Thursday, April 18, 2024

October 2020 OBA Legal Briefs

  • Contracts for deed
  • FAQ: Reg D early withdrawal penalties
  • Flood program extended
  • TRID timing requirement waivers
  • SCRA is still in the news

Contracts for deed

By Pauli D. Loeffler

What is a contract for deed? Title 16 O.S, §11A provides:

All contracts for deed for purchase and sale of real property made for the purpose or with the intention of receiving the payment of money and made for the purpose of establishing an immediate and continuing right of possession of the described real property, whether such instruments be from the debtor to the creditor or from the debtor to some third person in trust for the creditor, shall to that extent be deemed and held mortgages, and shall be subject to the same rules of foreclosure and to the same regulations, restraints and forms as are prescribed in relation to mortgages. No foreclosure shall be initiated, nor shall the court allow such proceedings, unless the documents have been filed of record in the county clerk’s office, and mortgage tax paid thereon, in the amount required for regular mortgage transactions. Provided, however, mutual help and occupancy agreements executed by an Indian housing authority created pursuant to Section 1057 of Title 63 [63-1057] of the Oklahoma Statutes shall not be considered to be mortgages or contracts for deed under the provisions of this section.

In other words, the contract for deed is a mortgage.

The contract for deed must be in writing. For it to satisfy the statute of frauds, the contract for deed must be in writing under Tit.15 O.S. § 136:

The following contracts are invalid, unless the same, or some note or memorandum thereof, be in writing and subscribed by the party to be charged, by an agent of the party or by a broker of the party pursuant to Sections 858-351 through 858-363 of Title 59 of the Oklahoma Statutes:

    1. An agreement for the leasing for a longer period than one (1) year, or for the sale of real property, or of an interest therein; and such agreement, if made by an agent or a broker of the party sought to be charged, is invalid, unless the authority of the agent or the broker be in writing, subscribed by the party sought to be charged.

Both the parties to the contract for deed must sign the contract for deed for sale of the property , but the signatures do not have to be acknowledged before a notary in order for it to be a binding contract.

Acknowledgment and recording.  Section 15 of Title 16 requires:

Except as hereinafter provided, no acknowledgment or recording shall be necessary to the validity of any deed, mortgage, or contract relating to real estate as between the parties thereto; but no deed, mortgage, contract, bond, lease, or other instrument relating to real estate other than a lease for a period not exceeding one (1) year and accompanied by actual possession, shall be valid as against third persons unless acknowledged and recorded as herein provided…

As far as acknowledgment for recording, the Title Examination Standards in Appendix 1 to Title 16, § 6.1 – Defects In Or Omission Of Acknowledgments In Instruments of Record provide:

With respect to instruments relating to interests in real estate:

A. The validity of such instruments as between the parties thereto is not dependent upon acknowledgments, 16 O.S. § 15.

B. As against subsequent purchasers for value, in the absence of other notice to such purchasers, such instruments are not valid unless acknowledged and recorded, except as provided in Paragraph C herein, 16 O.S. § 15.

C. Such an instrument which has not been acknowledged or which contains a defective acknowledgment shall be considered valid notwithstanding such omission or defect, and shall not be deemed to impair marketability, provided such instrument has been recorded for a period of not less than five (5) years, 16 O.S. §§ 27a & 39a

The purpose of recording any conveyance whether by deed, mortgage, contract for deed, release, etc., is to put third parties on notice. If the contract for deed is not recorded, the purchaser is at risk that the seller may double-deal and convey to third-party innocent purchasers.

Generally, a purchaser under a contract for deed is in actual possession of the real estate. In such case, even if the contract for deed is not acknowledged or recorded, the purchaser’s possession gives inquiry constructive notice to the world of his ownership claim to the real estate.  (Bell v. Protheroe, 199 Okla. 562, 188 P.2d 868 (1948); Wilkinson v. Stone, 82 Okla. 296, 200 P. 196 (1921). A third-party purchaser or lessee has an obligation to inquire of the possessor as to what interest in the real estate the possessor claims.

On the other hand, recording is necessary for the purchaser to claim homestead exemption and for the seller to foreclose its vendor lien. See Oklahoma Attorney General Opinion 1987 OK AG 103. The AG Opinion is based on Smith v. Frontier Federal Sav. and Loan Ass’n. The case was decided by the Oklahoma Supreme Court and dealt with whether a contract for deed entered into between the Smiths (owners of record title) to the Valentines was a conveyance triggering the due-on-sale clause in the mortgage to Frontier Federal in an action to foreclose its mortgage. The opinion states:

CONTRACT FOR DEED

¶6 The state question remaining for resolution concerns whether the contract for deed is a transfer of the property or an interest therein, as used in the mortgage instrument, thus triggering the due-on-sale clause, making the loan balance due and owing.

¶7 The due on sale clause in the mortgage agreement between the Smiths and Frontier Federal excluded “the creation of a lien or encumbrance subordinate to this Mortgage.”

¶8 The appellants’ argument is based on Laws 1976, Ch. 70, § 1 (now 16 O.S. Supp. 1980 § 11A ).

¶9 It is true that under § 11A, the contract for deed executed by the appellants must be regarded as a mortgage. Unfortunately for the appellants, however, the mortgage has been given in the wrong direction: the Smiths are the mortgagees, not the mortgagors. Since the transaction was by statute a purchase money mortgage, equitable title passed to the Valentines even though the Smiths purported to retain title pending payment in full. The effect of the appellants’ contract is that the Smiths have sold the property in question to the Valentines, retaining only a security interest; and that is the type of situation in which the due on sale clause may be invoked.

Important take-aways from this opinion are:

  • Although record title remained in the Smiths, equitable title passed to the Valentines as purchasers at the time the contract for deed was executed by both the Smiths and the Valentines.
  • The contract for deed is a purchase money mortgage.

Contract for deed, Reg Z, and Reg B. The contract for deed IS a purchase money mortgage, recorded or not. A consumer loan application to pay off the balance owed would be a refinancing under TRID. If the collateral is the principal dwelling of the borrower, the right of rescission applies. Whether or not the loan is subject to Reg Z, if there is a first lien on a dwelling on the property, § 1005.14  of Regulation B rules on providing appraisals and other valuations come into play.

FAQ: Reg D early withdrawal penalties

By Pauli D. Loeffler

Question: We have questions regarding the required penalties when a CD is cashed in prior to maturity. I’m trying to determine what the requirement is and what leeway the bank has in waving these penalties if we wanted to.

Answer: Regulation D Sec. 204.2(c) provides:

(c)(1) Time deposit means:

(i) A deposit that the depositor does not have a right and is not permitted to make withdrawals from within six days after the date of deposit unless the deposit is subject to an early withdrawal penalty of at least seven days’ simple interest on amounts withdrawn within the first six days after deposit.1 A time deposit from which partial early withdrawals are permitted must impose additional early withdrawal penalties of at least seven days’ simple interest on amounts withdrawn within six days after each partial withdrawal. If such additional early withdrawal penalties are not imposed, the account ceases to be a time deposit. The account may become a savings deposit if it meets the requirements for a saving deposit; otherwise it becomes a transaction account.

[Several varieties of time deposits are listed, including CD accounts.]

1   A time deposit, or a portion thereof, may be paid during the period when an early withdrawal penalty would otherwise be required under this part without imposing an early withdrawal penalty specified by this part:

(a) Where the time deposit is maintained in an individual retirement account … and is paid within seven days after establishment of the individual retirement account …, in a Keogh (H.R. 10) plan, or … in a 401(k) plan …; Provided that the depositor forfeits an amount at least equal to the simple interest earned on the amount withdrawn;

(b) Where the depository institution pays all or a portion of a time deposit representing funds contributed to an [IRA] or a Keogh …  plan …or a 401(k) plan … when the individual for whose benefit the account is maintained attains age 59 1/2 or is disabled … or thereafter;

(c) Where the depository institution pays that portion of a time deposit on which federal deposit insurance has been lost as a result of the merger of two or more federally insured banks in which the depositor previously maintained separate time deposits, for a period of one year from the date of the merger;

(d) Upon the death of any owner of the time deposit funds;

(e) When any owner of the time deposit is determined to be legally incompetent by a court or other administrative body of competent jurisdiction;

(f) Where a time deposit is withdrawn within ten (10) days after a specified maturity date even though the deposit contract provided for automatic renewal at the maturity date.


The bolded text at the beginning of the definition states when a penalty of at least 7 days’ simple interest must be imposed. Almost all banks disclose a much longer period during which their penalty will be imposed. Additionally, most banks disclose a much greater penalty amount than is required by the regulation.

The footnote allows the required 7 days’ simple interest penalty to be waived by the bank if the withdrawal is made within 6 days of account opening or partial withdrawal under certain circumstances. The footnote does not require the bank to waive the penalty but leaves that decision up to the bank.

As long as the bank complies with Section 204.2(c)(1), it is in compliance with the regulation regardless of whether its disclosures state a longer period for the penalty and/or a larger penalty amount. In waiving its disclosed early withdrawal penalty provisions, the bank should be consistent in allowing/denying a waiver. Avoid denying a waiver to an unlikable customer when the bank would normally waive the penalty.

Flood program extended

By Andy Zavoina

Here we go again. It’s sometimes like watching the water swirl down the drain, it goes around and around and when the tap is on, it seems to go on forever. So does the National Flood Insurance Program (NFIP) as it gets appropriations from Congress, and then those come to an end and we repeat the process over and over so long as there is no permanent “fix” and we hope as each period winds down, that there will be no gap between periods, or as little as possible.

On October 1, 2020, the president signed H.R. 8337. Section 146 of the “Continuing Appropriations Act, 2021 and Other Extensions Act” postponed the expiration of the NFIP for one more year. The new expiry date is September 30, 2021. And there is language to bridge the gap between the September 30, 2020, expiration date and the signing date. Gap closed.

This is not a temporary problem. FEMA, the Federal Emergency Management Agency, manages the NFIP. It provides more than $1.3 trillion in insurance coverage through some 5 million policies. Since 2017 there have been 15 different extensions to the NFIP. Each deadline and extension can make bankers scramble to get closing in under the deadline to have coverage on a covered loan, or the bank must put in place an alternate procedure to handle loans made during the gap so that coverage is obtained as soon as it is available. A hassle, to say the least.

In 1968, the original Act was intended to provide a temporary fix between local communities, builders, those in Special Flood Hazard Areas (SFHA) and insurance companies that could not afford to provide coverage when there is a disaster that includes flooding. What would become the NFIP would help the insurability of properties and save the government money by alleviating the huge disaster payouts that would otherwise be needed. FEMA and the NFIP provide subsidized flood insurance and in return those communities adopt flood plans and builders make areas conform to specifications or tend to build in other areas. That sounds like a good plan, but 52 years is less than temporary and the program has virtually encouraged the building in SFHAs rather than discouraged it, according to Christine Klein, a professor at the University of Florida Levin College of Law, who published a study on this two years ago on the program’s 50th anniversary. Klein said on a recent podcast, “The astounding thing I realized is we’re not any safer, and we’re not saving any money and we’re not having less flood damage. And instead, you know, through some perverse combination of human nature and different incentives, we have more people and more housing units in the homes waiting along the coast. On the coast, for example, housing units have gone up 225% and the population of vulnerable areas is expected to go up by 140% by the end of the century, so we are not any safer and I think it’s fair to say that NFIP is just not working.”

For the fiscal year 2019, FEMA reported that the program had a loss of $1.7 billion. The government does not seem to be saving a lot in this current arrangement.

In the 1970’s the National Flood Insurance Act formalized a program whereby federally backed loans on properties that were in an SFHA required flood insurance to close. That is the requirement that today pains many mortgage lenders and garners millions of dollars in flood penalties against those lenders and servicers who either do not obtain or fail to maintain flood coverage as required. In the last five years the average flood civil money penalty (CMP) has gone from $7,200 to $26,250. This year, 2020, is an unusual year even for flood CMPs, however, as the OCC issued an extremely large penalty — just shy of $18 million — against one bank. The severity of that penalty has already set the annual record in CMPs, as between the prudential agencies, the OCC, FDIC and FRB, there have been $18.3 million in penalties paid this year. Last year had “only” $1 million in penalties cited but to establish a benchmark, the five-year average for 2014-2019 was $1.2 million with an average of 23 penalties each year. This year there have been only 10 CMPs issued but we have one more quarter to go.

The payment of all those premiums from the 1970s forward covered a lot of the expenses until 2005 when Hurricane Katrina hit New Orleans and 15 years later Hurricane Laura struck. The NFIP was underwater for the first time as the cost was about $15 billion for those storms. Premiums since then have not paid for the losses and now the NFIP is very much dependent on taxpayer dollars. The Biggert-Waters Act provided the last long-term reauthorization of the NFIP from 2012 to 2017. Another long-term reauthorization is needed, but some may want to see how the recent introduction of private policies helps reduce taxpayer costs.

Over the years the regulations required to comply with the flood rules have only grown and that includes for insurance agencies as well. Currently we have SFHAs and there is a line drawn. If a covered structure crosses a line it is in the SFHA and coverage is required. However, if it goes up to the line, but does not cross over it, it won’t flood, right? Wrong. The flood waters do not obey those boundary lines. So, FEMA will soon be implementing a new rule, Risk Rating 2.0. This will include more factors to assess the risk of the property, including which side of that flood line the structure is on, elevation, climate impact, the type of structure and building materials and the distance to the water source likely to cause flooding. This will soon be altering the cost of flood insurance and it remains to be seen how much havoc this may cause with escrowed funds for flood policy premiums.

Until some magical fix floats to the top and presents itself, bankers need to remember that a home in the 100 year flood plain has a 26 percent chance of flooding during a 30-year mortgage term and that is a greater risk than the same house burning down. We always require hazard insurance, but flood coverage is often a “step-child” and gets less respect. Flood has been a problem for years and the growing penalties are evidence the problems have grown with the requirements. We do not have a permanent fix as long as builders continue to build in flood prone areas and affected property owners continue to repair and rebuild in those same areas after a flood, hoping it will not happen again.

Until local communities, builders and Congress arrive at a solution we can all live and lend with, persevere, and keep a lifesaver buoy handy in case you have a problem with the ever-growing flood rules.

TRID timing requirement waivers

By Andy Zavoina

On April 29, 2020, the CFPB issued an interpretive rule on provisions allowing consumers to modify or waive specific waiting periods required under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). These are the TILA-RESPA Integrated Disclosure (TRID) Rules we employ now but the basis for the provisions pre-dates TRID.

TRID rules requires banks to deliver or mail a Loan Estimate to a consumer no later than seven business days before consummation of a loan. The TRID Rule also requires that consumers receive a Closing Disclosure not later than three business days before consummation. And thirdly, the right of rescission rules contained in Reg Z require a bank to give a consumer at least three business days after consummation to rescind certain loans  secured by the consumer’s principal dwelling and requires disclosure to this affect.

The TRID rule and Reg Z rescission rule provide that a consumer who has received the required disclosures may modify or waive the waiting periods required if the consumer needs the credit extended to meet a bona fide personal financial emergency. In order to modify or waive the waiting periods, the rules require a the bank to have a dated written statement from the consumer doing each of three things— (1) describe the emergency, (2) specifically request the modification or waiver of the waiting period, and (3) be signed by all consumers who are primarily liable on the loan or who are entitled to rescind.

The term “bona fide personal financial emergency” has never been defined and while examples are typically provided during Reg Z training, the bank takes a risk when it opts to utilize this exception. If a consumer defaults on their loan later, they will take advantage of any error the bank made to lessen the likelihood that they will lose the property, or even have to repay the loan. A rescission error could be gold to the consumer’s attorney.

Some consumers want the funds immediately so they can buy a vacation package before the sale ends and that carries with it more risk to the lender than if the consumer needs the funds to pay a contractor’s costs for roof repairs before another storm is predicted to arrive and do even more damage. The discretion as to what it accepts as a personal financial emergency is up to the bank, but subject to a court’s review if litigation ensues.

The CFPB’s interpretative rule stated that a bona fide personal financial emergency may be one caused by the COVID-19 pandemic. If a consumer is experiencing a personal financial emergency stemming from the COVID-19 crisis, the consumer may say so in their written statement requesting the bank to modify or waive the standard waiting periods under TRID and rescission. The interpretive rule encourages banks to voluntarily inform consumers during the COVID-19 pandemic of their ability to seek these modifications and waivers in the event of a bona fide personal financial emergency.

The TRID Rule requires banks to provide good faith estimates and disclose those costs which consumers will occur in connection with their requested mortgage. TRID allows banks to use revised estimates of these costs in certain situations, including “changed circumstances” that affect the settlement charges the consumers will pay. The CFPB’s interpretive rule also specified that the COVID-19 pandemic qualifies as a changed circumstance for purposes of revising estimated settlement charges, if the pandemic has in fact affected the estimate of the stated charges.

The interpretive rule is now a few months old but recently I have received questions about extended times for these disclosures, of which there are no standard extended times, and as to lenders wanting to blanketly request waivers from consumers early in the application process “just in case” there are issues when the bank gets to the closing date and some error or need arises that could delay the closing date because of the required wait times. The first question is answered, now let’s address the latter in more detail. The interpretive rule was intended to add a COVID-19 induced problem to the examples of a bona fide personal financial emergency and clarify for banks that this would be acceptable.

It is permissible to assist consumers with waivers because of COVID-19. But a bank wanting to blanketly request a written waiver as a standard procedure is falling on its sword. There could be several interpretations of this when files are reviewed by internal audit, outside auditors, compliance staff, examiners, and the plaintiff’s attorney. First, the bank would have in effect circumvented consumer protection laws and regulatory requirements when it requested a waiver as its standard procedure to be used in the event the bank erred and failed to make certain disclosures in a timely manner. Yes, this may help the consumer meet a closing date, but if there was no bona fide personal financial emergency this could come back on the bank in the future. The bank cannot assume there will be such an emergency weeks or months in advance.

It’s more likely the bank would use the waiver request to cover itself for timing problems caused by the bank or a vendor. Requesting such a waiver in advance would appear to be asking the consumer to lie as a part of their credit application.  Second, having these waivers at the ready could induce a failure to follow approved procedures and a failure to schedule closings based on a reasonable schedule. Closing events may be accelerated at the expense of the required wait times which exist for a purpose. Any bank seen to be employing excessive waivers might become a target not only for TRID criticism but also UDAP allegations.

At the end of the day, waivers are permissible, and consumers should be made aware of the possibility of having a waiver approved when requested, including waivers related to COVID-19. But waivers are an exception to the rule, not standard operating procedures.

SCRA is still in the news

By Andy Zavoina

I read recently that there are some common violations cited involving loans to service members, particularly under the Servicemembers Civil Relief Act. It was noted that some banks will reduce the annual percentage rate on a loan based on the service member’s request date. This is incorrect. The rate reduction must be based on their orders, usually the date they report to active duty, and it is not based on the date of the request.

Another misconception is that the Military Lending Act (MLA) protects the active duty members of the Army, Navy, Marine Corp and Air Force. In fact, Reserve and National Guard members are covered under the MLA as well as the SCRA. Some banks fail to include the broader definition of a “covered borrower” under § 232.3(g), which includes all regular or reserve members of the Army, Navy, Marine Corps, Air Force, or Coast Guard, serving on active duty under a call or order that does not specify a period of 30 days or fewer, or such a member serving on Active Guard and Reserve duty as that term is defined in 10 U.S.C. 101(d)(6). It goes on to include that service member’s spouse, child or dependent and some others such as individuals receiving more than one-half of their support from a service member.

While the recent enforcement actions I’m about to mention are not against banks, they act as a reminder that enforcement actions are taking place.

The City of San Antonio recently settled with the Department of Justice (DOJ) for illegally auctioning off or otherwise disposing of cars of protected servicemembers. The city must pay $47,000 to compensate two servicemembers who complained that the city unlawfully auctioned off their cars while they were in military service. The city must also establish a $150,000 settlement fund to compensate other affected servicemembers and pay a $62,029 civil penalty.

The DOJ also reached a settlement with a Florida towing company for violations like San Antonio’s. This settlement is pending court approval and will require the towing company, ASAP Towing and Storage, to pay up to $99,500 to compensate servicemembers whose cars were unlawfully auctioned off while they were in military service. ASAP must also pay a $20,000 civil penalty. In both cases those “or otherwise disposed of” vehicles were likely junked, non-operable and abandoned but protected, nonetheless. ASAP said it was a misunderstanding as some of the 33 cars it sold over the 7-year period reviewed had been there for 3 years. Ensure your procedures are specific, and followed, even when you assume a vehicle has been abandoned and is not wanted. That doesn’t mean it’s unprotected.