, but the failure to have members shall not affect otherwise valid corporate acts or work a forfeiture or dissolution of the corporation. Nonstock corporations may provide for classes or groups of members having relative rights, powers and duties, and may make provision for the future creation of additional classes or groups of members having such relative rights, powers and duties as may from time to time be established including rights, powers and duties senior to existing classes and groups of members. Except as otherwise provided in the Oklahoma General Corporation Act, nonstock corporations may also provide that any member or class or group of members shall have full, limited, or no voting rights or powers, including that any member or class or group of members shall have the right to vote on a specified transaction even if that member or class or group of members does not have the right to vote for the election of members of the governing body of the corporation. Voting by members of a nonstock corporation may be on a per capita, number, financial interest, class, group, or any other basis set forth. The provisions referred to in the three preceding sentences may be set forth in the certificate of incorporation or the bylaws. If neither the certificate of incorporation nor the bylaws of a nonstock corporation state the conditions of membership, or other criteria for identifying members, the members of the corporation shall be deemed to be those entitled to vote for the election of the members of the governing body pursuant to the certificate of incorporation or bylaws of such corporation or otherwise until thereafter otherwise provided by the certificate of incorporation or the bylaws…

There are subtle differences between a not-for-profit corporation and a charitable nonstock corporation regarding the Certificate of Incorporation requirements under Sec. 1006 A.:

  1. If the corporation is not for profit:

a. that the corporation does not afford pecuniary gain, incidentally or otherwise, to its members as such,

b. the name and mailing address of each member of the governing body,

c. the number of members of the governing body to be elected at the first meeting, and

d. in the event the corporation is a church, the street address of the location of the church.

The restriction on affording pecuniary gain to members shall not prevent a not-for-profit corporation operating as a cooperative from rebating excess revenues to patrons who may also be members; and

  1. If the corporation is a charitable nonstock and does not otherwise provide in its certificate of incorporation:

a. that the corporation is organized exclusively for charitable, religious, educational, and scientific purposes including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code,

b. that upon the dissolution of the corporation, its assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, for a public purpose, and

c.  that the corporation complies with the requirements in paragraph 7 of this subsection. [Emphasis added.]

As far as bylaws, Sec. 1013 as amended provides: “In the case of a nonstock corporation, the power to adopt, amend or repeal bylaws shall be in its governing body. Notwithstanding the foregoing, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors or, in the case of a nonstock corporation, upon its members. The fact that such power has been so conferred upon the directors or members, as the case may be, shall not divest the shareholders or governing body of the power, nor limit their power to adopt, amend or repeal bylaws.”

Elsewhere in Title 18 there are provisions for merger and consolidation of nonstock companies as well as conversion of stock/nonstock companies without regard to whether the entities are for profit or not for profit.

For nonstock for profit, the bank will need the same documents as it does for other corporations, and CIP will be the same. As far as beneficial ownership, if there are members, you need to know the percentage of member interests, but is possible that a for profit may have no members. In that case, the bank will need to determine the undivided interest of the directors. with undivided interest. Documentation for not for profit/charitable nonstock is the same but such corporations have no beneficial owners.

Who is authorized to sign corporate documents: Sec. 1007. The amendment to this section for corporations affects who signs instruments other than the Certificate of Incorporation. Until November 1, 2019, this section provides:

  1. All other instruments shall be executed:

a. by the chair or vice-chair of the board of directors, or by the president, or by a vice-president, and attested by the secretary or an assistant secretary; or by officers as may be duly authorized to exercise the duties, respectively, ordinarily exercised by the president or vice-president and by the secretary or an assistant secretary of a corporation,

b. if it appears from the instrument that there are no such officers, then by a majority of the directors or by those directors designated by the board,

c. if it appears from the instrument that there are no such officers or directors, then by the holders of record, or those designated by the holders of record, of a majority of all outstanding shares of stock, or

d. by the holders of record of all outstanding shares of stock.

On and after November 1, in order to the statute states:

  1. All other instruments shall be signed:

a. by any authorized officer of the corporation,

b. if it appears from the instrument that there are no such officers, then by a majority of the directors or by those directors designated by the board,

c. if it appears from the instrument that there are no such officers or directors, then by the holders of record, or those designated by the holders of record, of a majority of all outstanding shares of stock, or

d. by the holders of record of all outstanding shares of stock.

Interestingly, this conflicts with Title 16 (Conveyances) Secs. 53 and 93 (“Every deed or other instrument affecting real estate made by a corporation must have the name of such corporation subscribed thereto either by an attorney-in-fact, president, vice-president, chairman or vice-chairman of the board of directors of such corporation” and Oklahoma Title Standards Sec. 12.2.  It also conflicts with Sec. 414 G. of the Banking Code: “Every conveyance of real estate and every lease thereof made by a bank or trust company shall have the name of such bank or trust company subscribed thereto, either by an attorney-in-fact, president, vice-president, chairperson or vice-chairperson of the board of directors of such corporation.”

Title 16 – Conveyances.

Sec. 13.  This statute permits a married person to convey (deed, mortgage, etc.) real property without joinder of the spouse when the property is not homestead. The only time the signature of both spouses is NOT required is when one spouse purchases real property and title is conveyed solely to him or her. In that case and only in that case, he or she can execute the mortgage without the non-title holding (“non-owner”) spouse signing the mortgage. In all other cases, the non-owner spouse must sign. If this is not done, the mortgage is defective until 10 years after recording affecting marketable title. It could not be cured by way of recording an affidavit of the non-signing spouse with regard to homestead or waiver of homestead, and a subsequent mortgage executed solely by him or her as spouse. Title Examination Standards §7.2 Comment states:

While 16 O.S. §13 states that “The husband or wife may convey, mortgage or make any contract relating to any real estate, other than the homestead, belonging to him or her, as the case may be, without being joined by the other in such conveyance, mortgage or contract,” joinder by both spouses must be required in all cases due to the impossibility of ascertaining from the record whether the property was or was not homestead or whether the transaction is one of those specifically permitted by statute. See 16 O.S. §§4 and 6 and Okla. Const. Art. XII, §2. A well-settled point is that one may not rely upon recitations, either in the instrument or in a separate affidavit, to the effect that property was not the homestead. Such recitation by the grantor may be strong evidence when the issue is litigated, but it cannot be relied upon for the purpose of establishing marketability. Hensley v. Fletcher, 172 Okla. 19, 44 P.2d 63 (1935).

The amendment effective November 1, 2019, allows the non-signing spouse to either a) execute an affidavit stating the property is not homestead, or b) execute a mortgage either with or without others to the original grantee, or to a successor or successors in interest stating the property was not homestead. In discussing the amendment to Sec. 13, I understand that changes to the Title Standards will be presented to the Delegates of the Oklahoma Bar Association for adoption at the annual meeting in November. On a side note, there will be a Title Standard regarding series LLCs as well.

Real Property Electronic Recording Act was enacted in 2008 and was covered in the December 2008 OBA Legal Briefs. Existing Sec. 86.3 validates recording of an original conveyance on paper or other tangible medium signed by an electronic signature as well as notarization with an electronic signature attached to or logically associated with the document or signature. A physical or electronic image of a stamp, impression, or seal is unnecessary. New Sec. 87 goes further. Subsection C. permits a notary to certify such paper or tangible document as a true and correct copy if the notary: a) confirms security features reveal no tampering, b) no changes or errors in electronic signature or other information are evident, c) personally printed or supervised printing of the document, and c) no changes or modifications are made to the electronic document, paper, or tangible copy beyond the certification by the notary.

The form of certification shall state: “I certify that the preceding or attached document (document title), (document date), containing (number) pages is a true and correct copy of an electronic document printed by me or under my supervision, and that, at the time of printing, no security features present on the electronic document indicated any changes or errors in an electronic signature or other information in the electronic document since its creation or execution.”  It will be dated and signed by the certifying notary, with seal and commission expiration. The certificate is prima facie evidence that the requirements of subsection C of this section have been satisfied with respect to the document.

The legislature enacted the Remote Online Notary Act (Title 49, Secs.201- 214) effective January 1, 2020. The Oklahoma Secretary of State will promulgate rules for notaries.

Title 12A – Uniform Commercial Code – Article 15

Article 15 is the Uniform Electronic Transactions Act (EUTA). The definitions for subsection (9), “Electronic record” and subsection (10) “Electronic signature” in Sec. 102 have been amended to add blockchain technology making it subject to this article. This is effective November 1, 2019

Title 14A – Uniform Consumer Credit Code

Sec. 3-508B. I covered the dollar amount changes to this section in the June 2019 OBA Legal Briefs. Amendments were made to that statute adding (1)(g) and (1)(h). Sec. 3-508B consumer loans are based on a special finance-charge method that combines an initial “acquisition charge” with monthly “installment account handling charges,” rather than using the provisions of § 3-508A. Late or deferral fees and convenience fees as well as convenience fees for electronic payments under § 3-508C are permitted, but other fees cannot be imposed. No insurance charges, application fees, documentation fees, processing fees, returned check fees, credit bureau fees, or any other kind of fee is allowed. No credit insurance even if it is voluntary can be sold in connection with in § 3-508B loans. If a lender wants or needs to sell credit insurance or to impose other normal loan charges in connection with a loan, it will have to use § 3-508A instead. Existing loans made under § 3-508B cannot be refinanced as or consolidated with or into § 3-508A loans, nor vice versa. Further, substantially equal monthly payments are required. The first scheduled payment cannot be due less than one (1) calendar month after the loan is made, and subsequent installments due at not less than 30-day intervals thereafter. The minimum term for loans is 60 days.

3-508B is more than a bit complex and confusing in that neither online version of the statute nor print versions of the Oklahoma Uniform Consumer Credit Code are updated when dollar amounts are adjusted pursuant to Sec. 1-106. Basically, you have to take the current Changes in Dollar Amount published by the Oklahoma Department of Consumer Credit (which can be accessed at the link below and are also available on the Oklahoma Bankers Associations Legal Links page), and then write in the those amounts in order for the statute to make any sense. Or at least that is what I have to do. To save you from having to do that, you will find the version effective for Sec. 3-503B loans I have prepared on the Legal Links page for July 1, 2019 as well as one incorporating the amendments effective for 3-508B loans consummated on and after November 1.

The acquisition charge authorized under this statute is deemed to be earned at the time a loan is made and shall not be subject to refund. Provided, however, if the loan is prepaid in full, refinanced or consolidated within the first sixty (60) days, the acquisition charge will NOT be deemed fully earned and must be refunded pro rata at the rate of one-sixtieth (1/60) of the acquisition charge for each day from the date of the prepayment, refinancing or consolidation to the sixtieth day of the loan. The Department of Consumer Credit has published a Daily Acquisition Fee Refund Chart for both the changes effective July 1, 2019, and effective November 1, 2019, links on this page. Further, if any loan is prepaid, the installment account handling charge shall also be subject to refund. A Monthly Refund Chart for handling charges for can be accessed on the page indicated above, as well as § 3-508B Loan Rate (APR) Table for both July 1, 2019 and November 1, 2019 are accessible from the link above.

Title 12 – Civil Procedure

Sec. 1560. I found this new section regarding foreclosure of Oklahoma licensed medical marijuana dispensaries, growers, and processors very interesting. It provides that if any of these businesses is subject to foreclosure, has a receiver appointed, becomes insolvent, bankrupt, or ceases operation (sole owner dies), a secured party or receiver may continue operations by submitting proof to the Oklahoma Medical Marijuana Authority (OMMA) proof of the secured status, receivership, etc. OMMA may permit the secured party or receiver to continue operations at the dispensary, etc. without additional charge to the creditor or receiver but subject to the annual license fee and to operate the business for a reasonable period of time (which is not defined but will presumably be subject to rules promulgated by OMMA). The statute provides that marijuana items left by a deceased, insolvent or bankrupt person or licensee, or subject to a security interest or a court order appointing a receiver, may be foreclosed, sold under execution or otherwise disposed whether by foreclosure or by sale as a going concern.

This is what OMMA tweeted on August 26, 2019:

Here are 1-yr. totals for Medical Marijuana applications & approvals in Oklahoma: Applications: Patient 189,129. Caregiver 1,699. Businesses 8,089.  Total: 198,917

Approvals: Patient 178,173. Caregivers 1,277. Growers 4,287. Dispensaries 1,848. Processors 1,173. Total: 186,758

It is my impression that relatively few banks in Oklahoma actually bank licensed dispensaries, processors, or growers, and some refuse to bank customers who lease to licensees or those who supply equipment or services to licensees. Of course, all that may change if the federal legislation which recently passed the House also passes the Senate. However, I do wonder how regulators will view financial institutions actually running a foreclosed dispensary, etc.

  1. A secured party or court-appointed receiver may continue to operate a business for which a license has been issued under Section 421, 422 or 423 of Title 63 of the Oklahoma Statutes for a reasonable period after default on the indebtedness by the debtor or after the appointment of the receiver.

Title 68 – Public Health and Safety

Medical marijuana (MMJ). There was a lot of new legislation enacted with regard to MMJ already in effect in addition to the foreclosure statute in Title 12 mentioned above. HB 2016 became effective March 19th enacting the “Oklahoma Medical Marijuana and Patient Protection Act” Secs. 427.1 through 427.23. Sec. 429 of the “Oklahoma Medical Marijuana Waste Management Act” is already in effect, while Secs. 427a, 428 and 430 are effective on November 1, 2019. Frankly, it is easier to read the current rules on OMMA.gov rather than wade through the statutes.

Sec. 427.8. This statute is sometimes referred to as the “Unity Bill.”  It contains provisions regarding rights of licensed patients and caregivers. The provisions of this statute that a bank needs to consider are those regarding applicants for employment and employees. There is a rather short list of what the bank cannot do. You cannot refuse to hire, discipline, or penalize an applicant or employee solely because s/he is a medical marijuana (MMJ) licensee, nor can you do any of the foregoing solely on the basis of a positive drug test for MMJ if the bank has a drug testing policy. I suggest you review your hiring policy and employee manual. The bank can ban all use of MMJ on its premises and/or during work hours. You can also ban use if performing “safety sensitive” jobs set out in subsection K of the statute which includes operating a motor vehicle, firefighting, carrying a firearm, etc. BUT there is still a catch: the employee must test “above the cutoff concentration level established by the U.S Department of Transportation or under Oklahoma law for being under the influence, whichever is lower, and this will require a drug testing policy that complies with Tit. 40 O.S. Secs. 551, et seq. The employee manual can ban possession and consumption of MMJ by employees with licenses while at work, picking up bank mail from the post office, etc.  None of the members of the OBA Legal and Compliance team is an expert in the field of labor law. It is highly recommended the bank contact an attorney who is an expert to review and draft your employment policy and employee manual.

CBD. Sec. 1-1431 is a new statute effective November 1, 2019. It covers labeling of cannabidiol but doesn’t apply to drugs approved by the FDA such as Epidiolex (approved June 2018). More importantly, it codifies that there is no licensing requirement for retail sales as long as the hemp is grown legally in this state or in another state:

  1. Retail sales of industrial hemp and hemp products may be conducted without a license so long as the products and the hemp used in the products were grown and cultivated legally in this state or another state or jurisdiction and meet the same or substantially the same requirements for processing hemp products or growing hemp. The addition of derivatives of hemp, including hemp-derived cannabidiol, to cosmetics, personal care products and products intended for human or animal consumption shall be permitted without a license and shall not be considered an adulteration of such products. Nothing in this section shall exempt any individual or entity from compliance with food safety and licensure laws, rules and regulations as set forth under the Oklahoma Public Health Code.

Title 28 – Fees

Sec. 32. The fee payable to county clerks for preservation of instruments recorded increases from $5 to $10 effective November 1, 2019. Banks will need to keep this in mind in making disclosures for consumer loans.

Watch for new CTR filing instructions

by John S. Burnett

Apparently, the current instructions for CTR filings involving individuals who complete multiple transactions in different roles (on own behalf and one behalf of another person) are causing problems for FinCEN and those who need to understand the nature of reported transactions. For example, under the current instructions, if John Smith makes two deposits – one  to his personal account with $6,000 in cash and the other to J Smith, Inc., his business account, with $8,000 in cash – filers are instructed to complete one Part I record identifying John Smith as a person who conducted the transactions, and, because he conducted one on his own behalf and the other on behalf of another person (the corporation), item 2a (Person conducting transaction on own behalf) is to be checked. The full amount of $14,000 and the two account numbers appear in item 21 on the John Smith Part I record. Another Part I record is completed for the corporation, with item 2c (Person on whose behalf transaction was conducted) checked, and $8000 and the business’s account number in item 21.

FinCEN has reportedly posted an alert for discrete and batch filers on its eFiling portal that the instructions will soon change (optional compliance now and mandatory compliance February 1, 2020). According to the alert, an update has been or will be made to the eFiling system to require two Part I records for a conductor completing multiple reportable cash transactions both on his/her own behalf and on behalf of another person(s) – one for the transaction(s) on his own behalf (2a checked) and the other for the transaction(s) on behalf of other persons (2b checked). There would continue to be a separate Part I (2c) record for person(s) on whose behalf transactions are conducted.

If your bank uses a third party to batch file its CTRs, you should be getting more information on these changes from the service provider.

We’ll continue to watch for updates from FinCEN and report them to you in future Legal Updates.