Thursday, March 28, 2024

April 2023 OBA Legal Briefs

  • Oklahoma Settlements Involving Minors Act
  • Minor as POD beneficiary
  • Discrimination update: ECOA and FHA

Oklahoma Settlements Involving Minors Act of 2022

By Pauli D. Loeffler

The Oklahoma Statutory Thresholds for Settlements Involving Minors Act of 2022 (“Minor Settlements Act” or the “Act”) is found in Title 12 of the Oklahoma Statutes and became effective November 1, 2022.  For some reason, this legislation flew under our radar until a bank sent us a question regarding the requirements for setting up an account under the Act. The Act only has two sections: Sec. 86, which provides the name of the Act and Sec. 86.1 (https://www.oscn.net/applications/oscn/DeliverDocument.asp?CiteID=492228) which contains the actual provisions and procedures that must be followed.

Banks are generally familiar with court-ordered UTMAs that result from personal injury, wrongful death, distributions to the minor under an insurance policy, and the like. The Act allows settlements that meet the provisions of the Act to avoid filing a lawsuit in district court when all conditions are met. Many of the requirements, such as naming a custodian of the settlement proceeds, the form submitted to the bank to evidence the opening of the required deposit account, forbidding withdrawal of the funds without a court order, and direct payment by the bank to the minor upon attaining the age of 18, are the same as for court-ordered UTMAs.

The person having legal custody of the minor is authorized to enter into a settlement, and the determination of who has legal custody is not left up to the bank to decide. In most cases, this would be either parent of the child unless a guardian of the minor has been appointed by a court. If the parents are divorced and have joint custody of the minor, then either parent could enter into the agreement. On the other hand, if one parent has sole custody, s/he would have to be the one to sign the agreement, and it is not up to the bank to make the determination with regard to custody.

I will note at this point that there is inconsistency in the Act caused by the use of the terms “legal custody” and “guardian” with regard to payment of the settlement, which is troublesome.

The Act can be used provided no conservator over the property of the minor nor guardian ad litem (a person appointed by a court to represent the minor’s interests in a lawsuit, such as divorce) is appointed. Further, there is a restriction on the dollar amount. The settlement amount, which does not include reimbursement of medical expenses, liens, reasonable attorney fees, and costs of suit, cannot exceed $25,000.00 if paid in cash, check, draft, or if paid by the purchase of a premium for an annuity. I question why the statute mentions “costs of suit” since the whole point of the Act is to avoid filing a lawsuit.

How the funds shall be paid depends on whether or not the minor or guardian is represented by an attorney. If the minor or person entering into the settlement agreement on their behalf IS represented by an attorney and the amount paid in cash, by check, draft, or by direct deposit will be made into the attorney IOLTA account maintained pursuant to the Rules of Professional Conduct.  The attorney shall deposit the monies received on behalf of the minor directly into a federally insured savings account that earns interest in the sole name of the minor and shall provide notice by personal service or first-class mail of the deposit to the minor and the person entering into the settlement agreement on behalf of the minor.  The bank has no duty to ascertain whether the notice was given.

If the minor or guardian is not represented by an attorney and the settlement is paid in cash, or by check or draft, the monies shall be deposited by the guardian (I take this to be the person having legal custody and signed the settlement agreement). The funds shall be deposited into a federally insured savings account that earns interest, in the sole name of the minor. The settlement funds may also be deposited by electronic funds within ten (10) business days of the settlement.  The same account requirements with regard to federally insured interest-bearing savings account in the sole name of the minor as well as notice to of the deposit by personal service or first-class mail apply.

Finally, a settlement agreement entered into in compliance with the Act signed by the person entering into the settlement agreement on behalf of the minor is binding on the minor without court approval or review as if the minor was a competent adult signing the settlement agreement.  A person acting in good faith on behalf of the minor as well as any entity or person against whom the minor has a claim that settles the claim by the minor in good faith will be protected from liability to the minor.

Minor as POD beneficiary

By Pauli D. Loeffler

The OBA Legal and Compliance Team regularly receives questions on what the bank should do with the funds payable on death to a minor.  There are four available options available, and I will start with the ones that involve court orders.

Monies recovered in any court proceeding by a next friend or guardian ad litem.  Sec. 83 of Title 12 is the basis for court-ordered UTMAs, which restrict any withdrawals from the account without further order of the court until the minor reaches the age of 18, at which point the bank will pay the funds directly to the child. This statute applies when the funds owed to the minor or on their behalf exceed $1000.00. The court at the request of the next friend or guardian ad litem, may allow all or a portion of the recovered monies to be deposited in an account pursuant to the Oklahoma College Savings Plan Act with the minor designated as beneficiary of the account. I admit that I have never seen a court-ordered UTMA with that provision. (The italicized language is the result of amendment effective November 1, 2021.)

Note that when the next friend or guardian ad litem is not represented by an attorney, the judge shall prepare the order.

This statute does not apply if a legal guardian has been appointed for the minor prior to any award of monies. If a legal guardian is appointed after any award of monies, the legal guardian may petition the district court in the county where the bank holding the funds is located to transfer them to the legal guardian to be held in a guardianship account subject to reasonable safeguards required by the district court.   The district court may make the granting of the request to transfer funds subject to reasonable safeguards.

Estate of Minors not Exceeding $10,000. Sec. 2-116 of Title 30. The term “estate” means “property.” I note that the title to this Section is a bit misleading since it also covers minor estates which exceed $10,000. This statute is under the Oklahoma Guardianship and Conservatorship Act and is the one that specifically mentions the Oklahoma Uniform Transfer to Minors Act (the “UTMA”) found in Title 58. The provisions of this statute apply if the entire estate of minor does not exceed $10,000 and allows the court in its discretion to avoid appointing a guardian of the minor. The property of the minor may be delivered to one or more custodians under the OK UTMA. Please note that only one custodian can be named under the OK Uniform Transfers to Minor Act (OK UTMA).

Alternatively, the court can order payment or delivery of the property or any portion to the parent of the minor, the person having the care of custody, or directly to the minor to be used to pay the necessary expenses of the minor and hold, manage, and dispose of the property as directed by the court.

If the estate of the minor exceeds $10,000 the court may still order property of the minor in the amount of $10,000 be delivered to one or more custodians under the OK UTMA as stated, above. As indicated above, the OK UTMA only allows naming one custodian.

Minor as Sole Owner of Deposit Account. Sec. 903.1 of Title 6 (Banking Code). If your bank offers minor as sole owner of a deposit account, whether the account offered is a checking, savings, MMDA, or CD, this can be a great option when the POD is under the age of 18. The state removes the disability of minority allowing the minor to legally contract and be bound by the account agreement without the possibility of disaffirmation. The parent or legally appointed guardian can request in writing that the account be restricted to require the parent’s or guardian’s consent for transactions preventing the minor from frittering away the money while preventing the parent or guardian from access to the funds. It also prevents the funds from attachment (garnishment) by creditors of the parent which can happen when the account is joint with minor.

Designating a custodian under the UTMA for the minor POD.  Quite frankly, this is my favorite option when a minor is named as POD. The account owner(s) name an adult as custodian under UTMA to hold the funds during the beneficiary’s minority. I do recommend that one or more successor custodians be designated, particularly if the minor is young and the adult named as custodian is the same age or older than the account owner or owners. If at the minor has attained the age of 18 when the account owner or owners die, the bank would simply pay the POD directly.

Discrimination update: ECOA and FHA

By Andy Zavoina

Several aspects of illegal discrimination have been in the press over recent months. We feel banks may need to increase and, in some cases, improve situational awareness to avoid claims of discrimination. By reviewing some of the current events our hopes are that our Oklahoma banks can raise risk awareness and continue to avoid problems by learning from others.

Trident Mortgage Company

First, let’s take an in-depth look at a case brought last July by the Consumer Financial Protection Bureau (CFPB) as it joined with the U.S. Department of Justice (DOJ) in filing a complaint and proposed consent order in a federal district court against Trident Mortgage Company (Trident). The complaint alleges that, from 2015 through 2019, Trident violated both the Fair Housing Act (FHA) and Equal Credit Opportunity Act (ECOA) because it discriminated in and around the Philadelphia, Pennsylvania, area. It was not that in 2019 Trident changed its practices, but rather its ownership and name.

Trident was a non-depository mortgage company licensed to originate mortgage loans in Delaware, New Jersey, and Pennsylvania. In late 2018 it became licensed in Maryland as well. It financed purchases of 1-4 family homes and had a few refinances in its portfolio. In the period in question, about 80% of Trident’s mortgage loan application volume came from the Philadelphia MSA.

Trident is accused of redlining majority-minority neighborhoods with acts or practices that would discourage prospective applicants from applying for credit with them. Trident is accused of purposely avoiding making home loans and providing other home mortgage services in majority-minority neighborhoods in the Philadelphia MSA. It is said to have discriminated against applicants and prospective applicants living in or seeking credit to purchase properties in that area in several ways. The affected area in the complaint includes parts of four states, Pennsylvania, New Jersey, Delaware and Maryland. The Philadelphia MSA comprises 11 counties in those four states.

Of course, the basic rule in real estate is that three things matter the most – location, location, location. The same rule includes where a lender puts its offices. They should be strategically located to serve the customers the lender wants to do business with, which is the same logic a bank uses to serve its customers. In this case, during that 2015 to 2019 period, Trident had nearly all its locations and its lending officers in majority-white neighborhoods. It appears to have been purposely avoiding putting offices in, or having loan officers serve, the entire area to include majority-minority areas.

Banks specifically produce maps of the areas they will serve. For the Community Reinvestment Act (CRA), the bank will have this map and be able to analyze its lending pattern within and outside of this area. By designating the areas based on income and racial demographics, the bank can see where a variety of loan products are being used. A proactive bank is looking not just at housing related loans, but commercial and consumer loans as well. Automation and thorough geocoding help in this. Analysis will also show the areas that are not getting a fair share of loans. This is where the next two prongs of a proactive bank will be seen. Is the bank targeting marketing activities towards these areas where there may be less than upper-income borrowers, are locations being planned for these lower-income and potentially majority-minority areas and lastly how does the bank compare to other lenders making loans in these areas? If your bank is noticeably lower in its penetration rates than peer banks having some of those same areas, how do your locations and marketing efforts compare to what others are doing?

In this case, Trident is accused of having discouraged applicants and prospective applicants, generating disproportionately low numbers of loan applications and home loans from majority-minority neighborhoods compared to similarly situated lenders. Analyzing your bank’s HMDA data as well as that of your competitors is very helpful in understanding your bank’s position as a community provider. The bank has an obligation to serve the entire community just as it has an obligation to select a market area that does not exclude low- or moderate-income areas. While CRA and its related fair lending interests are not color driven, they are not color-blind, either. Often those lower income areas are the majority-minority areas of keen interest in these fair lending cases.

One thing some readers may be thinking is that there was a recent court case stating that discrimination against prospective applicants is not discriminatory. We will look more at that case but for now suffice it to say that was one court’s ruling, it isn’t binding everywhere, and it was based solely on ECOA. The Trident case includes the FHA which does permit discriminatory practices against applicants.

The CFPB does not enforce the FHA, but the DOJ does. In November 2020 the CFPB sent a referral to the DOJ after it concluded there were discriminatory practices, “by intentionally redlining minority neighborhoods in the Philadelphia MSA by engaging in acts or practices directed at prospective applicants that would discourage reasonable people on the basis of race or national origin from applying for credit.” Look for more joint enforcement cases in the future where discrimination against prospective applicants is an issue.

It is alleged that Trident was trying to meet the credit needs of majority-white neighborhoods while simultaneously avoiding meeting the credit needs of majority-minority and high-minority neighborhoods in the Philadelphia MSA. Trident’s statements, acts, and practices were intended to discourage applications for credit for properties located in majority-minority and high-minority neighborhoods in this MSA.

Locations and staffing

Let’s talk about some of the meaty issues – what were they doing wrong? Trident did not own the offices it used but rather it rented space from an affiliate in its real estate offices. As noted above, the locations selected did not represent a desire to reach out to the entire market, but to serve primarily majority-white neighborhoods instead. Trident operated 53 offices, of which 51 were in these majority-white neighborhoods. While 29 percent of the census tracts in the Philadelphia MSA are majority-minority, only two of Trident’s offices were in a majority-minority neighborhood. Of the two offices in majority-minority areas, one was in an area that was 53% minority residents and the other was in an area that was 52%. None of the offices were in high-minority census tracts and 17 percent of the tracts in the MSA were in this category. As further evidence of avoiding majority-minority areas, it was noted that of the 53 Trident offices, 13 were in the Philadelphia Metropolitan Division (MD) and 10 were in the Camden MD, which are the two areas within the Philadelphia MSA that have the highest concentration of residents who identify as a minority and have the largest number of majority-minority and high-minority census tracts. Despite the high number of minority residents in the Philadelphia and Camden MDs, all 23 of these offices were in majority-white areas of the Philadelphia and Camden MDs. By virtue of where they placed their office locations, Trident discouraged residents of majority-minority areas from applying for and obtaining home loans, and that restricted their access to credit.

Trident did not task its loan officers to solicit applications in majority-minority communities and failed to train or incentivize its almost exclusively white loan officers to lend in majority-minority areas. Of the 68 mortgage loan officers in this MSA, 64 were white and four were Black. It is worth noting that two of the four Black loan officers were terminated in 2018. There were 50 assistant loan officers. Race and ethnicity information was only available for 40 of them, but they were 90 percent white, and 2.5 percent each, Black, Hispanic, Pacific Islander and Arab American. (2.5 percent is the equivalent of one person.)

Periodic analysis of lending data from prior years and more recent periods should be done regularly so that marketing and outreach efforts can try to reach for more lending opportunities in underserved areas. Lenders should be on the frontline of these efforts and whenever possible, represent the entirety of the area they serve. In this case, Trident relied primarily on its loan officers to generate loans and serve the credit needs of residents in the Philadelphia MSA. Each lender was assigned to an office but was neither trained nor encouraged to reach outside that immediate area, which largely eliminated the minority population because of the office locations. So, geographically Trident was redlining by its selection of targeted borrowers and a lack of outreach efforts. Its lack of a diversified staff furthered the argument that it was not trying to reach the entirety of the area it was to serve. New hires were often referrals from existing staff. Trident had no formal policies or procedures for recruiting new mortgage loan officers.

Marketing

During the period in question, Trident’s primary method of marketing was via relationships with Fox & Roach real estate agents. Fox & Roach was the affiliate from which it rented office space. Trident made virtually no effort to market to residents of majority-minority neighborhoods. Direct mail marketing was not a primary medium used but when it was used, it targeted majority-white areas. Trident conducted 15 direct mail marketing campaigns from 2015 through 2018. Over 92 percent of the direct mailings were sent to majority-white areas. Geographically it was very limiting.

Each of these 15 campaigns had models used which depicted people – and these were exclusively whites, representing both white borrowers and white lenders. If one depiction of people is used it is always recommended that it represent the diversity of the target market it is intended to be viewed by. If there will be a series of depictions, they could represent one demographic group, and then another, or again have a mixed group to represent the diversity of the area. This is something often discussed with marketing, but it should not be “lip service,” as the market will respond positively to someone who looks more like them be it race, gender, nationality, etc.

Trident also advertised with open-house flyers. But the foundation of the program was still flawed as it was the properties listed by the Fox & Roach agents that these were given to for distribution. Similar to the direct mail campaigns, greater than 90 percent of these flyers were provided at open houses located in majority-white areas. And the graphics were also similar containing photos of almost exclusively white loan officers. That may be natural since most of the loan officers were white, but that only reinforces the need for a more diverse workforce or a variation on the use of images in the marketing materials. The complaint noted, “The use of all white-appearing models and images of all white mortgage loan officers on Trident’s marketing materials discouraged residents in majority- and high-minority neighborhoods.”

In an effort to reach out, from 2015 through 2017, Trident used a third-party vendor to market to real estate agents, potential homebuyers, and prospective applicants using the Multiple Listing Service (MLS). The third-party vendor generated Trident-specific brand marketing information on each selected MLS listing. The selected MLS listings were for properties that were overwhelmingly concentrated in majority-white areas (87.5 percent). This left 12.5 percent of the advertising material for properties in majority-minority census tracts, and only 5.8 percent of the selected listings were for properties located in high-minority census tracts. This was not representative of the demographics of the area.

Damning emails

As a part of the fair lending investigation, employees’ emails were reviewed. Loan officers sent and received emails using their Trident email accounts which contained racial slurs and racist content and some of which clearly indicated their intent to avoid lending in majority-minority areas. Bank ethics policies might need to address issues such as this. While it might be difficult to avoid receiving such an email, what is done with it and how business is conducted on the bank’s side is entirely up to the bank, or in this case the mortgage lender, Trident.

As has been referenced in other fair lending cases, Trident employees referred to properties in majority-minority areas as being in the “ghetto,” which carries negative connotations. In one email a lender from Trident responded to an online lead coordinator also from Trident who was referring a prequalification request. The response was, “This one is in the ghetto. pass [sic] it along to Ian. HAHAHAHAHHA kidding.” In another email discussing appraisal comps used, a lender wrote, “This comps [sic] street is like a ghetto and he knows it and if he doesn’t that’s even worse.” And on this same issue a senior loan officer emailed another lender, “talked to [agent]…. He said to stay away from sears street, its [sic] upper ghetto blocked off bad area just a heads up.” Emails such as these help define redlining.

In exams we do not often look for these types of issues, but perhaps if there is any reason to suspect such problems, audits should go deeper than just loan files. Lenders making such comments should not depict the intent of the bank, but their actions will be interpreted as “the bank’s” and the bank may suffer for it in more than one way. It brings reputational, financial and regulatory risk.

Further on the use of email and the risks to the bank (or in this case Trident), here is an example of an email entitled “Being White, reminder” one lender received from an employee at Fox & Roach and then forwarded to others:

  1. “Proud to be White;”
    b. “You call me ‘White boy’, ‘Cracker’, ‘Honkey’, ‘Whitey’, ‘Caveman’… And that’s OK… But when I call you [series of racial slurs], You call me a racist.”
    c. “You rob us, carjack us, and shoot at us. But, when a white police officer shoots a black gang member or beats up a black drug dealer running from the law and posing a threat to society, you call him a racist.”
    d. “There is nothing improper about this email… But let’s see which of you are proud enough to send it on. I sadly don’t think many will.”
    e. “BE PROUD TO BE WHITE!”

Emails are not encrypted, private and “for eyes only” documents. And just as in evaluating a borrower for character, staffing should be selected using these criteria as well. Emails such as this should not and cannot be tolerated by an employer responsible to serve the public. This email was not an isolated incident as there are more quoted in the complaint. Our quotation of the above is used to drive home a point. The language is offensive. The words we omitted were far worse.

Peer comparisons

Back to the analytics of this case. Trident received 80 percent of its mortgage applications for properties located in the MSA it defined as its market area. But the actual loan distribution pattern showed a disproportionate number in the majority-white areas. As a foundation there was the selection of office locations and limited outreach and marketing which led to these lending patterns which are confirmed by HMDA data. One must ask, “was this a choice?” When comparing HMDA data, Trident significantly underperformed its peer lenders in generating home mortgage applications from majority-minority neighborhoods, and the disparity between the rate of applications generated by Trident and by its peer lenders from majority-minority neighborhoods and high-minority neighborhoods were both statistically significant.

Of the nearly 31,000 applications on the HMDA reports from 2015 through 2019, 12 percent came from majority-minority areas. Peer lenders generated 21.5 percent of their 135,000 applications. The disparity was seen year after year. In high-minority neighborhoods, Trident showed 4.1 percent of its applications as coming from high-minority areas, compared to 10.8 percent of its peer lenders.

Trident significantly underperformed its peer lenders in making home loans in majority-minority neighborhoods as well. The complaint notes that, “…of the 22,960 HMDA-reportable loans Trident made for single family dwellings from 2015 through 2019 in the Philadelphia MSA, 11.7% came from residents of majority-minority areas. By contrast, Trident’s peers made 16.2% of their 50,060 loans from these same majority-minority neighborhoods.” And only 3.7 percent of Trident’s loans were made in high-minority areas, while peer lenders made 6.9 percent of their loans in these same areas.

Third-party vendors repeatedly made Trident aware of its lending disparities between 2015 and 2018. I would assume these were brought on by organizations that promote fair lending and consumer activism. It appears that regardless of these reports Trident failed to take meaningful actions. The CFPB initiated its actions, likely spurred on by complaints over fair lending, supported by lending data.

The consent order

The consent order, if approved by the court, calls for $18.4 million to be set aside for a loan subsidy program designed to increase nondiscriminatory access to credit, a $4 million penalty to the CFPB for the victim’s relief fund, and an additional $2 million to fund advertisements targeting redlined areas. The Attorneys General of Pennsylvania, New Jersey, and Delaware have also entered into concurrent agreements with Trident.

It is worth pointing out that in March the FFIEC released some 2022 HMDA data. The modified Loan Application register data is now available. The CFPB will release more substantive HMDA reports that lenders may use for peer analysis later in the year. For now, banks have their own 2022 data to analyze.

The CFPB and DOJ complaint is here – https://files.consumerfinance.gov/f/documents/cfpb_trident_complaint_2022-07.pdf and the proposed consent order is here – https://files.consumerfinance.gov/f/documents/cfpb_trident_consent-order_2022-07.pdf

Evolve Bank and Trust

To emphasize that fair lending in general is a hot topic with the CFPB and the DOJ, I’ll also quickly mention the proposed consent order with Evolve Bank and Trust (Evolve) presented in September 2022. That case involves fair lending as it pertains to discrimination on the basis of race, sex, and national origin in the pricing of mortgage loans from 2014 through 2019.

Evolve lends in 15 states. The DOJ maintains that its use of discretionary pricing has resulted in Black, Hispanic and female borrowers paying more for mortgage loans than white borrowers for reasons unrelated to their creditworthiness. Lenders had the ability to set artificially higher rates, resulting in FHA and ECOA violations.