Thursday, May 23, 2024

October 2023 OBA Legal Briefs

  • Deposit account questions and answers
  • Other frequently asked questions

The OBA Compliance Team fields well over a hundred email messages every month, along with a healthy number of telephone inquiries. This month, our Legal Briefs include a sampling of the emails, which have been anonymized to remove the names of banks and individuals.

Deposit account questions and answers.

Compiled by Pauli D. Loeffler

Tribal account, public funds

Q. We are opening an account for Citizen Potawatomi Nation. Are they considered public funds? Can we open an interest-bearing checking account that’s not a Money Market?

A. This is from the July 1, 2019 COMPARISON OF THE POWERS OF NATIONAL BANKS AND  FEDERAL SAVINGS ASSOCIATIONS:

NBs may accept deposits of public money and may be employed as financial agents of the federal government. NBs may be required to provide security in connection with these activities. NBs also may accept and provide security in connection with the deposit of state or local government funds, as provided by the law of the state in which the NB is located, as well as of Indian tribal funds. 12 U.S.C. 90 and 265; 25 U.S.C. 156 and 25 U.S.C. 162a.

The account belongs to federally recognized Indian tribe and is considered a government account as far as AML/BSA CIP and beneficial ownership except for tribal casinos where the casinos are not managed by the tribe itself. See https://fincen.gov/resources/statutes-regulations/guidance/fincens-guidance-determining-whether-tribally-owned-and

Note that since July 21, 2011, it has been legal for banks to offer interest-bearing checking accounts to businesses.

Minor sole member of an LLC

Q. I am circling back to this question from a little while back. This customer has presented an updated Operating agreement, and I wanted to reach back out and explore the UTMA designation you had mentioned in the previous email.  The full operating agreement is attached.

The customers are wanting to open this account for their minor son, it is his business. They would like him to sign on the account as well.

The minor, Bam Bam, is listed as 100% owner of the LLC. You mentioned that a minor lacks legal capacity to bind the LLC. Should this be worded as Bam Bam, minor under UTMA, Betty as custodian” owns 100%. We understand that the adult would be the one that we CIP.  Would she be listed as 100% Beneficial Owner? Or as the Custodian under UTMA 100% Owner?

The minor is also listed as the Manager. I feel that the mother who is listed as legal representative should also be the manager. Should she be listed as Manager in the UTMA Custodian role as well?  Also, as the manager would she then be able to list the Minor as a signer on the account?

A. If the membership is held by a custodian under the Uniform Transfer to Minors Act, the custodian can run the LLC until the minor attains the age of 18 or an age not exceeding the attainment of age 21. The custodian will sign the Operating Agreement and will act as manager for the minor. However, the minor should not be added as a signer on the account since he lacks the capacity to bind the LLC.

I would note that 2.6 of the operating agreement states that the minor is the registered agent for the LLC. A registered agent is either a natural person or corporation upon whom service of process may be served. Sec. 2005 – Service and Filing of Pleadings and Other Papers found in Title 12 of the Oklahoma Civil Procedure Code provides:

B. SERVICE: HOW MADE.

Delivery of a copy within this section means:

  1. Handing it to the attorney or to the party; or
  2. Leaving it at the office of the attorney or the party with the attorney’s or party’s clerk or other person in charge thereof; or
  3. If there is no one in charge, leaving it in a conspicuous place therein; or
  4. If the office is closed or the person to be served has no office, leaving it at his or her dwelling house or usual place of abode with some person residing therein who is fifteen (15) years of age or older.

The LLC must name a registered agent who is old enough to be legally served with process.

Additionally, 2.7 of the operating agreement states that the LLC will be taxed as a partnership. This is a sole member LLC rather than a multi-member LLC and would not taxed as a partnership.

Paying higher interest on CD owned by chairman of the board

Q. The chairman of our board is asking for a “special” rate on his CD. I can’t find anything saying that we can’t, other than the Federal Reserve System. However, we are a non-member bank. He is asking for a higher rate than we can borrow on our borrowing lines for, so it’s not in the bank’s best interest to pay what he is asking. Any advice is greatly appreciated.

A. Title 12 USC Section 376 applies to national banks and state member banks. There is no comparable federal (FDIC) prohibition for state non-member banks. However, I have had this question before, and I contacted Matt Mowdy at OSBD. He pointed out Rule 85:10-11-5. Interest on deposits:

Any state bank is authorized to pay interest on deposits at rates authorized by its board of directors and not otherwise prohibited by the law of this state or by federal law.

In other words, the bank will have to show that it has extended the same deposit terms to similarly situated non-insiders in order to avoid a claim of preferential treatment with regard to an insider. The bank cannot simply say that “We would do this if a customer asked.”

Closing a Medicaid Income Pension Trust account

Q. We received notification that one of our customers who has a Medicaid Income Pension Trust account passed away. The trustee for the account came in yesterday to close it and provided a letter to us from the Oklahoma Health Care Authority with instructions on paying funds to the OHCA. I’m not familiar with the intricacies of these types of accounts, and I wanted to ensure what obligations we have, or if we are able to move forward with closing the account as normal.

A. The trustee will pay the amount owed for reimbursement of Medicaid to the Oklahoma Health Care Authority. Any funds in excess of that amount belong to the deceased’s estate.

Other frequently asked questions

Compiled by John Burnett and Andy Zavoina

Search warrants

Q. We have received a Search Warrant and Affidavit of Bank Records from the Superior Court of California, County of Sonoma. We want to make sure with the right to financial privacy that this is okay to give this Detective copies of checks and wire transfers.”

A. Unless your bank has a branch in California, the court has no jurisdiction over your bank. You will find a “No Jurisdiction Template” on the OBA Legal Links webpage at the very bottom of the “Templates, Forms, and Charts.” You will need to create an account through the My OBA Member Portal if you have done so already.

Flood insurance (property address)

Q. I am reviewing a loan prior to closing where the collateral is a dwelling located in Zone AE.  The address on all our documents (i.e., appraisal, survey, hazard insurance, title commitment) identify the property to be located in Del City, OK.  Even the legal description includes “City of Del City, Oklahoma County.”  When ordering the flood determination, we ordered it based on the Del City address so that is what is reflected on the SFHDF form.  When we received the flood insurance application and Declaration Page, the address refers to the property being in Oklahoma City, OK.   We reached out to the flood insurance agent (private flood insurance provider) on the City discrepancy and was advised that when completing the application for the company they write through they are required to enter the Zip Code for the property and the City auto fills on the application.  In this case it pulled in Oklahoma City instead of Del City.  The insurance agent advised that the application system will not allow them to change the name of the city, so the only way that they could issue flood insurance on the property would be to use the address as an Oklahoma City, OK address.  He said that this is common when issuing flood insurance coverage for Del City or Midwest City because of the use of the same Zip Code with Oklahoma City.

Our practice has been to refuse to accept evidence of flood insurance if the addresses do not match.  However, I have never had an issue where the insurance agent is telling us they cannot change the name of the City.  We hate to require our applicant/borrower to get flood insurance coverage elsewhere, especially since it appears that they have already paid the premium in advance, but we are also not willing to risk a possible violation because of an address discrepancy.  Have you had any experience with a situation like this where we could possibly document correspondence from the insurance agent to justify the discrepancy?

A. There are three Oklahoma City ZIP codes (four, if you include the separate ZIP code for P.O. boxes) that cover addresses in the City of Del City. The U.S. Postal Service accepts either “Del City” or “Oklahoma City” — with a preference for Oklahoma City — for addresses in those ZIP code areas.

If the Postal Service knows that a particular street address in ZIP code 73115 is located in Del City, it delivers the mail to that location whether the envelope says Oklahoma City or Del City.

I don’t think you have a problem. The address adequately describes where the dirt is.

Safe deposit access on death deputy

Q. I am trying to get some information on the procedures required when a Lessee authorizes access to his/her Safe Deposit Box after death. We have never allowed a lessee to name someone (because we were unsure of the correct procedures and if it was allowed in Oklahoma) but instead would use an Affidavit of Heirship upon death. I have searched the OBA legal briefs for information, but I wasn’t able to find anything.

While doing my research I saw that it is listed in the Oklahoma Statutes, but it states that an Affidavit of Heirship should be completed upon death of the Lessee, by the person the Lessee has named. If so, would the Affidavit of Heirship under Section 393 be the one we need to use? I hope you can provide some clarification on these procedures and whether or not this poses any risk to the bank by allowing the Lessee to grant someone access upon death. I attached an example of the form that prints in [our onboarding system] when a customer authorizes access.

[Included was a link to Oklahoma Statutes § 6-1301.2 – Authorization for access to safe deposit box upon death of lessee]

A. The affidavit described in section 1301.2 is not an Affidavit of Heirship. It is an affidavit that includes the statements required by the statute. There is an Affidavit of Access on Death Deputy for Safe Deposit Box Template on the Legal Links page of the OBA’s website (scroll down to the Templates, Forms, and Charts section of the page).

The form that you attached, when correctly completed and signed by the box lessee(s), sets up the access on death authorization. The person designated for access completes the affidavit (when requesting access), which must be sworn to before a Notary.

Paragraph F of section 1301.2 provides the bank legal cover provided the bank acts in accordance with the requirements of section 1301.2.

The wording of section 1301.2-A: “A lessee of a safe deposit box may grant authorization for one or more persons to have access to that safe deposit box upon the death of the lessee, and the financial institution in which the safe deposit box is located shall grant such access, subject to the provision of this section.” That suggests that, while the lessee has the option to grant or not to grant such an authorization, the second half of the sentence appears to require that the bank must honor such an authorization subject to the requirements of the statute.

Q. Is a safe deposit lessee’s authorization for a person to have access to his/her safe deposit box upon the death of the lessee valid after the lessee’s death? I thought that safe deposit deputy authorizations ended on the lessee’s death.

A. The “normal” safe deposit deputy authorization does, in fact, end on the lessee’s death (or the death of the last of the lessees when the box is leased to more than one individual). The authorization for access to a safe deposit box upon the death of the lessee is under a special statute. That authorization stays in effect until it is revoked and until the person given the authorization to access the box does so, removes all the contents, and closes the box.

There is one exception. If John and Jane Doe are married to one another, and John grants Jane the authority to have access after his death to a safe deposit box leased by John, that authorization is revoked under the law if John and Jane are later divorced. If, after the divorce, John still wants Jane to have access to the box after his death, he must provide another written authorization dated after the divorce is final.

Executive Officer — Regulation O

Q. Based on 12 CFR 215.2, individuals who are involved in major policymaking functions are classified as Executive Officers, regardless of whether they hold a formal title or receive compensation. Our assistant cashier is a member of the policy and procedure committee, which approves revisions to policy and procedures. Does her participating on this committee make her an executive officer? Initially, we thought that the assistant cashier was not included in this classification, as the board did not designate her as an executive officer. However, considering the definition, should she be considered an executive officer for regulatory purposes?

A. If she is a voting member and these are major policymaking decisions, yes, because her influence drives the bank’s direction. That is a large part of what this is about. Say she proposes to expand the bank into a new market area. It happens that looks good for the bank. It also happens that her family has most of the land for sale where a branch would be needed and also owns the local construction company that can build it.

On the other hand, if the assistant cashier is there principally to provide information and insight on the impact of a policy or procedure on the staff, its needs, training, etc., then she may be participating, but not as a voting member, and she would not be considered an executive officer based on her participation on that committee.

Ensure her role is defined. And yes, she may be an insider regardless of title.

Reg CC and mobile deposited checks

Q. I am not clear on mobile deposits.  It appears that mobile deposits have come under the Reg CC umbrella.  Am I correct in assuming that Reg CC expedited funds availability time frames now apply to checks deposited via mobile capture?

A. There were a number of changes made to Regulation CC effective July 1, 2018. But none of them made remote deposit capture (RDC) or mobile deposit (mobile RDC or mRDC) checks subject to subpart B of the regulation, which is where we find the rules on funds availability and related disclosures. RDC and mRDC items did become subject to subsections C and D, which address relationships between banks (C) and substitute checks (D).

It will take combined action by the Federal Reserve System and the Consumer Financial Protection Bureau to amend subpart B (the section of the regulation that is so woefully out-of-date that it still includes rules involving non-local checks, which have not existed since February 2010) to put RDC and mRDC items under subsection B. The Fed has made two failed attempts to do that, and it does not seem to be a priority at either agency.

Unless and until Regulation CC is further amended, RDC and mRDC items are subject to whatever funds availability policy your bank adopts, and, I suggest, discloses.

Reopening closed accounts

Q. If we receive an ACH into an account that has been charged off are we allowed to keep that transaction as an offset to the account or do we have to return the ACH as account closed?

A. On May 10, 2023, the CFPB released Circular 2023-02 to opine that unilaterally reopening a closed account without a customer’s permission in order to process a transaction is a likely violation of federal law, particularly if a bank collects fees on the account.

https://www.bankersonline.com/topstory/173547

Non-consumer debit cards

Q. Hello, can a non-profit account have a debit card?

A. It can if your bank allows it. Be certain you do not provide Regulation E disclosures in connection with the card or the account. And provide a debit card agreement that covers the issuance of the card and what the non-profit must do in the event the card is lost or stolen or is used without authorization.

If your bank is not already issuing non-consumer debit cards, it needs to decide whether that is something it wants to be able to do and discuss the nuts and bolts of it with whoever the bank is working with for its debit card program.

(As a resource) You can find examples of such disclosures/agreement by googling “business account debit card agreement.” If the bank wants to go this route, I suggest reviewing some of those disclosures with legal counsel to decide on what parameters the bank wants to use.

CTRs – multiple transactions?

Q. I have a CTR I am working on with the following scenario, and I was hoping you will steer me in the right direction. A gentleman came in and withdrew $14,000.00 out of his personal account along with $6,000.00 out of his business account. Do I complete two Part 1 sections for him with one marked conducting transaction on his own behalf and another one with person conducting transaction for another (so there would be two pages with his info) along with a section one for the business (person on whose behalf transaction was conducted) or can I mark both on one page? If I do two separate pages, do I put the separate cash totals on each page that would be one for $14,000.00 and one for $6,000.00? Would this be considered multiple transactions if there was only one out ticket but two withdrawal slips? Hope I didn’t make this confusing.

A. When the conductor completes more than one transaction in more than one role, you complete a separate Part I for the conductor for each role. Assuming that the $6,000 withdrawal from the business was made on behalf of the business, let’s take a look at those Part I sections.

You will have a Part I for the conductor with items 2a and 3 checked and the amount of cash withdrawn from his personal account (and that account number), and another Part I for the conductor with items 2b and 3 checked (with the $6,000 amount withdrawn and the business’s account number), plus a Part I for the business with item 2c (and not item 3) checked, with the business’s account number and the $6,000 amount withdrawn.

Deceased and surviving PODs

Q. We have an account on which the owner is deceased. The account has five POD beneficiaries, two of whom are deceased. What would we need to close the account? I know the deceased POD beneficiaries’ shares would go to their respective estates. Do the heirs have to sign an affidavit, and do we need to wait to give the rest of the POD beneficiaries their share until we receive the affidavit?

A. If the POD designations were made before November 1, 2021, the estates of the deceased POD beneficiaries are entitled to their shares. If some or all of the deceased beneficiaries’ estates were probated, you may use the final decree in those probates to disburse the funds without any need for affidavits. On the other hand, if some or none of the POD beneficiaries’ estates went to probate, you would need to use the Sec. 393 Probate Code Affidavit for the share owed these predeceasing PODs.

You can find a template for the affidavit under Probate Code section 393 as the third entry in the Deceased Customers section of the Templates, Forms, and Charts collection on the OBA site’s Legal Links page.

The law under which the Affidavit is prescribed can be found in the Oklahoma Probate Code, Title 58, Section 393, at https://www.oscn.net/applications/oscn/DeliverDocument.asp?CiteID=103663.

Follow-Up Q. The owner of the account only had $503.02 in the account. If they all agreed, could we pay it towards the funeral, or do they still have to sign the affidavit?

Do they sign the Section 906 affidavit of heirs only if no will and no other property? Section 393 seems more complicated.

A. Frankly, if there is no POD beneficiary or joint owner, the funeral home may bill the bank directly and the bank can make payment. If there is a joint owner or one or more PODs, you would need written consent in order to pay the funeral home.

Funny Money

Q. On the money we send back to the Secret Service, if a bill is marked motion picture only, do we need to send those in or can we shred? They do come from businesses that have accepted these, but we know they are not legal tender.

We have been logging and sending these in, but I wonder if it is necessary.

A. The “motion picture only” funny money isn’t counterfeit even though it is worthless. You don’t need to send it. Your customers need to train their cash handlers to recognize those pieces of paper for what they are and refuse them.

Dealing with fraudulent checks

Q. We have a couple of questions we need help with. With the increase in fraudulent checks, whether altered or counterfeit, our bank is looking for ways to help mitigate losses for the customer and the bank. Positive Pay is a product that we feel can help with this. Many customers do want to sign up for Positive Pay even though they have already had to close and reopen an account for that very reason. We do understand we can make a Breach of Warranty Claim for an altered item.

  • Are we able to shorten these limits when it comes to Altered and Counterfeit checks?  We are seeing such an increase in fraudulent checks, particularly with large business accounts. See our disclosure below.
  • We are considering having our customers sign an agreement to hold us harmless in the event a fraudulent check clears their account IF they do not sign up for a fraud protection product, Positive Pay.

The customer would use Positive Pay daily to determine if a check should be paid or returned within the 24-hour turnaround. They are in the best position to determine that. Would the hold harmless agreement supersede the UCC 4-401 or does the UCC supersede the hold harmless agreement?

(Attachment) You agree that the time you have to examine your statement and report to us will depend on the circumstances, but will not, in any circumstance, exceed a total of 30 days from when the statement was first sent or made available to you.

You further agree that if you fail to report any unauthorized signatures or alterations in your account within 60 days of when we first send or make the statement available, you cannot assert a claim against us on any items in that statement, and as between you and us the loss will be entirely yours. This 60-day limitation is without regard to whether we used ordinary care. The limitation in this paragraph is in addition to that contained in the first paragraph of this section.

A. The bank can require positive pay (I assume you’re limiting the requirement to business accounts) and limit the bank’s liability if the customer refuses to use it, but will the bank be requiring the customers using positive pay to provide a file of issued checks each time checks are issued? Will that file include the name of the payee of each check to detect and protect against alterations? If the bank is working with the customer’s file of issued checks, payee alterations won’t be caught unless the payee’s name is included in the issued check file. While the bank does recognize that it can assert a breach of presentment warranty claim for paid altered checks, making such claims can be expensive and frustrating when the depositary bank stonewalls the paying bank.

If your positive pay service requires the customer to notify the bank of any unauthorized or altered checks, set a daily cut-off hour for such notices that will allow the bank sufficient time to act on the customer’s notice and meet the bank’s deadline for submitting its return items file for the day. Include the customer notice deadline time in your positive pay agreement. Also, include language addressing what will be done if the service is unavailable to the customer (system downtime, etc.).

I suggest discussing with bank legal counsel any plan to require that business customers who refuse to use positive pay provide the bank with a hold harmless agreement for fraudulent checks. Ask counsel for a check of any court cases in Oklahoma dealing with such a requirement.

Your proposed deposit account agreement changes to the UCC section 4-406 deadlines for reporting unauthorized or altered items seem reasonable, but the bank should ask legal counsel to see if there are any Oklahoma court cases in which changes to 30 and 60 days have been deemed unreasonable.

Additionally, we will add to this Q&A that the bank can require positive pay and limit the bank’s liability if the customer refuses to use it, but the caveat is whether use of positive pay would actually avoid the loss. That depends on the information provided and/or verified. Positive pay will not protect the bank as far as altered payees unless payee names are included in the file sent to the bank, or, if no customer issued file is provided, the customer can view images of checks pending final payment and check each image for alterations of the payee or dollar amount. As noted earlier, relying on the right to make claims for breach of presentment warranties can be an unsatisfactory “crutch” when a depositary bank fails to honor such a claim, due to the added costs of involving attorneys or the time involved in pressing a legal case.