January 2021 OBA Legal Briefs

  • Second round of stimulus payments
  • Accepting OK Real ID receipts
  • Special purpose credit programs
  • BSA revisions

Second round of stimulus payments

By Pauli D. Loeffler

With the first round of stimulus payments, customers who died prior to receipt were not eligible to receive them. This was made clear by on the IRS’s Economic Impact Payment Information Center website (https://www.irs.gov/coronavirus/economic-impact-payment-information-center) in responding to “Does someone who died qualify for payment?”:

A5. No, a payment made to someone who died before receiving the payment should be returned to the IRS by following the instructions in Topic I: Returning the Economic Impact Payment.

Joint filers with a deceased spouse: For payments made to joint filers with a deceased spouse who died before receiving the payment, [the surviving spouse should] return the decedent’s portion of the payment.

Topic I covered returning payments:

A1. You [the person returning the check] should return the payment as described below.

If the payment was a paper check:

    1. Write “Void” in the endorsement section on the back of the check.
    2. Mail the voided Treasury check immediately to the appropriate IRS location listed below.
    3. Don’t staple, bend, or paper clip the check.
    4. Include a brief explanation stating the reason for returning the check.

If the payment was a paper check and you have cashed it, or if the payment was a direct deposit:

    1. Submit a personal check, money order, etc., immediately to the appropriate IRS location listed below.
    2. Write on the check/money order made payable to “U.S. Treasury” and write 2020EIP, and the taxpayer identification number (social security number, or individual taxpayer identification number) of the recipient of the check.
    3. Include a brief explanation of the reason for returning the EIP.

Liability for repayment falls on the surviving spouse rather than the bank. if the deceased customer is the sole payee, neither paper checks nor direct deposits should be accepted.

To be eligible for the second stimulus payment, a deceased person must have died on or after January 1, 2020. The bank may presume the person is alive unless it has notice the death occurred in 2019, then the procedure stated above should be followed for deceased joint payee or deceased sole payee.

Unlike the first round of payments, second round payments will be issued even if taxes or child support is owed. Further, the U.S. Treasury deposits will be encoded of “XX” in the first two positions of the Company Entry Description field to designate them as exempt from garnishment. Note that if the account is closed, the payment should be returned

The FAQs for the second payments are found at this link: https://www.irs.gov/coronavirus/second-eip-faqs.

Accepting OK Real ID receipts

By Pauli D. Loeffler

When opening an account for someone who is not a current customer or cashing an on-us check, the bank needs to have a reasonable basis to believe the person is who he says he is. Most banks rely on an unexpired driver’s license, passport, etc. If the new customer is waiting for an Oklahoma driver’s license or identification card that is a Real ID and provides the receipt from the tag agent, it is up to the bank and its policy as to what is acceptable for CIP for deposit accounts, loans, and for cashing on-us checks.

The receipt for the Real ID is temporary and effective for 30 days from issuance. The “temporary” nature has spurred concerns about accepting it.  The receipt has a facsimile of the Real ID that will be mailed including photo, name, license or ID number, date of birth, address, signature, etc. which will be on the permanent card. Until the 30 days have expired, it is a government issued photo ID and there is nothing to prevent a bank from accepting it.

We do not recommend opening the account in reliance on the temporary ID and requiring the person to come back and present the new ID when it is received. This would require the bank to calendar a call if the customer doesn’t return (similar to opening a joint account when one of the owners isn’t present and fails to sign within a short period of time, which is a recurring nightmare for banks).

With the pandemic, many people are reluctant to venture out a second time. And requiring the customer to provide the final, laminated ID is no more necessary than the bank requiring a new license or ID card when the current card expires, another practice that isn’t required.

Special purpose credit programs

By Andy Zavoina


The Consumer Financial Protection Bureau (CFPB) announced in March 2020 that it would initiate a new program under which Advisory Opinions would be issued. On November 30, 2020, the final policy for the program was issued. The Advisory Opinions are to be considered interpretive rules under the Administrative Procedure Act. They are binding and as important as the regulation and will be published in the Federal Register and on the CFPB’s website. Advisory Opinions are intended to react to the need for clarity when there is a regulatory or statutory question on a specific topic. There are five factors used to determine if an Advisory Opinion will be issued. In brief these are:

  1. Has the issue been cited during exams, meaning clarity is needed as banks are misinterpreting the rules currently?
  2. Is the issue of significant importance or will the guidance be a significant benefit to those who must comply with the rules?
  3. Will the interpretation of the issue align with the CFPB’s statutory objectives?
  4. How will this guidance affect other regulatory agencies?
  5. What will the impact be on the CFPB’s resources?

Advisory Opinions will generally not be issued if there is an ongoing investigation, enforcement action, or planned rulemaking. Think of it as a statement of “no comment” during an active investigation.

Anyone or any entity can request an Advisory Opinion. The CFPB believes when it issues one, the matters addressed will be of interest to many.  The CFPB noted that issuance of this latest Advisory Opinion resulted from comments received in response to the CFPB’s recent Request for Information on ECOA and Reg B.

Special purpose credit programs

On December 21, 2020 the CFPB issued its third Advisory Opinion (the first two were issued on November 30, 2020, and addressed private education loans and earned wage access). It addresses Reg B and the authorization for banks to offer special credit programs under Reg B. Since many banks may have an interest in such programs for Community Reinvestment Act reasons or simply for meeting a credit need for the market area and better serving a market segment, we will review special purpose lending programs here to facilitate any planning your bank may need to do. A special purpose credit program will require forethought, direction and planning, as without these elements, it may be seen as carelessly trying to sidestep regulatory requirements and could involve illegal discrimination.

The CFPB and other regulatory agencies do not provide approval for your programs, but rest assured they will review them. Because the bank will request otherwise prohibited information to qualify an applicant for a program, without proper preparation for the program, there would almost certainly be violations cited for the collection and use of the prohibited information.

As of January 4, 2021, the Advisory Opinion on special purpose credit programs has not been published in the Federal Register. It will become effective on publication. Any bank wanting to initiate such a program should become familiar with the Advisory and review the Federal Register for a publication and effective date.

The Advisory repeats many of Reg B’s requirements reminding us of why it exists. But it goes beyond that in the attempt to clarify program requirements so that a bank may confidently employ a special program with less fear of being cited for it. No one wants to hear “no good deed goes unpunished” when examiners review a special program that is fiscally advantageous to a borrower and reduces potential bank income. The CFPB guidance offers direction on how the bank may determine the class of persons the program is designed to benefit, and how to request and consider otherwise “prohibited” information regarding the common characteristics used to determine eligibility for the program. It also helps the bank better understand the type of research and data required to demonstrate the social need for the program it wants to offer.

The Advisory indicates it is applicable to a “for-profit organization” which your bank will qualify as. When your bank wants to do something, which is otherwise forbidden under Reg B, it must have a purpose of meeting some social need and then follow prescribed rules. A bank must have a written plan under which the special purpose credit program will be administered. Additionally, the bank must document why this program is needed. This will likely be purpose driven. The bank should clarify in its plan what type of research was used to define this need and why the data is appropriate to justify the program’s use of the data and what class of persons will benefit from it.

When the Equal Credit Opportunity Acy was enacted in 1974 it initially prohibited discrimination in credit transactions on the basis of sex or marital status. Two years after that the ECOA was amended to include the other factors we know today—age, race, color, religion, national origin, receipt of public assistance benefits, and exercise of rights under the Federal Consumer Credit Protection Act.

Consideration of these prohibited bases is not considered discriminatory when the bank is extending credit pursuant to “any special purpose credit program offered by a profit-making organization to meet special social needs which meets standards prescribed in regulations…” Ordinarily you may be aware of one or more of these prohibited bases but they are not to factor into any credit decision. In the case of a special purpose credit program one or more of these otherwise prohibited characteristics may be considered and essentially must be considered to qualify the applicant for the program, such as a loan to the elderly or to member of a minority group at a special rate or other advantageous terms.

Congress felt that loan programs “specifically designed to prefer members of economically disadvantaged classes” could serve “to increase access to the credit market by persons previously foreclosed from it.” Therefore, by allowing a prohibited basis such as race, national origin, or sex to be considered, there was a greater good being served because these persons had been traditionally excluded.

In June 2020, the Federal Reserve Bank of New York wrote about income inequality in a research document titled, “Credit, Income and Inequality” where it showed the disparities in both the availability of credit, and differences in the terms and conditions under which credit was available to applicants of limited wealth. For example, a home is often the largest purchase a consumer makes. The equity built through payments and appreciation is often the largest share of the household’s net worth. But Home Mortgage Disclosure Act (HMDA) data shows that in 2019, Black, Hispanic White, and Asian borrowers had notably higher mortgage loan denial rates than non-Hispanic White borrowers. The Advisory explains that, “For example, the denial rates for conventional home-purchase loans were 16.0 percent for Black borrowers, 10.8 percent for Hispanic White borrowers, and 8.6 percent for Asian borrowers; in contrast, denial rates for such loans were 6.1 percent for non-Hispanic White borrowers. Black and Hispanic White borrowers were also more likely to have higher-priced conventional and nonconventional loans in 2019.” The inability to buy a home restricts their household net worth making them a credit-constrained group of individuals.

“Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances” was published in September 2020 by the Board of Governors of the Federal Reserve System. This indicates that the typical White family has $188,200 in median family wealth, which is eight times the wealth of the typical Black family ($24,100), and five times the wealth of the typical Hispanic family ($36,100).

Disparities based on racial and ethnicity go beyond mortgages, it was reported. HMDA data supports this on mortgage loans, but the data is less obvious on non-mortgage loans because banks are not allowed to keep or consider such data. But the same September 2020 report provides that there are, “disparities in both mortgage and non-mortgage credit denials among White, Black, and Hispanic credit applicants. Specifically, White credit applicants reported being denied for credit— including, but not limited to, mortgage credit—at a rate of 17.3 percent; Black credit applicants reported being denied for credit at a rate of 41.3 percent; and Hispanic credit applicants reported being denied for credit at a rate of 34.6 percent.

In the small business lending context, a report by the Board showed that “[o]n average, Black- and Hispanic-owned firm applicants received approval for smaller shares of the financing they sought compared to White-owned small businesses that applied for financing. This same report noted that larger shares of Black-, Hispanic-, and Asian-owned firm applicants did not receive any of the financing they applied for—38%, 33%, and 24%, respectively—compared to 20% of White-owned business applicants.” (This was referenced in the “Report on Minority-Owned Firms, December 2019, by the Federal Reserve.)

This is the type of data research the bank should consider using to support a special purpose credit program that eases underwriting requirements for minority applicants. By expanding the access to credit, underserved communities and classes of individual will be empowered to grow their net worth and borrowing power for the future.

The Advisory explains that it applies only to certain aspects of a special purpose credit program. It does not apply to federal or state authorized credit assistance programs under 501(c) of the Internal Revenue Code.

The fact that a bank would offer a special program to a specific minority, but deny someone of that minority, will not in itself be considered discriminatory. The written plan the bank creates should define several aspects of its program. Be familiar with Regulation B section 1002.8 – Special purpose credit programs, and particularly 1002.8(a)(3)(i). As the bank creates the written plan there are four items of information which need to be included:

  1. The class of persons that the program is designed to benefit. Set the standards for credit approval and keep in mind, the intention is to grant credit to a class of borrowers who would not ordinarily qualify for this credit under your existing underwriting criteria, or who would receive it with less favorable terms.One element that the bank may include is that all the approved borrowers share one or more common characteristics, such as being a minority, over a certain age, etc. Examples in the Advisory notice indicate a, “written plan might identify a class of persons as minority residents of low-to-moderate income census tracts, residents of majority-Black census tracts, operators of small farms in rural counties, minority- or woman-owned small business owners consumers with limited English proficiency, or residents living on tribal lands.”So long as the program is not discriminatory and is not intended to evade Reg B requirements, this information may be requested and considered in the approval process. Note in the given example that “residents of a majority-Black census tract” may qualify. The Advisory allows that the protected class subject to the program could be defined with or without reference to a characteristic that is otherwise a prohibited basis under Reg B.

2.  The procedures and standards for extending credit pursuant to the program. This element of the written plan is intended to define the standards and terms of the credit program. It must lean in favor of the protected class such that those who would not have qualified under normal underwriting guidelines will now qualify or those who would have qualified under less than favorable terms will now qualify for the better terms of the program.

To reach this objective the bank may consider offering a new credit product or service, could modify the terms and conditions of an existing product or service, or may modify policies and procedures of a loss mitigation program. As an example, if the bank offers a small business loan product and current underwriting requires three years of experience in the industry, this could be relaxed to one year under a modified program when research data indicates this will make more credit available and that the three-year requirement was a difficult hurdle for applicants.

The written plan should describe how this variance will increase credit availability and there should be research from the bank and/or third parties to substantiate this. In this example, the business must be woman-owned. This is a protected class of persons so the explanations must include what will be required to qualify, and what information obtained would otherwise have been prohibited under Reg B. A heightened awareness of what is collected and why is called for.

3.  Either the time period during which the program will last or when the program will be evaluated to determine if there is a continuing need for it (or both). If the bank opts to reevaluate a program, the parameters triggering reevaluation should be described, such as based on a trigger date or circumstance such as a set amount of total funds loaned. The bank could create a combined approach as well such as whichever occurs first. If after reevaluation the program is extended, the written plan should detail this and include the expectations for the future of the program. Will there be a new target date set, amount of funds loaned or a combination?

4.  A description of the analysis conducted by the bank to determine the need for the program. The program is to be established and administered to benefit the class of people who would otherwise have been denied or approved with less favorable credit terms. This is determined by what the CFPB refers to as “broad analysis.” The Official Interpretations to Reg B provide that a written plan “must contain information that supports the need for the particular program.” (8(a)-5) The bank’s written plan must describe or incorporate the analysis that supports the need for the program.

The need for the program is based on this “broad analysis” which may be the bank’s own research, or information from outside sources including governmental reports and studies. In addition to HMDA analysis, the bank may find useful data in CRA evaluations and data, Small Business Credit Surveys done by the Federal Reserve or the Small Business Administration.

Section 1002.8(a)(3)(ii) requires that the research and data used support the conclusion that this class of protected applicants either would not receive credit, or would have received it under less favorable terms. Then show the connection between that information and the bank’s customary underwriting requirements. As an example, underwriting guidelines for a mortgage product may require a certain amount of cash for a down payment. With a demonstration of how a protected class of applicants does not have this, but could service the debt they want to undertake, a downpayment assistance program may be called for.

Any program the bank considers may use necessary information to an applicant’s benefit, but still may not discriminate on a prohibited basis. The CFPB notes, “[i]f participants in a special purpose credit program . . . are required to possess one or more common characteristics (for example, race, national origin, or sex) and if the program otherwise satisfies the requirements of [Regulation B], a creditor may request and consider information regarding the common characteristic(s) in determining the applicant’s eligibility for the program.” If no special purpose credit program has yet been established, however, a creditor may use statistical methods to estimate demographic characteristics but it cannot request demographic information that it is otherwise prohibited from collecting, even to determine whether there is a need for such a program. Moreover, while a for-profit organization may rely on a broad swath of research and data to determine the need for a special purpose credit program—including the organization’s own lending data—it may not violate Regulation B’s prohibitions on the collection of demographic information exclusively to conduct this preliminary analysis before establishing a special purpose credit program.”

Only after the bank has determined a program is advantageous and has developed what it believes is a valid and justified credit program can it begin to request and use the otherwise prohibited information under Reg B. The bank may not request this prohibited information to justify implementing a program. The bank may use statistical methods to estimate demographic characteristics, however.

In summation, if your bank sees an unmet need, and this is directly related to a protected class under Reg B, the bank is free to develop a program, based on research and statistical data, to assist this class who would otherwise either be denied credit or receive credit under less favorable terms. There can be a number of reasons the bank would want to entertain such a program. Even though the bank would need to relax some qualifications to grant a loan, that does not mean any loan has to be made which is not safe or sound or profitable for the bank. If you want to find that median which eases underwriting and serves a positive purpose for the bank, consider a special purpose credit program.


BSA Revisions

By Andy Zavoina

Have you heard there were revisions to the Bank Secrecy Act? Have you been looking for a Bill on BSA? Well, it would have been easy to miss because Congress rarely does one thing at a time. When one of our elected officials has a bill they want approved, sometimes the easiest thing to do is to append it to another bill that has a very good chance of passing. Then it can sail through perhaps under the radar, but in plain view. In this case the 1,480-page version of the newest bill to fund defense, the “William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021” (which the president vetoed, but Congress enacted with an override of the veto) includes significant changes to the BSA. If you want to read it, look for H.R. 6395, and you will find Division F pertinent (Sections 6001 to 6511). That’s only 86 pages, so let’s talk about the highlights if you are not sure you want to dive in just yet.

Perhaps the biggest potential benefit comes from the changes to the Beneficial Ownership Rule. Congress realizes that many, if not most states do not require information about the beneficial owners of entities formed under those states’ laws. There can be many layers as to ownership interests in a company and there has to be a better way than FinCEN’s Beneficial Ownership Rule to bring the U.S. into compliance with international anti-money laundering laws.

Under the current rule, banks are required to act as information-gathering middlemen between their customers and law enforcement agencies. Federal agencies and law enforcement wanted this information to get to “who” was really the owner benefitting from these transactions and banks were not given much of a say. But the new law will require certain U.S. companies (corporations, limited liability companies, and similar entities) and companies doing business in the U.S. to report information regarding their beneficial ownership directly to FinCEN. A newly formed company will now have to report its information to FinCEN when it is formed. Companies that have a change in beneficial ownership will be required to provide FinCEN with updated information within one year.

There are exceptions in the law. The new law excludes select companies from the reporting requirements. Those which meet the following criteria are excluded:

  • It has more than 20 full-time employees,
  • It reports more than $5 million in annual revenue to the IRS, and
  • It has an operating presence at a physical office within the U.S.

General exclusions also will apply to public companies, and to:

  • banking organizations (banks, credit unions, bank holding companies, savings and loan holding companies),
  • FinCEN-registered money transmitters,
  • SEC-registered broker-dealers,
  • SEC-registered investment companies and investment advisers, and insurance companies.
  • Additional exceptions apply such as for pooled investment vehicles and more.

A “beneficial owner” is any person who, directly or indirectly owns 25% of the equity interest or exercises substantial control over the entity. This then begs an answer to what constitutes “substantial control” and that is unclear and not defined in the new law. It is also unclear whether the term will be interpreted similarly to FinCEN’s current Beneficial Ownership Rule, which says control exists where there is a “a single individual with significant responsibility to control, manage, or direct a legal entity customer.”

Those companies required to report to FinCEN need to include the names, dates of birth, addresses, and unique identifying numbers (such as a driver’s license or passport number) of their beneficial owners.

FinCEN will now maintain a non-public database of the beneficial ownership information it collects. An individual or entity that provides beneficial ownership information to FinCEN may request the issuance of a FinCEN identifier which may be supplied to the reporting company for its use in reports to FinCEN. The new law requires several provisions relating to authorized disclosure by FinCEN of beneficial ownership information. For example, FinCEN may, with the consent of a reporting company, disclose beneficial ownership information to a bank to assist it in compliance with customer due diligence requirements. Once the database is in place and operative, FinCEN may relax some parts of the onerous Beneficial Ownership Rule’s impact on banks.

CTR and SAR improvements

In an effort to streamline and improve the SAR and CTR processes, Treasury must take into consideration the burdens to reporters compared to the benefits from these reports. The law requires FinCEN in consultation with other regulatory agencies to establish streamlined, automated, processes which permit the filing of noncomplex SARs by banks. Treasury must conduct a formal review of SAR and CTR requirements and current reporting thresholds, including a review of possible exemptions to reduce reports that may be of little or no value to law enforcement. This requires FinCEN to publish not less than semiannually, information on threats and threat patterns to assist in the preparation, use, and value of SARs and other reports.

The new law also includes information on stricter penalties for BSA violations, more sharing requirements and the inclusion of virtual currency and more.

it also creates a whistleblower reward program with incentives and protections for the reporting of potential BSA violations when reporting to the government. It is generally similar to the Securities and Exchange Commission’s whistleblower program. Rewards will be offered to whistleblowers who voluntarily provide original information to their employer, Treasury, or the Department of Justice (DOJ) on possible BSA violations, provided that tip leads to successful enforcement action and the monetary penalties exceed $1 million. Whistleblowers can report violations anonymously and qualify for rewards if represented by counsel.