Thursday, December 1, 2022

Legal Briefs

August 2021 OBA Legal Briefs

  • Reg Z’s business day definitions
  • Advance Child Tax Credits and closed accounts
  • 2021 Oklahoma legislation—Part I

Reg Z’s business day definitions

By John S. Burnett

Why Juneteenth caught lenders unprepared

Congress clearly doesn’t know (or care?) that two days’ notice isn’t enough to give lenders when they pass legislation creating a new federal legal public holiday. The kerfuffle that erupted over the addition of the Juneteenth National Independence Day to the list of holidays in 5 U.S.C. 6103(a) may not have ruffled Congress’s legislative feathers, but it raised a lot of questions among lenders, compliance officers, closing agents, investors and, yes, borrowers.

Why? Because it affected many mortgage loans for which closing disclosures had already been provided in the days immediately before the law was enacted on July 17, with closing dates set for early the following week. It also eliminated Saturday, June 19, as a business day for the purpose of counting rescission period days on loans that had closed on June 16 and 17.

In short, some lenders had to postpone closings by a day or more and others had to delay disbursement of loan proceeds, and, of course, borrowers weren’t happy that the new holiday forced those scheduling changes. For lenders who, for whatever reason, were not able to make the right moves, the risk is very real of litigation down the road over technical timing requirements in Regulation Z.

There is talk – or wishful thinking – that the CFPB can “fix” everything with an interpretation or ruling about the impact of the new holiday on mortgage loans closed with unavoidable errors. However, the Bureau can do what it can, but the courts will ultimately decide whether lenders’ concerns are real, and at what cost.

The “business day” definitions

The key to complying with any law or regulations is an understanding of its terms. That’s why there is usually a collection of important definitions, and for regulations, it is usually found in one of the first sections of the rule.

Regulation Z has so many technical timing requirements that include a count of business days that it should be no surprise that “business day” is a defined term in the regulation. In fact, there are two definitions of the term, and which definition applies in a given case depends on which timing requirement in the regulation is in question.

Regulation Z’s definitions of “business day” are found in section 1026.2(a), in paragraph 1026.2(a)(6), which includes two sentences.

The “general” definition. The first sentence of the paragraph reads—

Business day means a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions.

What does that sentence mean by “substantially all of its business functions”? Comment 2(a)(6)-1 explains—

Business function test. Activities that indicate that the creditor is open for substantially all of its business functions include the availability of personnel to make loan disbursements, to open new accounts, and to handle credit transaction inquiries. Activities that indicate that the creditor is not open for substantially all of its business functions include a retailer’s merely accepting credit cards for purchases or a bank’s having its customer-service windows open only for limited purposes such as deposits and withdrawals, bill paying, and related services.

So, for example, if your bank’s branches are open on Saturdays for handling deposits, check cashing, withdrawals and other routine teller responsibilities, but there are no staffers who can disburse loan proceeds, handle inquiries about loans or loan rates or open new accounts, your bank is not “open to the pubic for carrying on substantially all of its business functions,” and Saturday would not be a business day for your bank under the business day definition in the first sentence of section 1026.2(a)(6).

But if during your Saturday teller hours there is someone at all or most of your branches to open accounts, make loan disbursements and handle credit transaction inquiries, Saturdays would be a business day for your bank.

The term “business day” appears 72 more times in the text of the full regulation (excluding the Official Interpretations in Supplement I). This general definition — a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions — applies to most of those uses of the term.

However, there are thirteen sections or paragraphs of the regulation in which “business day” is used where the “precise” definition for “business day” is used. Those sections and paragraphs are listed in the second sentence of paragraph 1026.2(a)(6), which reads—

However, for purposes of rescission under §§ 1026.15 and 1026.23, and for purposes of §§ 1026.19(a)(1)(ii), 1026.19(a)(2), 1026.19(e)(1)(iii)(B), 1026.19(e)(1)(iv), 1026.19(e)(2)(i)(A), 1026.19(e)(4)(ii), 1026.19(f)(1)(ii), 1026.19(f)(1)(iii), 1026.20(e)(5), 1026.31, and 1026.46(d)(4), the term means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C, 6103(a), such as New Year’s Day, the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, [Juneteenth National Independence Day,] Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.

(I added Juneteenth to the list in the regulatory text.)

There are two important lists in that sentence:

  • The list of sections where the “precise” definition applies
  • The list of legal public holidays

The affected Regulation provisions: Here’s a list of the affected Reg Z sections with a brief description of each:

  • 1026.15 – Counting the three business days in the rescission period for certain open-end credit extensions for which there is a security interest in a consumer’s principal dwelling
  • 1026.23—Counting the three business days in the rescission period for certain closed-end credit transactions secured by a consumer’s principal dwelling
  • 1026.19(a)(1)(ii)—Counting the presumed three business days by which a consumer is deemed to have received good faith estimate disclosures in connection with a consumer’s application for a reverse mortgage to be secured by the consumer’s dwelling, if the disclosures are mailed to the consumer. The consumer cannot be charged a fee (except for the cost of a credit report) before the consumer receives (or is deemed to have received) the disclosures.
  • 1026.19(a)(2)—Those good faith estimate disclosures must also be delivered in person or placed in the mail not later than the seventh (precise definition) business day before consummation of the reverse mortgage loan. The precise definition is also used in counting three business days before consummation (and the presumed three-day delivery time if sent by mail) that a revised disclosure must be received if the APR in the early disclosures becomes inaccurate.
  • 1026.19(e)(1)(iii)(B)—Counting the seven business days before consummation to determine the latest day the creditor may send a TRID loan estimate (except for loans secured by a timeshare interest).
  • 1026.19(e)(1)(iv)—If a TRID loan estimate is not provided to the consumer in person, counting the three business days until the consumer is considered to have received it after it was delivered or placed in the mail
  • 1026.19(e)(2)(i)(A)—The consumer in a TRID transaction cannot be charged a fee (other that for a credit report) before the consumer has received the loan estimate and has expressed an intent to proceed with the transaction described in the loan estimate. Section 1026.19(e)(1)(iv) just above requires that, if the loan estimate isn’t given in person, the consumer is considered to have received the loan estimate three (precise) business days after delivery or mailing.
  • 1026.19(e)(4)(ii)—Counting the four business days before consummation by which the consumer must receive any required revised loan estimate and counting the three business days after non-in-person delivery by which the consumer is considered to have received a revised loan estimate.
  • 1026.(f)(1)(ii)—Counting three business days before consummation to determine when the consumer is required to have received the TRID closing disclosure.
  • 1026.19(f)(1)(iii)— If the TRID closing disclosure isn’t given in person, counting the three business days after placing them in the mail by which the consumer is considered to have received them.
  • 1026.20(e)(5)—Counting business days for the timing requirements for disclosures involved when closing a consumer’s mortgage escrow account.
  • 1026.31—Counting the three business days prior to consummation or account opening by which the creditor must provide disclosures required by § 1026.32 for a high cost mortgage or by § 1026.33 for a reverse mortgage
  • 1026.46(d)(4)—Counting the three business days after which a required disclosure for a private education loan is mailed to a consumer that the consumer is considered to have received the disclosure.

The public legal holidays. There are now 11 public legal holidays and 52 (or 53) Sundays that are not business days (even if your bank is open for all purposes) when the precise business day definition in Regulation Z applies. Six of those holidays —the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Labor Day, Columbus (or Indigenous Peoples) Day, and Thanksgiving Day—are always weekdays (five Mondays and one Thursday), and have not caused anyone any confusion.

The other five public legal holidays fall on designated dates—January 1, June 19, July 4, November 11, and December 25—that can occur on Saturday or Sunday. When one of these holidays falls on Saturday, it is often observed the previous Friday, especially by federal employees. In those cases, whether or not the Federal Reserve Banks are closed (they normally are open under these circumstances) the observed holiday (Friday) is a business day when the precise business day definition is applied. The actual holiday (Saturday in such cases) is not a business day when the precise business day definition is applied, even if your bank is fully operational.

When one of the five designated dates occurs on Sunday (Juneteenth and Christmas in 2022, New Year’s Day in 2023), it is often observed on the following Monday, especially by federal agencies and offices. In such cases, the actual holiday is not a business day (both because it is one of the 11 public legal holidays and because it is a Sunday); the observed holiday on Monday (June 20 and December 26 in 2022, and January 2, 2023) is a business day when the precise business day definition applies, even though all Federal Reserve Bank offices will be closed.

For those of you who have read comment 2(a)(6)-2 and note that it says nothing about a designated date public legal holiday falling on Sunday, I agree. The Fed, when it added that little clarifying example of July 4 occurring on Saturday, ignored the fact that it also falls on Sundays with a Monday observance (as it did in 2021). In a phone conversation with a CFPB representative on Friday, July 2, I was assured that Monday, July 5 would be a business day.

In that conversation I suggested that the CFPB will probably be issuing an amendment to § 1026.2(a)(6) and comment 2(a)(6)-2 to add Juneteenth National Independence Day to their lists (hopefully they will make those amendments before Juneteenth arrives in 2022), and that when they make those amendments it would be the perfect opportunity to add an example to the commentary of one of the five designated date holidays (Juneteenth would be the perfect example to use) falling on Sunday. We’ll have to wait and see if the powers that be at the Bureau agree with that logical suggestion.

Don’t use the Reg Z definition elsewhere

Some of you may already be anticipating where this is going, and you’re wondering, “What about Regulation CC and its definition of “business day?” And this is the perfect time for the warning: Never “borrow” a definition from one regulation and apply it to a different regulation. It is a recipe for confusion (or worse) to do so.

Regulation CC is the perfect example, since it has its own “business day” definition in § 229.2(g):

Business day means a calendar day other than a Saturday or a Sunday, January 1, the third Monday in January, the third Monday in February, the last Monday in May, July 4, the first Monday in September, the second Monday in October, November 11, the fourth Thursday in November, or December 25. If January 1, July 4, November 11, or December 25 fall on a Sunday, the next Monday is not a business day.

Do you see the differences between this definition and either definition in Regulation Z?

  • It can never be a Saturday or a Sunday.
  • It doesn’t matter whether your bank is open for substantially all business (it does matter in the definition of “banking day”).
  • If one of the designated-date holidays occurs on a Sunday, the next Monday is not a business day (because the Fed isn’t open for check clearing, etc.)

The same list of public legal holidays is included in both regulations. The Fed should be amending the definition at some point to add Juneteenth to that list in Regulation CC (but, given the Fed’s track record on keeping the regulation current, I won’t hold my breath).

Advance Child Tax Credits and closed accounts

By John Burnett

The IRS started sending direct deposits of Advance Child Tax Credits (ACTC) on July 15, 2021. Additional ACTC credits will be sent on August 13, and the 15th of each month from September through December 2021.

Some of the direct deposits will be directed to accounts that have been closed by the depositor or the bank. This will probably mean that people in some banks will start thinking about “offsets.” But don’t go there!

Treasury regulations require that direct deposits of federal benefit payments directed to closed accounts be returned. The IRS will reissue the payments in check form. A bank cannot legally “reopen” a closed account to accept such a payment, and the payment cannot be diverted to recover on a charge-off. The payments should be returned even if the recipient has another account with your bank.

The IRS has an online tool – the Child Tax Credit Update Portal at https://www.irs.gov/credits-deductions/child-tax-credit-update-portal — for taxpayers to use to update bank account information.

2021 Oklahoma legislation – Part I

By Pauli D. Loeffler

Legislation was enacted amending two sections in the Oklahoma Banking Code (Title 6) and an entirely new section was added. The effective date for the amendments and the new section is November 1, 2021.

§ 901 – POD beneficiaries.

The amended provisions of this statute are emphasized.

B.

2.  A deposit account with a P.O.D. designation shall constitute a contract between the account owner, (or owners, if more than one) and the bank that upon the death of the last surviving owner of the account, and after payment of account proceeds to any secured party with a valid security interest in the account, the bank will hold the funds for or pay them to the named primary beneficiary or beneficiaries if living. If a primary beneficiary predeceases the account owner, the share of that primary beneficiary shall be distributed pursuant to either paragraph 4 or 5 of this subsection, whichever is applicable.

3.  Each P.O.D. beneficiary designated on a deposit account shall be a primary beneficiary unless specifically designated as a contingent beneficiary.

4.  If there is only one primary P.O.D. beneficiary on a deposit account and that beneficiary is an individual, the account owner may designate one or more contingent beneficiaries for whom the funds shall be held or to whom the funds shall be paid if the primary beneficiary is not living when the last surviving owner of the account dies. If there is more than one primary P.O.D. beneficiary on a deposit account, contingent beneficiaries shall not be allowed on that account.

5.  If the sole primary P.O.D. beneficiary is not living and one or more contingent beneficiaries have been designated as allowed by paragraph 4 of this subsection, the funds shall be held for or paid to the contingent beneficiaries who are alive at the time of the account owner’s death in equal shares, and shall not belong to the estate of the deceased primary beneficiary. If neither the primary beneficiary nor any contingent beneficiary is living at the time of the account owner’s death, the funds shall be paid to the account owner’s estate

7.  If only one primary P.O.D. beneficiary has been designated on a deposit account, the account owner may add the following, or words of similar meaning, in the style of the account or in the account agreement:

“If the designated P.O.D. beneficiary is deceased, then payable on the death of the account owner to (Name of Beneficiary), (Name of Beneficiary), and (Name of Beneficiary), as contingent beneficiaries, in equal share.”

8.  Adjustments may be made in the styling, depending upon the number of owners of the account, to allow for survivorship rights, and the number of beneficiaries.  It is to be understood that each beneficiary is entitled to a proportionate share of the account proceeds only after the death of the last surviving account owner, and after payment of account proceeds to any secured party with a valid security interest in the account.  All designated primary P.O.D. beneficiaries shall have equal shares.  All designated contingent P.O.D. beneficiaries shall have equal shares as if the sole primary beneficiary is deceased. In the event of the death of a beneficiary prior to the death of the account owner, the share of that beneficiary shall be divided among any surviving beneficiaries or distributed to contingent beneficiaries pursuant to paragraphs 4 and 5 of this subsection, if applicable.  If no beneficiaries are alive at the time of the account owner’s death, the funds should be held for, or paid to, the estate of the deceased account owner…

12. Subsequent to the effective date of this act, a bank shall provide a customer creating a P.O.D. account with a written notice that the distribution of the proceeds in the P.O.D. account shall be consistent with the provisions of this section.

 What you need to know:

  • First and most importantly, the changes apply ONLY with regard to POD beneficiary designations made on or after November 1, 2021. They do not apply to existing POD designations, so it is critical to take into account the date the POD designations were made in order to comply with the statute.
  • If only one natural person is named as POD beneficiary, the owner may name contingent beneficiaries. if a tax-exempt § 501(3)(c) beneficiary or a trust is named as POD beneficiary, no contingent beneficiaries can be named. These statements apply under both the current version of § 901 and the amended version.
  • If two or more natural persons are named as POD beneficiaries and one of them predeceases the last surviving owner of the account, under the current version of § 901 the funds will be split equally among the living PODs and the estate of the predeceasing POD beneficiary. Under the amended version, only those PODs alive at the time the last surviving account owner dies will receive equal shares.
  • If there is only one natural person named as POD beneficiary who predeceases the last surviving account owner and contingent beneficiaries are named, the contingent beneficiaries who are alive at the time the last account owner dies will receive equal shares under the amended statute as opposed to the current statute under which the estate of a predeceasing beneficiary would receive a share.
  • If all primary beneficiaries predecease the last surviving owner, the funds belong to the owner’s estate under the amended statute, Likewise, this is the result if the sole primary beneficiary and all named contingent beneficiaries predecease the owner.

§ 906 – Transfer of deposits or contents of safe deposit boxes to heirs.

Again, I have emphasized the amendments to this statute.

A. 1. When a deposit has been made in a bank or credit union in the name of a sole individual without designation of a payable-on-death beneficiary, upon the death of the sole owner of the account if the amount of the aggregate deposits held in single ownership accounts in the name of the deceased individual is Fifty Thousand Dollars ($50,000.00) or less, the bank or credit union may, without a requirement that heirs open an additional account, transfer the funds to the known heirs of the deceased upon receipt of an affidavit sworn to by the known heirs of the deceased which establishes jurisdiction and relationship and states that the owner of the account left no will; provided, however, that no probate proceedings are pending.  The affidavit shall be sworn to and signed by the known heirs of the deceased and the same shall swear that the facts set forth in the affidavit establishing jurisdiction, heirship and intestacy are true and correct. The affidavit may contain a clause indemnifying the bank from any damages related to the release of funds.  In the event the account is subject to pending probate proceedings, the release of the deposits in the account shall be determined by the court.

2.  Upon the death of an individual who is the sole renter of a safe deposit box in a bank or credit union, the bank or credit union may open the box in the presence of all known heirs and transfer or release the contents to such heirs upon receipt of an affidavit which establishes jurisdiction and relationship to the deceased and states that the renter of the safe deposit box left no will or that the contents of the safe deposit box are the only known assets of the deceased renter. The affidavit shall be sworn to and signed by the known heirs of the deceased and the same shall swear that the facts set forth in the affidavit establishing jurisdiction, heirship and intestacy or that the contents of the safe deposit box are the only asset of the deceased are true and correct.  Every known heir shall either be present in person or by a duly authorized agent.  If any known heir is unable to be physically present for the opening of the box and transfer of the contents, such heir may appoint an agent by executing authorization in writing in the following form:  “I hereby authorize (name of person) to act as my agent at the opening and transfer of contents of safe deposit box (number or other identification) at (name of financial institution).”  The authorization form shall be signed and dated by the heir and notarized.  The bank or credit union may impose its standard fee for drilling the box if the heirs cannot provide the key for opening.

B.  Receipt by the bank or credit union of the affidavit described in subsection A of this section shall be a valid and sufficient release and discharge to the bank or credit union for any transfer of deposits or contents made in good-faith reliance on the affidavit and shall serve to discharge the bank or credit union from liability as to any other party, including any heir, legatee, devisee, creditor or other person having rights or claims to funds or property of the decedent, and include a discharge of the bank or credit union from liability for any estate, inheritance or other taxes which may be due the state from the estate or as a result of the transfer.

C.  Any person who knowingly submits and signs a false affidavit as provided in this section shall be fined not more than Three Thousand Dollars ($3,000.00) or imprisoned for not more than six (6) months, or both. Restitution of the amount fraudulently attained shall be made to the rightful beneficiary by the guilty person.

Unlike the amendments to § 901, the amendments should have little or no impact on banks. If a) the aggregate deposits held in sole ownership without PODs do not exceed $50,000, b) the customer died a resident of Oklahoma, and c) did not have a will, the affidavit under § 906 was and is available for authority to disburse the funds. If there is a will, or the customer died a resident of another state, then an affidavit under this section is not an option, but the Affidavit under § 393 of the Oklahoma Probate Code (Title 58) might be used both for deposits and safe deposit boxes, if all conditions of that statute are met. I note that under the probate code the Affidavit requires a statement that there is no pending probate. Unlike an Affidavit submitted under § 393, the bank does not face liability for refusing to accept an affidavit under § 906 of the Banking Code for either deposits or safe deposit box contents.

I am mystified by some of the additional language. For instance, I have no clue why “without a requirement that heirs open an additional account” was added. I assume that some banks or credit unions may have had such a requirement that I didn’t know about. Allowing the bank to include an indemnity clause was not prohibited under the current statute, and in light of the provisions under subsections B. and C, I am not sure this change was needed. I note that charging a drilling fee was not prohibited under the prior version.

§ 909 – Powers of Authorized Signer — Form for Additional Powers

This is an entirely new statute. You may access both the statute and the form here.

A. Unless the deposit agreement states otherwise, an authorized signer on a deposit account shall have the following powers, regardless of whether the account is a consumer or commercial account:

 1.  Sign checks;

2.  Make deposits of checks payable to the account owner into the account;

3.  Make cash deposits into the account;

4.  Obtain an account balance;

5.  View copies of checks he or she has signed; and

6.  Obtain deposit slips when making a deposit.

B.  If additional authority is not expressly granted in the deposit account agreement, additional powers may be granted in writing by the owner of the account. If the account is an individual account, the owner may execute an additional authorization document.  It must be dated and in writing and may be revoked or amended at any time by the account owner.  If there are multiple owners, all must execute the additional authorization document.  If the account is owned by an entity, the entity must approve the grant of additional powers in the same manner as it appoints authorized signers.

C.  A customer may initial next to the additional powers to be granted and line through those that are not being granted, pursuant to subsection D of this section.

Form for Additional Powers for Authorized Signer:

I, the undersigned account owner or duly empowered representative of the account owner, hereby grant and approve the following additional powers for authorized signer(s) on account

# _______________________.  Bank name ______________________.

____________ Obtain and use a debit card or automated teller machine card

____________ Obtain copies of statements on the account from the bank

____________ Order checks

____________ Obtain copies of checks or other transactions on the account

____________ Authorize or terminate automated clearing house debits to the account

____________ Complete affidavits of forgery

____________ Initiate a change of address for the account

____________ Withdraw cash up to $___________

____________ Dispute a card transaction on the account

____________ Report a lost or stolen card on the account

____________ Use online banking to view transactions on the account

____________ Set up online bill payments

____________ Use the mobile app to access information about the account.

Important points. The list of powers granted to an authorized signer in subsection A. is not exclusive, and your account agreement may grant powers that aren’t listed in that subsection or restrict powers that are. Additionally, UCC § 4-403 provides that any person authorized on an account may stop payment or close the account and that power exists regardless of the omission from this statute.

There is no requirement that the bank use the additional powers form, and the bank is free to add to or delete powers from the form as it chooses. Please keep in mind that guardians and attorneys-in-fact are governed by other law, so neither the statute nor the additional powers form is appropriate for use in those cases.

July 2021 OBA Legal Briefs

  • Vacations — Required or recommended

Vacations – Required or recommended

By Andy Zavoina

We last wrote about vacation time in the September 2019 Legal Briefs. That was a short article on the recommended necessity of taking consecutive days off. After a year of COVID-19 and everyone being couped up, summer 2021 stands to be a record as people can finally get back out and take much needed vacation time. But rather than say, “here is a cite from the FDIC and Human Resources needs to enforce a policy…” I want to explore why a “vacation” policy should be required, where it is required as well as where it is not, and how to meet the spirit and intent. I put quotes around the key term, vacation, but that is misleading. I also want to explore not just being absent but also being disconnected, and why this is important. It is important to point out to both management and staff that such a policy is a safety and soundness issue, not a way to inconvenience staff or force them to group together the few days of vacation they have.

We will talk about a few real-life cases which reinforce why this policy needs to exist, and under what circumstances exceptions are allowed. By the time you are done, you will be able to ensure management has all the facts and the reasons for requiring many staff members are in fact absent from their duties, and how this is beneficial to both the bank and the employee. In short, it will help you understand why a policy is needed and how to craft it or tweak, if needed, what you already have in place, to best meet the spirit and intent of the rule.

Three cases of interest

Indirect vehicle financing. Fortunately, this was not my bank, but it was a bank about a block away from our main branch and we all knew many of the staff there. Many in my bank knew the woman in question. She had worked for the bank for over 20 years. She rarely took a vacation or sick day. She was seen as dedicated. She was seen as experienced. She was trusted.

It turned out what she was, was a thief, an embezzler. She worked in the indirect dealer area and handled drafts. With many larger floorplans there was a lot of money coming in and going out and that meant large suspense accounts. Those accounts had to be reconciled and checked. But when you have an employee of this caliber and with this experience, you ask her “why?” She will explain it and on you go, because these audits are such a pain to do and explain anyway.

But when she was on a very rare vacation, the employee filling in had questions. Nobody liked the answers because it was well over $100,000 that could not be reconciled and that is a shock for a small bank. She had been taking money and as the phrase goes, cooking the books. When she was not available to answer certain questions, the facts came pouring out because numbers do not lie.

First Community Bank, Cave City, AR. Two years ago, there was an incident in Cave City, Arkansas. This is “Home of the world’s sweetest watermelons.” In the 2010 census this was a town of less than 2,000 people, so a small town to say the least.

Today the bank involved has 28 locations in Arkansas and Missouri and the Cave City branch shows to have deposits of $22 million. For 18 years Carrie Porter worked at First Community Bank. She was a teller. For about 12 of those years Carrie would periodically take a stack of $100 bills. The first time she walked out of the bank with $10,000 in her purse that was not hers, it was not hard. She continued this every three or four months.

By the time she was caught the sum of her theft was calculated to be $285,125. She was very apologetic and confessed what she had done. She was cashing in her retirement and her family was harvesting trees from their property and selling land. She hoped to repay 80 percent of what she had stolen before she reported to prison for 18 months. She swore she would repay all of it. She said the money “was just gone” and really had nothing to show for it.

Carrie Porter will be about 51 years old when she is released and most certainly her family will be paying the price with her. Thefts such as this impact the bank, the employee, and the families of all involved.

Bank fraud, wire fraud, and money laundering (Oh, my!). In April of this year in New York, Gangadai Rampersaud Azim was arrested and charged with wire fraud, bank fraud, bank theft, money laundering, and conspiracy, for her role in a scheme to defraud the bank she worked at, of $1.7 million. These charges are pending, so the crime is alleged at this point.

Azim allegedly stole more than $1.7 million and concealed the crime until an absence from work led to its discovery. Yes, she had an illness that forced her to take leave. She was not there to cover her tracks.
In January 2021, the bank set off a customer’s deposit for a delinquent loan. The customer claimed the loan had been paid off in 2019, and the unravelling began. In 2019 the money was taken for the loan and the customer believed the loan was paid off. Azim kept that payoff and unbeknownst to the borrower, started a renewal of the loan for them. There is both a debit and credit, but Azim’s theft created an additional debit that had to be concealed in the future.

The investigation revealed Azim repeatedly made false entries in the bank’s systems, misappropriating funds paid to the bank by many borrowers who thought their loans were paid off. In fact, Azim was extending the maturity dates, so the bank believed it had assets, while the borrowers thought they had no debts. As loans came due, they were covered by new loans faked by Azim to replace them.

The criminal complaint says, “Between August 2008 and January 2021, Azim, a long-time employee of a New York, New York-based bank (“Bank-1”) stole approximately $1.7 million from her employer. Over the course of approximately 12 years, Azim executed hundreds of wire transfers of Bank-1 funds to co-conspirators and related companies, who then sent portions of the ill-gotten funds to Azim’s personal bank account.

“In furtherance of her scheme to defraud Bank-1, Axim repeatedly made false entries in Bank-1’s systems, misappropriating funds paid to Bank-1 by its clients to satisfy outstanding loan obligations and then extending the maturity dates of those loan obligations, making it appear as though the loan obligations had not yet been paid. When even the fraudulently extended maturity dates came due, Azim originated new, fraudulent loans. Azim utilized the proceeds of those fraudulent loans to satisfy the loans for which she had previously stolen the client payments. In doing so, Azim abused her position at Bank-1 and enriched herself at the expense of her employer.”

In all it appears there were 14 fraudulent loans without promissory notes for $1 million that were used to pay the fictitious debts Azim created, and five others for more than $700,000 with extended maturity dates where the borrower thought the loans had been satisfied. Over approximately 12 years, between 2008 and 2020, Azim made approximately 200 wire transfers of bank funds, each for an amount under $10,000, sent to third party accounts. Transfers were made to co-conspirators and related companies, which then returned portions of those funds to Azim.

We never would have thought …

The bank’s Security Officer will advise the bank to diligently have the internal control and other periodic audits completed because the bank must be diligent against theft. Banks and other companies often say when an embezzlement is found that that was the last employee they would have ever thought would steal from them. Unfortunately, many of the traits of a dedicated employee are also those of someone covering up a theft. Additionally, there are signs to look for in employees such as those living beyond their means, having financial difficulties, having unusually close relationships with vendors, and having excessive control issues such as over the account relationships they oversee.

Security programs will point out common warning signs seen when employee thefts have occurred. These are not definitive points, but rather are intended to raise awareness.

• The employee never wants to take vacation.

• The employee works a lot of overtime and enjoys the peace of quiet of being the only one there.

• The employee takes work home.

• There are signs of excessive personal spending, cars, vacations, collectibles, etc. Some of these may be converted to cash through sale, laundering if you will, and some may be for personal enjoyment.

• Frequent casino trips.

• Unusually close relationship with customers or vendors.

• Unverified expense reports for supplies or travel.

Disconnecting

Human Resource managers and health experts all agree that there is a reason for weekends and vacations regardless of the energy and dedication an employee has. Disconnecting from the job is needed for mental health. Therefore, your bank offers vacation time.

There are many reasons big vacations are not taken. Not every employee wants to travel or has the means to do so. There may be additional restrictions due to an employee’s health or that of someone they care for. Family schedules can be hard to sync and there can be many other reasons. But that does not prevent a person from using time off and disconnecting from the job.

There is the occasional employee who wants control. The work they do may be intricate and detailed and having a day-to-day knowledge of what has transpired assists them in keeping up to date and resolving problems quickly and accurately. “If I leave for a few days, I’ll just come back to a mess that will take weeks to clean up.” This may be a valid concern, but sometimes it is a sign of a controlling person who has falsified records and accounts and is concerned that anyone stepping into their job may find a discrepancy and that could lead to discovery. It is like a juggler with many balls in the air. If you miss one, many others may come down as well. They must be there, in control, to keep those balls in the air.

There are pros and cons of a mandatory vacation requirement. These should be recognized by management, HR, and the bank’s employees. Taking a short block of days, such as one week, gives the employee a chance to recharge their batteries. It can be a needed break.

This employee’s time off is also an opportunity for the bank to review the employee’s area. Have there been complaints from customers or staff that a supervisor was overstepping their authority? This is a chance for issues to come to the top so they can be resolved. It is also a time when workloads can be reviewed and balanced for the benefit of everyone. It also encourages cross training staff. No one person is irreplaceable and if they are, the bank needs to rectify that. People come and go but the business tasks continue as do deadlines. This gives the junior employee a chance to work at a higher level and to understand a job they may inherit or may not be suited for. In that case, it is better to know sooner rather than later. If that junior employee is in a rut, this may be an opportunity to help them as well. And if that seasoned employee were to decide to leave suddenly, the bank wants to know who can fill the position and what information may be needed to do so. A few vacation days may reveal that more cross training is required to be efficient, or that the written procedures are not adequate for the position in today’s environment.

After a year of so many telecommuting on a full or part time basis, this need is even more pressing today. It is rare that an employee will come back from a vacation more tired than when they left, even if they filled every day with activities. They either enjoyed the time off or looked forward to getting back to their routine. Either way, it is a positive position for the bank. That leads to happier employees, and makes future recruiting easier as well. It also makes planning easier for the bank and the employees because certain dates can be blacked out well in advance for the benefit of both the bank and staff.

Something that can be a short term “con” and a long term “pro” is that this advance planning reveals staffing concerns. Certain positions can be harder to fill and may stretch key employees very thin. Knowing this in advance assists in resolving the issue before it happens at a less controlled time.

Preplanned vacations may contribute to scheduling challenges as well. When several employees want the week off around given holidays like July 4th or Christmas, it can be taxing on those left to complete all the work. This may also draw down management’s time as increased supervision over a department or certain jobs becomes required. For this reason, adding planned maternity leaves into the calendar aids in the overall planning. A vacation will be easier to adjust than a parental leave.

Another challenge in having a mandatory vacation requirement is enforcing it. HR needs to be able to warn employees well in advance so there is not a concentration of employees who all need the last week of the year off. If planned events must be adjusted for whatever reason, they should be rescheduled immediately to avoid a bottleneck.

If an employee does not use their annual vacation time, either it accumulates which could cause the bank actual cash if it pays the employee for that time, or the employee could lose those days which could be seen in the long term as “theft of time” by the employee. That is, if their opinion of the bank sours, this will be one more thing they dislike about it and blame the bank. It also serves to support a bad employee as it adds justification to anything they are doing wrong.

How should the bank manage these situations? The bank controls the risks. The risk is the employee could be embezzling, but that is certainly not the norm and we do not assume it is, but we do recognize it as a red flag. It is a risk that is mitigated in part by ensuring employees use vacation time. You may hear arguments, “I don’t have enough vacation time to take an entire week off,” or “I’m a one-person department. If I’m not here to do my job, it will not get done.” This brings us back to risk mitigation. The bank truly needs someone else to understand that job and to be able to do it. In addition to the proverbial bus taking that employee out of their job, that employee limits their upward mobility in the bank, and if they ever choose to leave the bank there would be nobody cross-trained to fill in or take over. Again, risk mitigation is good for the bank and the employee in this case. Fortunately, this risk mitigation is also an audit control feature.

Audit Controls

The bank’s HR area should have a record of which employees have how many days of vacation. Proper procedures tell us the vacation days should be tracked. The bank needs to be aware of who uses, stockpiles, or loses vacation time. Proactively monitoring who has how many vacation days is a positive step for the bank in planning its calendar. When the bank has large projects coming up such as systems conversions, a new branch opening, or a major exam, certain employees may not be able to take vacation days. These need to blacked out and the employee needs to know this in advance.

Likewise, the employee should be able to identify at least one block of time they do want vacation, and this should be communicated to the bank. As an example, a bank with a mandatory five-day block of vacation needs to know when certain employees will be out. Additional vacation days may be broken up as some people enjoy short breaks and pairing one or two days with a holiday weekend provides interim breaks. But that five-day break helps detect possible ongoing fraud. Five days is often enough for one or more of those balls in the air to drop.

There may be a set period of days the bank identifies as “mandatory vacation.” If the bank determines that for a variety of reasons a five or even ten-day block of time is required, employees and the bank need to plan when this will be, so it meets the needs of both the staff and the bank. Employees may be restricted from having overlapping days with another key employee, so it may be necessary to create a hierarchy of who gets preference, the senior employee by position or time at the bank, the first one to request those days or some other methodology that works for your bank.

OK Administrative Code 85:10-5-3

To save you from looking this up, here is what the Administrative Code requires of your internal controls program as to being absent. The actual text is in italics, and I’ve injected my own comments after each paragraph, as needed, to reinforce certain points:

All internal control programs adopted by banks shall contain as a minimum the following:

(1) A requirement that each officer and employee, when eligible for vacation, be absent from the institution at least five consecutive banking days each calendar year, unless otherwise approved in writing by the bank’s bonding company for bank officers and employees generally and then each officer and employee who may be excepted from this requirement must be specifically approved by the bank’s board of directors and it shall be recorded in the board of director’s minutes, that the officer or the employee may be absent less than the five consecutive banking days. During the absence of an officer or employee, the duties of the absent officer or employee must be performed by other bank officers and employees.

This section says a lot. Some banks have expressed a policy of providing immediate vacation availability to meet this perceived five days off requirement. Note the text says, “when eligible for vacation.” If the bank’s vacation policy requires accrual and prohibits taking vacation in the first three or six months, then the requirement to take days off is based on eligibility and no time is available during that probation or accrual period. The bank may consider a policy such as “the employee will accrue 0.83 days of vacation per month yielding 10 days after one year. The employee will be eligible for vacation after 6 months, when five days have accrued. As vacations are planned, a five-day continuous block must be scheduled by the employee. Additional days may be taken at the convenience of the bank in one day increments, but at least one block of five days must be planned.” A policy such as this means that an employee hired after June will not have time to accrue the minimum five days required, July to December is six months, 6 x0.83=4.98 days, rounded up to the five needed, but the calendar year ends with the last accrual. In this case the accrued days could be taken in that year with the caveat that the 5-day block will be taken the following calendar year as there are more days accrued. Employees hired in May could feel resentment as a strict reading says they are eligible for five days of vacation in December and would have to take those days then to achieve the “each calendar year” requirement. The bank would then have to consider that is what is required, or an exception be granted or that vacations are simply not allowed in the first calendar year except by special permission.

Note next that the actual requirement is not that an employee take vacation days, but that they be absent for at least five consecutive days. In that this is an internal fraud control procedure the five days are business days – days in which problematic transactions such as those noted in the actual cases above could be detected. This means we do not count non-banking days such as weekends, holidays, or days when the bank is otherwise closed. This brings up an exception to consider. Say an employee is on a five-day vacation break and a winter storm closes your bank for two days. If there is no item processing, the intent of this break may not be met. The bank needs to consider extending that employees time off to accomplish the five-day break. Since the bank was closed those shouldn’t be vacation days anyway, but the employee may not have enough vacation days remaining for a five-day absence. If the vacation is not extended at that time, consider noting it as an unintended and unavoidable exception caused by an act of God.

Let’s consider another exception. Say an employee has a severe illness and has used their personal and vacation days. Some policies allow other employees to donate their days off to that sick employee. That may exhaust the donating employees vacation days and not allow the five-day absence requirement to be met. Such a policy should allow all but five days to be donated, unless the absence requirement has or will otherwise be met, so keep reading.

The real point here is that the issue is a five-day absence. Let’s assume the bank’s CFO is travelling out of town on Monday for a conference to be held Tuesday through Thursday. She then will travel home on Friday. All 5 of those days were business days. The 5 days of absence can be met with her not performing any of her duties in the bank – that is, if she was absent.

Now let’s consider what “absence” means. Remember that one motivating factor here is fraud detection. This means that employee is not conducting any of their functions or advising on issues while away. They should not be calling, texting, or emailing anyone about their job. Any message such as “Do not worry if it does not balance. Leave it as out and I will fix it/figure it out when I get back. No one will know” would completely defeat the purpose of the rule from an internal control perspective. Similarly, the bank should consider suspending the logon credentials of the absent employee. This protects the bank and the employee as the employee will without question not be able to go into the bank’s systems and make any changes, and any other employee using those credentials will be locked out. The bank’s IT department would be able to track attempted logons and determine if these credentials were compromised. That would be a separate issue, but an important internal control, nonetheless.

Exceptions can be allowed. These may require the approval of the bank’s bonding company, and the board of directors. The latter should be noted in the board meeting minutes. I was a common exception in my bank. It was a smaller bank, and I was the Compliance Department. This is a field requiring precise knowledge of laws and regulations and I was not easily replaceable. There were subject matter experts in various departments of the bank who could answer questions about their areas, but I tied it all together. I never worked on any general ledgers, debits or credits or handled cash or checks for processing. I did not grant or close loans. This put my position at a very low risk of conducting internal fraud and especially any fraud that would be detected because of my absence.

In a very small bank, another potential solution is cross-training. Two employees may switch positions, but it is imperative that they not conduct or advise each other about their duties as this could defeat the purpose of being absent. This is not ideal but may be permissible under certain circumstances.

Other Rules

The FDIC addressed this issue in FIL-52-95. Yes, that is from 1995 and it is still valid. In part it says, “The FDIC endorses the concept of a vacation policy that allows active officers and employees to be absent from their duties for an uninterrupted period of no less than two weeks.” Some larger banks do hold to a ten-day period but because of staffing issues, five days is often considered adequate to detect wrongdoing. The FIL is guidance, not a requirement. It states that if a bank is not following this guide, examiners should encourage the board of directors to annually review and approve the policy followed and the exceptions allowed. The March 2015 Internal Routine and Controls exam manual includes a section recommending a bank have a policy requiring employees (which includes officers) be absent for a two consecutive week period. I understand examiners will inquire about this, but that little else is done when risk management practices and strong internal controls exist. The exam manual calls for only a discussion with management when such a policy does not exist. It also states, “Any significant deficiencies in an institution’s vacation policy or compensating controls should be discussed in the ROE and reflected in the Management component of the Uniform Financial Institutions Rating System (UFIRS).” The exam manual also refers to the rotation of staff as an effective internal control and a valuable part of an employee’s training.

The Federal Reserve issued SR 96-37 in December 1996 discussing required absences. This was a guidance document. The FRB later issued Circular 10923 on February 10, 1997, where it provided guidance and recommended a ten-day absence. It is specific to sensitive positions and allows for well document exceptions.

I was in a national bank for over 20 years, and it was not an event during any of our exams. I have read that as national banks get bigger, the examiners do pay more attention and do point it out as a strong internal control. So, like the FDIC and FRB, they encourage a policy requiring absence, but it is not a requirement. It is mentioned in the OCC’s Internal Controls Manual. This references sensitive positions or risk-taking activities and asks, “Is there periodic unannounced rotation of duties for employees or vacation requirements that ensure their absence for at least a two-week period?” This is a question, but not a stated requirement.

The bank may opt to prioritize which positions would require a consecutive five- or ten-day absence from their positions and those handling cash and checks, approving and processing loans and similar “at-risk” tasks and positions may be the only ones required, or they may require a higher bar to request and have approved any exception. Risk rating the employee’s positions will not please all of them, but some may be happier than others. Changes to a position’s duties could influence this risk status, so remember to add that to a checklist, if applicable.

May 2021 OBA Legal Briefs

  • Dot your i’s, cross your t’s (employer workplace notice rules)
  • Foreclosures and evictions after a pandemic

Dot your i’s, cross your t’s

By Andy Zavoina

We, in the compliance and legal fields make it a habit of dotting our i’s and crossing out t’s because we are nitpickers. We look for little details and we agonize over potential terms like “the bank may…” If your mother said you “may” eat all your brussels sprouts does that seem like “may” means it is an option to do so or you must do so? And different people may interpret that statement differently, but we all need to know and follow the rules as best we can. Doing so is a risk issue. Sometimes that risk issue is of a regulatory nature and at others it may be a litigation issue.

Now let’s address one of those often-forgotten rules addressing signage. As nitpickers we periodically walk through our branches and we look for signage. There are funds availability notices near the teller line, equal lending posters near the loan area and a Customer Information Program notice near new accounts. We are very familiar with the signage requirements that are well defined in the regulations we deal with every day. But it is the odd requirements we could fail on because we are not well versed in personnel compliance matters, nor are our examiners who may or may not be checking them. These are signage requirements involving the bank as employer and its employees. These may be of little “importance” on day-to-day matters because it is not a consumer protection issue, but it may be an employee information issue. In my bank, I would include these human resource signage requirements in my compliance signage audits because as a bank officer, it was my job to protect the bank in all matters, extending beyond consumer compliance.

Has your bank ever been involved in litigation with an ex-employee? It might be like many marital divorces as the name calling and mudslinging begins. Signage could be an issue in these instances, because the bank never posted “that sign advising me of my rights, so the bank was negligent.” That may be heard from the ex-employee’s lawyer as they ask for back pay or some other compensation they feel they are now entitled to, or when the employee’s gripe may lead to a monetary penalty from a government agency like the Department of Labor.

When you do that walk-through (annually or at some other frequency based on your compliance audit program) in the branches with your signage checklist, you may be looking for the 5-in-1 Employment poster. On the BankersOnline Tools section for Signage Audits, this is noted as “Required to be visible to job applicants and employees, 42 USC 2000e-10(a). This poster should include five parts, and if not in a combined poster, individual signs must be posted in the manager’s office or lobby. The five laws are: Equal Employment Opportunity Act, Fair Labor Standards Act, Employee Polygraph Protection Act, Family Medical Leave Act, and OSHA’s Plain Language ‘It’s the Law’.”

There is also a Notice of Employee Rights poster under the National Labor Relations Act, the primary law governing relations between unions and employers in the private sector. See 29 CFR Part 471. Banks need this sign because they have FDIC deposit insurance, complete savings bonds transactions, and perhaps have government contracts. Post the notice conspicuously in offices where employees covered by the NLRA perform contract-related activity, including all places where notices to employees are customarily posted both physically and electronically.

Generally, there are several requirements your bank may need to follow from the Fair Labor Standards Act (FLSA), the Family and Medical Leave Act (FMLA), the Employee Polygraph Protection Act (EPPA), or the Service Contract Act (SCA). The SCA is also referred to as the McNamara-O’Hara Service Contract Act, a federal law controlling service contracts entered into between individuals or companies and the federal government, for the contractors to engage “service employees” to provide services for these government agencies. Most banks don’t have SCA concerns.

Sometimes these signage requirements are met with notices in a Human Resources area, where staff hiring and training is common, and perhaps in a breakroom where employees frequently gather for meetings and breaks. But how many times have employees seen these required notices since the pandemic sent them to work from home?

Many employees have been working from home for twelve months or more. While some staff may be returning to the branches to work, others may be rotating back and forth from a home office to the bank every other week or with some other frequency, and still others may be shifting to a home office on a permanent basis for any number of reasons. Many banks and other employers have ignored signage requirements because there were more pressing issues, and the home office was a temporary assignment. No regulators were asking about signage and it has not risen to being a formal issue, yet.

But as a nitpicker, part or your job assignment is to mitigate risk – and to avoid it when possible. As it pertains to compliance with federal employment laws, let’s talk about risk avoidance. Be sure to include Human Resources in this discussion both to ensure they are aware of what can be done, as well as to avoid duplicative efforts and to know that anything that has been done meets all the legal requirements. Two heads are better than one.

The Department of Labor (DOL) has provided some assistance in its Field Assistance Bulletin No. 2020-7 (FAB 2020-7). This bulletin was published last December and provides guidance explaining what can be done with electronic postings.

Early in FAB 2020-7, it separates the federal requirements of these notices which require continuous availability from those which are considered individual notices. The former includes FLSA, FMLA, and the EPPA. The latter group requires the bank to provide one-time, individual notices includes Section 14(c) of the FLSA. According to FAB 2020-7, the bank may meet posting and disclosure requirements for the first group by always making them available to home office workers on a website; the latter may be delivered by email. There are conditions for these substitutions and the bank may still have to keep those paper versions posted in the branches.

For laws or regulations which require a bank to “post and keep posted” certain signage “at all times” the Wage and Hour Division of the DOL says that it will consider electronic posting an acceptable substitute where three conditions are met. (1) All of the employer’s employees exclusively work remotely; (2) all employees customarily receive information from the employer via electronic means; and (3) all employees always have readily available access to the electronic posting. Let’s break down some of this and immediately clarify some points.

Like E-SIGN, the idea is that accessibility matters. Unlike E-SIGN there are no demonstrable consent requirements. If you have employees working remotely, it is assumed technology is not a problem and the employee can send and receive, view, and respond to all these work-related items. The requirement is that electronic postings and notices be as effective as the hard copy notices you have in branches. Next, when it says “all of the employer’s employees” it does not mean the entire work force must be working from remote locations for these disclosures to be permitted, but rather it is referring to all of those who are working remotely. It is also separating those who may be remotely working from those in the branches. Remote workers can get these notices electronically while those in the physical branches could have it available electronically but must also have it available via the traditional means of physical posters, as an example. The FAB explains that “where an employer has employees on-site and other employees teleworking full-time, for example, the employer may supplement a hard-copy posting requirement with electronic posting and the Department would encourage both methods of posting.” It also says “In most cases, these electronic notices supplement but do not replace the statutory and regulatory requirements that employers post a hard-copy notice. Whether notices are provided electronically or in hard-copy format, it is an employer’s obligation to provide the required notices to all affected individuals,” referring to EPPA and FMLA requirements.

The FLSA has a requirement for individual notices under Section 14(c) which pertains to subminimum wage provisions. I’m including some discussion here in the event Section 14(c) is applicable to some of our banks.

The FLSA provides for the employment at wage rates below the statutory minimum for certain individuals. These include students which could be high school vocational students, full-time students employed at the bank as well as college interns. Also included are individuals whose earning or productive capacities are impaired by a physical or mental disability. These may be related to age or injury. Employment at less than the minimum wage is authorized to encourage employment opportunities for this class.

Section 14(c) requires delivery of individual notices to applicable employees. Notice requirements may be met using email or something similar, such as through an intranet, but only if the employee typically receives communications from the bank in this same manner. So, this is not a channel exclusively used for these notices.

To meet the requirements of delivery via an electronic medium, the employee must have “access.” This means they must be able to readily see a copy of the required postings, and the electronic postings must meet the same requirements as worksite postings in the branches. This effectively means the employee must have access to the postings without first acquiring any special permissions such as links or passwords that they would not typically already have. It is not an effective substitute if the postings are in an unknown or little-known location. If this were the case the DOL might consider the disclosures to effectively be hidden from view. The bank would be required to inform employees how to access these notices and provide that employees easily be able to identify which postings apply to them. If the bank does not customarily post notices to affected employees electronically, then doing so just for these notices would not be considered an effective substitute.

Fair Labor Standards Act

The FLSA applies to employers whose annual revenues total $500,000 or more or who are engaged in interstate commerce. The interstate commerce sounds like it may be a disqualifier for some banks, but courts have ruled that this is a very low bar. In fact, some courts ruled that using the postal service to send and receive mail to and from other states qualifies and so can using bank telephones to make and accept calls from other states. There are exemptions for executive, administrative and professional workers in many cases, but it is unlikely everyone in the bank is exempt.

Banks with employees subject to the FSLA rules on overtime, minimum wage or Break Time for Nursing Mothers are required to have a disclosure continually available. This signage must be in a conspicuous place in each branch (or office) so the employees can easily see it.

When the three conditions described above are met, the bank can satisfy its posting requirements using electronic format.

Family and Medical Leave Act

The FMLA applies to all public agencies, all public and private elementary and secondary schools, and companies with 50 or more employees. In our case, it requires banks meeting the criteria to provide an eligible employee with up to 12 weeks of unpaid leave each year for various reasons including for the birth and care of an employee’s newborn, new adoption, or new foster child, to care for an ill immediate family member, and more.

Similar to the FLSA, a notice in the branches and offices must be posted and kept continually available with prescribed information for the employees. It must be in a prominent place to be seen, in this case, by existing employees and applicants for employment. It must be easily readable. In this case, having the FMLA notice in an area accessible by existing staff is not sufficient if the bank is hiring staff using a web site. Remember as these notices are placed, they must be where the applicable persons will see them. Again, review the three conditions above to satisfy the FMLA signage requirements when doing so electronically.

Employee Polygraph Protection Act

The EPPA prohibits the bank (and most private employers) from using polygraph tests for pre-employment screening and during employment. The bank cannot require that someone take a polygraph test, fire, discipline or discriminate against someone because they refuse to take one and exercise their rights under this law. But there are some exceptions to the rules. The bank may obtain a polygraph when that person is reasonably suspected of involvement in a bank incident (theft, embezzlement, etc.) that resulted in economic loss or injury to the bank. If one is done, it must be completed by an examiner licensed by the state where the test is done, they must be bonded and have professional liability coverage. Additionally, the test must include a pretest, test and posttest following strict standards.

This is a poster that must be continually available. It must be in a prominent and conspicuous place in every branch or office so employees will see it. The online EPPA poster specifically says in red, capitalized text, “THE LAW REQUIRES EMPLOYERS TO DISPLAY THIS POSTER WHERE EMPLOYEES AND JOB APPLICANTS CAN READILY SEE IT.” https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/eppac.pdf Note we have another instance of applicability to job applicants. While the DOL has these notices in English and Spanish, the latter is optional. The current required poster was revised in July/August 2016 and has a “REV 07/16” date in the lower right corner.

In the cases of the FLSA, FMLA and EPPA, if you have staff in a branch or office, those persons are not intended to rely on these electronic versions for notice. Do not remove the paper versions that should be posted already.

Section 14(c) of the Fair Labor Standards Act

The requirements of this section are described above. Of note, this is the only notice discussed here requiring that each worker (in this case with a disability) and, as applicable, the parent or guardian of the worker, be informed orally and in writing by the bank of the terms of the employment. These terms will be according to the DOL certificate allowing the subminimum wage. In addition, employers must display the Wage and Hour Division poster, Notice to Workers with Disabilities Paid at Special Minimum Wages described and available here –https://www.dol.gov/agencies/whd/posters/section-14c.

Generally, Section 14(c) notices are posted in a conspicuous place where it will be seen by the disabled workers and their parents or guardians, as well as other workers. If the bank feels the notice would be inappropriate to post, the regulations allow you to comply by providing the poster directly to all employees subject to its terms. Therefore, the bank can meet the Section 14(c) requirements by emailing or direct mailing the poster to the Section 14(c) workers, or their parents or guardians. For compliance here it may be necessary to have more than just the employees contacted and to inform others concerning where to find the disclosures required.

Action Steps: Some action steps the bank should take depend first on determining if electronic notices are needed based on where employees are working and how often they may have access to all required disclosures. Remember that electronic versions may be a substitute in some cases but can always supplement those in the branches.

  • Based on applicable laws and regulations, which may apply? The DOL has a tool to assist all employers on this at https://webapps.dol.gov/elaws/posters.htm.
  • To meet the needs of continuously available notices, the three conditions above must be met if they are to be made only in electronic form. Otherwise, paper type notices are required in the branches.
  • For individual or one-time notices, consider how the bank normally communicates with employees. How are conference calls set up, or work assignments and pay stubs delivered and are those same channels appropriate for these notices?
  • If a website or intranet is used, factor in how often the employee uses it and if it is commonly used for other notices and information the employee regularly accesses.
  • If the bank is posting many items in the same area, ensure the employee will be able to readily determine which applies to them.
  • Consider employing some positive acknowledgment of the required notices by the applicable employees. If the notices are available via links or in an online PDF manual, requiring a click-through affirmation helps the bank provide a virtual paper trail demonstrating compliance. Much the same way the bank uses non-bypassable disclosures to meet consumer compliance requirements where one item must be acknowledged to go to the next step, the same process may be used here.

The guidance provided in FAB 2020-7 will apply to these federal requirements controlled by the DOL. Much the same as HUD could not provide a legal interpretation of RESPA applicable to your bank, the FAB does not provide guidance on other federal or state laws not enforced by the DOL.

Foreclosures and evictions after a pandemic

By Andy Zavoina

The Consumer Financial Protection Bureau (CFPB) has proposed a ban on foreclosures until 2022. There are an estimated three million homeowners past due on mortgage payments of government backed loans. Evictions are in a similar holding pattern where rent is owed and there are COVID-19 hardships. Those who are owed mortgage and rental payments seem to have had their financial wellbeing put aside with few ways to take action and remedy the situation.

The inability to conduct evictions started when the Centers for Disease Control and Prevention (CDC) used its authority and issued orders limiting evictions. In short, anyone with the rights to evict a tenant is prohibited from doing so. The tenant must meet certain conditions.

  1. The tenant must declare they have used their best efforts to obtain any available government rental or housing assistance.
  2. In 2020 they did not earn more than $99,000 or $198,000 if taxes were filed jointly and they do not expect to earn more than that in 2021, or they did not have to file taxes or they received Economic Impact Payments – stimulus checks.
  3.  They cannot pay the rent due to a loss of income due to a loss of work or extraordinary medical bills.
  4. The tenant has made their best efforts to make even partial payments.
  5. Eviction would likely make them homeless or force them to live in close quarters in a shared living environment. These seem to be low bars to qualify as a covered person. But the last qualification is a key to the medical justification and would likely apply to foreclosures as well.

Many people have sought to challenge the CDC order, but a recent study led by researchers at the University of Pennsylvania, Johns Hopkins University, and the University of Illinois at Urbana-Champaign found that local and federal eviction moratoria are in fact a “warranted and important component of COVID-19 control.” There was a recent article in phillymag.com that focused on this study, how it was being used and the article, while Philadelphia-centric, could be applicable to other cases, and in fact is being used in courts to justify the actions.

The City of Philadelphia was sued by the Homeowners Association of Philadelphia. Researchers determined that preventing the moves due to evictions (and presumably foreclosures) helped limit or delay the necessary lockdown measures many cities had to take and in fact, “likely prevented thousands of excess COVID-19 infections for every million metropolitan residents.” Researchers said, “defense lawyers ended up contacting us to provide evidence in support of the city’s efforts to stop the spread of infection.” And “When the CDC announced they were halting residential evictions nationwide from the beginning of September through December 31st (which was recently extended through the end of June), we got flooded with requests for an evidence-based model that would help show that such policies are warranted when it comes to epidemic control.”

Using real time infectious patterns, historic and predictive population movements the study determined that the displaced household could increase the risk to themselves as well as whomever they moved in with, be it at a residence or homeless shelter. “We also spent a lot of time assessing the transmission risk evictions might have on those who are not directly impacted by evictions and found that spillover impact was significant (a.k.a. increased infection rates). That helped demonstrate that eviction moratoria were in the interest of public health, not simply for a specific group, as they help reduce risk of infection for all residents.” As they modeled a study around Philadelphia demographics, eviction rates and anonymous mobile phone data, the study found, “that the greater the eviction rate, the greater number of cases that would likely result, highlighting that allowing evictions to resume would have substantially increased the number of cases among different socioeconomic populations in Philadelphia, including those experiencing a low number of evictions, by the end of 2020.”

The article also noted, “Much remains uncertain about what will happen to countless renters across the country when the federal eviction moratorium is lifted. Though, the federal government has committed significant resources to localities to develop rent relief programs aimed at keeping people housed. What we do know is that renters have amassed significant debt, as they have extended all other forms of savings and credit to remain housed. A survey of rent relief applicants in Philadelphia by the Housing Initiative at Penn found that almost 63 percent of survey respondents in Philadelphia delayed the payment of other bills to pay rent, and over 25 percent went without medicine or medical care in order to remain housed.”

Many people initially perceive these tenants and homeowners on forbearance plans as potentially abusing the system and taking advantage of the rules, and that is likely happening in some cases. But many are suffering genuinely difficult times financially.
Homeowners on forbearance and deferral programs should fare better than renters as they emerge from pandemic protections, whenever that may be. The homeowners should be able to resume payments without being excessively delinquent on payments seemingly impossible to catch up on. Much of the successes will depend on the forbearance programs and formal agreements the lenders and servicers have with the borrowers.

The CARES Act provided a 180-day forbearance period with an allowance for an additional period of 180 days upon request. The CARES Act also provides for interest during this period as it stated that interest would not accrue “beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract ….” The intent here seemed to be to control interest penalty or default rates by maintaining no higher rate than the contractual rate paid while the account was current. But some experts in the industry believe there is uncertainty as to how interest is calculated for an account that is paid off, reinstated or in a loss mitigation program.

The contention comes into play because there are two common ways interest is calculated when for example, an account that has not paid is paid off. One is very simple; the unpaid principal balance is multiplied by the daily rate of interest and that is applied for each day since interest was owed and unpaid. The second method is more common when mortgage loans are coming out of a modification program. Interest in this case is applied based on the amortizing balance as though the payments were made as scheduled.

During good times management may have considered the occasional loan where interest would be “eaten” based on a projected amortization example a cost of doing business, a preferred method to receive a return of the money before a return on the money, and not worth the time to dispute. Obviously, the income difference between these two methods could be significant, especially when multiplied by a large volume of accounts that have been on forbearance and deferral programs. Using the amortized payment method amplifies the lost income opportunity of the principal that was in fact outstanding and effectively not interest bearing.

An argument for the CARES Act says that the outstanding principal balance method is not justifiable because it is not, “as if the borrower made all contractual payments on time and in full.” But many servicers (and banks servicing their own accounts) use the actual principal balance method to calculate past due interest at payoff. The servicers and banks that use this method to calculate a payoff and do not change this method for borrowers in a CARES Act forbearance status may be in error. They run the risk of charging interest amounts greater than what the CARES Act allows and that may bring with it litigation and penalty if the methodology used cannot be justified.

Renters on the other hand may have a more difficult time as past due rents are, well, past due rents. Banks may want to help any landlord borrowers they have, ensuring they are aware of any rental assistance programs that are becoming available on a state and federal level. These programs may be a win-win as otherwise either the tenant goes, or some payment plans will be required potentially delaying cash flows many more months into the future.

The ongoing stimulus payments for eligible families may provide some relief beginning with the scheduled July payments. The same law providing the last round of $1,400 EIP stimulus payments is set to provide working families up to $3,300 per child. Half of that will come in the form of cash at $250 to $300 per month, per child, and the IRS said these will start in July 2021. The remainder will be a tax credit claimed when the next federal return is filed in 2022 for 2021. The latter is not a cash flow that will assist in rental payments, but the cash payments could.

Lastly, as it pertains to those renters, on April 19, 2021, the CFPB clarified in an interim final rule that debt collectors must provide written notice to tenants of their rights under the eviction moratorium, and this prohibits debt collectors from misrepresenting tenants’ eligibility for protection from eviction. Violators of this rule face prosecution at both the federal and state levels for violations of the Fair Debt Collections Practices Act (FDCPA). Further, an attorney representing a client in such an eviction is deemed a debt collector. Expect more i’s to be dotted and t’s to be crossed when it comes to evictions, and costs will increase. We know the CFPB will be taking aim at any violators it finds and if the target is clear in its sights, the CFPB will likely make an example of them to send a message.

April 2021 OBA Legal Briefs

  • Third round of stimulus payments (EIP3)
  • Reg B has expanded: What you need to do
  • UDAAP U-turn
  • More reasons to watch the Bureau

Third round of stimulus payments (EIP3)

By Pauli D. Loeffler

Basics. To receive the third stimulus payment (“IEP3”) the payee(s) must be U.S. citizens or U.S. resident aliens. The payee must have a social security number issued by the Social Security Administration. This means that a person who has an Individual Taxpayer Identification Number (“ITIN”), 9-digit number, beginning with the number “9” issued by the IRS isn’t eligible. If the payee died before January 1, 2021, s/he is not eligible for the third stimulus (EIP) payment.

Deceased payee. If the payee died before January 1, 2021, return the direct deposit. If it is a paper check do not cash or deposit the paper check. Like the first and second stimulus payments, it is the customer’s responsibility (not the bank’s) to return any funds attributable to a deceased joint payee or dependent.
Taxes, child support, garnishment, and offset. The third stimulus payment will not be reduced for federal taxes owed nor will state tax and child support intercepts apply. On the other hand, direct deposits do not have the two XXs identifying them as subject to the Garnishment of Federal Benefits rule, which means the bank does not include them in determining the protected amount under the rule. Direct deposits of EIP3 payments are subject to garnishment and child support levies. If the account is open and overdrawn, the bank may use offset to collect the overdrawn amount.

Closed accounts. If the account is closed, the bank cannot reopen it to accept the direct deposit. Return the ACH entry using R02 (account closed). The customer will receive a paper check sent to the address used on the 2019 or 2020 tax return. We get a lot of questions regarding re-opening a charged off account that receives a direct deposit. I know how tempting this is, but the short and definitive answer is an adamant “No!”

What if the account was administratively closed because it hit a zero balance? This is problematical if the customer does not have another account (deposit account or loan) since the bank needs to perform CIP and the existing customer exception is not available. Often the customer is not aware that the account will automatically close if the balance is zero and had no intention to close the account. The best way to avoid the problem is to set the automatic closure to occur a few days after the balance reaches zero when the customer has not indicated his/her intention to close the account. A more time-consuming measure is to check for zero balance accounts daily and contact the customer to find out if s/he intended to close the account, and if not, override its automatic closure.

Reg B has expanded: What you need to do

By Andy Zavoina

Background

OK, so you heard the Consumer Financial Protection Bureau announced an interpretive rule on Regulation B. Anti-discrimination efforts are front and center for the CFPB and, it appears, for the new administration now supporting it. In a nutshell the interpretation says the prohibition against sex discrimination under the Equal Credit Opportunity Act and its implementing Reg B includes protection against any discrimination based on sexual orientation or gender identity. This includes discrimination based on actual or perceived nonconformity with sex-based or gender-based stereotypes and discrimination based on an applicant’s “associations.” We will explore what this all means in a moment.

This may seem, at first blush, like much ado about nothing because discrimination in your bank is a non-issue. There is none. But that is not necessarily the case here. Not that you have any lending discrimination happening, but that there are things to be done because of this interpretation. This ruling is not intended to be a guidance document that would qualify as advice and not be binding. It is an interpretation of the law that says, “this is how we read the regulatory requirements and you must conform with them.” You should recognize that you now have a task list resulting from this interpretive rule and it is already in effect. More on the task list further in this article.

This is not a “new” interpretation and it is not coming from nowhere. It has roots in both prior interpretations and in legal cases that have gone as far as the Supreme Court (SCOTUS). In 2016 the CFPB responded to an inquiry from SAGE, the Services & Advocacy for GLBT Elders. SAGE says it “stands proudly with the LGBT pioneers across the country who’ve been fighting for decades for their right to live with dignity and respect.” SAGE queried the CFPB about sex discrimination resulting from sexual orientation and gender identity.

The CFPB opined and concluded that ‘‘the current state of the law supports arguments that the prohibition of sex discrimination in ECOA and Regulation B affords broad protection against credit discrimination on the bases of gender identity and sexual orientation, including but not limited to discrimination based on actual or perceived nonconformity with sex based or gender-based stereotypes as well as discrimination based on one’s associations.” The CFPB said further that it was monitoring legal developments and that ECOA and Reg B would reflect the precedents and interpretations of sexual discrimination laws. This position, which the CFPB took five years ago, is the same as it is taking now.

Fast forward to June 2020 and a case before the Supreme Court, Bostock v. Clayton County, Georgia, which involved sex discrimination under Title VII of the Civil Rights Act of 1964. Specifically, this was the case of an employer who allegedly fired a long-time employee simply for being homosexual or transgender. SCOTUS relied on three key findings to reach its decision: (1) Sexual orientation discrimination and gender identity discrimination necessarily involve consideration of sex; (2) Title VII’s language requires sex to be a “but for” cause of the injury but need not be the only cause; and (3) Title VII’s language covers discrimination against individuals, and not merely against groups. SCOTUS basically connected the dots as it stated in its opinion, “An employer who fires an individual for being homosexual or transgender fires that person for traits or actions it would not have questioned in members of a different sex. Sex plays a necessary and undisguisable role in the decision, exactly what Title VII forbids.“ These three points, emphasized by the opinion, easily translate from this employment case to credit situations under ECOA and Reg B. In the Federal Register announcing this interpretation the CFPB said, “It is well established that ECOA and Title VII are generally interpreted consistently.”

The CFPB said it would monitor legal actions and react accordingly. The language from SCOTUS is very much in alignment with the interpretation the CFPB offered in 2016 and it certainly fuels this new CFPB interpretation which essentially expands Reg B protections. The reality is, ECOA and Reg B have not expanded, but the CFPB is making clear that sexual orientation and identification are included as prohibited bases under sex discrimination. No one questions a woman dressing as a woman. But if a man does so, it may be viewed in a derogatory manner because he is not a woman – and that stereotyping is based on his sex.

Details

The CFPB’s interpretive rule intended to clarify that ECOA and Reg B prohibitions against discrimination on the basis of sex include discrimination based on sexual orientation and/or gender identity. The rule was considered effective on the date of publication in the Federal Register, March 16, 2021.

ECOA prohibits discrimination based on sex. It does not require that it be a primary issue in any complaint or action to be an issue, it can be a contributing factor in any case. Sex discrimination is often thought of as an “all males” compared to “all females” problem such as having a higher denial rate for female applicants who are similarly qualified to approved male applicants. But sex discrimination also applies at an individual level. Additionally, discrimination may be based not only on the characteristics of an applicant but also on the characteristics of a person with whom an applicant associates.

The CFPB “owns” Reg B and is therefore the only entity empowered to provide binding interpretations. It clarifies in this rule that under Reg B: (1) sexual orientation discrimination and gender identity discrimination necessarily involve consideration of sex; (2) an applicant’s sex must be a ‘‘but for’’ cause of the injury, but need not be the only cause; and (3) discrimination against individuals, and not merely against groups, is covered. The Bureau also clarifies that ECOA’s and Reg B’s prohibition against sex discrimination encompasses discrimination motivated by perceived nonconformity with sex based or gender-based stereotypes, as well as discrimination based on an applicant’s associations.

Fact One: Sexual orientation discrimination and gender identity discrimination do involve consideration of sex, which would violate Reg B on a prohibited basis. If a male applicant is denied a loan in whole or in part because that male applicant is attracted to other males, that is discriminatory based on sex, because a female who is attracted to males would be approved. The male attracted to other males is “failing to fulfill traditional sex stereotypes.”

If a loan workout specialist declines the forbearance application on a home loan of a transgender borrower who was identified as male at birth but who now identifies as female, but a similarly qualified applicant who was identified as female at birth and continues to identify as female was approved, the specialist will be seen to have discriminated against the transgender borrower because the bank accepted the female applicant who was identified as female at birth and continues to do so. In these examples, the individual applicant’s sex plays an unmistakable and impermissible role in the credit decision and thus this conduct constitutes discrimination on the basis of sex in violation of ECOA and Regulation B.

The interpretation from the CFPB above is consistent with the SCOTUS conclusion in Bostock that “it is impossible to discriminate against a person for being homosexual or transgender without discriminating against that individual based on sex.” (Sometimes this is easier to grasp if in your mind you consider “gender” or “gender identification” in place of “sex.” This may also assist students when they are being trained.)

Fact Two: Basing any decision on a loan under consideration or already funded in whole or in part on the sex of a person (or gender identification) is discriminatory and it does not matter if sex was a primary or secondary factor, it simply may not be any factor in a decision.

As a practical example, when the bank rejects an applicant on the basis of that person’s being gay or transgender, there could be two contributing factors in the decision and while both the person’s sex and something else, a collateral issue, contributed to the decision, the fact that just one factor was based on a prohibited basis attaches the liability of discrimination to the decision if collateral in this example alone would not have been enough. Having been on the loan desk for many years I have been in the discussion where it is stated, “I don’t like this, but this alone is not reason to deny it, and I don’t like that, but that alone is not reason enough to deny it, but if you consider this and that, deny the loan.” If either “this” or “that” are reflective of a prohibited basis, it may deemed discriminatory.

Fact Three: The rules against sex discrimination apply to individuals and not just situations which apply to all men, or all women.

A case in point is a lender who denies a loan request from any woman he feels is not feminine enough. Perhaps he objects to her short hair, “manly” gestures or that she is dressed in a man’s suit. The lender applies this treatment universally however, in that he also denies any man he feels is too feminine. Perhaps the man wears makeup, uses feminine gestures, or has long fingernails. The lender is treating each group equally and may justify the actions saying it is equal treatment. But in fact, each group was discriminated against in violation of ECOA and Reg B based on sex and the lender’s perception or stereotype of what is acceptable. Going back to Lending 101, many of us were taught the five Cs of credit – character, capacity, capital, collateral, and conditions. Do not confuse the lender’s stereotyping with character. Character is addressing the credit rating and a person’s desire and determination to pay their bills in a timely manner. In this example the lender is not mitigating a bias by applying misguided logic against both men and women, he is compounding the problem by doubling it. As noted by the CFPB, “It is no defense for a creditor to argue that it is equally happy to reject male and female applicants who are gay or transgender because each instance of discriminating against an individual applicant because of that individual’s sex is an independent violation of ECOA and Regulation B.”

In this example, the point is that applying a bias equally may be equal treatment, but that does not make it non-discriminatory.

Fact Four: The last example provided in the interpretive rule addresses discrimination based on sex, when the discriminatory acts are based on gender specific stereotypes like what I used immediately above. Generally speaking, these are stereotypes related to gender identity and/or sexual orientation, as well as discrimination based on an applicant’s associations.

Specifically, an example could include a transgender applicant wanting a small business loan for a nursery. Jane, the small business lender received an email from John Smith on this topic which started with “happy spring to you,” and she replied with an invitation to visit her office and discuss the loan request. When John appeared for the meeting he was not dressed as a man and he was interested in setting up a daycare and nursery in town. Jane sent John home to change without discussing the loan. Her actions were based on John’s dress and told him that this was inappropriate attire — it was not suitable for the bank or for such a loan request. The CFPB views this as discriminatory stereotyping and supports that opinion with various court cases including EEOC v. Boh Bros. Constr. Co. as well as others cited in the Federal Register document finalizing this rule.

In the Boh Bros. case the company settled with the EEOC for $125,000 resulting from the actions of a superintendent against a worker on a bridge construction project. The 2009 case included verbal abuse, taunting gestures of a sexual nature, and the superintendent exposing himself. He admitted he harassed Woods, the plaintiff, because he thought Woods was feminine and did not conform to his gender stereotypes of “rough iron workers.” There was also a jury trial in which Boh Bros was found to have permitted a hostile work environment and sexual harassment, which is illegal sex discrimination under Title VII. Again, the CFPB relies on the similarities between Title VII and ECOA. It is also worth noting Woods was awarded $451,000 by the jury for back pay and compensatory and punitive damages. The district court reduced this to $301,000 because of statutory limits. One point here is that you can easily substitute the lender–bank relationship for the superintendent–company relationship.

Actions based on stereotyping a person must be discouraged when the stereotyping is based on a prohibited basis, the same as actions based on the associates or associations of that person. Discrimination based on sex, including sexual orientation and/or gender identity, of the persons with whom the individual associates is prohibited. The rule tells us, a “creditor engages in such associational discrimination if it, for example, requires a person applying for credit who is married to a person of the same sex to provide different documentation of the marriage than a person applying for credit who is married to a person of the opposite sex.”

Task List

The interpretive rule was published on March 16, 2021, and was “effective” that day. Because it was not a change to Reg B there was no comment period required or offered. The CFPB has simply said this is how the rule needs to be viewed, and we can expect that it will be enforced based on this.

Does your bank regurgitate Reg B in any policies or procedures? It may be time to review any that may and determine if edits are necessary to demonstrate not just a willingness to comply, but an affirmation to do so. Consider reviews of policies, procedures and actual practices, underwriting guidance, credit scoring and compliance monitoring systems.

Will training documents, presentations, videos, or computer-based training require edits to include the points made by the interpretive rule? Remember that Reg B and the ECOA apply to all phases of your loans, consumer, commercial and real estate, whether they are in the advertising or application stage, payment period or past due and in a workout status. Being preemptive is more desirable than being reactive after an exam criticism or a complaint. Having loan staff aware of the rule immediately is best. The four Facts and Examples above may be excellent training points. Likewise, it is recommended that Compliance use any opportunity to mention the rule and the bank’s reactions to senior management and the board to ensure they are aware of what has been clarified and how the bank has ensured implementation.

The CFPB referenced President Biden’s Executive Order 13988, “Preventing and Combatting Discrimination on the Basis of Gender Identity or Sexual Orientation.” President Biden’s order mandates all federal agencies must fully enforce Title VII and other laws that prohibit discrimination based on gender identity or sexual orientation. Federal agencies must take all lawful steps to make sure that federal anti-discrimination statutes that cover sex discrimination also prohibit discrimination based on sexual orientation and gender identity.

UDAAP U-turn

By Andy Zavoina
On March 11, 2021 the CFPB announced it was rescinding its “Statement of Policy Regarding Prohibition on Abusive Acts or Practices,” originally published January 24, 2020. Many in banking, regulation and even Congress repeated the same question, “what is abusive, how does it differ from or supplement the rest of UDAAP and how is it enforced?” The 2020 policy statement clarified this, as you will see below. This 2021 rescission was effective March 19, 2021.

CFPB Acting Director Dave Uejio shared in a blog post that he planned to reverse policies of the Trump Administration “that weakened enforcement and supervision,” some of which included rescinding public statements proclaiming a relaxed approach to enforcement. The UDAAP policy statement was one of the first to be reversed.
We are back to what the Dodd-Frank Act considers as abusive:

  • Materially interferes with someone’s ability to understand a product or service;
  • Takes unreasonable advantage of someone’s lack of understanding;
  • Takes unreasonable advantage of someone who cannot protect themselves; and
  • Takes unreasonable advantage of someone who reasonably relies on a company to act in their interests.

The 2020 policy statement outlined three principles which were to guide the CFPB in supervisory and enforcement actions pertaining to abusive acts or practices:

1) The CFPB would focus on citing conduct as abusive in supervision and challenging conduct as abusive in enforcement if it concluded that the harm to consumers outweighed the benefits.

2) The CFPB would generally avoid challenging conduct as abusive where an alleged violation relied on all or nearly all the same facts as those deemed unfair or deceptive. This helped prevent piling on violations for the same thing. Where an act or practice was deemed abusive, the CFPB intended to be very clear and show the legal analysis of the claim and what separated these actions from others.

3) Generally, the CFPB would not seek monetary remedies for abusive acts or practices if the bank had made a good faith effort to comply with the law and a reasonable interpretation of it.

If your bank revised any UDAAP policies or procedures based on this guidance, be aware that Acting Director Uejio has rescinded it and adjustments to the materials noted and training the bank conducts may need adjustments as well. Adjustments may be guided based on the reasoning by the CFPB. The rescission was done for several reasons as noted in the Federal Register on March 19, 2021.

The CFPB said it reviewed what had happened since the 2020 policy went into effect and concluded that the principles in the statement “do not actually deliver clarity to regulated entities” and in actuality may, “afford the CFPB considerable discretion in its application and uncertainty to market participants.” Not citing a violation as abusive because it may overlap with an unfair or deceptive conduct or based on other principles in the statement “has the effect of slowing the CFPB’s ability to clarify its statutory abusiveness authority by articulating abusiveness claims as well as through the ensuing issuance of judicial and administrative decisions.”

By only citing conduct as abusive in exams or in enforcement actions, if the CFPB concludes that the harm to consumers from the conduct outweighed the benefits, the CFPB would be applying the abusiveness standard “differently from the normal considerations that guide the CFPB’s general use of its enforcement and supervisory discretion.”

If the CFPB fails to apply the full scope of the statutory standard according to the statement, it “has a negative effect on the CFPB’s ability to achieve its statutory objective of protecting consumers from abusive practices.” The policy of not seeking civil money penalties for abusive acts or practices “is contrary to the CFPB’s current priority of achieving general deterrence through penalties and other monetary remedies and of compensating victims for harm caused by violations of the Federal consumer financial laws through the CFPB’s Civil Penalty Fund.” Similarly, not citing conduct as abusive when that conduct is also unfair or deceptive “is contrary to the CFPB’s current priority of maximizing the CFPB’s ability to assert alternative legal causes of action in a judicial or administrative hearing.” The CFPB plans to continue its practice of considering the factors that it typically does in using its prosecutorial discretion.

The policy standard was not required and “stated an intent to refrain from applying the abusiveness standard even when permitted by law.” If Congress intended to limit the CFPB’s authority to fully apply the abusiveness standard, it could have prescribed a narrower prohibition but did not. The Dodd-Frank language “provides sufficient notice for due process purposes.”

Many saw the “friendlier” CFPB as a regulatory agency that was not always confrontational and considered the industry while protecting consumers. However, the phrase above, “…the CFPB’s current priority of achieving general deterrence through penalties and other monetary remedies and of compensating victims…” brings us back to the CFPB’s early years and regulation by enforcement. That said, there may have been more written about the confusion surrounding “abusive” behavior than it being used in enforcement actions. It simply has not been cited much at all.

Considering the changes to Reg B and to UDAAP, compounded by the increased enforcement activity we expect to see from the CFPB, banks may consider a full review of policies, procedures and training materials involving Reg B/ECOA, UDAP/UDAAP and the bank’s general compliance management program for needed updates. After the tremendously disruptive year-plus that banks have had to work under pandemic conditions, it would be easy to see how some tasks went undone. The new administration is moving fast in our industry, the CFPB is leading the way to install changes and the prudential regulatory agencies will follow suit to some degree.

More reasons to watch the Bureau

By Andy Zavoina

Acting CFPB Director Uejio has advised Bureau personnel that there are new priorities for the Bureau’s Supervision, Enforcement, and Fair Lending Division (SEFL), specifically involving COVID-19 relief to consumers and racial equity. He believes that strong oversight can have a meaningful impact on pandemic recovery. One of his directives to CFPB staff is to “always determine the full scope of issues found in its exams, systemically remediate all of those who are harmed, and change policies, procedures, and practices to address the root causes of harms.” Uejio indicated this change includes active Prioritized Assessments. Another directive was for “SEFL to expedite enforcement investigations relating to COVID-19” in order to send a “message that violations of law during this time of need will not be tolerated.”

Any bank taking specific actions, or not taking actions, on credit reporting, overdrafts, PPP loans, loan extensions or forbearance programs, and loan servicing may want to review their actions and be prepared to support the position taken with customers. As to racial equity, Uejio indicated that he plans to expand scheduled exams and add new ones to “have a healthy docket intended to address racial equity” and that fair lending enforcement will serve as “a top priority” at the CFPB. The CFPB will look for opportunities “to identify and root out unlawful conduct that disproportionately impacts communities of color and other vulnerable populations.”

Related to future acts, the CFPB will resume supervising lenders for compliance with the Military Lending Act (MLA). In 2018, then Acting Director Mick Mulvaney had the CFPB stop its supervisory MLA activities because he believed that by virtue of the law itself, the CFPB did not have explicit statutory authority for this. Director Kathy Kraninger, who followed Mulvaney, held this same position, even providing Congress with text for a bill which would rectify this. That request was never acted on with many Democrats maintaining it was not necessary to enforce the law. Acting Director Uejio has already started to reverse “policies of the last administration that weakened enforcement and supervision.” He has taken action not only on the MLA, but on Unfair, Deceptive, or Abusive Acts or Practices (UDAAP). He has already had the CFPB “rescind [seven] public statements conveying a relaxed approach to enforcement of the laws in our care.” https://www.consumerfinance.gov/about-us/newsroom/2020-hmda-data-on-mortgage-lending-now-available/
It’s clear from these early actions that banks can expect a more consumer-centric, proactive CFPB. It is a safe assumption that Uejio is not operating in a vacuum and is in contact with the nominated director, Rohit Chopra. Chopra told a Senate panel during confirmation hearings that he plans to prioritize the enforcement of fair lending laws and scrutinize the large technology companies wanting to break into the financial services industry. He currently is a commissioner at the Federal Trade Commission, where he has campaigned for stricter consumer privacy rules and enforcement penalties. He helped establish the CFPB and worked under Senator Elizabeth Warren while doing so. He was an ombudsman for student loans when Richard Cordray was the first CFPB Director.

March 2021 OBA Legal Briefs

  • Happy Anniversary! It’s 2020.1! (COVID-19 workplace and vaccination policies)
    • Inquiring about disability and medical exams
    • Confidentiality
    • New hires
    • Reasonable accommodations
    • Discrimination in the workplace
    • Vaccinations

Happy Anniversary! It’s 2020.1!

(COVID-19 workplace and vaccination policies)

By Andy Zavoina

It was just about a year ago that we all became even more intimately familiar with what the term “pandemic” really meant to our personal and professional lives. From getting a mask, to getting several and remembering to have and wear them, to opening branches to appointments only, to working from home – our lives changed on many levels. Few of us thought this year would be 2020.1 even though, when we flipped that calendar to January 1, we knew life in the abnormal would not revert to what we considered normal. The worst of it is that we are not out of the woods yet. Much depends on “the herd” getting vaccinated so that those with COVID-19 infections will be less impacted and most of us can avoid any COVID-19 related illness altogether.

The problem is that we are racing the clock. As people take time to get vaccinated, the virus mutates and may become less affected by the medications and this could lead the way to a new surge of infections. We must get ahead now. But people have choices, and some do not want vaccinations. Some people believe working at home is sufficient protection and they are content to do so, at least until there are enough people inoculated out there who remain healthy and without adverse effects from the vaccination itself. It appears many staff are productive working from home and content to be there for awhile. Still, there is a need to have staffing at the branches and especially so as those in “the herd” who are our customers want to do business face to face. Considering the long game and the fact that we did not think we would still be dealing with these issues after a year, it’s time to plan accordingly.

Increasingly it sounds like the pandemic environment of today will last until the year end, at least to some large degree. So, bank management should mitigate risks to the bank and staff and decide what will be done, recognizing that this is less of a temporary situation than we thought. Experience it now and use the lessons learned for preparedness and making the best of what we do have. This article will address the ongoing question of employee requirements in the continuing pandemic environment.

One of the first questions we received about the pandemic a year ago is one we can still anticipate today. In this case there were several nested questions. If an employee takes vacation days and travels, especially to an area where the COVID-19 infection rate is higher, and then returns home, can they come back to work right away? Should they quarantine before returning to work? Does the bank have to pay them for that quarantine period? Does the bank have to allow them to work from home? What if this was a lower performing employee to start with and the entire situation is not sitting well with coworkers who must take up the slack? To make the issue current you may add does it matter if they were vaccinated, not vaccinated, or opted not to get one when it was offered? And finally, can the bank require employees to be vaccinated?

I addressed several of these issues in the May 2020 Legal Briefs. I will highlight a few of the more salient points here but encourage you to review that May issue for more information.

The Equal Employment Opportunity Commission (EEOC) oversees anti-discrimination issues in the workplace, including accommodations for the disabled, which includes those suffering from a disease. The Americans with Disabilities Act (ADA) regulates what the bank can ask about a disability and medical exams for all employees and job applicants, whether they have a disability or not. The ADA prohibits the bank from excluding individuals with disabilities from the workplace for health or safety reasons unless they pose a “direct threat,” which means a significant risk of substantial harm even with reasonable accommodations. Those accommodations include social distancing, splash shields, sanitizing stations, etc.

The EEOC uses four factors to identify whether an employee poses a direct threat: (1) the duration of the risk; (2) the nature and severity of the potential harm; (3) the likelihood that potential harm will occur; and (4) the imminence of the potential harm. Guidance from the Centers for Disease Control and Prevention (CDC) says this pandemic does qualify as a direct threat and it allows the bank to make medical inquiries to protect staff and imposes other restrictions we have come to live with daily. The bank is free to ask if someone is experiencing influenza-like symptoms, such as a fever, cough, loss of taste, etc. These are COVID-19 symptoms. The replies about a person’s illness must remain confidential, however. During a pandemic, the bank can take a person’s temperature which would normally not be allowed as it is considered a medical exam. And the bank may send someone home because they exhibit flu-like symptoms. This is done to preserve a safe workplace for those at work. A doctor’s note may even be required for a person to return to work.

As we have progressed in dealing with the pandemic, some of our procedures and plans have been refined. Here are some thoughts:

Inquiring about disability and medical exams

1. There is no set of “required” screening questions. The bank is restricted on what is asked to protect all employees as these must relate to the direct threat at hand. That is, flu-like symptoms, loss of taste and smell, etc. Questions being asked by public health authorities are the best guidance on what to ask which are pandemic related. These may expand or contract as various symptoms change and are better understood.

2. The bank may actually administer COVID-19 tests if it is considered job related and consistent with a business necessity (remember, these terms may be subjective). It may be done if that person is a direct threat, under the CDC guidance. The tests administered must be considered accurate and reliable. The bank should rely on CDC and Federal Drug Administration (FDA) guidance as well as its own record of false positives, or false negatives.

3. As people have experienced COVID-19 and recovered, there is much discussion about their immunity due to antibodies in their system and their ability to return to work. The CDC guidance indicates this should not be considered in whether a person should be allowed to return to work. As a result of this guidance, the bank may not rely on it; that would then violate the ADA as an antibody test would be a medical exam. If the CDC felt this was credible, it could be allowed, but that is not the case here, as opposed to taking a person’s temperature.

4. Guidance updated in September 2020 says that the bank may ask all employees who will be physically entering the bank’s facilities if they have COVID-19 or symptoms associated with COVID-19 and ask if they have been tested for COVID-19. In my experience this is usually followed by “in the last 14 days” as that is the commonly accepted incubation period for symptoms to show. It never means that a person could not have been infected any time after having a test with negative results. Additionally, keep in mind the “direct threat” perspective for allowability of these and other screening questions, and for those employees who are working from home and are not physically interacting with coworkers or customers, the bank would generally not be allowed to ask these questions.

5. When the bank screens staff, it is not necessarily an all or nothing affair. But the bank cannot target just one employee for screening unless it has a reasonable belief based on objective evidence that this person might have the disease.

6. Asking questions the right way is as important in screening staff as it is on the loan desk for fair lending. As an example, the bank cannot ask if the employee has any family members if they are positive for COVID-19 or have symptoms as this would violate the Genetic Information Nondiscrimination Act (GINA). Realistically it also is more limiting and a question that could be asked would be “have you have had contact with anyone who has tested positive or has COVID-19 symptoms?” Again, this is often followed by “within the last 14 days” for the same reason noted above. If the employee does not have symptoms and has not contact, they are hopefully healthy.

7. What can the bank do if an employee wants to come back to work in the bank branch, but refuses to answer screening questions or have their temperature taken? In this case the bank may follow the ADA to protect the others at work and refuse access. Realistically, asking why they object is the best action. If the employee does not want this done in public or feels their replies would be conveyed to others without a need to know, reasonable accommodations or explanations may be made.

8. Nothing from the EEOC or ADA prohibits the bank from asking staff who work on-site daily or occasionally, questions about their symptoms as part of workplace screening for COVID-19 if that employee says they feel ill.

9. The bank may always ask an employee who called out sick why they were absent from work. That is not considered a disability-related question or something prohibited under the ADA.

10. The bank can ask questions about where a person traveled. This is not an ADA disability-related inquiry. If the CDC or state or local public health officials recommend that people who visit specified locations remain at home for a certain period of time, an employer may ask whether employees are returning from these locations, even if the travel was personal. There has been no official guidance on this as to paying staff. Some employers, even outside of banking, have not counted the days off from work as unauthorized absences, but whether an employee is paid for that time or not is up to the employer. We do recommend being consistent.

Confidentiality

11. As to the confidentiality of medical information, what should the bank do with this information gathered from staff and retained? Similar to many banks separating financial statements of insiders from loan files, medical information should also be separated from an employee’s regular personnel file. It should only be accessible by those with a need to know. In fact, the ADA requires that all medical information about a particular employee be stored separately from the employee’s personnel file.

12. If an employee is positive for COVID-19, the bank may release that information to a public health agency. This may be necessary for infectious contact tracing as an example, and the agency will have confidentiality standards of its own to follow to protect the employee. For the same reason, if the bank used a temporary staffing agency to provide employees, that staffing agency can notify the bank if a person who was assigned to the bank was later diagnosed as positive. The bank and a public health agency may need this information to do contact tracing.

13. In the case of a supervisor learning that an employee is symptomatic, confidentiality of this medical information and the protection of others are of equal weight. The bank then has an obligation to all parties. The medical information on the employee is separated and restricted to a need-to-know basis.

A bank representative may interview that symptomatic employee and determine who they may have come in contact with. Then, the other employees may be told something to the effect of, “you may have had contact with an employee who has showed signs of being positive for COVID-19 and you should be tested and may need to quarantine or telecommute…” Respecting the confidentiality of all staff precludes the symptomatic employee from being named. Others may be able to deduce who that was, but that is no reason for the bank to violate the ADA and name them. Those with a need to know, who actually need to know, should be reminded that the information is not to be shared unless required to do so. Determining internally who all the managers and supervisors will be with a need to know are, should be done in advance and all staff should be trained to understand the process and the need for confidentiality.

Continuing with the notification example, if all employees are aware that the bank has done basic contact tracing, they will better understand that being told, “someone in this department has tested positive and you may have had contact with them last Monday through Wednesday,” so they will understand the when, where and how of the situation and the “who” is not specifically required, only that the bank has already determined that it may have happened.

If that positive employee begins working from home, coworkers may be told that one or more employees, by name, are now working from home. But the specific reason (i.e., they tested positive) need not be disclosed. Again, this protects confidentiality.

Advance training can make this more acceptable to everyone involved.

14. As just discussed, a supervisor is not violating any ADA rules by reporting the illness of an employee while respecting confidentiality of that employee. Similarly, no coworker violates any prohibitions by making the initial report to their supervisor.

I have heard more than once of an employee talking with a coworker and commenting that they must have an allergy as they’ve lost the sense of taste and smell, as an example. The coworker may comment that those are COVID-19 symptoms and that person answer questions about that at the beginning of every shift, followed by “why are you here?” But people have begun to tune out the common screening questions and provide the automatic “yes” and “no” responses automatically and without thinking.

15. One last note pertaining to confidentiality of medical information. The ADA requires this medical information to be stored separately from their personnel file. If an authorized person has this information, the ADA rules apply whether they are in their office, at a remote location or even working from home. Information on forms, written on notepads or stored on a laptop or mobile phone must still be protected from snooping eyes.

New hires

16. Here are some additional points of interest to Human Resources as many banks are hiring again and business is increasing:

    • Job applicants may be required to submit to COVID-19 screening as conditions for employment, so long as this is applicable to all who apply for that job.
    • A medical exam – i.e. taking one’s temperature, may be a requirement for employment the same as for returning to work. It should be noted that a fever is not conclusive proof of having COVID-19.
    • If a new hire has symptoms of COVID-19, their start date may be delayed as a result. This is done to avoid introducing the virus into the workplace.
    • A job offer could also be rescinded if the employee cannot enter the workplace in a safe manner for them, or other persons, when they have COVID-19.
    • If that employee has underlying conditions, such as being over 65 years old, pregnant, heart condition, etc., those persons could not be denied employment because of those conditions and the fact that they may be at a higher risk. All the exceptions to normal policies here are due to the pandemic, not the underlying condition.

Reasonable accommodations

17. If the bank has an at-risk employee who is more susceptible to COVID-19, such as being over 65 years old, pregnant, heart condition, etc., and that person must work in a branch, the bank should provide reasonable accommodations unless that would cause an undue hardship on the bank. The bank is not responsible under the ADA to predict that an employee requires a reasonable accommodation, but rather the employee must request this. Undue hardship includes significant difficulty or expense in meeting the employee’s needs. The pandemic may have lessened the available workforce or materials necessary to construct reasonable accommodations, so what may have been feasible pre-pandemic may not be now. Also, what was affordable in the past may not be now based both on current income and expenses.

These are ADA rules the bank addresses every day, but the pandemic conditions may increase the necessary accommodations. The bank should do what it can to reduce exposure for at-risk staff such as implementing social distancing, adding splash shields, adding sanitizer stations, etc. If the only area where this work can be done does not allow for protections without some expensive buildout then the bank may be able to claim an undue hardship. Even then the bank is encouraged to work with an employee with each exercising some flexibility in accommodations, temporary job transfers, work schedule modifications, etc.

If an employee who is at-risk is already working from home, but the bank is beginning to plan on moving all staff back into branches, reasonable accommodations should be considered at this time. Prior planning will make preparation and a transition easier. This includes further modifying the employee’s workspace even if it had been modified prior to the pandemic because of the employee’s hardship.

18. An employee who is not themselves disabled is not entitled to reasonable accommodations because of potentially exposing a family member. The ADA does not require that the bank accommodate an employee without a disability based on the disability-related needs of a family member or other person with whom s/he is associated. For example, an employee without a disability is not entitled under the ADA to work from home as an accommodation to protect a family member with a disability from potential COVID-19 exposure. The bank could provide an accommodation or be flexible, but it is not required to do so.

19. Let’s now address the employee who had reasonable accommodations made for them in the branch, but who is now working from home at the bank’s request. If the employee makes an additional request of the bank to accommodate the home workspace, the bank should discuss these needs with them. What additional accommodations are necessary, and why? If the changes are necessary for prolonged work at home conditions, this may be something the bank wants to do. The employee should have as functional a workspace at home, where the bank has asked them to work, as they have in the branch. Flexibility on the part of the bank and the employee may be necessary however, as what is reasonably done in a branch may not be possible at the employee’s home.

20. As the bank begins transitioning staff from work at home status back into the branches, might this create an opportunity for some staff to request a continuation of the home-work status as their reasonable accommodation? It could trigger more requests, but the bank is not obligated to consider working from home as a permanent solution to staff who were allowed to work from home due to the pandemic. Any time an employee requests a reasonable accommodation, the bank is entitled to understand the disability-related limitation that necessitates the request. If there is no disability-related limitation that requires working from home, then the bank does not have to provide this as the accommodation. If there is a disability-related limitation but the bank can effectively address the need with another form of reasonable accommodation at the branch, then the bank can choose that alternative.

21. If the bank opted to have an employee work from home because of the pandemic and limited one or more essential duties to make this happen, if that employee wants to continue to work from home, the bank is not obligated to allow this just because it did so initially. Because the bank allowed the employee to work in a safer environment to protect them does not mean the bank has permanently adjusted their job description or duties. The bank is under no ADA obligation to refrain from restoring that employee’s essential duties.

Discrimination in the workplace

22. Now may be a time to remind management, supervisors and all other staff that federal Equal Employment Opportunity laws prohibit harassment or other discriminatory acts against coworkers based on race, national origin, color, sex, religion, age (40 or over per the Age Discrimination in Employment Act which is separate from the CDC guidance that those 65 and over are at high-risk for severe COVID-19 complications), disability, or genetic information, and if any of these support a person’s decision not to be vaccinated, the effects test could lead to claims of discrimination against the bank and that person. It may be particularly helpful for the bank to remind all staff of their roles in watching for, stopping, and reporting any harassment or other discrimination. The bank may also make clear that it will immediately review any allegations of harassment or discrimination and take appropriate action.

Vaccinations

Now we will explore vaccinations for a moment. Some people are all for them and believe each person will be safer around others who have been vaccinated. The other side includes many who do not trust the various chemicals that are used in the different vaccinations being offered and/or believe the process was too rushed and that the vaccinations themselves may not be safe. Some want to wait and see more of the long-term effect while others, including medical workers, simply do not want the shots. Bank management has to weigh the desires of each group, but one does not necessarily feel safe around the other. Can the bank require staff to be vaccinated? Can the bank provide an incentive to get vaccinated?

As we go to press Johnson & Johnson has been approved as the third provider for COVID-19 vaccinations and has begun shipping its product. More and more people will have vaccinations readily accessible and the bank must make some decisions on its policy.

In December 2020, the EEOC published an FAQ guidance document, “What You Should Know About COVID-19 and the ADA, the Rehabilitation Act, and Other EEO Laws,” as its recommendation that employers, in our case banks, encourage staff to get the inoculations for COVID-19. And the following month it issued proposed regulations allowing the banks (and other employers) to offer de minimis incentives as part of a wellness program that incentivizes staff to get the vaccinations. However, this proposal was withdrawn on February 17. Now there is little guidance as to payments of incentives as these may conflict with the ADA and GINA and any regulation must be carefully crafted for compliance.

The regulation was not withdrawn because it was poorly crafted, but rather as President Biden took office, a White House Memorandum required all executive departments and agencies to immediately withdraw any proposed rules that had not yet been published in the Federal Register. This one had not. But the EEOC had been asked by many including the US Chamber of Commerce to better explain what de minimis was in this case. Prior to this it was interpreted to be a small consideration like a gift card or T-shirt. A court case more appropriate to this topic of vaccinations used guidance that 30 percent to the treatment cost was an allowable amount. But there was no clarification issued and the proposal has been withdrawn. Some employers are or were offering time off from work for anyone getting vaccinated or cash payments of up to several hundred dollars based on some news reports.

Absent EEOC guidance however, any bank offering an incentive must consider the ADA’s requirement that the disabled enjoy the same benefits and privileges of employment as the abled employees. So, under the ADA and in response to any person whose religious beliefs preclude them from being vaccinated, they are entitled to the same incentives even though they will not be vaccinated. They may be required to complete some other requirement such as a safety class on dealing with people in a pandemic environment. This could be suitable and not conflict with ADA requirements or religious beliefs.

The EEOC December guidance document actually allows banks to require staff to be vaccinated, but as usual, there are some exceptions carved out as noted already which may involve health concerns and religious values. There are many hurdles to requiring a vaccination and more still to fire an employee if they have ADA protections.

For ADA purposes, receiving a vaccination is not considered a medical exam. If it were, this could be deemed intrusive and in violation of the ADA. But the screening questions that must be answered prior to being inoculated are considered a medical exam subject to the ADA standards for disability related inquiries. This means the bank would need to demonstrate that the screening questions are “job-related and consistent with business necessity.” To meet this standard, the bank would need to have a reasonable belief based on objective evidence, that an employee who does not answer the questions and then does not receive a vaccination will pose a direct threat to the health or safety of themselves or others.

There are two circumstances under which disability related screening inquiries may be asked without being job related and a business necessity. 1) If the bank offers staff a vaccination on a voluntary basis, the ADA requires that the employee decides to answer pre-screening questions making it voluntary. If the employee chooses not to answer the questions, the employer will not provide the vaccine and the bank may not retaliate against the employee for refusing to answer. 2) If an employee receives a bank-required vaccination from a third party that does not have a contract with the employer, such as a pharmacy, the ADA “job-related and consistent with business necessity” restrictions on disability related inquiries would not apply.

If the bank adopts a policy that vaccinations for COVID-19 are required, it would be because it has a requirement that an employee shall not pose a direct threat to the health or safety of individuals in the workplace. As noted earlier, there are four factors in determining whether a direct threat exists:

1- the duration of the risk;
2- the nature and severity of the potential harm;
3- the likelihood that the potential harm will occur; and
4- the imminence of the potential harm.

A direct threat could be that an unvaccinated employee would expose others in the bank. The bank would have to determine that the employee who cannot be vaccinated due to disability and poses the threat cannot be provided reasonable accommodations that would eliminate or reduce this risk. Even with this, other laws and rights may protect the employee from being dismissed. Reassignment of responsibilities may be in order.

To summarize: being flexible, working with staff to find reasonable accommodations for the benefit of all, and encouraging vaccinations while addressing the needs of those dissenting may be the recommended actions, but each bank must decide, and both legal counsel and the bank’s human resources department should be involved in forming any policy.

 

February 2021 OBA Legal Briefs

  • Closing accounts for the undesirable customer
  • Military lending rules have teeth

Closing accounts for the undesirable customer

By Andy Zavoina

Some language in this article may be considered offensive by some readers but is taken from the court documents and has not been “softened” to accurately portray the treatment some bank staff endured. The severity of the language may help explain why the bank was adamant in its actions.

We’ve all had a customer like this at one time or another. Those who berate and belittle bank staff and believe that not only are they, the customer, always right, but that they may look down on those serving their financial needs. This article explores the implications of closing an account of just such a customer. In this case it is easy to assume the customer was looking for a quick settlement from the bank to extinguish the case, but that did not happen. This legal case extended over four years and the lawsuit included not only the bank, but personally included three employees who were involved.

In my banks, management’s philosophy included the question, “is this customer profitable?” A bigger part of management’s philosophy, however, was that there was no cause for bank staff to take physical or verbal abuse from customers. I believe most banks have this basic tenet. Could a customer have a bad day – sure. And that was excusable because we are all human, but if there was a track record of abuse toward staff, we would close the account. Some customers are high maintenance and low profitability and the bank does not have an obligation to serve everyone, especially when it demoralizes staff and costs the bank money to do so. Account closure is what was done in the case of this Texas customer and the customer challenged the bank in court.

Let’s look at the specifics of a case in Texas, Denson v. JPMorgan Chase Bank. Here you will find a customer who believed they were right and could verbally abuse bank staff. In this case there was a deposit error which lasted literally only a few minutes. But the customer believed, or at least accused the teller of trying to steal from her. The customer then went on to sue the bank and, in my opinion, load the list of charges with everything imaginable, making baseless claims, failing to provide factual and pertinent evidence, and believing that providing the court with pounds and pounds of paper documents which were not supportive of their claim, made their claims accurate. Instead, they wasted the court’s time, the bank’s time and their own. The case needlessly cost everyone involved.

Customers do have a right to justice and the right to seek that justice. This case had what most of us will view as the right result, but what was the cost of getting there?

Timeline

On January 13, 2017, Sandra Denson went to her bank, JPMorgan Chase, and deposited $730 with Mary Green, the teller. The cash was deposited using a cash counting machine. Unfortunately, this machine malfunctioned and held a $50 bill which temporarily reduced the amount to be deposited to $680. Denson knew this was incorrect and called Green “stupid,” cursed at her and called her a “dumb b***h” who needed her “ass whipped.” Denson said that Green required training to do her job and that Green was “going to keep that $50 for lunch.”

The $50 was discovered in the cash-counter moments later and was immediately added to the deposit. Rasheal Farris was Mary Green’s supervisor and she had another teller complete Denson’s deposit transaction. This would hopefully diffuse the tension between Denson and Green. But there had been previous incidents involving Denson during which she verbally abused bank staff. Having records of such incidents may seem petty, but it can support future actions. Bank staff would be wise to file some form of an incident report with the bank’s Security Officer to preserve memories of what occurred. This is a “who, what, when, where and why” record.

Based on the culmination of these incidents the decision to close all of Denson’s accounts was made. The bank opted to end this relationship by closing a joint savings account Sandra Denson had with her husband, Robert, and a joint checking account she had with her sister. The bank’s deposit agreement provided that, “Either you or we may close your account (other than a CD), at any time for any reason or no reason without prior notice.”

Al Ramirez is an employee of Global Security & Investigations Group, used by the bank. The bank and Ramirez prepared notices to Denson advising her of the account closure. They included a cashier’s check for the balances and a no-trespass letter for Denson so that she would not return to the bank. These were then sent using UPS Next Day Air.

Before the UPS package was delivered on January 14, 2017, Denson and her husband discovered online that their accounts were at a zero balance. They returned to the bank to inquire. Green told them that they were restricted from entering the bank and explained that the accounts were closed and an explanation and cashier’s checks for the balances was being delivered to them.

On February 17, 2017 Denson sued JPMorgan Chase, Mary Green the teller, Rasheal Farris her supervisor and Al Ramirez for wrongful dishonor of a check; conversion or, alternatively, money had and received; payment on forged signature and unauthorized withdrawal of  funds; breach of contract, breach of fiduciary duty, and breach of good faith and fair dealing; civil conspiracy/aiding and abetting; intentional infliction of emotional distress; common law fraud; negligence; and gross negligence. On February 5, 2018, Denson filed a “supplemental” petition, asserting claims under the United States and Texas Constitutions and alleging violations of the Fourth Amendment, the Fourteenth Amendment, and the right to privacy, and 42 U.S.C. § 1983.

Because Denson’s claims were in part under federal law, JPMorgan Chase moved to have the claims heard in federal court. The trial court awarded summary judgment for the bank, and Denson appealed. The CaseText document on the Court of Appeals for the First District of Texas recounts the various legal requirements each party had to make as it dissected the charges. As an example, as it relates to the claim of Intentional Infliction of Emotional Distress, it is noted, “To recover damages for intentional infliction of emotional distress, a plaintiff must establish that: (1) the defendant acted intentionally or recklessly; (2) the defendant’s conduct was extreme and outrageous; (3) the defendant’s actions caused the plaintiff emotional distress; and (4) the resulting emotional distress was severe. Extreme and outrageous conduct is conduct “so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community.” “[H]einous acts . . . except in circumstances bordering on serious criminal acts . . . will rarely have merit as intentional infliction claims.” And it goes on to indicate, “JPMorgan argued that Denson’s intentional infliction of emotional distress claim failed because Denson offered no evidence of the elements of extreme and outrageous conduct or severe emotional distress. It asserted that JPMorgan acted pursuant to its legal rights under the DAA (Deposit Account Agreement) when it closed Denson’s accounts and excluded her and her husband from the bank branch, and that such conduct cannot be extreme and outrageous. The bank further argued that, even if its conduct was actionable, no claim for intentional infliction of emotional distress was available to Denson because she could assert other contract and tort theories.”

Intentional infliction of emotional distress

On appeal this argument shifted the burden to Denson to produce the evidence for each challenged element of her claim. In her summary judgment response Denson did not reference the issues JPMorgan Chase challenged and provided no evidence to substantiate her claims. No evidence was introduced but Denson attached numerous documents including:

  1. the transcript from the federal court hearing;
  2. changes to her deposition;
  3. changes to Robert Denson’s deposition;
  4. plaintiffs’ original petition and several exhibits including:

a. pages from the Texas Secretary of State’s website related to JPMorgan Chase’s registered agent for service of process;

b. the January 13 letters from JPMorgan Chase to her confirming the closing of the accounts she owned including jointly owned accounts and notifying her of the no-trespass condition

c. a January 27 letter from her counsel to JPMorgan Chase advising that she has retained counsel and requesting that JPMorgan Chase preserve certain evidence;

d. a copy of a check written by Denson to the tax-assessor collector, dated January 12, 2017, in the amount of $526.79; and

e. a portion of Dorsaneo’s Texas Litigation guide. To her “reply in opposition,” Denson attached several of the same exhibits enumerated above as well as a portion of an email chain between counsel discussing the scheduling of depositions.

Denson attached almost 300 pages of documents to her summary judgment response while still failing to provide any specific evidence to support her case on this claim.

The law required Denson to specifically identify the supporting evidence in order to have it considered. The fact that nearly 300 pages of a response were provided was not sufficient to defeat a summary judgment. The court then noted that “concluding non-movant failed to carry burden to produce evidence raising genuine issues of material fact on challenged elements of claims against defendants for tortious interference, fraud, and conspiracy where response to defendants’ no-evidence summary judgment motion did not direct trial court to any evidence on challenged elements of her claims.” Legally the court must grant JPMorgan Chase’s motion unless Denson produced evidence that raised genuine issue supporting the claims made. This was not done.

Denson contended in her appeal that “Rasheal Farris and Mary Green acted intentionally or recklessly to cause severe emotional distress on Appellants by intentionally closing Appellant’s bank accounts which then totaled more than $53,000 in collected good funds without notice and without reason. When Sandra and Robert Denson inquired about their accounts, Mary Green did not tell them on purpose, to cause the emotional distress.” Denson stated that “she had ‘flashbacks’ since the incidents and that Green and Farris “jointly tarnished and ruined Sandra Denson’s reputation by making the above false accusations that Appellant Sandra Denson used foul language.”

Similar to the issue discussed above, the court received no evidence to support these allegations and again noted that case law does not require the court to sift through the documentation provided to determine what evidence may be there. The court documents stated, “We conclude that Denson did not carry her burden to produce evidence raising a genuine issue of material fact on the challenged elements of her intentional infliction of emotional distress claim against JPMorgan. Accordingly, we hold that the trial court did not err in granting summary judgment in favor of JPMorgan on this claim.” This statement was in fact similar to the conclusion noted on the other issues Denson appealed as well. I will not go item by item with the exception of the “fiduciary duty” a bank has to its customers and the claims of fraud because of the severity of the claims.

Breach of fiduciary duty

Let’s first review the facts of the case and then some of the media response.

In court, proving a breach of fiduciary duty required Denson to meet three criteria. First, establish that a fiduciary relationship existed between the Denson and the bank. Second, the bank must have breached its fiduciary duty, and lastly the breach must have resulted in injury to Denson or benefit to the bank.

JPMorgan Chase argued that this relationship required no fiduciary duties and there were no damages that resulted from the transaction or closure of the account. The bank believed this was a “creditor/debtor” relationship and the actions taken by the bank were allowed for in the deposit account agreement. This argument then shifted the responsibility of providing evidence to Denson. As noted above, again there was no evidence provided to these arguments and the word “fiduciary” did not even appear in either of Denson’s summary judgment response or reply. One challenged item was responded to as Denson stated that “the Bank owed Sandra Denson and Robert Denson a fiduciary duty.” This was a statement and no evidence was provided to substantiate it. There being no real rebuttal and no evidence to support the claim, the court favored the bank.

Investopedia defines a fiduciary as an, “…organization that acts on behalf of another person or persons, putting their clients’ interest ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests.” Bankers are often included as an example of a fiduciary, but in this case the bank was never acting on behalf of Denson as to managing her money or investments, hence the bank’s “creditor/debtor” perspective.

The Editor of gsiexchange.com published a similar article as many other legal websites did, but gsiexchange.com noted, “In a landmark decision that ruled in favor of JP Morgan Chase, courts decided in Denson v. JPMorgan Chase Bank, N.A., that THE BANK DID NOT OWE ANY “FIDUCIARY” DUTIES to the plaintiff, one of the bank’s depositors…But clearly, the article is spinning the narrative in a way that does Denson and other depositors a significant injustice. Given that wealth is a relative concept, what if we scaled her deposit amount to $750,000? And what if $50,000 went missing due to human error? Any depositor might have taken Denson’s route, calling that teller the B-word. But aside from that, the real issue here is that the court ruled in favor of JPM because the bank is NOT a fiduciary. If JP Morgan Chase bank is not a fiduciary, then why are Americans depositing millions of dollars into the bank (and other similar banks) when–as non-fiduciary institutions-they are not held legally responsible for acting in the best interest of their depositors? This is a blatant injustice.” I must add that this website is for a business which deals in precious metals and the editorial comments closed with a solicitation to withdraw all funds from banks, for each person to be their own fiduciary and to invest those funds in precious metals. But if social media were to pick up these comments, I suspect the closing solicitation would be omitted.

If this were your bank, management and counsel would need to decide if any information for your employees, banking customers and market area was needed. In a pure deposit relationship. it can be argued that the bank was not managing the funds and the FDIC insurance protected the deposits. The bank offered no financial or investment advice, unlike the editorial comments themselves. But there may still be those who want to change the facts in such a way that would require other changes to the case. It is unlikely that $50,000 would become jammed in a cash counter and if a complete deposit was not counted for some reason, but that error was found and corrected in a matter of moments, was any fiduciary duty breached?

Fraud

In the claim of fraud, there are six elements to be proved:

  1. Was a material misrepresentation was made?
  2. Was the representation false?
  3. When the representation was made, did the bank either know it was false or make the statement without knowledge of the truth?
  4. Did the bank intend that the representation to be acted upon?
  5. Did the customer act in reliance on the representation?
  6. Did the customer suffer any injury?

The bank argued that Denson provided no evidence of any fraudulent misrepresentation, there was no reliance on statements made about the deposit accounts and there were no damages incurred. The only possible misstatement was that the deposit was $50 short but that was rectified within minutes and before Denson ever left the bank on that day of the deposit.

Denson claimed fraud against the teller and supervisor, Green and Farris, claiming that they made fraudulent accusations that Denson used foul language and threatening behavior. Denson failed to argue that at the trial court and therefore could not appeal it after that. As a result the appeals court found for the bank and its employees on this issue.

In this case the claim was invalidated because it was not initially argued but a bank would be wise in such cases to gather evidence and hold it for some period until it knows no claims were made or could still be made. This is why having statements and video and any other evidence collected immediately after an event is a sound procedure. I was taught that the palest of inks is better than a person’s memories, and this would hold especially true four years later.

Breach of contract

Denson’s claims of a breach of contract were also nullified as she claimed the bank had a duty to provide a copy of her deposit account agreement before the accounts were closed. No evidence on her part was made to support the claims, but again a bank would rely on its procedure to always provide such documents when an account is opened.

Can the bank close any account?

The OCC maintains a consumer information website, HelpWithMyBank.gov and addresses the question by simply saying “yes.” It does expand on that to say that generally accounts may be closed for any reason and without notice. It urges customers to review the agreements they have with their banks and to contact the OCC if they feel their account was wrongfully closed. So while there is support for a bank to end a relationship, it is still open to dispute.

Your deposit agreement likely has a clause similar to this:
“We reserve the right to close your Account at any time for any reason. We are not responsible for any items, checks or EFTs returned after your Account has been closed. YOU SHALL INDEMNIFY AND HOLD US HARMLESS FROM ALL CLAIMS, DEMANDS, LAWSUITS, LOSSES, COSTS, EXPENSES AND ATTORNEYS’ FEES WE SUFFER OR INCUR IN CONNECTION WITH OR RELATED TO CLOSING YOUR ACCOUNT.”

While necessary and in cases like the Denson account, very helpful, this may not be enough to satisfy a jury box filled with bank customers. The bank needs a good reason to close a customer’s account and there may be steps and timelines which must be followed.

Consider the Federal Government Participation in the Automated Clearing House rules, 31 CFR 210, which applies to all entries and entry data originated or received by a federal agency through the Automated Clearing House (ACH) network, with a few exceptions. The key statement in the applicability of the rule are “applies to all entries and entry data originated or received by an agency” (the emphasis is mine) and “agency” is a defined term which includes any department, agency, or instrumentality of the United States Government, or a corporation owned or controlled by the Government of the United States, excluding the Federal Reserve Bank.  You may have customers receiving direct deposits of government benefits making your bank subject to this because of the agency sending you the deposits.

What this means to you is that 30 days’ notice (or longer if the account agreement provides a longer period) could be required except in the case of fraud.  Refer to § 210.4(c)(3):

(c) Termination and revocation of authorizations.  An authorization shall remain valid until it is terminated or revoked by:

(3) The closing of the recipient’s account at the RDFI by the recipient or by the RDFI. With respect to a recipient of benefit payments, if an RDFI closes an account to which benefit payments currently are being sent, it shall provide 30 calendar days written notice to the recipient prior to closing the account, except in cases of fraud; or…

So the bank may not be able to close applicable accounts unless there is fraud, without first providing a 30-day advance notice to your customer. That was not the situation in the Denson case, but before closing an account, the bank must be aware of this rule and have a procedure to follow when applicable.

Bank staff must also be aware of all the agreements and all the disclosures that are provided to customers. How else can requirements and agreements like closing an account be enforced? Customers have the right to choose where they bank and a bank has the right to choose who it will do business with.

In Denson v. JPMorgan Chase Bank, the bank and three of its staff members went through four years of litigation to remove one customer who was rude, abusive and threatening to staff. The cost of litigation is not cheap and no bank or person subject to a lawsuit wants the lowest-cost attorney representing them. Well written and enforceable agreements are necessary both to protect the bank and its customers and to eliminated ambiguity. They may not eliminate litigation such as the Denson case, but without them, that case could have taken even longer to be resolved.

Military lending rules have teeth

By Andy Zavoina

Let’s talk for a moment about 2,175,000 reasons to follow the letter of the Military Lending Act (MLA). In dollars, those are the reasons Omni Financial is paying for not following the rules.

On December 28, 2020, the CFPB entered into a Consent Order (File No. 2020-BCFP-0028) with Omni Financial of Nevada, Inc., also doing business as Omni Financial and Omni Military Loans. Loans were being made to active duty servicemembers or their dependents who are protected by the MLA. Omni makes tens of thousands of loans annually ranging from $500 to $10,000 for terms of six months to three years.

One issue the CFPB had with Omni was a requirement for some borrowers to repay by allotment. Section 232.8 of the Department of Defense’s regulation, “Limitations on Terms of Consumer Credit Extended to Service Members and Dependents and specifically section (g) prohibits this.

Title 10 U.S.C. 987 makes it unlawful for any creditor to extend consumer credit to a covered borrower with respect to which:

(g) The creditor requires as a condition for the extension of consumer credit that the covered borrower establish an allotment to repay the obligation. For the purposes of this paragraph only, the term “creditor” shall not include a “military welfare society,” as defined in 10 U.S.C. 1033(b)(2), or a “service relief society,” as defined in 37 U.S.C. 1007(h)(4).

Keywords here are “requires as a condition” and you simply cannot do that. Procedures should be written such that the borrower may offer to pay by allotment, but they should know that it is not a requirement to receive a loan.

If you are wondering why allotments are preferred by lenders, “back in the day,” servicemembers had direct deposit and could set up allotments for specific payments. This eased the burden on the borrower who could be deployed or otherwise not available to handle routine personal financial matters because of their military duties. It seemed like a win-win because the borrower would always have their debt paid and nobody had to worry about calls and letters for debt collection. Additionally, a good credit rating is good for a military security clearance. A poor credit rating is definitely a problem. The servicemember receives a known amount of monthly pay and benefits. The allotments would be paid and the remainder was direct deposited to their bank.

Some servicemembers realized that if they were to receive an Article 15 (judicial punishment) which included pay forfeiture that fine would be deducted after allotments were taken out. As a result, many servicemembers would start an allotment to their spouse as an example for all but $100. That way the household always had money and forfeiture of pay was never more than $100. The allotment could easily be deposited at the bank if desired. So allotments were a better way of being paid monthly.

Eventually the government realized a lot of work goes into making allotments and correcting allotment problems that sometimes arise. They found that some lenders, especially those with high interest rates would require allotments and even charge fees to be paid that way. As a result certain allotments are prohibited, such as to purchase or finance vehicles or appliances; and others are not limited, such as for mortgage or rental payments on real property, dependents support and for a variety of other items.

Omni lenders would tell their borrowers, 90 percent of whom were covered borrowers under the MLA, they had to pay by allotment to be approved and 99 percent of active-duty borrowers did set up allotments for their Omni loans.

Not all of Omni’s borrowers were military. What is a civilian equivalent of an allotment? It would be when a lender requires an borrower to authorize electronic funds transfers (EFTs) for payments in advance. Yes, Reg E, which civilian banks are very familiar with, also comes into play in the Omni case. Omni required every borrower to provide information on their bank account routing and account numbers. Each contract included the authorization for Omni to initiate an EFT which would automatically be initiated the first business day after any missed payment.

Reg E prohibits a lender from conditioning a loan on repayment by an EFT. § 1005.10(e)(1) – No financial institution or other person may condition an extension of credit to a consumer on the consumer’s repayment by preauthorized electronic fund transfers, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer’s account.  

The result of Omni’s violations of the Defense Department regulation and of Regulation E is more than a fine. Omni must stop conditioning loan approvals on military allotments and EFTs. They must write to each borrower with an outstanding loan and clearly and prominently inform them of the Consent Order, offer different repayment options, list all the methods available to repay the loans, and provide the options the borrower may select. They are also prohibited from drafting funds from a borrowers account without a new, written authorization from the borrower. Similarly, allotments will not be accepted from a military borrower without a prescribed written authorization with a notice that it may be stopped at any time.

There were more training and compliance requirements in addition to the civil money penalty of $2,175,000.

On a related note, David Uejio, the acting director of the CFPB, has made it clear in a statement he shared with everyone at the Bureau and posted on the Bureau’s website on January 28, that the Bureau will be “reversing policies of the last administration that weakened enforcement and supervision. As of today, it is the official policy of the CFPB to supervise lenders [subject to Bureau supervision] with regard to the Military Lending Act.”

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

Background

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.

 

 

December 2020 OBA Legal Briefs

  • Systemic overdraft problems
  • Resolving escrow shortages and deficiencies
  • An update on the Payday Lending Rule

Systemic overdraft problems

By Andy Zavoina

Let’s talk “politically correct” and separate that from what is legally correct. The former term is used loosely to mean generally accepted by the vocal public, which in this case includes those tired of what they may view as exorbitant bank fees.

Let’s examine a recent case about bank fees. The fees in question are nonsufficient funds fees on checks and it is possible your bank is following the same practice that just led to a $16 million settlement. The case, Ruby Lambert v. Navy Federal Credit Union, became a class action suit. It could likely just as well have been against any bank, possibly even yours, although this case was in the United States District Court, Eastern District of Virginia. It involves a dispute over multiple fees charged for the payment of items for which there were nonsufficient funds in the account, because of the re-presentment of a check.

You should be familiar with your disclosures. If you are not, get one out and see if you have language like this addressing NSFs and fees:

XYZ Bank may return debits to the checking account (e.g., checks or ACH payments) if the amount of the debit exceeds funds available in the checking account. A fee may be assessed in the amount shown on XYZ Bank’s current Schedule of Fees and Charges for each returned debit item.

Automated processes present an item and compare it to the balance available. If the item will not pay, an NSF fee is typically charged to the account and that item can be returned to the payee. The payee then has options. They may choose to call the bank to determine if, at that later date, there are sufficient funds and, if so, the item can be represented for payment. Other payees may automatically re-run the item or in some cases they contact the issuer for payment.

“Banking veterans” remember when checks were more popular and generally a paper item would be run through the clearing system up to two times. The item could then be stamped with a disclaimer similar to “Do Not Re-Deposit” after the second presentment or even have holes punched in the MICR code at the bottom of the check. The intent was to avoid further re-presentments when there was little hope of the item paying. This saved the bank time handling the item and avoided accruing yet another NSF fee that could prove difficult to collect. These items could still be sent as collection items. At the end of the day, one item could accrue two NSF fees, one for each presentment. But that is not an absolute rule.

The OCC’s website meant to answer questions from consumers includes the following Q&A:

Question – How many times will a bank allow an insufficient funds (NSF) check to be redeposited/resubmitted?

Answer – Generally, a bank may attempt to deposit the check two or three times when there are insufficient funds in your account. However, there are no laws that determine how many times a check may be resubmitted, and there is no guarantee that the check will be resubmitted at all.
Overdraft or insufficient funds fees can be assessed each time the check is submitted. Review your bank’s deposit account agreement for its policies regarding overdrafts and the presentment of checks.

(Last Reviewed: October 2020)

With this background, let’s examine the Lambert case. Lambert initiated her suit against NFCU after a preauthorized charge for insurance she had set up was presented in ACH form and refused. NFCU charged a $29 NSF fee as the item was presented, processed, and returned. Two days later the payee submitted another ACH debit request for that same payment, which was still owed. NFCU followed the same procedure and again returned the item due to nonsufficient funds and charged Lambert another NSF fee.

Lambert’s suit claims that the second charge for an NSF fee violates the contractual language in her agreement with NFCU. Any subsequent charge, a second, third, etc. was not authorized as each is a resubmission of the first and only that one charge was authorized. In the sample language above it states NFCU “may” return items and may assess “a fee.” As Lambert views these transactions, all subsequent attempts to charge her account involved the same debit.

She filed two claims based on this belief. First, she believes there was a breach of contract and the covenant of good faith and fair dealing. Secondly, it was a violation of North Carolina’s Unfair and Deceptive Trade Practices Act.

NFCU claims that it enjoys a federal preemption under the Federal Credit Union Act and the Truth in Savings Act as state law claims may be preempted by Congress “either expressly through the statute or regulation’s language or impliedly through its aim and structure.” National banks will also enjoy some preemptions and state banks may enjoy some benefits of parts of these laws under parity rules. Check with bank counsel if you have any questions, but these facts influence this case, which could impact how your bank contracts for fees. At the very least Your compliance and legal departments should feel confident in the terms used in contracts between your bank and your customers.

Analysis of the Lambert claims indicates “12 CFR parts 707 and 740, as well as other federal law, and its contractual obligations, determine the types of fees or charges and other matters affecting the opening, maintaining and closing of a share, share draft or share certificate account. State laws regulating such activities are not applicable to federal credit unions.” In particular § 701.35 “expressly provides that [federal credit unions] are authorized to determine, free from state regulation, the types of disclosures, fees or charges” for their account offerings. And TISA implementing regulations require federal credit unions to provide disclosures regarding “[t]he amount of any fee that may be imposed in connection with the account . . . and the conditions under which the fee may be imposed.”

Some laws, such as those involving breach of contract and misrepresentations of terms, are not federally preempted. Lambert claimed this was at the root of her case because the NFCU “may” charge “a fee” based on the terms in the agreement. This meant there was discretion and the fee imposed was singular (and remember she maintains the subsequent presentments for payments are all related to and part of the initial presentment).

As to the breach of contract, the court dismissed this “because the contract unambiguously gives Navy Federal the contractual right to impose fees in the way that it did.” and “Contracts must be construed as a whole without placing undue emphasis on isolated terms…” While Lambert maintained that two ACH debit requests made by the same merchant, in the same amount, for the same purpose, are the same “debit item,” she disagreed with interpreting the terms to mean that a fee may be charged for each item and that subsequent resubmissions were “new” items. The Court agreed with NFCU based on the facts that the terms were unambiguous and that NFCU was following the terms.

In the Court’s decision, it stated, “Plaintiff’s interpretation is unreasonable in light of the contract as a whole. When Plaintiff was charged the initial nonsufficient funds fee, it was because her insurer’s request for payment (the “debit item”) was returned. The contract specifies that “Navy Federal may return debits to the checking account (e.g., an ACH payment) if the amount of the debit exceeds funds available in the checking account” and assess “[a] fee” for the “returned debit item.” Further, it stated, “Plaintiff’s interpretation is unreasonable in light of the contract as a whole. When Plaintiff was charged the initial nonsufficient funds fee, it was because her insurer’s request for payment (the “debit item”) was returned. The contract specifies that “Navy Federal may return debits to the checking account (e.g., an ACH payment) if the amount of the debit exceeds funds available in the checking account” and assess “[a] fee” for the “returned debit item.”

There was a dispute of how to interpret the agreement. The Court found, “the sentence in dispute must be read in conjunction with the sentence immediately before it. The first sentence states: “Navy Federal may return debits to the checking account (e.g., an ACH payment) if the amount of the debit exceeds funds available in the checking account.” The next sentence warns: “A fee may be assessed in the amount shown on Navy Federal’s current Schedule of Fees and Charges for each returned debit item.” Taken together, these sentences clearly provide that Navy Federal may return a debit item, such as an ACH debit, if there is not enough money in the account (the first sentence), and, if there is a return, Navy Federal may charge the member a fee for that returned debit transaction (the second sentence).

Lambert argued that “returned debit item” meant something different than “returned debit” in the agreement. The court found “that the use of “item” does not render the sentence ambiguous. As noted above, other provisions of the contract demonstrate that an “item” includes various types of transactions that would either add or subtract money from the account. The contract merely uses “debit” as an adjective to modify “item,” just as “returned” is used as an adjective to modify “debit item.” Thus, “debit item” clearly refers to a transaction that attempts to withdraw money from the account, such as an ACH debit request, and the inclusion of “item” in “returned debit item” does not render the contract ambiguous.”

The second claim as to good faith and fair dealings was then addressed in the Court’s decision. This claim was dismissed for the same reasons as the breach of contract.
The Court ruled, “In this case, Navy Federal’s right to charge a fee depended on the existence of an objective fact: whether a debit item had been returned for nonsufficient funds. Thus, although the contract stated that Navy Federal “may” rather than “will” assess a fee for each returned debit item, Navy Federal had the contractual right to assess the challenged fee and, unlike in the cases cited by Plaintiff, had not exercised any contractual discretion in bad faith to cause that right to accrue.” On August 14, 2019 the Court dismissed the case with prejudice.

So, it sounds like this case had a good ending for the credit union and perhaps reassured other financial institutions that similar practices they follow are “legally validated.” But the Lambert case wasn’t over, yet.

Lambert appealed her case to the United States Court of Appeals for the Fourth Circuit. There was also an unsuccessful attempt at mediation under a Fourth Circuit program. Fast forward to October 2020, and we read that NFCU and Lambert have agreed preliminarily to settle the dispute. A final approval is expected in March 2021. The CU will reimburse an estimated 700,000 current and former members who were charged similar fees for nonsufficient fund presentments. This comes at a cost of $16 million, which includes $5.2 million in attorney fees, a $5,000 “service award” for Lambert, and millions in NSF fee reimbursements – and for a case which was originally dismissed with prejudice.

This sounds like a business decision made to help end this two-year-old case and potentially stop future cases from being brought. Because NFCU is a $131 billion financial institution it probably doesn’t consider the settlement exorbitant. There was no admission of guilt or liability. And NFCU will amend its deposit agreement with either the following or similar language:

Navy Federal may return debits (e.g., checks or ACH payments) submitted for payment against the checking account if the amount of the debit exceeds the funds available in the checking account. Each time we return a debit for insufficient funds, we will assess an NSF fee in the amount shown on Navy Federal’s current Schedule of Fees and Charges for each returned debit item. The entity that submitted the debit may submit another debit to Navy Federal even if we have already returned the prior debit for insufficient funds in the checking account. If the resubmitted debit again exceeds the funds available in the checking account, Navy Federal will again return the debit and assess an additional NSF fee. Thus, you may be charged multiple NSF fees in connection with a single debit that has been returned for insufficient funds multiple times.

A question each bank needs to ask itself is, will our disclosures and agreements insulate us from such a claim? Is your current disclosure more like what was cited early in this article, or the one just above? This may be a question for counsel and or your forms vendors. Once a case like this becomes well known there is always a chance others will seek a similar outcome, even though initially the agreement was not found at fault. You will never be insulated 100 percent, but it may be worth a review, especially as many banks may be getting ready to make annual adjustments to fee schedules and agreement terms with the new year approaching.

Resolving escrow shortages and deficiencies

By Andy Zavoina

Often when we have a compliance issue to address, we must first look at the definitions. And that is what we will do here, in just a moment. The issue to address is what seems to be a practice at some mortgage servicing banks to offer “options” to borrowers who are short escrow funds to cover those shortfalls. With 2021 around the corner, many banks will be generating escrow statements, and they may reflect escrow shortfalls.

Now, let’s consider two definitions from RESPA pertaining to Section 1024.17’s escrow rules:

A deficiency is the amount of a negative balance in an escrow account. If a servicer advances funds for a borrower, then the servicer must perform an escrow account analysis before seeking repayment of the deficiency.

A shortage is an amount by which a current escrow account balance falls short of the target balance at the time of escrow analysis.

It is important to understand the differences between the two. A deficiency is an actual negative balance for that escrow account. It is money that is not there, and the bank has effectively made a zero-interest loan to a mortgage borrower for this amount. A shortage is a projection of a running balance like a checkbook ledger. There is a beginning or current balance and cash flows in and out of the account. When the outflows are projected to be greater for that year’s period than the current balance plus the in-flows, we have a shortage.

RESPA defines specifically how to cure a deficiency and a shortage. In both cases the borrower is responsible to pay the difference to the bank so that the bank will have sufficient funds available to pay all escrowed items such as taxes and insurance when those bills come due. If allowed in the agreement with the borrower, there may also be a one-sixth (two month) cushion also allowed to be maintained to handle unexpected increases.

But they are not identical cures, and the amount of the shortfall impacts the cure.

In the case of a deficiency that is confirmed by escrow analysis, if the deficiency is less than one month’s escrow account payment, there are three options:

1. Allow the deficiency to go on – basically ignore it
2. Require the borrower to repay the deficiency within 30 days, or
3. Require the borrower to repay the deficiency in two or more equal payments.

If there is a shortage, the three options are slightly different:

1. Allow the shortage to go on – basically ignore it
2. Require the borrower to repay the shortage within 30 days, or
3. Require the borrower to repay the shortage in 12 or more equal payments.

Now, let’s up the ante and increase the amount of that shortfall. If it is a deficiency that is greater than or equal to one month’s escrow payment, the servicer may

1. allow the deficiency to exist and do nothing to change it or
2. require the borrower to repay the deficiency in two or more equal monthly payments.

If an escrow account analysis discloses a shortage that is greater than or equal to one month’s escrow account payment, then the servicer again has two possible courses of action:

1. allow a shortage to exist and do nothing to change it; or
2. require the borrower to repay the shortage in equal monthly payments over at least a 12-month period.

Note that when we increased the shortfall, the “option” of requiring the borrower to repay that amount within a 30-day period went away. In its Supervisory Highlights, Issue 22, Summer 2020, the CFPB noted that Reg X violations were seen in the treatment of escrow shortages and deficiencies. Examiners found borrowers with either shortages or deficiencies equal to or greater than one month’s escrow payment who were offered a lump sum repayment option. The permitted options for this larger amount are to do nothing or spread the repayment over time. RESPA is a consumer protection regulation and favors the consumer by requiring the bank to amortize the shortfall to a more manageable amount. The cures stated in RESPA are very specific.

The Bureau’s enforcement actions put many banks and others in the mortgage industry on notice that offering this friendly “option” of a lump sum payment for shortfalls of one month’s escrow payment or more is not an option at all. It doesn’t matter if the other allowed means of curing the shortfall are considered or not. Banks are not allowed to impose “options” otherwise.

After the Supervisory Highlights were published, some in the mortgage industry questioned the CFPB’s interpretation of this rule. The bank can predetermine that the first option of ignoring the shortfall is not an option it will accept and that option, which cures nothing, may be ignored and not offered. But if the other two options are offered, plus addition choices, they reasoned, it is still the consumer making the choice of amortizing the payments, or of paying a lump sum. In some cases, the borrower may have just received a tax refund (these start coming to borrowers who file early about the same time as year-end escrow statements are going out). Rather than have an increase in their monthly mortgage payment for escrow, some may want the option of making a lump sum payment while they have that cash, thereby keeping the monthly payment similar to the prior year’s payment. It may be offered as an option, not as a strong suggestion or quasi-requirement. Some feel this lessens confusion for the borrower as well.

The problem with that reasoning is that the interpretation that the CFPB has issued through enforcement actions and in the Supervisory Highlights says, the “enumerated repayment options” in Reg X “are exclusive.” Thus, according to the CFPB, banks that include both a lump sum repayment option and the required repayment period of 12 (or more) months were deemed to have violated Reg X because the first option, lump sum repayment, is not specifically permissible under the regulation. As a result, “the servicers violated regulatory requirements by sending disclosures that provided borrowers with repayment options that they cannot require under Regulation X.” So, while banks see offering options as a good thing, the CFPB says it is not allowed.

The CFPB’s stance makes some sense based on as literal reading of Reg X. The Reg says the bank has two options, and neither allows for a lump sum repayment method. The rule exists so that a bank projecting or seeing a large shortfall in the escrow account cannot require a lump sum payment of a large amount which the borrower had no way of anticipating or preparing for. If this were required of a borrower, it could cause delinquencies of the mortgage or other debts of the borrower. So, an amortization of 12 months (shortages) or 2 months (deficiencies) or more must be the only cure of the shortfall on the table.

But RESPA and Reg X place requirements on the banks, not on the borrowers, or at least not on what a borrower can do. Many will ask, why limit the available options so long as what is required by the regulation is offered, and there is no pressure as to which cure is selected by the borrower. The CFPB is limiting the consumer’s options by not allowing a bank to offer the lump sum.

I have read that informally the CFPB has since indicated that borrowers should be allowed to repay escrow shortages in a lump sum if that’s what they want. I have not found this reduced to writing yet, as the Supervisory Highlights have been. Bankers are urged to recognize the risk in this area and act accordingly.

Still, the CFPB has the power of enforcement and has stated the “enumerated repayment options” are the “exclusive” options for repayment of these larger shortfalls. It certainly indicates that banks may not offer a lump sum payment option and perhaps that borrowers who may prefer having that option, will not. Again, this may not make sense to management, but if your bank is one that sees options as positive things, you may want to re-think that position. The CFPB’s guidance can be interpreted to suggest that a bank may not be permitted to accept a lump sum escrow shortage repayment if a borrower were to offer it. That may not be the CFPB’s intent, but it may be the result.

The CFPB’s current position may actually cause some harm to a borrower by reducing the cure options available to them. For the immediate future banks are urged to review the escrow statements that are being prepared and should review the shortage and deficiency remedies which are stated above and in accordance with 1024.17(f)(3)-(4). Any written or oral discussions with a borrower about a lump sum payment to cure a shortage or deficiency greater than one month’s escrow payment should be clear that it is not an option the bank is suggesting in any way or requiring. If a borrower chooses to remit such a payment, the escrow will not show a surplus based on analysis and the amount would not have to be refunded. I see little or no harm under UDAAP, either, because if the borrower chooses to make a lump sum payment, the monthly (or other periodic payment) going to escrow would balance out over the year. This means only the lost income generated by that lump sum could be considered a borrower cost and would likely be viewed as very little harm, if any.

Recognizing the risk, I recommend that a bank not broach the topic of a lump sum payment of larger shortfalls with a borrower, whether in its written notice or in conversation. And if a borrower cures a larger deficiency or shortage with an unsolicited lump-sum payment, the bank should clearly note the borrower did so despite that option not being offered by the bank.

An update on the Payday Lending Rule

By John S. Burnett

The CFPB’s Payday. Vehicle Title, and Certain High-Cost Installment Loans Rule (usually shortened to “Payday Lending Rule”) initially became effective on January 16, 2018, but it has a general compliance date of August 18, 2019. So why isn’t anyone worried about complying with the rule?

The main reason is that in 2018 the U.S. District Court for the Western District of Texas issued, in the matter of Community Financial Services Association v. CFPB, (No. 1:18-cv-00295), a stay of the compliance date, and that stay continues in place as this article is being written.

The plaintiffs in that case allege that the CFPB was unconstitutionally structured with a single director who could not be removed by the president except for cause. Therefore, the plaintiffs argue, the regulation is invalid or void.

The court stayed not only the compliance date of the regulation, but also the case itself, awaiting action by the Supreme Court on the issue of the constitutionality of the Bureau’s structure.

When SCOTUS finally ruled that the CFPB’s structure was not constitutional, but saved the agency itself by ordering that the wording in the Dodd-Frank Act relating to the dismissal of the CFPB director be changed from “for cause” to “at will,” the Texas court asked the parties to the suit for motions on next steps. In the meantime, CFPB Director had issued a ratification of the prior actions issuing and finalizing the Payday Lending Rule.

The plaintiffs moved that the CFPB be required to go back to “square one” and start a new proposed rulemaking, complete with a comment period and a final rule, as required by the Administrative Procedures Act. To support their motion, the plaintiffs argued that the Rule was invalid when it was issued because the Bureau didn’t have the authority to issue it, and that Director Kraninger’s ratification was ineffective because ratification requires two actors—one that does something without authority to do so, and another that had the authority and now approves the initial action. Since there is only one actor (the Bureau) involved, claims the plaintiff, there can be no ratification.

The Bureau has filed a brief arguing that the plaintiffs’ “definition” of ratification has no precedent and asking for summary judgment dismissing the suit and lifting the court’s stay on the effective date of the rule.

Which leaves us waiting for the court to schedule hearings and ultimately issue a ruling. The court could lift the stay pending its ruling, but that doesn’t appear likely since it could mean the Bureau would have to amend the compliance date only to have the court find for the plaintiff (and order that the rule be rescinded or that the Bureau start over with a new proposal).

In the meantime, the National Association for Latino Community Asset Builders has filed a complaint in the U.S. District Court for the District of Columbia, arguing that the Bureau’s removal of the borrower underwriting (ability-to-repay) standards violated the Administrative Procedure Act. The suit said the Bureau “used an arbitrarily truncated analysis” and didn’t collect data to justify removing the underwriting provisions from the 2017 regulations. The complaint also alleges the CFPB didn’t get sufficient input from consumer groups and other interested parties when crafting the new rules.

My assessment — The status of the Payday Lending Rule is very much in limbo but could be affected by the transition to the Biden administration. For the moment, at least, the outcome of the Texas court case needs to be decided before we can know what’s to become of the rule. If the court finds for the Bureau, we will have to see what the Bureau does to amend the compliance date.

November 2020 OBA Legal Briefs

  • FAQs on RESPA Section 8
  • The year is nearly over – Loose ends

FAQs on RESPA Section 8

By Andy Zavoina

When we hear “Section 8” and “RESPA” in the same sentence, violations and civil money penalties often come straight to mind. It promotes negative connotations much like hearing your dentist say, “root canal” or your accountant, “IRS” and “audit” together.

In this case. though, “Section 8” and “RESPA” are good together. The Consumer Financial Protection Bureau (CFPB) published a new Compliance Aid on October 7, 2020, that is meant to answer questions on the topic of Marketing Service Agreements (MSAs). While some of this information has not changed, some has, and the changes may be substantive for many.

In any case, when we see information expressed in a new way, it is a great reminder of the rules we must follow. I always have a bit of apprehension, as well, that the agency is subtly reminding us of these rules for a reason. And since it has been a few years since we heard of big Section 8 enforcement actions and there are many new compliance officers, lenders, marketing and business development persons filling these roles, we should review these FAQs and consider what we are doing in our banks and how the FAQs can help us form future procedures to avoid creating problems and taking unnecessary risks. This is especially so as many mortgage lenders are trying to get outside of the box in this troubled economy.

The CFPB said it was providing clearer rules for RESPA Marketing Service Agreements, which are covered under Section 8. In particular, the CFPB rescinded its 2015 guidance issued under the CFPB’s first director, Richard Cordray.

The new FAQs address how RESPA’s Section 8 applies to MSAs. The good news is that your bank need not change anything, because the clarity provided doesn’t make the rules more restrictive. Rather, they are either not changed significantly or are eased, and your bank may be able to do more than in the past. If your bank is looking to expand its mortgage portfolio via marketing agreements, you should continue reading.
In 2010, RESPA’s “ownership” was transferred by the Dodd-Frank Act to the CFPB under its first Director, Richard Cordray. Under Cordray’s administration many enforcement actions were brought under Section 8 and the anti-kickback rules for violations of paying and receiving referral fees, directly or indirectly, and some of those actions involved MSAs.

This was a period often referred to as one of “regulation by enforcement,” as that was how many banks learned what was not acceptable. On October 8, 2015 (5 years prior to the rescission date of October 7, 2020), the CFPB issued Compliance Bulletin 2015-05, “RESPA Compliance and Marketing Services Agreements.” While this Bulletin clearly stated, “determining whether an MSA violates RESPA requires a review of the facts and circumstances surrounding the creation of each agreement and its implementation,” it also said, “MSAs are usually framed as payments for advertising or promotional services, but in some cases the payments are actually disguised compensation for referrals.” In fact, many or most MSAs were characterized as facilitating the payment of illegal referral fees. Up to this point of increased enforcement activity, the industry practice accepted under HUDs “ownership” of RESPA was that if a one party such as a mortgage lender paid a reasonable market value for non-referral services that were actually provided, including marketing services, that payment would not be considered an illegal referral payment under Section 8.

Bulletin 2015-05 went on to state, “…while some guidance may be found in the Bureau’s previous public actions, the outcome of one matter is not necessarily dispositive to the outcome of another. Nevertheless, any agreement that entails exchanging a thing of value for referrals of settlement service business involving a federally related mortgage loan likely violates RESPA, whether or not an MSA or some related arrangement is part of the transaction.” The document cited whistleblowers drawing attention to MSAs that were simply a way to disguise kickback and referral fees. The CFPB cited one example of a title insurance company that used MSAs “as a quid pro quo for the referral of business.” The fees that were paid under this MSA were directly based on the number of referrals received and the income generated from the title policies issued and not the general MSA agreement itself. When MSAs were in place, the payments of fees were increased more often than not.

MSAs also led to steering borrowers to certain service providers. One enforcement action (and keep in mind these are pre-TRID rules) concluded that the borrower’s ability to shop for a service was hampered because a settlement service provider buried the disclosure that the borrower could shop for certain services in a description of the services that its affiliate provided. In another enforcement action, a settlement service provider failed to disclose an affiliate relationship with an appraisal management company and did not inform the borrower that they could shop for services before steering them to the affiliate. The CFPB stated “the steering incentives that are inherent in many MSAs are clear enough to create tangible legal and regulatory risks for the monitoring and administration of such agreements.” These agreements could lead to an increased borrowing cost for the consumers and therefore violated the spirit and intent of RESPA and Section 8. Because the agreements were results-oriented, the CFPB saw them as illegal payments.

The enforcement actions and Bulletin 2015-05 did not provide clear, actionable items that could be used to construct reasonable procedures that would all but ensure compliance with the Section 8 rules as they were plainly read by lenders, but interpreted by the CFPB. There seemed to be great deal of subjectivity, so the industry’s response was a knee-jerk reaction to all but cease the practice of using MSAs. MSAs had been considered low-risk agreements that were beneficial to mortgage loan production, but not after Bulletin 2015-05. The risks now were greater than the benefits.

The CFPB posted a Blog entry on October 7, 2020, in which it now agrees with the industry that Bulletin 2015-5, “does not provide the regulatory clarity needed on how to comply with RESPA and Regulation X and therefore is rescinding it.” It went on to be clear that this action does not mean all MSAs would be deemed compliant with Section 8 rules. Any evaluation would be based on specific facts and circumstances including how the agreement is structured and implemented. As noted already, this could be a subtle hint, as the CFPB reminds us that it remains committed to vigorous enforcement of RESPA and Section 8.

The CFPB did not change this opinion out of the goodness of its heart. I believe there were events leading up to this including industry groups and litigation. Remember PHH Corporation v. Consumer Financial Protection Bureau – that case was well known at the time as it challenged the CFPB’s structure as being unconstitutional. But at the heart of the case was RESPAs Section 8. In January 2018 the U.S. Court of Appeals for the D.C. Circuit upheld the CFPB’s structure as constitutional but it also reaffirmed that PHH’s captive mortgage reinsurance program did not violate RESPA Section 8 if the mortgage insurers at issue paid reasonable market value, and no more, for captive reinsurance which was consistent with previous HUD guidance on the issue. Then Acting Director of the CFPB, Mick Mulvaney, had the case dismissed.

In September 2018, the CFPB issued its first No-Action Letter Template in connection with a RESPA Section 8 issue. HUD requested the no-action letter on behalf of HUD-approved counseling agencies and lenders with funding agreements. This facilitated mortgage lenders paying housing counseling agencies based on whether a borrower made contact with or closed a loan with the lender. The CFPB said its no-action letter “will not make supervisory findings or bring a supervisory or enforcement action against the mortgage lender under” RESPA and RESPA’s Section 8. This action demonstrated what many lenders would consider more of a pro-business response to the issues of kickbacks and referral fees and that there may be a circumstance under which they are acceptable, with controls and limitations in place.

Even though Bulletin 2015-05 was rescinded, a mortgage lender’s life is still not a bed of roses. We are still left with the FAQs, but these also have not provided a list of actionable items that lead lenders down a path of guaranteed compliance. At its heart, “RESPA Section 8(a) and Reg X (RESPA), 12 CFR § 1024.14(b), prohibit giving or accepting a fee, kickback, or thing of value pursuant to an agreement or understanding (oral or otherwise), for referrals of business incident to or part of a settlement service involving a federally related mortgage loan.” This is from one of the first questions in the FAQs.

These FAQs supply information so that the reader will understand the spirit and intent of the pertinent sections of RESPA, but it is technical. If you have a mortgage lender, marketing or business development personnel involved in promoting mortgages, or anyone discussing MSAs as a way to promote growth in the mortgage loan portfolio, this is a good read for them. It provides information on kickbacks and referral fees, what is prohibited and what is not, and includes three questions on gifts and promotional activities and four questions on MSAs.

The first section of the FAQs (“General”) has six questions and provides general information about the major provisions, about Section 8 and 8(a) through 8(c). One huge takeaway in Q2 is where it prohibits the giving and accepting of kickbacks. People in the mortgage industry need to be aware that BOTH parties are in violation of the law and each may be punished under the law. Q4, which refers to subsection 8(c), provides details on bona fide fees and expenses that may be paid. Qs 5 and 6 define who the Section 8 prohibitions apply to and the fact that a gift may be given, but it may not be in exchange for the referral of business.

Differentiating the purpose of a gift or a bona fide item with no strings attached from one that “maybe could possibly” have connotations that it was for past referrals or the hopes for future ones can be very difficult, and often the gift just looks improper. A risk-averse attitude simply prohibits all gifts or those of more than minimal value. This may cross reference the bank’s Ethics Policy and prohibit gifts greater than (for example) $50 per annum unless the persons are related. So, a parent working in the bank could provide their child who is a Realtor with a large gift which is common for that relationship, if it’s separate from any business dealings. The parent could not provide a gift of $100 for each mortgage loan referral. RESPA refers to no de minimis amount but to allow friendly gift exchanges many banks have a limit under which it is allowed because it is small enough to not be considered as payment.

Section two (“Section 8(a)”) has only one topic, which details prohibited activities. Discussed first is the definition of a fee, kickback, or thing of value. It is very inclusive —“monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person’s expenses, or reduction in credit against an existing obligation. ‘Payment’ is used synonymously with the giving or receiving of a ‘thing of value’.” Any reader should be able to interpret this as all-encompassing if there is an expectation for future referrals or if it in any way is related to an amount of business transacted.

A distinction that lenders need to keep in mind is that these rules pertain to RESPA applicable loans, typically mortgages. They do not apply to car loans. And the RESPA rules relate to transactions with third parties. A bank can provide a discount or payment to a borrower for their own loan, but the bank could not pay that person for referring other business when there are no services provided other than the referral.

Section three (“Gifts and Promotional Activity”) has three questions. The first asks if gifts and promotions are allowed and quite (in)conclusively starts with, “It depends.” This section does provide several relevant, real-world examples of what are permissible “normal promotional and educational activities,” such as a settlement agent broadly advertising and hosting a prize drawing for previous customers and all local loan originators. The FAQs and RESPA are always clear that any exchange for referrals as part of an agreement or understanding would violate RESPA Section 8(a). Q2 expands on this with a discussion to help us understand what would not be conditioned on business referrals and what activities do not involve defraying expenses. And Q3 expands on what are considered “normal promotional and educational activities.”

The fourth and final section’s four questions directly address MSAs. In contrast to the relevant gift and promotional sections examples, this one has no examples of permissible MSA structures. MSA Q4 does provide examples of MSAs that are prohibited, and it is like the 2015-05 Bulletin. Q2 tries to explain the difference between referrals, which are prohibited, and marketing services, which can be permissible based on the facts and circumstances. It tries to use real world examples but would have been more useful if it included examples of social media rather than including just “newspaper, a trade publication, or a website.” An expanded discussion would have more clearly drawn a line between referrals and marketing services when consideration is placed on the use of artificial intelligence, targeted marketing, linking and the information provided and under what circumstances or fact patterns.
To be clear, this is a good step by the CFPB, but it could have been much more. In any case, the door is partially open and the use of MSAs can resume, bearing in mind the spirit and intent of such agreements. As noted above, the CFPB will continue enforcing RESPA and other regulations. It is reported that the FDIC has ramped up enforcement actions on MSAs but is recognizing that some MSAs can be permissible with reasonable fees paid in relation to a fair market value for the cost of marketing services performed.

Resources: RESPA FAQs: https://www.consumerfinance.gov/policy-compliance/guidance/mortgage-resources/real-estate-settlement-procedures-act/real-estate-settlement-procedures-act-faqs/

CFPB Blog on rescinded Bulletin 2015-05: https://www.consumerfinance.gov/about-us/blog/cfpb-provides-clearer-rules-road-respa-marketing-service-agreements/

The year is nearly over – Loose ends

By Andy Zavoina

2020 has really been a different year and many are ready to see it go. As we get through the ice storms, power outages and video calls working on budgets, I will remind you there are loose ends that need to be tied up as time stops for no compliance program.

Reg E § 1005.8 – If your consumer customer has an account to or from which an electronic fund transfer can be made, an error resolution disclosure is required. There is a short version that you may have included with each periodic statement. If you’ve used this, you are done with this one. But if you send the longer version that is sent annually, it is time to review it for accuracy and send it out. Electronic disclosures under E-SIGN are allowed here. This may also be a good time to review §1005.7(c) and determine if any electronic fund transfer services were added, and if they were disclosed as required. Think Person-to-Person transfers like Zelle, Venmo or Square.

Reg P § 1016.5 – There are exceptions allowing banks which meet certain conditions to forgo sending annual privacy notices to customers. The exception is generally based on two questions, does your bank share nonpublic personal information in any way that requires an opt-in under Reg P, and have you changed your policies and practices for sharing nonpublic personal information from the policies and procedures you routinely provide to new customers? Not every institution will qualify for the exception, however. John Burnett wrote about the privacy notice conundrum in the July 2017 Legal Briefs. That article has more details on this.

When your customer’s account was initially opened, you had to accurately describe your privacy policies and practices in a clear and conspicuous manner. If you don’t qualify for the exception described above, you must repeat that disclosure annually as well. Ensure that your practices have not changed and that the form you are sending accurately describes your practices.

For Reg P and the Privacy rules, annually means at least once in any period of 12 consecutive months during which that relationship exists. You may define the 12-consecutive-month period, but you must apply it to the customer on a consistent basis, so this is not necessarily a December or January issue, but it could be. And each customer does not have their own “annual date.” If a consumer opens a new account with you in February, you provide the initial privacy notice then. That is year one. You can provide the annual privacy notice for year two at any time, up until December 31 of the second year.

It is important to note that unlike most other regulatory requirements, Reg P doesn’t require E-SIGN compliance for your web-based disclosures. You can use e-disclosures on your bank web site when the customer uses the web site to access financial products and services electronically and agrees to receive notices at the web site, and you post your current privacy notice continuously in a clear and conspicuous manner on the web site. So, the demonstrable consent requirements and others in E-SIGN’s 15 USC Sect. 7001(c) do not apply, but there must still be acceptance to receive them on the web. Alternatively, if the customer has requested that you refrain from sending any information regarding the customer relationship and your current privacy notice remains available to the customer upon request this method is acceptable.

BSA Annual Certifications – Your bank is permitted to rely on another financial institution to perform some or all the elements of your CIP under certain conditions. The other financial institution must certify annually to your bank that it has implemented its AML program. Also, banks must report all blockings to OFAC within ten days of the event and annually by September 30, concerning those assets blocked.

IRAs, IRS Notice 2002-27 – If a minimum distribution is required from an IRA for a calendar year and the IRA owner is alive at the beginning of the year, the trustee that held the IRA on the prior year-end must provide a statement to the IRA owner by January 31 of the calendar year regarding the required minimum distribution.

  • Notice 2020-6 – provides guidance to banks on reporting required minimum distributions for 2020 based on the amendment of § 401(a)(9) of the Internal
    Revenue Code. The CARES Act altered many reporting requirements throughout 2020 and your bank should be familiar with those many changed for this year and beyond.

Reg Z Thresholds and Updates – These changes are effective January 1, 2021. You should ensure they are available to staff or correctly hard coded in your systems:

  •  The CARD Act penalty fees safe harbor amount in section 1026.52(b)(1)(ii)(A) will remain at $29.
  • The CARD Act penalty fees safe harbor amount in section 1026.52(b)(1)(ii)(B) will remain at $40.
  • The HOEPA total loan amount threshold that determines whether a transaction is a high cost mortgage is changed to $22,052.
  • The HOEPA total points and fees dollar trigger amount is changed to $1,103.
  • Effective January 1, 2021, a covered transaction is not a qualified mortgage if, pursuant to § 1026.43(e)(3), the transaction’s total points and fees exceed 3 percent of the total loan amount for a loan amount greater than or equal to $110,260; $3,308 for a loan amount greater than or equal to $66,156 but less than $110,260; 5 percent of the total loan amount for loans greater than or equal to $22,052 but less than $66,156; $1,103 for a loan amount greater than or equal to $13,783 but less than $22,052; or 8 percent of the total loan amount for loans less than $13,783.

Annual Escrow Statements § 1024.17 – For each escrow account you have, you must provide the borrower(s) an annual escrow account statement. This statement must be done within 30 days of the completion of the escrow account computation year. This need not be based on a calendar year. You must also provide them with the previous year’s projection or the initial escrow account statement, so they can review any differences. If your analysis indicates there is a surplus, then within 30 days from the date of the analysis you must refund it to the borrower if the amount is greater than or equal to $50. If the surplus is less than that amount, the refund can be paid to the borrower, or credited against the next year’s escrow payments.

Fair Credit Reporting Act – Affiliate Marketing Opt-Out § 1022.27(c) – Affiliate marketing rules in Reg V place disclosure restrictions and opt out requirements on you. Each opt-out renewal must be effective for a period of at least five years. If this procedure is one your bank is using, are there any expiration dates for the opt-outs and have these consumers been given an opportunity to renew their opt-out?

Fair Credit Reporting Act – FACTA Red Flags Report – Section VI (b) (§ 334.90) of the Guidelines (contained in Appendix J) require a report at least annually on your Red Flags Program. This can be reported to either the Board, an appropriate committee of the Board, or a designated employee at the senior management level.

Regulation O, Annual Resolution §§ 215.4, 215.8 – In order to comply with the lending restrictions and requirements of 215.4, you must be able to identify the “insiders.” Insider means an executive officer, director, or principal shareholder, and includes any related interest of such a person. Your insiders are defined in Reg O by title unless the Board has passed a resolution excluding certain persons. You are encouraged to check your list of who is an insider, verify that against your existing loans, and ensure there is a notification method to keep this list updated throughout the year.

Reg BB (CRA), Content and availability of Public File § 228.43 – Your Public Files must be updated and current as of April 1 of each year. Many banks update continuously, but it’s good to check.

HMDA and CRA Notices and Recordkeeping – HMDA and CRA data are gathered separately by applicable banks but both Regs C and BB respectively have reporting requirements for the Loan Application Registers (LAR). Each must be submitted by March 1, for the prior calendar year. National banks are currently required to update LAR data quarterly. The new HMDA rules will require all HMDA reporters to do so and the CRA Public File will be changing with HMDA as will signage. Regardless, if you are a reporter of either LAR you should start verifying the data integrity now to avoid stressing the process at the end of February. And start getting that new HMDA sign ready to post as well. Section 1003.5(e) has language in the Commentary that should go up January 1.

Training – An actual requirement for training to be conducted annually is rare, but annual training has become the industry standard and may even be stated in your policies. There are six areas that require training (this doesn’t mean you don’t need other training, just that these regulations have stated requirements).

  • BSA (12 CFR §21.21(c)(4) and §208.63(c)(4) Provide training for appropriate personnel.
  • Bank Protection Act (12 CFR §21.3(a)(3) and §208.61(c)(1)(iii)) Provide initial & periodic training
  • Reg CC (12 CFR §229.19(f) Provide each employee who performs duties subject to the requirements of this subpart with a statement of the procedures applicable to that employee)
  • Customer Information Security found at III(C)(2) (Pursuant to the Interagency Guidelines for Safeguarding Customer Information), training is required. Many banks allow for turnover and train as needed, imposing their own requirements on frequency.)
  • FCRA Red Flag (12 CFR 222.90(e)(3)) Train staff, as necessary, to effectively implement the Program;)
  • Overdraft protection programs your bank offers. Employees must be able to explain the programs’ features, costs, and terms, and to explain other available overdraft products offered by your institution and how to qualify for them. This is one of the “best practices” listed in the Joint Guidance on Overdraft Protection Programs issued by the OCC, Fed, FDIC and NCUA in February 2005 (70 FR 9127, 2/24/2005), and reinforced by the FDIC in its FIL 81-2010 in November 2010.

Security, Annual Report to the Board of Directors § 208.61 – The Bank Protection Act requires that your bank’s Security Officer report at least annually to the board of directors on the effectiveness of the security program. The substance of the report must be reflected in the minutes of the meeting. The regulations don’t specify if the report must be in writing, who must deliver it, or what information should be in the report. It is recommended that your report span three years and include last year’s historical data, this year’s current data and projections for the next year.

Information Security Program part of GLBA – Your bank must report to the board or an appropriate committee at least annually. The report should describe the overall status of the information security program and the bank’s compliance with regulatory guidelines. The reports should discuss material matters related to the program, addressing issues such as: risk assessment; risk management and control decisions; service provider arrangements; results of testing; security breaches or violations and management’s responses; and recommendations for changes in the information security program.

Annual MLO Registration § 1007.102 – Mortgage Loan Originators must go to the online Registry and renew their registration. This is done between November 1 and December 31. If this hasn’t been completed, don’t push it to the back burner and lose track during the holidays and year-end rush to complete tasks. This is also a good time to plan with management and Human Resources those MLO bonus plans. Reg Z Section 1026.36(d)(1)(iv)(B)(1) allows a 10 percent aggregate compensation limitation on total compensation which includes year-end bonuses.

MISC – Some miscellaneous items you may address internally in policies and procedures include preparation for IRS year-end reporting, vendor due diligence requirements including insurance issues and renewals, documenting ORE appraisals and sales attempts, risk management reviews, records retention requirements and destruction of expired records, and a designation by the Board of the next year’s holidays. Has there been a review of those not yet extending vacation or “away time” to the five consecutive business days per the Oklahoma Administrative Code 85:10-5-3 “Minimum control elements for bank internal control program”?

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.

 

September 2020 OBA Legal Briefs

  • Advertise this way, everyone is doing it!
  • Trust documents

Advertise this way, everyone is doing it!

By Andy Zavoina

Penalties: In just over a month we heard of not one, two, or three cases of the Consumer Financial Protection Bureau (CFPB) enforcing advertising requirements on mortgage lenders, but four. Let’s cut to the chase for a recap of these enforcement decisions, (who, how much and the date of the action,) discuss why these are important, and dissect the individual actions.

1. Sovereign Lending Group, Inc. — $460,000, July 24, 2020

2. Prime Choice Funding, Inc. — $645,000, July 24, 2020

3. Go Direct Lenders, Inc. — $150,000 August 21, 2020

4. PHLoans.com, Inc. — $260,000, August 26, 2020

Yes, that is $1,515,000 in penalties.

There are several common bonds among the actions subject to this CFPB sweep. The first is Section 1 of the Overview of the action in each of the four cases starts with a similar opening, “…is a mortgage broker and lender that offers and provides mortgages guaranteed by the United States Department of Veterans Affairs….” The exception is Go Direct was not a broker, just a lender. Perhaps that contributed to the fact that it suffered the smallest penalty amount.

This four-lender sweep starts with VA loans, but that is not the sole reason these lenders and these advertisements are involved and there are lessons all lenders and banks should take away from these enforcement actions. There are marketing techniques, some questionable at best and illegal at worst, employed by these and other lenders. It is important to not only be conversant in the “letter of the law” when it comes to what is required in advertisements, but to also follow the spirit and intent of the law as well. What is not said can be as important as what is said, and follow-through is necessary to actually deliver products and services as advertised. When that does not happen, complaints will follow.

Additional commonalities between the enforcement actions include the manner in which marketing campaigns were delivered (direct-mail), and that these violated federal law because of misleading and deceptive statements and inadequate disclosures. Each action also noted that the lenders distributed their advertisements to service members, veterans, and other consumers.

In General: In many respects the content of an advertisement should be easy to pass regulatory scrutiny. Using a checklist, you look for keywords and triggering terms and ensure that any “if this, then that” conditions are met. For example, if the advertisement refers to the number of payments, the period of repayment, the amount of any payment, or the amount of any finance charge, the advertisement also references the terms of repayment, the “annual percentage rate” or “APR,” using one of those terms, and if the rate may be increased after loan consummation, a statement of that fact.

Advertising compliance may become subjective when creative salesmanship comes into play and one lender wants to separate itself from others. This may be done with promises or innuendo that may actually be beyond reach, or when promises are made that will not be kept. The advertisement may cause a consumer to contact the lender, and that is half the marketing battle. This is where many ads fail the compliance test. This may also be the case when omissions are made believing the full disclosures can be made later, perhaps after the applicant has passed “a point of no return” in the application process.

Another subjective element of an advertisement is the message being sent. Ads depicting only Whites may have a negative impact on minority applicants, and those with high minimum loan amounts may dissuade first-time home buyers and especially minorities wanting to buy more modest homes. These are often in older parts of town and stereotypically are often more populated by minorities. Restrictions such as this can negatively impact revitalization efforts in aging neighborhoods.

Examples of discriminatory housing advertisements include, statements promoting “no kids,” “Christian housing,” or “must speak English.” More covert ways include targeted marketing to a select group that eliminates a possible applicant based on one or more of the fair lending factors described above. While the intent of the ad may be to target a specific market perceived as more qualified or desirable, using these factors as a basis to deny or discourage an applicant is discriminatory.

Social Media: In 2019 the Department of Housing and Urban Development (HUD) initiated a lawsuit against Facebook for FHA violations. The complaint stated, “Respondent collects millions of data points about its users, draws inferences about each user based on this data, and then charges advertisers for the ability to micro-target ads to users based on Respondent’s inferences about them.”

Civil rights groups were involved and soon settled with Facebook as a result of its paid advertising platform. There were five separate legal claims alleging that Facebook’s platform unlawfully enabled advertisers to target housing, employment, and credit ads to Facebook users based on race, color, gender, age, national origin, family status, and disability. The groups believed that Facebook’s advertising platform contained pre-populated lists allowing advertisers to place housing, employment, and credit ads that could exclude certain protected groups, such as African Americans, Hispanics, and Asian Americans from exposure to the ads. The platform was not designed to exclude Whites in a similar manner. Exclusions or filters were used based on sex, age, interests, behaviors and demographics associated with the prohibited bases described above, either based of known demographics of the person logged onto Facebook, or their browsing history recorded by cookies and advertising websites.

Many advertisers likely believed that micro-targeting customers was an optimal use of advertising dollars, without understanding the underlying factors contributing to the process. As a result of the settlement, Facebook agreed to eight key concessions which would end these practices.

Specifics – Each of these four consent orders cited violations of:

1. Reg Z – 1026.24 (closed-end advertising)

2. the lesser known Mortgage Acts and Practices—Advertising Rule (MAP Rule or Regulation N for those subject to Federal Trade Commission oversight) – 12 CFR 1014.3 which prohibits any material misrepresentation, expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product, including (for example) interest charges, the APR, fees and costs associated with the loan, payment terms, prepayment penalties, etc. and

3. various sections of the Consumer Financial Protection Act — 12 USC 5531, 5536 (deceptive and prohibited practices).

As noted above, the advertisements in each case were for VA mortgage loan products and involved direct mail advertising sent to hundreds of thousands to millions of potential borrowers. The advertisements contained misleading and deceptive statements and inadequate disclosures.

The advertisement stated specific credit terms which the reader would assume were representative of what the lender was offering them. In fact, in each case, the lender was not making loans at the terms described.

As examples, Sovereign, Prime, and Go Direct mortgage ads described mortgages with a simple interest rate and APR combination that, on the date of the advertisement, none of the advertisers was actually prepared to arrange or offer. PHLoans mortgage advertisements misrepresented the payment amount applicable to the advertised mortgage or amount of cash available to the consumer in connection with the advertised mortgage.

Sovereign Lending Group, Inc. In September 2018 Sovereign sent 87,000 ads for a variable-rate mortgage with a fixed interest rate of 2.75% for the first five years and an APR of 3.5%. In fact, the advertised APR was not correct because it did not take into account the fully indexed rate, required discount points, or origination fees. The actual APR for this loan with the required discount points, and origination, underwriting, and funding fees, exceeded 3.75%.

Similar to a PHLoans example below but with different numbers, advertisements misrepresented payment amounts applicable to mortgage examples. In September 2018 some 87,000 ads were sent stating the consumer could “Take $27,909 CASH-OUT FOR ONLY $113.94 PER MONTH!” In fact, the product requires the refinance of an existing mortgage and the stated payment only includes the cash-out portion which would not be enough to also service the refinanced balance.

There were also examples of loans using the term and capitalizations “New FIXED Rate” next to an interest rate on page one, but on page two there was a fine print disclaimer that this was a variable-rate loan. The term “fixed” was often used before the more accurate terms “Adjustable-Rate Mortgage,” “Variable-Rate Mortgage,” or “ARM” and these were not as prominent as the former, “fixed.”

Many ads falsely represented that consumers were prequalified for or would likely qualify for a loan. One ad stated: “As a VA loan holder, you’re prequalified to upgrade your home loan and pay off your mortgage sooner by refinancing with Sovereign . . . ” The ad went on to say “PRESCREEN & OPTOUT NOTICE: This ‘prescreened’ offer of credit is based on information in your credit report indicating that you meet certain criteria.” In fact, consumers who received these ads had not been selected or screened based on credit scores or other criteria.

There was also an ad stating, “Low FICO Score OK.” This phrase was very near other specific credit terms such as the APR, interest rate, and payment amount. However, the fine print on the back stated: “Offer rate… assumes… all borrowers having a credit score of at least 740.” The qualifying credit score is not low, and the ad is misleading. Sovereign actually targeted these ads to consumers with FICO scores in the range of 560-750. Most consumers receiving the ads likely would not qualify but could be sold other products at higher rates.

Sovereign was also cited for false or misleading representations that it was affiliated with the government. Because it used phrases or terms like “Eligibility Notice,” “Reference #: V146310333,” and “…as a VA loan holder, the Department of Veteran Affairs allows you to combine…” These ads were published on light green paper that is similar to the light green paper that the VA has used for Certificates of Eligibility, and the VA Certificates of Eligibility contain a certificate “Reference Number” that generally has eight digits.

Sovereign also sent about 237,000 consumers an ad with what appears to be “official language” such as, “Eligibility Status: Pending Authorization,” “Mortgage Payment Reduction Notification,” “Reduction Notice;” “Reference # V107652374,” and “…as a VA loan holder, the Department of Veteran Affairs allows you to combine…” These ads included the year “2019” printed in block numbers in the top right corner, with the “20” in white and the “19” in black, a distinctive format used by the IRS and similar to a withholding form W-4. Simulating official government forms or correspondence may draw attention from the consumer, but it may also draw unwanted attention from an examiner.

There were ads sent to nearly 237,000 consumers with a banner across the center stating in capitalized letters, “NOTICE REGARDING LATE PAYMENT, UNAUTHORIZED INTEREST RATE ADJUSTMENTS OR UNNECESSARY PAYMENT INCREASES YOUR IMMEDIATE PARTICIPATION IS REQUESTED.” These were not sent to past due borrowers but were likely to get the reader’s attention, tricking them into reading the ad out of fear they were past due on a debt or had interest rate adjustments on an existing mortgage.

There were also inadequate disclosures in ads. Triggering terms were used without the accompanying required disclosures. One such loan ad stated it had 360 payments and a fixed payment of $923 for the first five years. This stated the number of payments and the amount for the fixed-rate period of the loan, but it failed to state the amount of each payment and the number and period of the payments during the variable-rate period of the loan.

Numerous advertisements that included periods in which more than one interest rate would apply stated a simple annual rate of interest, but failed to state the period during which each simple annual rate of interest would apply, failed to state an accurate APR for the loan because the stated APR was not correctly calculated, or failed to state these terms clearly and conspicuously.

One example cited a loan for a variable-rate mortgage on the front with a simple annual interest rate of 2.75% and an APR of 3.5% that applied to the first five years of the loan. But the advertised APR was not correct as it did not take into account the fully indexed rate, discount points required to obtain the advertised rate, and origination fees. The actual APR for this loan exceeded 3.75%. This exceeds tolerances under Reg Z § 1026.22(a)(2). The ad did not have an equally prominent and closely proximate statement of the period during which the 2.75% interest rate would apply. The fact that the advertised interest rate applied only to the first five years was disclosed, but was in fine print on the back of the ad.

Numerous mortgage advertisements stated the amount of a payment, but failed to state the amount of each payment that would apply over the term of the loan such as for adjustable-rate mortgages, or failed to state the period during which each payment would apply. One example was a mortgage with an introductory, discounted rate of 2.75% that applied only to the first five years. That payment was not calculated based on the index and margin that would be used to make subsequent payment adjustments over the remaining term. And the ads failed to state any payment amount based on a reasonably current index and margin. As of the date of the ad, the fully indexed rate based on a reasonably current index and margin was at least 4.3%. It failed to disclose the payment amounts associated with that rate after the first five years and failed to state the period during which each payment would apply.

Ads also used the name of the consumer’s current lender but did not clearly indicate that the ad was not from that lender.

Numerous Reg Z violations were noted including advertising credit terms that were not actually available, triggering-term problems under 1026.24(d)(1) and (2)(ii), inadequate payment term disclosures and misleading terms being used such as “fixed” in the examples above for variable-rate products. Many of these same violations carry into the MAP Rule, and CFPA (UDAAP) violations cited in the consent order.

Prime Choice Funding, Inc. Violations were similar to those in the Sovereign case. Prime Choice was cited for advertising mortgage products with terms it was not offering at the time. There were confusing ads for variable-rate products but with fixed-rate terms and miscalculated APRs. Like some of the other consent orders, there were ads with similar faults but using varied amounts. The Sovereign and Go Direct orders include a cash-out example which ignores the principal and interest payment portion of a refinanced balance. Prime Choice, however, used an example with a loan amount of $366,715 stating the consumer could obtain a 2.75% APR fixed-rate loan with a payment amount of $840, with an additional $30,000 in cash for a total new payment amount of $909. Those payment amounts were incorrect. The actual minimum payments that would apply to the advertised loans were each at least $600 more than the advertised amounts.

There were also ads insinuating or misleading the consumer into believing there was an affiliation with a government agency, that a consumer “could obtain $27,500 in cash, today” meaning the same day as the ad and ignoring the fact that there may not even be equity in the property, misrepresenting fixed and variable rate loans, excluding discount fees and other closing costs plus many other similar violations as noted above.

In a variation of the pre-qualified/prescreened ad, a 2018 Prime Choice ad said, “URGENT NOTICE,” and included a quote from forbes.com stating that the Federal Reserve “expects three or more rate increases in 2018” and stated: “Based on our information, this WILL affect your monthly budget.” The ads further stated, “You have been preselected and already have what it takes to qualify” for the loan product in the ad. These statements were misleading because Prime Choice had not used any pre-screening qualifications for the ad campaign. Some ads misled the consumer into believing that a property value assessment had already been done and the ad was an offer based on value when this was incorrect. Other ads even had photos of the recipient’s home showing through the envelope with the subject line “RE: Property Assessment” to mislead the reader into believing this was pertaining to the taxable value of their home.

Prime Choice also had its share of inadequate and misleading disclosures under various sections of Reg Z, failed to mention taxes or insurance payment requirements, or that some ads were not from their current lender even though that lender was named in such a way as to appear to be from it.

Go Direct Lenders, Inc. sent advertisements to about 30,000 consumers in June 2018 advertising a mortgage with a fixed interest rate of 2.75% and an APR of 2.885%. These advertisements stated in the fine print that the offer was only available to borrowers with a credit score of 740 or higher. But for those qualifying borrowers, when allowing for discount points and prepaid fees the APR was instead 3.612% or .28% higher than advertised.

These ads also stated in a large font on the first page that the 2.75% interest rate and 2.885% APR were available to borrowers with “FICO scores as low as 500.” But the fine print contradicted this with the qualifying requirement of a credit score of at least 740. The interest rate and APR may have been even higher for those with lower credit scores.

In another similarity to the Sovereign case, Go Direct sent numerous ads misrepresenting what were variable rate loans as fixed rate products. As an example, advertisements sent to 30,000 consumers in February 2019 used the word “fixed” in capitalized, bold font lettering next to the advertised interest rate on the first page. But in the fine print on page two it indicated that the advertised loan was actually a variable-rate mortgage. This was misleading and deceptive. The term “fixed” was often more prominent and used before the more accurate terms, “adjustable rate mortgage, “ARM” or “variable rate mortgage.”

Fees were also often misrepresented. Ads dating back to November 2017 and sent to about 30,000 consumers stated, without qualification or condition, that there was “No Application or Processing Fee” for the advertised loan. But the vast majority of consumers who obtained a loan from Go Direct paid a processing fee, and virtually every consumer who obtained a VA loan from them in the three-month period following this advertisement paid a processing fee. Therefore, the statement “No Application or Processing Fee” was deemed false or misleading.

In another example, advertisements included a blanket statement: “No Appraisal, No Assets, & No Income Documentation Needed.” While this statement is generally true for Interest Rate Reduction Refinance loans, it was not true for VA cash-out refinance loans. The latter do require appraisals, sufficient assets, and income documentation. The ads sent rarely differentiated the products which would qualify for the blanket statement made.

Ads sent by Go Direct also misrepresented that it was affiliated with the government or that the advertised product was endorsed, sponsored by, or affiliated with the government. About 28,000 ads were sent in July 2018 enclosed in envelopes which prominently displayed the year 2018 across the bottom with the “20” in white block letters and the “18” in black box letters. This distinctive format is used by the Internal Revenue Service. The envelope stated that it was a “Notification” and the contents pertained to a “NOTICE” about “VA BENEFIT ELIGIBILITY.” The ad stated that it was an “ELIGIBILITY ADVISORY” about “VA BENEFITS. It also included a boxed headline that stated the contents were about a “2018 – VA Policy Change Advisory.” It said: “The U.S. Department of Veterans Affairs offers you an Interest Rate Reduction based on your mortgage payment history.” The enclosure did state in fine print that “This is an advertisement,” but the mailing strongly implied that the solicitations originated from a lender affiliated with the VA or the IRS. UDAAP rules have long stated that what is misleading is not cured by a follow-up disclosure.

PHLoans.com, Inc. There did not have to be many thousands of bad credit offers to get the attention of the CFPB. PHLoans advertisements were sent to just 25 consumers from May through July 2018 (similar to the ad example above under Sovereign) which stated the borrower could “take” a $20,000 cash-out loan for “ONLY $95.68 PER MONTH.” But PHLoans did not offer a product with those terms. The cash-out amount was only available if the loan was a refinance and the example failed to allow for the existing balance to be refinanced. The payment example was only on the cash-out portion so it was only part of what would be the scheduled payment.

Ads for VA products specified “No out of pocket expenses” but there are closing costs for VA loans and this statement could be incorrect. As with the other consent orders, there were Reg Z and UDAAP issues all of which have already been described and some with examples.

“Everyone else is doing it.” It would seem from comparing the four consent orders that each of these mortgage lending companies either copied the others for many years, or they used the same advertising agency which was big on recycling. The numbers were changed, but not the violations. It is easy to violate one citation in many ways, but these descriptions and violations so closely tracked one another, it is difficult to believe each was simply not trying to keep up with its competition using similar ad campaigns. The mentality that “everyone else is doing it” can be outright dangerous and, as Mom used to say, “if everyone jumped off a cliff, would you?”

Properly employing compliance controls and checklists could have avoided years of accumulated violations and $1.5 million in fines. These cases are highlighted here so that your bank will see what others are doing wrong and avoid jumping off that cliff that Mom talked about. A review of CFPB complaint files shows that many lenders have been aggressive in marketing products and in selling products. It appears first they want to get the consumer’s attention, and then to offer higher-priced products by using misleading information. That is a recipe for disaster.

Editor’s note: Since Andy wrote his article, the Bureau has continued its sweep of VA loan advertisers. At least three more settlements, all involving violations very similar to those Andy has described, were announced before our press deadline.

Trust documents

By Pauli D. Loeffler

Some banks require the entire trust while others only require specific pages (e.g., declaration, trustees/successor trustees, and execution pages), accept a Memorandum of Trust prepared by an attorney, or require a Certificate of Trust authorized under the Banking Code.

One problem with obtaining a copy of the entire Trust is that most trusts run 20 pages or more, contain a lot of legal terms, and cover tax and other matters which the vast majority of bankers have neither the time to read, understand, nor really need to know. A larger issue with having the actual trust is that if the trustee violates explicit provisions of the trust, the bank may be complicit with the trustee in breaching fiduciary duty.

The problem with requiring only certain pages of the Trust is that the bank may not get all the information it needs such as what constitutes incapacity of a trustee or whether co-trustees can act independently, by majority, or independently. These problems also exist with regard to an attorney prepared Memorandum of Trust which is really for use and recording for conveyances (deeds, mortgages, etc.) rather than opening an account.

Let’s look at Sec. 902 of the Banking Code’s Certificate of Trust provisions:

B.

2. If a deposit account is opened with a bank by one or more persons expressly as a trustee for one or more other named persons pursuant to or purporting to be pursuant to a written trust agreement, the trustee may provide the bank with a certificate of trust to evidence the trust relationship. The certificate shall be an affidavit of the trustee and must include the effective date of the trust, the name of the trustee, the name or method for choosing successor trustees, the name and address of each beneficiary, the authority granted to the trustee, the disposition of the account on the death of the trustee or the survivor of two or more trustees, other information required by the bank, and an indemnification of the bank. The bank may accept and administer the account, subject to the provisions of Title 58 of the Oklahoma Statutes’ in accordance with the certificate of trust without requiring a copy of the trust agreement. The bank is not liable for administering the account as provided by the certificate of trust, even if the certificate of trust is contrary to the terms of the trust agreement, unless the bank has actual knowledge of the terms of the trust agreement.

The biggest advantage to using a Certificate of Trust is that the bank is protected from liability provided it has no actual knowledge of contrary provisions in the actual trust. There is no need to comb through dozens of pages covering marital and residuary trusts, generation skipping tax and other provisions that are useful to the trustee and accountants but of little use to the bank. Instead of struggling with a massive document peppered with “legalese,” a Certificate of Trust can be read and digested in a few minutes with information that the bank really needs. Finally, in addition to the informational requirements for the Certificate of Trust under Sec. 902, the bank can require other useful information such as whether co-trustees may act independently and what constitutes incapacity which is include in the Certificate of Trust Template.

The Certificate of Trust Template (Word format) is accessible on the OBA’s Legal Links webpage once you create an account through the My OBA Member Portal.

August 2020 OBA Legal Briefs

  • Fair Lending—in the News and on Your Radar
    • Fair lending and HMDA
    • Fair lending and CRA
    • Paycheck Protection Program
    • Bank of America – disability
    • Townstone – redlining
    • Fair servicing
    • The CFPB’s RFI

Fair Lending—in the News and on Your Radar

By Andy Zavoina

It is not a huge surprise that enforcement actions have lessened from 2019 to 2020, but are we now beginning to see an uptick? From April 2019 to April 2020 there were more fair lending lawsuits than regulatory enforcement actions. During this period, according to Skadden, Arps, Slate, Meagher & Flom LLP, there were 20 actions filed—12 lawsuits and eight consent orders. Looking back to the prior administration, for the same period in 2015-2016 the Consumer Financial Protection Bureau (CFPB) filed 43 enforcement actions, of which 18 were lawsuits and 25 were consent orders.

Fair lending actions recently pale in comparison, but if there is only one suit, and it involves your bank, it is a big deal. As you will read, activity is increasing in these actions, but not to the point they were four and five years ago. Still, sometimes the best defense is a good offense, so all banks need to continue to train and monitor for fair lending issues and make any corrections necessary. The prudential regulators continue to actively examine consumer compliance issues—including fair lending—and these examinations will continue, COVID-19 or not, on-site and off.

Fair lending and HMDA

Fair lending is also closely related to your bank’s Home Mortgage Disclosure Act (HMDA) activity and records, if you are a HMDA bank. Fewer banks are with the increased exemptions now allowed under HMDA, but having that exemption is no reason to become complacent about fair lending. In fact, it may require banks that do not have the luxury of a loan application register to work harder to find a representative sample of loans for audit and internal testing.

Freedom Mortgage Corp. and HMDA problems. In June 2019, the CFPB issued a consent order against Freedom Mortgage Corp. for submitting erroneous HMDA data. The Freedom Mortgage Corp. order related primarily to the government monitoring information required for mortgage applications, including race, ethnicity, and sex information, which the CFPB claimed was reported incorrectly and on an intentional basis in many cases. When a lender’s GMI data are reported incorrectly, it can raise questions as to whether the lender may have fair lending problems.

Fair lending and CRA

The bank’s Community Reinvestment Act (CRA) rating is also influenced by its records in the fair lending area. CRA ratings can impact the bank’s ability to expand and if the rating is poor, it can draw attention to the bank’s inability to meet current customer needs. The Office of the Comptroller of the Currency’s (OCC) new rules pertaining to the CRA will impact national banks and federal savings associations, as their “assessment area” will now be more influenced by deposits and require inclusion of areas where deposits are sourced from. The effect is that low- and moderate-income areas will likely benefit from an increase in services available based on the deposits and this will translate into more loans being generated in those areas.

More than mortgages. Fair lending is about more than mortgage loans, though. While the CFPB and the federal prudential regulators did not enter into any public fair lending enforcement actions over the past year ending April 2020, the Department of Justice (DOJ) and the Department of Housing and Urban Development (HUD) reported settlements relating to redlining and automobile loan pricing. (The CFPB has announced some agreements since April, which will be discussed below.)

As banks begin adapting to a new normal, branch contraction may be planned and we may see more Loan Production Offices (LPOs) being established to fill new gaps. As it relates to fair lending, regulators have indicated that LPO locations may be relevant to redlining analyses in some circumstances. Unfortunately, we have little guidance in this area and even less with respect to LPO influences on fair lending analysis or indirect product lines. With respect to indirect product lines, key consideration may be the location of third-party originators, such as loan brokers and dealers the bank is doing business with. Management and business development should consider this in the future as location and products sold influence the market niche being served and this may be desirable to the bank, based on its own fair lending analysis.

Fair lending does not live in a vacuum and brings with it related, emerging issues such as Unfair, Deceptive or Abusive Acts or Practices (UDAAP) related to the COVID-19 pandemic. Much of the consumer compliance enforcement activity over the past year has included UDAAP with several enforcement actions also relating to the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA).

Paycheck Protection Program

Many banks participated in the Paycheck Protection Program (PPP), which has led to a number of compliance issues. Many banks immediately consider these commercial loans and not subject to consumer protections. But remember that Reg B and the Equal Credit Opportunity Act (ECOA) are not specific to only consumers. The PPP was a rushed product with up to 100 percent guarantees from the SBA, so the loans may have been perceived as having minimal risk to a lending bank. However, ECOA protections extend to all forms of commercial lending, including PPP lending. Perhaps as an early warning, the CFPB preemptively published a blog on April 27, 2020, emphasizing “the importance of fair and equitable access to credit for minority and women-owned businesses.” The posting discusses CARES Act, and reminds lenders, “Some examples of potential warning signs of lending discrimination based on race, sex, or other protected category include:

  • Refusal of available loan or workout option even though you qualify for it based on advertised requirements• Offers of credit or workout options with a higher rate or worse terms than the one you applied for, even though you qualify for the lower rate
  • Discouragement from applying for credit by the lender because of a protected characteristic
  • Denial of credit, but are not given a reason why or told how to find out why
  • Negative comments about race, national origin, sex, or other protected statuses”

As to the PPP, fair lending risks include the prioritization of existing customers for PPP loans. On the first day of PPP applications there was at least one lawsuit filed because of this internal requirement. In particular, some banks issued guidelines prohibiting loan applications from those who did not already have a loan account with the bank. To support the policy, the banks argued this minimized the burden on already short-staffing due to COVID-19, and compliance with know-your-customer rules was simpler and faster with established borrowers. But depending on the existing customer base, a customer-only policy may lead to a higher denial rate for minority-owned businesses, in clear conflict with ECOA and fair lending concepts. In addition, other underwriting requirements could create denial rate disparities and expose the -banks to further fair lending risk. The SBA rules did not include these requirements, but banks and lenders may have felt a loyalty to existing borrowers and certainly have a vested interest in seeing these borrowers succeed, especially where a limited pool of funds was available. The potential adverse impact on minority- or female-owned businesses was not considered and, understandably, there was no time for such planning. Lawsuits, however, see with hindsight and are 20/20 since it is easy later to ask, “what if.” It may take years to reach a final outcome of suits against JPMorgan Chase, Wells Fargo, Bank of America, and US Bank claiming those banks prioritized applications for large brands over small businesses, current borrowers over non-borrowers and larger loans over smaller. At face value a lender will say this makes good business sense and the small business borrower will say it is not what the PPP was designed for. Both are correct.

One lawsuit filed in Annapolis, Maryland, claimed the SBA’s PPP discriminated against women and minority-owned businesses by making the application criteria too broad. Another case in Baltimore, Maryland, was quickly put to rest as a judge ruled against small businesses in a discrimination-based case. There were also disputes over whether a business in bankruptcy could be disqualified from PPP loans.

PPP demographics. SBA PPP loan data is incomplete as the demographics were voluntarily submitted by the applicants and the rules were changing quickly as the program developed, even changing daily at times. An estimated 75 percent of borrowers did not provide demographic data.

Even with the incomplete data picture, once the SBA released loan data, the Center For Responsible Lending (CRL) analyzed it in an April 6, 2020, report and found roughly 95% of Black-owned businesses, 91% of Latino-owned businesses, 91% of Native Hawaiian or Pacific Island-owned businesses, and 75% of Asian-owned business “stand close to no chance of receiving a PPP loan through a mainstream bank or credit union.” One reason minority and small businesses were shut out was the lack of a preexisting banking or borrowing relationship. There were more issues cited by Forbes contributor Morgan Simon as it related to minorities being denied disproportionately, including:

  1. Many formerly incarcerated business owners were not allowed to apply.
  2. Banks set their own criteria for whom to lend to and were incentivized to choose large clients over small businesses.
  3. People of color were disproportionately left out, but we don’t know exactly how many, as no government data was collected on loan recipients by race or gender.
  4. 25% of the initial $2 trillion went to big business bailouts.
  5. Only a tiny fraction was set aside for the most vulnerable businesses and communities.
  6. Community Development Financial Institutions (CDFIs) — those institutions historically with the deepest relationships to vulnerable communities — were barely included.

Faced with incomplete SBA data, a recent study used testers who talked directly with banks about loans to help their small businesses stay open during the COVID-19 period and it found white applicants were treated better than Black applicants. This is an assertion that has been made for a long period prior to the pandemic we are all currently working through. The National Community Reinvestment Coalition (NCRC), found that Black and white matched-pair testers experienced different levels of encouragement to apply for loans, different products were offered and different information was provided by bank lenders – all of which is a fair lending concern. If you are not familiar with the testing technique, a majority applicant and a minority applicant contact the same bank or lender, and each provides the same qualifications leaving the major variable related to a protected basis such as race. The NCRC test included 17 banks in the Washington, DC, metro area.

Internal reviews. Whether you review incomplete SBA data or that from an organization which has an underlying agenda, there is always an analyst who cites discriminatory practices and disparities between demographics and the result is always one leading to a perceived need to improve fair lending efforts. Some questions a bank should ask and answer about a PPP or similar loan program include:

  1. Whether marketing efforts are planned for the entire trade area, regardless of the minority composition of the area
  2. Whether identical requirements imposed by the bank can vary, but are applied to similarly-situated applicants, and
  3. Whether any rule prioritizes existing customers or borrowers and disproportionately affects minority-owned applicants.

CFPB officials have stated they will be reviewing bank Paycheck Protection Program lending patterns under ECOA and certainly more claims won’t be surprising. “The bureau is requesting information related to the PPP to address potential fair lending risk,” said Bryan Schneider, the CFPB’s head of the Supervision Enforcement and Fair Lending division, during a July 16 CFPB webinar.

In addition to the small business stimulus efforts the CARES Act provided with the PPP loan program, there were provisions for mortgage and student loan forbearance, credit reporting relief, and other areas which fall under the CFPB’s jurisdiction and have its attention. The CFPB has shifted during this COVID-19 period from full-scope to targeted exams, but remember it has authority over more than banks. The CFPB’s prioritized reviews allow examiners to take a more “real time” look at coronavirus-era lending and compliance with CARES Act provisions, Schneider said. There is a focus now on mortgage, auto and student loan servicing, debt collection (a continual leader in complaints) and credit reporting, and the CFPB can see what is actually happening at that time. “They have a risk-based approach to supervision, and when you look at where the risks are for consumers right now, it is not surprising the CFPB would focus on particularly the CARES Act,” said Rachel Rodman, a former top CFPB attorney.

The CFPB does not have any direct authority to review compliance with the CARES Act, but its authority under Dodd-Frank to enforce UDAAP will allow enforcement indirectly. The PPP can also be reviewed under ECOA although the CFPB has traditionally focused its efforts on this on the consumer protections.

Appropriate documentation of the business reasons for underwriting and pricing decisions will be a key factor in fair lending enforcement actions. The PPP provided little latitude in loan pricing, but the loan decision was the bank’s to make and that is where there is contention now. Second review programs should also be well documented. Many borrowers saw a chance to “get something for nothing” in the PPP and others wanted to greatly assist their businesses most of which are suffering. In many cases these contribute to the claims of discriminatory practices and a desire to still receive some “compensation” because most feel they deserve something, from someone.

Bank of America – disability

In a different matter, Bank of America has reached a proposed settlement in a case where the bank is alleged to have engaged in a pattern or practice of discrimination on the basis of disability. The case was initiated by Seth D. DuCharme, Acting United States Attorney for the Eastern District of New York, and Eric S. Dreiband, Assistant Attorney General for Civil Rights. This practice would be a violation of the Fair Housing Act (FHA).

The complaint alleges that between January 2010 and 2016, Bank of America had a policy to deny mortgage loans to adults with disabilities who were under legal guardianships or conservatorships. Additionally, the same policy applied to home equity loans from January 2010 to 2017.

Bank of America no longer has either policy. The terms of the proposed settlement require Bank of America to pay approximately $300,000 as compensation to the victims. It also requires the bank to maintain the new, non-discriminatory loan underwriting policy and train its employees on that new policy. The bank must include monitoring and controls with its loan processing and underwriting activities to ensure compliance with the FHA. It will have to report to the DOJ every six months for two years on its compliance with the terms of the settlement and on any new complaints received regarding any mortgage loan application denied to an adult applicant represented by a legal guardian or conservator.

Townstone – redlining

Another July 2020 case is the first in which the CFPB filed a complaint for redlining against a non-bank mortgage lender, Townestone Financial, Inc. The complaint alleges Townstone violated the ECOA, and the Consumer Financial Protection Act (CFPA) but interestingly not the FHA (both HUD and the DOJ enforce the FHA but the CFPB does not have that authority). The CFPB maintains that from January 2014 through December 2017, Townestone redlined majority and high-majority African American neighborhoods in the Chicago MSA. The CFPB refers to majority and high-majority African American neighborhoods as neighborhoods that are more than 50% and more than 80% Black or African American, respectively.

The allegations against Townstone include that it committed acts or practices directed at prospective applicants that discouraged, on the basis of race, prospective applicants from applying for mortgage loans. One new issue in this case is how it was done. As part of Townstone’s marketing efforts, it had a weekly radio show and podcast during which it made statements about African Americans and predominantly African American neighborhoods in the Chicago MSA that would discourage applications for mortgage loans from minorities. Additionally it was alleged that Townstone:

1. Made no effort to market to African Americans.

2. Did not specifically target any marketing toward African Americans in the Chicago MSA.

3. Did not employ an African American loan officer among its 17 loan officers.

4. Received few applications from African Americans—1.4% of its total applications– as compared to 9.8% for other lenders.

5. Received almost no applications from applicants for properties located in African American neighborhoods—five or six per year from high African American neighborhoods, with half of those from white, non-Hispanic applicants—and only between 1.4% and 2.3% of its applications came from applicants with regard to properties located in majority African American neighborhoods.

6. In contrast, peer lenders drew 7.6% to 8.2% of their applications from majority African American neighborhoods, and 4.9% to 5.5% of their applications from high African American neighborhoods.

More specifically on the podcasts, the CFPB addresses comments made in five broadcasts, including the following:

“For example, in a January 2017 episode of the Townstone Financial Show, during which Townstone marketed its services, the hosts discussed a now replaced grocery store in downtown Chicago that was part of the Jewel-Osco grocery store chain. Townstone’s CEO described “[having] to go to the Jewel on Division. . . . We used to call it Jungle Jewel. There were people from all over the world going into that Jewel. It was packed. It was a scary place.”

“Jungle”—a word that may be used as or understood to be a derogatory reference associated with African Americans, Black people, and foreigners—and saying that the grocery store was “scary” would discourage African-American prospective applicants from applying for mortgage loans from Townstone; would discourage prospective applicants living in African-American neighborhoods from applying to Townstone for mortgage loans; and would discourage prospective applicants living in other areas from applying to Townstone for mortgage loans for properties in African-American neighborhoods.”

Another example cited in the complaint is that “In a June 2016 episode of the Townstone Financial Show, before discussing the mortgage-lending services that Townstone could provide to police officers and others, Townstone’s CEO stated that the South Side of Chicago between Friday and Monday is “hoodlum weekend” and that the police are “the only ones between that turning into a real war zone and keeping it where it’s kind of at.” Chicago’s South Side refers to the southern neighborhoods in the City of Chicago and is majority-African American, with about 489,000 African Americans currently living there.

A mortgage lender and self-described real-estate expert referring to Chicago’s South Side as “hoodlum weekend” would discourage prospective applicants living in the South Side from applying to Townstone for mortgage loans and would discourage prospective applicants living in other areas from applying to Townstone for mortgage loans for properties in this particular African-American community because the comments indicate that Townstone’s CEO, speaking during an official Townstone marketing program, believes that the area’s defining characteristic is that it is dangerous and full of criminals. Moreover, because the statement is disparaging toward a majority-African-American area, African-American prospective applicants throughout the Chicago MSA would also be discouraged from applying for mortgage loans from Townstone.” Additional examples are cited in the complaint.

Reg B states in § 1002.4(b) that “A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.” There are other potential legalities that involve Townstone as a non-bank, but a bank would not have such defenses. Suffice it to say that the Townstone case reminds lenders to be careful about what they say. Banks have for years paid careful attention to printed advertisements and scripts used in other media such as radio and television. Townstone reminds us that podcasts, which may seem more like people just talking, need well chosen words as well. The same advice would apply to any other social media a bank my use, such as Facebook Live.

Townstone was meeting the credit needs in the MSA’s majority-white neighborhoods.

Remedies requested in the CFPB’s complaint include fair lending compliance, no further recurrences of the discriminatory conduct, adoption and maintenance of policies and procedures for compliance, and monetary relief, damages and restitution under ECOA and the CFPA as well as a civil money penalty and the costs for this action. The amount or formula to calculate monetary payments was not specified.

Fair servicing

State and federal agencies have urged banks and others servicing mortgage loans (and other credit products) to work with borrowers during the COVID-19 pandemic. The CARES Act requires mortgage servicers and others to provide temporary forbearance for all loans that are federally insured, federally guaranteed, or purchased or securitized by Fannie Mae and Freddie Mac. The prudential regulators and the CFPB have urged banks, “to consider prudent arrangements that can help ease cash flow pressures on affected borrowers, improve their capacity to service debt, and increase the potential for financially stressed borrowers to keep their homes.” Many borrowers require help in making mortgage loan payments and the forbearance programs, extensions and modifications have provided assistance to millions of troubled borrowers.

There has been a lack of guidance as to how far these modifications and extensions can go, but it may be safe to consider much of this as a disaster relief program and allowances will be made. But how far is too far? No agency has encouraged unsafe or unsound practices and certainly no violations of any consumer protection laws. Common sense and a respect for the spirit and intent of the laws and regulations will go a long way as banks react to the changing and extending conditions COVID-19 has presented.

Reg B requires equal treatment of applicants and borrowers throughout the life of the loan. That certainly includes the servicing of these loans, but we do not know to what extent in black and white terms. The FHA “applies only to the ‘sale or rental of a dwelling’ or lending in connection therewith,” making its impact unclear. Nonetheless, ECOA and Reg B will apply. Does this mean a bank should be reviewing its programs to assist financially impacted borrowers to ensure the bank marketed these programs to all its borrowers, and tracked the acceptance rates?

Fair servicing considerations. Banks should carefully document what the regulatory agencies and other authorities have proposed, said to consider, and have said not to do. Create a resource file substantiating the various programs employed to assist borrowers and depositors.

1. Document the programs employed and especially any discretion allowed on the part of bank staff. Program features, including eligibility criteria, should be clear and applied consistently.

2. Establish controls, second looks and reviews of case-by-case exceptions.

3. Document the assistance levels that are to be provided to all customers to ensure uniformity.

4. Proactively communicate with all borrowers (and depositors if appropriate) about relief programs available to them. This may include statement stuffers, website and social media postings, and other advertising the bank does. Ensure the wider market is reached. If any targeted efforts are made, indicate why and the target demographics or conditions.

5. Carefully craft any applications for participation. In some cases a financial hardship may have to be proven and documented. The bank may find itself getting medical information as a family member or borrower is now ill or recovering, may have excessive medical bills from treatments, may be on public assistance, etc. and some of this information may be protected and even prohibited if the application is improperly worded. Develop the applications and scripts to introduce the programs.

6. Expanding on the mention of medical information, the FCRA and Reg V prohibit banks and servicers from requesting, obtaining, or using medical information in a credit decision or an evaluation of the borrower’s continued eligibility for credit. Customers’ statements may inadvertently disclose otherwise prohibited information.

Use of this unsolicited medical information in making a credit decision (which may be deemed applicable in these programs) is permissible only if:

(a) the information is the type of information routinely used in making credit eligibility determinations (such as a delinquency),

(b) the bank uses the medical information in a manner and to an extent that is no less favorable than it would use comparable information that is not medical information in a credit transaction (delinquent medical debt is treated the same as other delinquencies), and

(c) the bank does not take the consumer’s physical, mental, or behavioral health, condition or history, type of treatment, or prognosis into account as part of any such determination.

The FCRA also requires lenders and servicers that obtain a credit report containing medical information to keep that information confidential.

7. Consider extenuating circumstances involving the borrower and customer. Are they required to quarantine, socially distance or otherwise restricted as to meeting with your staff? Consider the additional assistance which may be provided and creative ways to assist the customer such as via drive-up facilities, e-banking, appointment to enter a branch safely, video calls where possible, etc.

8. All of the above will require training of both bank staff, and of those the bank must answer for –vendors acting on your behalf.

At the end of the day, document, document, document. What was offered, to which customers, how were they selected, were all customers reached regardless of any protected basis, location or income bracket? What offers were accepted and which were not? Were programs refined to increase acceptance is possible? As the programs progress, is the bank communicating with borrowers and monitoring the servicing of the loans and mortgages for compliance? Has the bank analyzed the acceptance of its efforts or tried to make any conclusions as to these fair servicing efforts?

New data collection? The Dodd-Frank Act is 10 years old. One of its provisions requires data gathering at banks for small business loan applications including those from minority applicants and women. This has not happened under the current or former administration and will be both burdensome for lenders difficult to implement.

The CFPB agreed to publish its proposed regulation on small-business data collection as part of a settlement with the California Reinvestment Coalition in early 2020. The COVID-19 pandemic may be slowing those efforts, but that is temporary. Could the recent actions and attention to inequities in the PPP program bring this to the forefront? It is already claimed that such recordkeeping would answer many of the questions and concerns faced as a result of the sketchy data on the PPP program.

The CFPB’s RFI

If you believe change is due in the fair lending area, you are not alone. The CFPB issued a Request for Information (RFI) on July 28, 2020, seeking input on how to best update regulatory issues which expand access to credit for everyone. Some issues in particular that the Bureau would like to see addressed by comments include:

• Disparate treatment analysis

• Assisting more limited English proficiency borrowers

• Better meeting the needs of small businesses, especially minority- and women-owned

• Addressing adverse action notice requirements.

Details are at https://www.federalregister.gov/d/2020-16722

 

July 2020 OBA Legal Briefs

  • Mortgage maturity date, 46 O.S. § 301
  • Appraisal update
  • Reg E error claims and ‘unjust enrichment’
  • HMDA thresholds
  • More on the death of savings transfer limits

Mortgage maturity date, 46 O.S. § 301

By Pauli D. Loeffler

One of the more frequently asked questions the OBA Legal and Compliance Team receives concerns when a Notice of Extension/Modification of Mortgage must be recorded when a loan secured by real estate is renewed or extended.

Let’s say the bank secures a one-year single-pay note or a 5-year balloon note with a 15- or 20-year amortization with a mortgage. The bank renews these notes annually or when the balloon becomes due. Does the bank have to record a Notice of Extension/Modification of Mortgage? This is where § 301 is relevant.

If the maturity date is stated (i.e., October 1, 2020) or ascertainable (e.g., 60 monthly payments), then Sec. 301 provides:

B. Beginning November 1, 2001, no suit, action or proceeding to foreclose or otherwise enforce the remedies in any mortgage, contract for deed or deed of trust shall be had or maintained after the expiration of seven (7) years from the date the last maturing obligation secured by such mortgage, contract for deed or deed of trust becomes due as set out therein, and such mortgage, contract for deed or deed of trust shall cease to be a lien, unless the holder of such mortgage, contract for deed or deed of trust, within the seven-year period, files or causes to be filed of record a written Notice of Extension as provided in paragraph 1 of subsection D of this section.

D.

1. The Notice of Extension required under subsection A [Note: Subsection A deals with mortgages filed before and after October 1, 1981] or B of this section, to be effective for the purpose of this section, shall show the date of recording, the book and page and the legal description of the property covered by the mortgage, contract for deed or deed of trust and the time for which the payment of the obligation secured thereby is extended, and shall be duly verified by oath and acknowledged by the holder of the mortgage, contract for deed or deed of trust.

If the one-year single-pay with a stated maturity or ascertainable maturity date is renewed/extended annually, foreclosure will not be available if the suit is brought unless a Notice of Extension/Modification of Mortgage is recorded on or before October 1, 2027. The bank will also have to pay additional mortgage tax and tax certification fee when it records the Notice of Extension if the bank originally only paid mortgage tax for one year. If the 5-year balloon mortgage is renewed for another 5 years, foreclosure will not be available unless the foreclosure is filed on or before October 1, 2032. In this case, no additional mortgage tax would not need to be paid when the Notice of Extension is recorded provided there is no new money out, but only the tax certification fee.

What if there is no stated or ascertainable maturity date in the mortgage? In that case, the following applies:

C. No suit, action or proceeding to foreclose or otherwise enforce the remedies in any mortgage, contract for deed or deed of trust filed of record in the office of the county clerk, in which the due date of the last maturing obligation secured by such mortgage, contract for deed or deed of trust cannot be ascertained from the written terms thereof, shall be had or maintained after the expiration of thirty (30) years from the date of recording of the mortgage, contract for deed or deed of trust, and said mortgage, contract for deed or deed of trust shall cease to be a lien, unless the holder of such mortgage, contract for deed or deed of trust either:

2. After October 1, 1981, and within the above described thirty-year period, files or causes to be filed of record a written Notice of Maturity Date as provided in paragraph 2 of subsection D of this section.

D.

2. The Notice of Maturity Date required under subsection C of this section, to be effective for the purpose of this section, shall show the date of recording, the book and page and the legal description of the property covered by the mortgage, contract for deed or deed of trust and the maturity date to which the last maturing obligation secured thereby is extended, and shall be duly verified by oath and acknowledged by the holder of the mortgage, contract for deed or deed of trust.

In other words, if no maturity date is stated or ascertainable in the mortgage, you do not have to file a Notice of Extension, but if you continually renew/extend the note so the last payment is more than 30 years after the date of the mortgage, you will need to record Notice of Maturity Date/Modification of Mortgage and pay the tax certification fee in order to foreclose the mortgage. No mortgage tax will be owed if there is no new money out since any mortgage without a stated or ascertainable maturity date is taxed at the maximum 5-year amount when recorded.

Finally, please be aware that although the remedy of foreclosure may be lost, that does not mean the bank has lost the ability to collect on the note. § 3-118 of the UCC provides:

(a) Except as provided in subsection (e) of this section, an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced within six (6) years after the due date or dates stated in the note or, if a due date is accelerated, within six (6) years after the accelerated due date.

In other words, you can still obtain a judgment on the note and record the judgment to have lien on the real estate, however, it is of dubious present value if the real estate is the exempt from forced execution (i.e., it is homestead), or if there are other prior mortgages or judgments that have attached to the real estate.

Appraisal Update

By Andy Zavoina

Reg B Appraisals – The CFPB offered two factsheets at the end of April 2020 pertaining to Reg B and appraisal requirements. One of the factsheets addressed the requirements to provide an applicant a copy of an appraisal and when (https://files.consumerfinance.gov/f/documents/cfpb_ecoa-valuation_delivery-of-appraisals-factsheet.pdf), while the second addressed loan requests covered by the rule. (https://files.consumerfinance.gov/f/documents/cfpb_ecoa-valuation_transaction-coverage-factsheet.pdf). The latter was updated and replaced on May 14, 2020, as the initial factsheet seemed confusing to many. Again, a good reason to search for updated documents.

These Reg B rules apply when a credit application (consumer or commercial) is secured by a first lien on a dwelling. A “dwelling” is a 1-4 family, residential unit. There are two prongs in that test, lien position and collateral. The initial factsheet included examples which did not in fact meet the definition. As an example it listed a 10-unit residential structure with three of the units securing the loan. The 1-4-units test is applied to the structure, not the number of units securing the loan. The revised factsheet correctly uses as one example a 4-unit condo with two units securing the loan. This will meet the 1-4-unit criterion and presumably the loan will have a first lien. The CFPB deleted the 10-unit residential structure example and changed a 30-unit residential structure example to a 4-unit structure in the revision. Ensure you have updated your files and retract any of the replaced documents you may have distributed or made available to your lenders and loan processors.

The original April 29, 2020, factsheet on the delivery of appraisal is fine and is suitable for distribution as a training document. It discusses delivery methods, timelines, and compliance issues.

The corrected fact sheet dated May 14, 2020, is useful as it helps define when an application for credit exists, lien status, and when an appraisal or valuation is developed in connection with an application. It too could act as a training document.

Reg E error claims and ‘unjust enrichment’

By Andy Zavoina

Reg E is a consumer protection regulation and one of the ways that is made clear is under § 1005.11, Procedures for Resolving Errors. In short, this section provides that if your consumer customer discovers the loss of their debit card or sees one or more transactions they claim they neither did, authorized nor benefitted from, they have what Reg E considers an error, an unauthorized electronic fund transfer. Naturally, the consumer will want this money back.

To shatter a few myths very quickly, there is no statute of limitations for a consumer to make this claim and they could be entitled to a complete refund even if this claim is made years later. It depends on the circumstances of the claim. There is also no such thing as “friendly fraud” and if a spouse, parent, child, or coworker steals money from your customer’s account electronically, the claim is not disqualified unless that person is also a joint accountholder with them. There also is no requirement that the claim be made in writing. A simple oral notification starts the bank’s response clock. In general, the first timeframe that is available for the consumer to recover their funds under Reg E is 10 business days.

The error resolution process begins with your consumer advising the bank of their claim. The clock starts and the bank has to deny or pay the claim in a short period of time. In this process the bank gathers information from the consumer and from anyone involved such as a merchant or ATM owner, as the attempt is made to verify who made the withdrawal and under what circumstances.

Let’s assume this claim is a charge at a retailer that the consumer says was processed twice when only one widget was bought. If the bank cannot resolve the claim within the first 10 business days, the bank is faced with paying a provisional credit to extend the investigation period. To do this, if the bank requested a written claim and it has been received, the bank will notify the consumer that a provisional credit will be made. If the bank did not require a written claim the consumer may still be entitled to this temporary credit. This credit is the amount of the transaction the consumer will be paid if the claim is approved. The consumer gets full use of these funds. There are no restrictions placed on them so they can pay bills, go on vacation, whatever they desire. This minimizes disruptions to their lives and allows them to pay their bills hopefully still on time while the bank completes the process. This is why Reg E is considered consumer protection and sometimes it is considered unfair to the bank. In our example, the retailer has more time to respond on this double-charge claim than the bank has to respond to the consumer in the 10-business day period. With no response or affirmation from the retailer the claim is provisionally paid. The bank can now take up to 90 calendar days under Reg E to resolve a Point of Sale claim. If the bank opts to close the claim and finalize the credit before the 90 days is up, the credit is made final and as a valid claim, the bank sends a written notification to this affect, and the case is closed.

Had the claim been denied, there is no allowance in Reg E for the consumer to present new facts and force the bank to reconsider it. The bank may accept new information but is not required to do so. Reg E allows that after all these steps, final is considered final. The rules for the bank are the same. Once the bank says this is final, final is final.

Now let’s assume in the example claim that a retailer has now realized there was in fact a double charge and it has sent a credit back to the consumer’s account in an attempt to make them “whole.” Wait – the bank has already made the consumer whole when it paid the claim. The consumer is now getting paid twice and would be profiting from this process. We know that is not fair, and since the bank has the debit and the consumer has the credit, it can take back that credit amount which it had already paid, right?

Reg E does not have a section or narrative that directly addresses this question, so we must break down certain requirements in the regulation to get an answer. Under § 1005.11(d) the regulations describes when a provisional credit may be reversed, stating “if it determines that no error occurred or that an error occurred in a manner or amount different from that described by the consumer.” The bank has already determined there was in fact an error. There is no section which states that after a claim is found to be valid and closed, that if the consumer is then paid by the retailer, that a bank can “unfinalize” the claim and recoup the money it has paid. Remember, final is final for the bank and the consumer. Some readers are now saying that constitutes unjust enrichment and it is not fair. I would agree on both counts.

Unjust enrichment is a legal principle where one person receives a benefit which is not owed to them, at the expense of someone else. But it takes a court to determine if unjust enrichment has occurred so the bank would need to sue the customer in civil court to use this remedy. The bank has no authority to setoff in this example.

What can be done? First, the bank can take the allowed time according to §1005.11(c) when there are potential variables outstanding such as waiting the 90 calendar days to see if the retailer sends a credit. Second, the bank can notify the consumer that they have been paid twice on the same claim and ask them to either send the bank a check or contact the bank and confirm the bank may debit the account. The wording of such a request is up to the bank.

Those who believe that Reg E is silent on this debit issue and therefore approves it by virtue of not prohibiting it must realize that there is no specific authorization allowing it and the bank risks violating Reg E with a debit. Reg E is not silent on this elsewhere in the regulation. The remittance transfer section of Reg E (§§ 1005.30-1005.36) has its own definition of errors and resolution procedures. It also includes the following additional information in Comment 33(f)-3 in the Official Interpretations:

Assertion of same error with multiple parties. If a sender receives credit to correct an error of an incorrect amount paid in connection with a remittance transfer from either the remittance transfer provider or account-holding institution (or creditor), and subsequently asserts the same error with another party, that party has no further responsibilities to investigate the error if the error has been corrected. For example, assume that a sender initially asserts an error with a remittance transfer provider with respect to a remittance transfer alleging that US$130 was debited from his checking account, but the sender only requested a remittance transfer for US$100, plus a US$10 transfer fee. If the remittance transfer provider refunds US$20 to the sender to correct the error, and the sender subsequently asserts the same error with his account-holding institution, the account-holding institution has no error resolution responsibilities under Regulation E because the error has been fully corrected. In addition, nothing in this section prevents an account-holding institution or creditor from reversing amounts it has previously credited to correct an error if a sender receives more than one credit to correct the same error. For example, assume that a sender concurrently asserts an error with his or her account-holding institution and remittance transfer provider for the same error, and the sender receives credit from the account-holding institution for the error within 45 days of the notice of error. If the remittance transfer provider subsequently provides a credit of the same amount to the sender for the same error, the account-holding institution may reverse the amounts it had previously credited to the consumer’s account, even after the 45-day error resolution period under § 1005.11. (Emphasis added.)

If such a provision is included in the remittance rules, it could have easily been added to § 1005.11(d) during revisions as well, but it was not. Absent a legal authority to setoff this double credit and based on the language which is in § 1005.11, I will not advise a bank to take it upon itself to enforce any claims it has against unjust enrichment, even if they have been successful doing so in the past. Reg E is a consumer protection regulation, and final is final. Not understanding this is taking on more risk than the setoff is worth.

HMDA thresholds

By Andy Zavoina

Did the second half of 2020 suddenly get freed up for your bank? In May 2020 the CFPB published a final rule to amend HMDA/Reg C. The transactional coverage thresholds for closed end mortgages and open-end lines of credit were increased permanently. That is, it should not fluctuate periodically as temporary limits were imposed and would expire. This change was effective July 1, 2020, for closed-end mortgages, so if your volume for these credits was low, you may have some free time on your hands. The new rule for the open-end lines will take effect January 1, 2022.

Closed-end mortgages – If your bank originated fewer than 100 closed-end mortgages in each of the two preceding calendar years, you qualify for this exemption. Effective July 1, 2020, this loan count increased from 25 to 100, so looking at your HMDA reports for 2018 and 2019, if these were under 100 you will not have to submit a 2020 HMDA file. Originally the proposal for this change would have been effective in 2021 meaning there would be a 2020 report. But the final rule backed the effective date up to mid-year; banks with smaller volumes will be relieved of Loan Application Register (LAR) requirements for the second half of the year and will not be required to file a LAR on January – June mortgage applications. Only the first quarter 2020 applications need to be finalized on the LAR and with verified accuracy. Finalizing the second quarter entries is not required. If your bank wants to continue LAR data collection under the HMDA rules and wants to file the annual report in 2021, it is free to do so.

Open-end lines – The current threshold of 500 open-end lines of credit will remain in effect until the new permanent threshold takes effect on January 1, 2022. On that date, this number would have reverted to 100, but that has changed. Your bank will be exempt from coverage under the new HMDA rule if it originated fewer than 200 open-end lines of credit in each of the two preceding calendar years.

Ongoing Requirements – Your bank needs to determine if it wants to continue the HMDA LAR for the last half of 2020. If the 2018 count was less than 100 but 2019 was over and 2020 is on pace to do the same, it makes sense to continue LAR tabulations rather than stop and re-start.

This data is always useful for CRA purposes and substantiating your mortgage fair lending efforts.

National banks may not be out of the woods yet, at least not completely. As a HMDA bank the LAR and other HMDA requirements were a substitute for requirements of 12 CFR part 27, the Fair Housing Home Loan Data System. If your bank is no longer a HMDA bank, if it received 50 or more home loan applications during the previous calendar year it may choose either of these two recordkeeping systems:

1. Maintain HMDA-like records, or
2. Record and maintain for each decision center, using the Monthly Home Loan Activity Format,

• the number of applications received
• the number of loans closed
• the number of loans denied
• the number of loans withdrawn

This information (a “raw count of applications”) must be updated within 30 days of each calendar quarter end. It may be assembled at each branch and tallied up for the bank as a whole.

A national bank that is exempt from coverage (it has fewer than the 50 loans required) will be covered for the next month following any quarter in which it receives an average of more than four home loan applications per month. It will be exempt again after two consecutive quarters of receiving four or fewer home loan applications in each quarter.

If your national bank is required to gather data for this, other than the “raw count of applications” there are many data items which are needed to be collected or attempted to be collected. Most of these items found under 12 CFR part 27 will be on the typical Uniform Residential Loan Application.

More on the death of savings transfer limits

By John S. Burnett

When I last wrote on this topic (May 2020), there were some unanswered questions concerning the Federal Reserve Board’s elimination of the transfer and withdrawal limits on savings accounts in section 204.2(d)(2) of its Regulation D. In this follow-up, I hope to out those questions to bed.

Quick background

On April 24, 2020, the Board issued an interim final rule revising the definitions of “savings deposit” and “transaction account” in Regulation D. The Board also issued a series of FAQs on its action. Our May Legal Briefs article, “Are savings transfer limits dead?” focused on the changed definitions and the Board’s “Savings Deposits Frequently Asked Questions” at the end of April.

At that time, there was discussion in the industry about whether the Fed’s action was permanent or—to borrow its own term—simply a “suspension” of the Fed’s use of reserve requirements during the COVID-19 pandemic and the resulting economic crisis. There were also questions concerning whether depository institutions should plan to reinstate transfer limits on their savings deposits at some time in the future, and whether the new definition of transaction account would require banks to extend their coverage of Regulation CC to deposits made to savings accounts.

After our May 2020 article went to press, the Fed Board updated the Savings Deposits FAQs (the webpage shows it was updated May 13, 2020).

Temporary or permanent?

In the May 13 FAQs, the Board explains that the changes to Regulation D that reduced the reserve percentages to 0% and changed the definitions of savings deposits and transaction accounts were driven by the Federal Open Market Committee’s selection of an “ample reserve regime” as its monetary policy framework, eliminating the need for required reserve percentages and transfer limits for savings deposits. FAQ #3 says, in part (with emphasis added), “The [Federal Open Market] Committee’s choice of a monetary policy framework is not a short-term choice. The Board does not have plans to re-impose transfer limits but may make adjustments to the definition of savings accounts in response to comments received on the Board’s interim final rule and, in the future, if conditions warrant.”

There is no longer any reason to believe that the Board’s action to eliminate required reserves and remove the transfer limits is temporary. We can safely say, I believe, that transfer limits are dead, as a regulatory requirement. There is, however, nothing to prevent a bank from continuing the previous limits or adopting different limits on transfers. In other words, it is the bank’s decision to make.

Will Regulation CC apply to savings accounts

Question and answer 13, added in the May 13, 2020, update to the “Savings Deposits FAQ,” addressed whether the revised Regulation D definition of “transaction account” in § 204.2(e), which now includes accounts described in § 204.2(d)(2) (savings deposits) will affect the definition of “account” in Regulation CC. The answer (with emphasis added) says:

“Regulation CC provides that an ‘account’ subject to Regulation CC includes accounts described in 12 CFR 204.2(e) (transaction accounts) but excludes accounts described in 12 CFR 204.2(d)(2) (savings deposits). Because Regulation CC continues to exclude accounts described in 12 CFR 204.2(d)(2) from the Reg CC ‘account’ definition, the recent amendments to Regulation D did not result in savings deposits or accounts described in 12 CFR 204.2(d)(2) now being covered by Regulation CC.

Unless the Regulation CC definition of “account” is amended to include savings deposits (or your bank has contractually agreed to include savings deposits as covered by the bank’s Funds Availability Policy), savings deposits (including MMDAs) are excluded from coverage.

Keeping savings deposits separate

Although the Fed Board indicates in its “Savings Deposits FAQ” that it won’t matter whether a bank reports savings accounts on their FR 2900 reports as savings deposits or transaction accounts (see FAQ #5) that report will continue to be required because the Fed still needs to know deposit account levels for other reasons, even though it won’t use the amounts to determine required reserve balances.

While how savings deposits are reported on the FR 2900 won’t concern the Fed, banks must still keep their savings and transaction account amounts separate for purposes of their quarterly Call Reports. New instructions have been issued for the June 30 (second quarter) Call Report for 2020, and they continue to require that savings deposits and transaction account balances be reported separately. See FDIC FIL 60-2020, Revisions to the Consolidated Reports of Condition and Income (Call Report) and the FFIEC 101 Report.

Note: The ABA has raised concerns about the “blurring of distinctions” between savings and transaction accounts, saying that other rules depend on the separate definitions. The ABA went so far as to ask the Fed to determine whether Regulation D is needed any longer or should be modernized. They also asked the Fed to decide whether the FR 2900 serves any purpose now.

Returning to savings transaction limits

As noted earlier, banks that have elected (or will elect) to suspend (rather than terminate permanently) their limits on savings transfer and withdrawal activity won’t be required to reinstate those limits, but may determine that a return to some transfer and/or withdrawal limits is desirable for reasons other than complying with a regulation.

If that is the case, the limits can be less confusing and more readily automated than the limits under pre-April 24, 2020, Regulation D requirements. “Six” need not be the “magic number” in any such decision. A bank can also throw out the old requirement that repeated breaches of the limits must result in termination of transfer capabilities, account closure, or conversion of the account to a transaction account. The penalty for excessive transfers or withdrawals can be as simple as a fee imposed on the account. If the limits are further simplified to drop the “old rule” distinction between “convenient” and “inconvenient” transfers/withdrawals, simple pricing can replace all the monitoring and enforcement required by the old rule, including those Reg D letters to errant customers!

Imagine reducing all the old cost and effort to something like “Fee for each transfer or withdrawal from the account per month (first 8 waived): $XX.00.”

June 2020 OBA Legal Briefs

  • Coronavirus Compliance Changes
  • Changes in UCCC Amounts Effective 7/1/20

Coronavirus Compliance Changes

By Andy Zavoina

We are in a much different compliance environment than we were when the calendar went to 2020 – or are we? I want to highlight some recent rulings that have come down from the regulatory agencies so that you can see that the agencies are providing a bit of latitude in the tasks we bankers do on a daily basis. These are temporary adjustments the examiners are going to let banks take advantage of, without criticism. For example, under the Fair Credit Reporting Act a bank has a limited time to investigate a claim that a file is reported with errors to a credit reporting agency. Because of COVID-19 many common tasks take longer today than they did a few months ago and it is not the bank’s fault. But the bank still needs to have sound policies, and procedures, understand what should be happening, and document why it is not. That is, the bank needs to show a good faith effort that it is not dragging out a process just because it can. The examining agencies will provide breaks where breaks are due, but it will not turn a blind eye to outright violations or unsafe or unsound practices.

So, as compliance and internal audit go on following the audit calendars they planned out for the year, what should be cited when an issue is found in an audit? I have some recommendations. First, be aware of the areas where the examining agencies have expressed their ability to provide some relief. Then be sure that if a deadline or task was not met as you would have normally done, ask why and ensure that it is documented in the bank’s files so that when an examiner reviews it they too will understand and hopefully agree with your findings. Exceptions need to be reasonable and requirements in the laws and regulations are not to be broken but may be bent temporarily.

In an audit report I recommend noting what the issue was, how it was beyond the bank’s control, and when the requirement was finally met or why it remained unmet. This may well require a follow-up from the Point of Contact in the bank responsible for the area being audited. Consumer protections should not be ignored because they can be, but only because they had to be due to circumstances beyond the bank’s control. If the issue being reviewed requires only an investigation withing the four walls of the bank, no retailer or vendor had to be contacted as an example, there would need to be a high degree of documentation to justify why bank staff couldn’t complete its own review. Personnel shortages could be one justification, and I would document it well. I believe that by identifying all these exceptions found in your own audits, your examiners will see that exceptions were correctly noted and justified and that consumer protections were not ignored, just delayed. And one item examiners will look at are your own audits so they will backtrack to the files and records for verification. Note the agency’s guidance documents permitting these exceptions wherever possible.

Mortgage Servicing Rules

On April 3, 2020 the agencies, specifically The Consumer Financial Protection Bureau (CFPB), Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the State Banking Regulators released a joint statement providing latitude in servicing mortgage loans under Reg X – RESPA. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides many home loan borrowers with forbearance options and the agencies understand that it will take a great deal of manpower to manage the requests and documentation to carry out the requests that would soon be coming in. There is also much to be done with systems and credit reporting and bank personnel may already be taxed with COVID-19 absences. Compliance guidance in the form of FAQs was issued to better inform bankers/loan servicers as to what adjustments they could make. The intent here is to allow staff to work with borrowers based on the changes triggered by the pandemic. This is meant to be a consumer-friendly extension of consumer protection rules.

For example, under the CARES Act mortgage servicers for federally-backed mortgage loan are required to provide a CARES Act forbearance program of 180 days, extendable to a second 180 day period, if the borrower makes a request and affirms that they are experiencing a financial hardship during the COVID-19 emergency. The bank/servicers cannot require any additional information from the borrower before granting the forbearance. This applies to federally backed mortgages— think Fannie Mae, Freddie Mac, HUD, the FHA, the Department of Agriculture (USDA direct and guaranteed loans) or VA loans.

A borrower need not be delinquent to request forbearance and in many cases the bank/servicer may want to seek out borrowers before they are past due to avoid an account being reported as past due or a workout under troubled debt restructuring rules which were addressed in the April 2020 Legal Briefs.

Loss mitigation rules may apply to loans the bank is servicing even when CARES Act forbearance requirements do not. It is important to review the guidance as the mortgage servicing document explains that the CARES Act forbearance program qualifies as a short-term payment forbearance program under Reg X which means it is excluded from some of the loss mitigation requirements normally followed. In addition, servicers can provide multiple sequential short-term payment forbearance programs under the servicing rules.

Beyond mortgage servicing, allowances such as these must be known and understood, and I suggest you reference them in your own audits when you come across them. You may also want to target the accounts which take advantage of some of these exceptions just to verify that the relaxed compliance rules are followed, but not violated (being used in excess, or with documentation problems). Training may also be needed for those executing these rules and servicers may use checklists or short reference documents. Be sure to include timelines so key dates are known. A second 180-day forbearance, as an example, must be requested prior to expiration of the first to qualify under the federally backed mortgage forbearance guidance. And any “special rules” that include an expiration date would need to be noted in a conspicuous way.

The mortgage servicing guidance states, “As of April 3, 2020, and until further notice, the agencies do not intend to take supervisory or enforcement action against servicers for:

• delays in sending the loss mitigation-related notices and taking the actions described in Regulation X, 12 CFR 1024.41(b)-(d), (h)(4), and (k), which, among other things, include the five-day acknowledgement notice, the 30-day evaluation and notice, and the appeals notice, provided that servicers are making good faith efforts to provide these notices and take the related actions within a reasonable time;

• delays in establishing or making good faith efforts to establish live contact with delinquent borrowers as required by Regulation X, 12 CFR 1024.39(a), provided that servicers are making good faith efforts to establish live contact within a reasonable time; and

• delays in sending the written early intervention notice to delinquent borrowers required by Regulation X, 12 CFR 1024.39(b) (the 45-day letter), provided that servicers are making good faith efforts to provide this notice within a reasonable time.”

In this case, there will be an end date for the exception on sending these notices, but it will be published later. This requires an ongoing review of guidance documents and communication streams so staff knows when it does end.
Servicing rules also address escrow statements, stating, “as of April 3, 2020 and until further notice, the agencies do not intend to take supervisory or enforcement action against servicers for:

• delays in sending the annual escrow statement required by Regulation X, 12 CFR 1024.17(i), provided that servicers are making good faith efforts to provide these statements within a reasonable time

Note my emphasis above in italics. There is both an expected but unknown end date, and the expectation that the bank/servicer is making a good faith effort to get escrow statements delivered. If the timing requirements cannot be met, the bank/servicer should have a documented plan on when it believes obstacles to compliance will be overcome.

Fair Credit Reporting

The CARES Act (Section 4021) amended the Fair Credit Reporting Act (FCRA) (Section 623(a)(1)) with the intent of stopping adverse credit reporting during the period of national emergency. As a furnisher of credit reporting entries, your bank should be aware that its procedures for responding to consumer disputes should not be relaxed.

There are two separate issues to address here. First, the amended FCRA requires the bank to report an account as current if it was current at the time an “accommodation” was made. An accommodation is an agreement to:

1. Defer one or more payments;
2. Allow a partial payment;
3. Forbear any delinquent payments;
4. Modify a loan or contract; or
5. Any other assistance or relief granted to a consumer who is affected by the coronavirus disease during the covered period.

If the borrower was delinquent on their loan before an accommodation was made, the bank must both continue to show the delinquent status during the period of accommodation, and report the loan as current if the borrower brings their account current during the period of accommodation. Loans which have been charged-off are not subject to the FCRA amendment and may still be reported as such.

I am not sure why a bank offering an accommodation would not have tried to bring the account current when the accommodation was made, but as was noted in the Legal Briefs in April, some accommodation programs are targeted for corrective actions only for payments during the period declared a national emergency. A borrower involved in an accommodation should be made aware of the bank’s position and how the account will be reported. This will hopefully reduce disputes whereby borrowers claim they believed the agreement with the bank would have brought them current.

Second, in compliance with the CARES Act, the CFPB issued a nonbinding policy statement on April 3, 2020. The “Supervisory and Enforcement Practices” says the CFPB will take a “flexible supervisory and enforcement approach during this pandemic regarding compliance” with the FCRA recognizing that the coronavirus crisis “poses operational challenges for consumer reporting agencies and furnishers.”

The CFPB “will consider a consumer reporting agency’s or a furnisher’s individual circumstances and does not intend to cite in an examination or bring an enforcement action against [such entities] making good faith efforts to investigate disputes as quickly as possible, even if dispute investigations take longer than the statutory time frame.”

Thus, the bank may take more time to investigate a FCRA reporting complaint, but it must make a good faith effort to comply. As noted earlier, make your best effort and document why it was not successful when that is the case. Further, note when the issue was closed so that it is evident that it was completed as soon as possible. This should appease examiners, but would it appease a court if the bank’s actions and time to resolve the dispute were challenged? The FCRA allows 30 days after receiving a dispute to investigate and respond to it. The CARES Act did not extend the time period, and the CFPB only said it would not plan to enforce it. Although courts have generally held that there is no private right of action for consumers against data furnishers under 15 U.S.C. § 1681s-2(a), enforcement of that section is given to state and federal governmental agencies under 15 U.S.C. § 1861s-2(c) and (d)..

The CFPB also reminded banks and other report furnishers that the FCRA includes a provision which eliminates your requirement to investigate a dispute that is reasonably thought to be frivolous. So, if the bank begins to see similar disputes made, perhaps following a template for the complaint, the bank may be able to quickly determine it to be frivolous but must be prepared to defend that action.

Regs E, DD and Z – Working with Customers

Like the guidance above, the CFPB issued three guidance documents on May 13, 2020, designed to aid banks in helping consumers during the COVID-19 period:

1. A statement for credit card issuers and those offering open-end lines that the CFPB will provide supervision and enforcement flexibility during the pandemic with respect to the timeframe for banks to complete billing error investigations under Reg Z;

2. FAQs on flexibility in Reg E and Reg DD for checking, savings, or prepaid accounts; and

3. FAQs on existing flexibility for open-end credit in Reg Z.

Let’s review those guidance documents—

Statement for credit card issuers and open-end lenders: This guidance provides information on your banks billing error responsibilities now, and on temporary relief measures intended to allow the bank to resolve consumer billing errors with handicaps caused by COVID-19.

The CFPB recognizes that some banks will have a difficult time completing timely investigations because many outside sources such as merchants and others which are needed to complete it are not available. Reg Z at 1026.13(c) addresses the investigations and allows 30 days to complete them. The CFPB indicated it will provide supervisory and enforcement flexibility regarding the allotted period. The CFPB says it intends to consider the bank’s circumstances and does not intend to cite a violation or bring an enforcement action against a bank that takes longer than the maximum timeframe allotted to investigate and resolve a billing error, so long as the bank can demonstrate that it made a good faith effort to obtain the necessary information and make a decision on the claim as quickly as possible, and the bank complies with all other requirements it has pending error resolution. Again, look at the italicized text for emphasis and urge your investigators to document what was done, when, why, and if there were delays beyond the bank’s control, describe them as well as when the information was obtained so that a decision could be made. Investigatory notes could be as simple as an estimate from the merchant of when it will be able to respond to the request for information, or determining that the merchant is unable to respond at the time and why that is. Remember, “the palest of ink is better than the best memory” – so have good notes made and be sure to include a discussion on the delays in any audit reports so that management and the board understand what has happened and that these were “allowed” but only when the rules were followed as diligently as possible.

Other sections of Reg Z (1026.13(d)) will apply if the bank must prolong the investigation period. That means they are not making payments on the disputed amount and it is not accruing interest or fees such as credit insurance and it is not reported as a past due account because of the claim. The CFPB also encouraged banks to consider being more flexible on the consumers time requirement of notifying the bank within 60 days of the billing error.

Flexibility regarding deposit accounts: This guidance in is the form of a three-question FAQ. Note that none of those questions address the Reg E claims investigation requirements or timelines for unauthorized electronic fund transfers. While your bank may suffer from the same merchant issues under Reg E and Reg Z, there is no flexibility in the 10- to 90-day time requirements to resolve a claim here. Banks that strove to complete investigations in 10-business days may default to paying provisional credit when necessary and extending the investigation period to 45 calendar days or more as permitted.

The FAQ’s intent was to remind banks that offer checking, savings, or prepaid accounts that, under both Reg E and Reg DD, the bank can change account terms without advance notice to where the change in terms is clearly favorable to the consumer. Any bank wanting to reduce fees such as those charged at ATMs or maintenance fees could do so immediately. These are changes in the consumer’s favor and could be implemented without advance notice for those wanting to help all their customers. This may also act as some compensation to customers for restricted lobby hours and availability. The CFPB also pointed out that the FRB’s interim final rule on Reg D eliminated the six per statement cycle transfer limitations and that required no advance notice.

Open-end (not home-secured) loans: This guidance addresses open-end loans which are not secured by a home. It, too, was in the form of a three question FAQ and addresses change in terms requirements and consumer assistance during COVID-19.
The CFPB restated Reg Z requirements for a change in terms notice in advance (1026.9(c)(i)(A)) for “significant changes” but also noted that there is no advance notice required if, for example, the bank extended the grace period for payments or reduced the cost of credit such as with an interest rate or a fee reduction. Also, no advance notice is required at the outset of an arrangement between the bank and consumer to address paying the loan such as with a rate reduction or deferral due to COVID-19. A “significant change” that may be detrimental to the consumer requires a 45-day advance notice.

The second item in that FAQ carries on with the example of working through hardship relief with a consumer and change notice requirements. No advance notice to the consumer is required to increase charges or payments at the end of the arrangement, so long as notice was provided at the beginning of the arrangement that the increase would occur. If your bank agrees with a consumer to a temporary hardship arrangement by telephone, for example, the bank can put the relief in place after providing the consumer with an oral disclosure of the terms of the arrangement including those that will apply at the end of the arrangement. The bank then mails or delivers a written disclosure of those terms to the consumer as soon as reasonably practicable. This is only the case where the terms that apply at the end of the arrangement are as favorable as the terms that applied prior to the workout arrangement. If at the end of the arrangement the rate or a fee would be higher than it was at the beginning, this exception would not apply. The exception also only applies to a workout or temporary hardship arrangement and does not apply to other accommodations that may be offered during this emergency.

The final item in the FAQ encourages banks to communicate with its consumers by, for example, putting additional information in with statements to inform them of alternatives and resources available to them as a means of getting ahead of a problem while it is more manageable. Banks may offer this information electronically but cautions banks that required disclosures would still require E-SIGN compliance.

Refresh saved documents – Guidance during the COVID-19 emergency is fluid. Be sure to check each of these guidance documents and FAQs for updates.

We’ll continue our review of guidance for the COVID-19 emergency in another Legal Briefs.

Changes in UCCC Amounts Effective 7/1/20

By Pauli D. Loeffler

Sec. 1-106 of the Oklahoma Uniform Consumer Credit Code in Title 14A (the “U3C”) makes certain dollar limits subject to change when there are changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers, compiled by the Bureau of Labor Statistics. You can download and print the notification from the Oklahoma Department of Consumer Credit by clicking here.  It is also accessible on the OBA’s Legal Links page under Resources once you create an account through the My OBA Member Portal. You can access the Oklahoma Consumer Credit Code as the changes in dollar amounts for prior years on that page as well.

Increased Late Fee

The maximum late fee that may be assessed on a consumer loan is the greater of (a) five percent of the unpaid amount of the installment or (b) the dollar amount provided by rule of the Administrator for this section pursuant to § 1-106. As of July 1, 2020, the amount provided under (b) will increase by $.50 to $26.50.

Late fees for consumer loans must be disclosed under both the UC3 and Reg Z, and the consumer must agree to the fee in writing. Any time a loan is originated, deferred, or renewed, the bank is given the opportunity to obtain the borrower’s written consent to the increased late fee set by the Administrator of the Oklahoma Department of Consumer Credit. However, if a loan is already outstanding and is not being modified or renewed, a bank has no way to unilaterally increase the late fee amount if it states a specific amount in the loan agreement.

On the other hand, the bank may take advantage of an increase in the dollar amount for late fees if the late-fee disclosure is worded properly, such as:

“If any installment is not paid in full within ten (10) days after its scheduled due date, a late fee in an amount which is the greater of five percent (5%) of the unpaid amount of the payment or the maximum dollar amount established by rule of the Consumer Credit Administrator from time to time may be imposed.”

§3-508B Loans

Some banks make small consumer loans based on a special finance-charge method that combines an initial “acquisition charge” with monthly “installment account handling charges” rather than using the provisions of § 3-508A with regard to maximum annual percentage rate. Section 3-508A contains provisions for a “blended” rate by tier amounts under (1)(a) as well as the alternative of using a flat 25% APR under (1)(b). § 3-508A is NOT subject to annual adjustment without statutory amendment.
The permitted principal amounts for § 3-508B is adjusting from $1,560.00 to $1,590.00 for loans consummated on and after July 1, 2020.

Sec. 3-508B provides an alternative method of imposing a finance charge to that provided for Sec. 3-508A loans. Late or deferral fees and convenience fees as well as convenience fees for electronic payments under § 3-508C are permitted, but other fees cannot be imposed. No insurance charges, application fees, documentation fees, processing fees, returned check fees, credit bureau fees, or any other kind of fee is allowed. No credit insurance even if it is voluntary can be sold in connection with in § 3-508B loans. If a lender wants or needs to sell credit insurance or to impose other normal loan charges in connection with a loan, it will have to use § 3 508A instead. Existing loans made under § 3-508B cannot be refinanced as or consolidated with or into § 3-508A loans, nor vice versa.

As indicated above, § 3-508B can be utilized only for loans not exceeding $1,590.00. Further, substantially equal monthly payments are required. The first scheduled payment cannot be due less than one (1) calendar month after the loan is made, and subsequent installments due at not less than 30-day intervals thereafter. The minimum term for loans is 60 days. The maximum number of installments allowed is 18 months calculated based on the loan amount as 1 month for each $10.00 for loan amounts between $158.95 and $530.00 and $20 for loan amounts between $530.01 – $1,590.00.

Lenders making § 3 508B loans should be careful and promptly change to the new dollar amount brackets, as well as the new permissible fees within each bracket for loans originated on and after July1. Because of peculiarities in how the bracket amounts are adjusted, using a chart with the old rates after June 30 may result in excess charges for certain small loans and violations of the U3C provisions.

Since §3-508B is “math intensive,” and the statute whether online or in a print version does NOT show updated acquisition fees and handling fees, you will find a modified version of the statute with the 2020 amounts toward the bottom of the Legal Links page or clicking here. Again, you will need to register an account with the OBA to access it.

The acquisition charge authorized under this statute is deemed to be earned at the time a loan is made and shall not be subject to refund, if the loan is prepaid in full, refinanced or consolidated within the first sixty (60) days, the acquisition charge will NOT be deemed fully earned and must be refunded pro rata at the rate of one-sixtieth (1/60) of the acquisition charge for each day from the date of the prepayment, refinancing or consolidation to the sixtieth day of the loan. The Department of Consumer Credit has published a Daily Acquisition Fee Refund Chart for prior years with links on this page. Further, if a loan is prepaid, the installment account handling charge shall also be subject to refund. A Monthly Refund Chart for handling charges for prior years can be accessed on the page indicated above, as well as § 3-508B Loan Rate (APR) Table. I expect the charts and table for 2020 to be added to that page

§ 3-511 Loans

I frequently get calls when lenders receive a warning from their loan origination systems that a loan may exceed the maximum interest rate. Nearly always, the banker says the interest rate does not exceed the alternative non-blended 25% rate allowed under § 3-508A according to their calculations. Usually, the cause for the red flag on the system is § 3-511. This is another section for which loan amounts may adjust annually. Here is the section with the amounts as effective for loans made on and after July 1, 2020 in bold type.

Supervised loans, not made pursuant to a revolving loan account, in which the principal loan amount is $5,300.00 or less and the rate of the loan finance charge calculated according to the actuarial method exceeds eighteen percent (18%) on the unpaid balances of the principal, shall be scheduled to be payable in substantially equal installments at equal periodic intervals except to the extent that the schedule of payments is adjusted to the seasonal or irregular income of the debtor; and

(a) over a period of not more than forty-nine (49) months if the principal is more than $1,590.00, or

(b) over a period of not more than thirty-seven (37) months if the principal is $1590.00 or less.

The reason the warning has popped up is due to the italicized language: The small dollar loan’s APR exceeds 18%, and it is either single pay or interest-only with a balloon.

Dealer Paper “No Deficiency” Amount

If dealer paper is consumer-purpose and is secured by goods having an original cash price less than a certain dollar amount, and those goods are later repossessed or surrendered, the creditor cannot obtain a deficiency judgment if the collateral sells for less than the balance outstanding. This is covered in Section 5-103(2) of the U3C. This dollar amount was previously $5,200.00 and increases to $5,300.00 on July 1.

May 2020 OBA Legal Briefs

  • Work “after” the coronavirus
  • Information on Oklahoma campaign accounts
  • Are savings transfer limits dead?

Work “after” the coronavirus

By Andy Zavoina

Whether you call it the new normal or the abnormal, as bankers we are really in new territory. Sometimes it is akin to walking into a dark room and feeling your way around and then learning someone is still arranging the furniture. On the deposit side of the bank rules are changing and it impacts your IRS reporting and required minimum distributions. And on the loan side borrowers want their Paycheck Protection Program loans, they want them now or you will be sued, and the Small Business Administration has your hands tied so you cannot get the applications submitted. And if you are a smaller bank, your submission times are 4 p.m. to midnight – welcome to “banker’s hours” in the COVID-19 pandemic.

We on the OBA compliance team are repeatedly asked if you can screen employees and take their temperature before allowing them to work? If they have COVID-19, are they protected under the Americans with Disabilities Act (ADA)? COVID stands for the Coronavirus Disease, so Yes, they could be. As you will read below the ADA protects all employees.

Employees want to work and may try to work even if they feel ill, but do not believe they actually have COVID-19. But their co-workers are nervous because this employee has a cough and one or more others may call in sick to protect themselves from the potentially ill employee. These are real issues today and they need to be addressed both as we work through the pandemic and as we begin bringing employees back to work. This article may also prompt changes to your pandemic policy as you prepare for the next one.

Much of the ADA is far from regulatory compliance, but just like our team, your compliance team is getting these questions, too. So, we will attempt to address some of these issues as they apply to your employees working today and getting back to work as the pandemic begins to subside. Banks and others will take a long time to get back to where they were in January, if they ever get back to that point.

First, let’s talk about health issues as they apply both to today, and as employees come back to work. The Equal Employment Opportunity Commission (EEOC) oversees anti-discrimination issues in the workplace and this includes accommodations for the disabled, which includes those suffering from a disease. In fact, to be clearer, the ADA regulates what the bank can ask about a disability and medical exams for all employees and job applicants, whether they have a disability or not. The ADA prohibits the bank from excluding individuals with disabilities from the workplace for health or safety reasons unless they pose a “direct threat,” which means a significant risk of substantial harm even with reasonable accommodations. The ADA still requires reasonable accommodations for individuals with disabilities during a pandemic.

Reasonable accommodations would include things like social distancing, splash shields, sanitizers or wipes, masks, etc. Whether or not someone poses a direct threat should be based on factual and objective information and not subjective perceptions or irrational fears.

The EEOC uses four factors to identify whether an employee poses a direct threat: (1) the duration of the risk; (2) the nature and severity of the potential harm; (3) the likelihood that potential harm will occur; and (4) the imminence of the potential harm.

The EEOC has reminded employers such as your bank that Equal Employment Opportunity (EEO) laws, including the ADA, apply during a pandemic but they should not interfere with, or prevent a bank from following guidance issued by the Centers for Disease Control and Prevention (CDC) or state and local health authorities. The guidance will often change. We’ve seen the COVID-19 pandemic evolves both positively and negatively and guidance has followed its trajectory up and down.
The EEOC has a guidance online. “Pandemic Preparedness in the Workplace and the Americans With Disabilities Act” [https://www.eeoc.gov/facts/pandemic_flu.html] provides information bankers want, especially in four key areas:

1. How much information can the bank request from staff if they call in sick? Management wants to protect other employees and feels information is warranted.

2. When can the bank require the employee’s temperature be taken?

3. Can the bank require employees to stay home if they have COVID-19 symptoms?

4. When employees return to work, can the bank require doctors’ notes clearing them?

The guidance document has been in existence for several years and was updated this year for the COVID-19 pandemic. Consider incorporating these guides with personnel policies and/or your pandemic policy. In today’s COVID-19 environment, the World Health Organization (WHO) is the body that officially declares a pandemic and has done so pertaining to COVID-19. So, as that criterion is required for parts of the EEOC guidance, it has been met.

Continuing with the above discussion on a “direct threat,” during a pandemic if the CDC or state or local public health authorities determine that the illness is like seasonal influenza or the 2009 H1N1 influenza, it would not pose a direct threat and would not justify disability-related inquiries or medical exams. When the CDC or other health authorities determine that pandemic influenza is significantly more severe, it could pose a direct threat. The assessment by the CDC or other health authority would provide the necessary evidence justifying disability-related inquiries and medical exams.

In March 2020, the CDC guidance stated that the COVID-19 pandemic did qualify as a direct threat. This, then, allows many of the medical inquiries bankers ask about. The precautions issued by various government authorities including closure requirements for some businesses such as restaurants, sports venues and schools and the urging of social distancing all support the fact that there is a significant risk of substantial harm posed by having someone with COVID-19, or its symptoms, present in the bank, lobby, offices, etc.

During a non-pandemic period, the bank may want to know about a person’s limitations, such as asking if they have a compromised immune system or a chronic condition that could make them more susceptible to a flu like COVID-19. This may be for preparedness, but it is not allowed. The ADA prevents it because the answer could expose a disability without cause and there is no direct threat to anyone before a pandemic actually occurs.

Shift to a pandemic period and now the direct threat has been established and substantiated.

Q1. During a pandemic, how much information can the bank request from employees who report feeling ill at work or who call in sick?

A1. The bank is free to inquire with staff if they are experiencing influenza-like symptoms, such as a fever, cough, loss of taste, etc. These are COVID-19 symptoms. The bank must keep all the information about an employee’s illness confidential.

If the pandemic flu is like a seasonal influenza these inquiries are not considered disability related. If pandemic flu becomes severe, the inquiries are justified by a reasonable belief based on objective evidence that this poses a direct threat.

Applying this principle to current CDC guidance on COVID-19, the bank may ask employees who report feeling ill at work, or who call in sick, questions about their symptoms to determine if they have or may have COVID-19.

A common follow-up question is whether the bank has to pay the employee, provide them time off, or require they work from home? The CDC and pandemic guidance from the EEOC do not address this question. The bank will determine how these issues will be addressed based on its own circumstances. Sick time, personal time, paid time off, unpaid time off or work from home offers should be addressed internally and applied uniformly based on bank policy. This may depend on time available, accrued, and duties.

Q2. Can the bank require its employees have their temperature taken to determine if they a fever and/or ask screening questions?

A2. This answer is Yes, during a pandemic period. Taking an employee’s temperature is considered a medical exam which would normally not be allowed but, in these questions, we are talking about during a pandemic and the risk of a direct threat. Because the CDC and state and other health authorities have acknowledged the spread of COVID-19 and issued precautions as of March 2020, the bank may measure employees’ body temperature.

As to screening, this is permissible when those questions are medically specific to the pandemic flu being experienced. You are best advised to focus on the questions the CDC or other health authorities ask. As noted above, the results would be considered confidential information.

This is EEOC guidance, so it addresses the bank and employee relationship. What is not covered is the relationship the bank has with its customers. Counsel or the bank’s insurer may be the ones to ask if these rules can be imposed on customers. We believe that if they are noninvasive, and pose the same direct threat, the bank has an obligation to protect its staff from customers as well as from other employees.

Q3. Can the bank send an employee home because they have symptoms of the current flu?

A3. The answer is Yes. The CDC states that employees who become ill with symptoms of influenza-like illness at work during a pandemic should leave the workplace. Advising your employees to go home is not a disability-related action if the illness is akin to current influenza such as COVID-19 today, or whatever causes the next pandemic. Additionally, the action would be permitted under the ADA if the illness were serious enough to pose a direct threat.

Q4. When an employee has been absent because of pandemic flu symptoms, can the bank require a doctor’s note clearing them to return to work?

A4. Yes. These requirements are permitted under the ADA either because they would not be disability-related or, if the pandemic was severe, the bank would be justified under the ADA standards for disability-related inquiries of employees. Recognize that medical staff may be too busy to see patients for the purposes of providing notes allowing them to return to work, so this may not be practical. The bank may choose to rely on a note or standard form from health clinics, a stamp on a bank form, or an e-mail to certify that a person does not have COVID-19 or another pandemic flu. Because of HIPPA, some medical professionals may be hesitant to disclose too much or do so with email. The bank may want to provide latitude in these requests.

Another question we were asked when the pandemic was in its infancy in the U.S. was if an employee was traveling, especially in a “hot zone” in another location, could the bank ask screening questions or must it wait to see if the employee developed symptoms? The bank would not have to wait because these are not related to any disability. The CDC or other health officials recommend that people who visit specified locations remain at home for several days until it is clear they do not have pandemic flu-like symptoms. The bank may ask whether employees are returning from these locations, even if the travel was personal.

Does the current pandemic mean the bank can ask employees who do not have flu-like symptoms to disclose whether they have a medical condition that the CDC says could make them more vulnerable? The answer is, No. If the pandemic flu (again COVID-19 in early 2020) being experienced is like a seasonal flu, making disability-related inquiries or requiring medical exams of employees without symptoms is prohibited by the ADA.

Could this inhibit the banks plans on getting employees back to work? It could when you cannot require disclosures such as this. But If an employee voluntarily discloses that they have a specific medical condition or disability that puts them at risk of contracting the pandemic flu, it is permissible. The bank still has an obligation to keep this information confidential. The bank may ask them to describe the type of assistance they believe will be needed such as working from home, additional time for medical appointments or the like.

Now, let’s turn our attention to getting back to work. As we have heard so many times, these are new experiences for all of us. There is no standard that will be applicable to all banks, in all circumstances. You may get ideas from these thoughts and questions which are applicable to your bank, however.

Consider which employees will be needed in the bank’s offices initially. Ask yourself if this implementation should be all at once or if it may be phased in, in stages based on your workforce, the offices/branch facility itself, and duties of the staff. This would differ perhaps for the large bank in a high rise (think elevators with push-buttons and social distancing challenges) versus a small community bank housed in one small branch. Can the bank identify its high-risk employees based on CDC guidance? This may include elder employees, especially those with known underlying health issues such as respiratory or heart ailments, diabetes, obesity, etc. What stage will they be in, or will they be encouraged to work from home for the foreseeable future? Is it best to rotate staff from an office environment to work-from-home, and back again periodically? Remember, those employees at high risk may be more comfortable working from home rather than exposing themselves on a daily basis. Consider both the bank’s needs as well as your employees’.

Consider how staff will be notified when and where they will office or carry out their duties. It may still be necessary to alter staffing requirements based on the facilities themselves and the customers anticipated to be served. Will this notification be by email, telephone, letter or a mixture of these? Is an acknowledgment from the employee required? Is this perhaps a single parent who requires day care for their children, and if so, are the day-care facilities open yet? They may not be, so should that employee be required to return to work yet?

How will staff make their commute? If they are dependent on public transportation, is this advisable yet? When they arrive at the bank or office, if elevators are being used what will the allowed occupancy be? Will there be attendants to push the elevator call buttons or wipes at each set of buttons, and the same for the buttons inside the elevator to reach a designated floor. If staff uses the stairs more, those handrails will need to be sanitized regularly.

The same questions should be asked about doors used to enter the building, offices, restrooms, breakrooms, backrooms, etc. All high-touch areas are high-risk areas whether this is a 50-story building in Oklahoma City or a one-story brick and mortar branch in McAlester.

Will all employees report for work entering a specific door where they will retain a six-foot distance from others and answer confidential screening questions? Will someone take their temperature? If yes to this last item, have thermometers (preferably non-touch) been ordered yet (with spare batteries)? Will staff be screened at the beginning of their shift, or more frequently such as every time they clock in/out or enter the building?

Once in place, will personal protective equipment be required and provided, such as masks for everyone, gloves for those handling cash, shields put up between teller windows or will tellers, new accounts desks and lenders be spaced a safe distance apart? Will another canister of those wipes be available at each phone – you must consider every touch point possible as requiring decontamination, including input devices like keyboards? Back to the cash, will it be rotated so that incoming bills are set aside for a few days to allow any possible coronavirus organisms to die? Will the breakroom have signage reminding staff to stay apart, and not loiter at the coffee pot – if the bank will even keep one? Is anything allowed in the refrigerator? Has the janitorial staff been asked to clean the lobby, with disinfectants, one or more times a day? The more they are seen especially in the lobby and high traffic areas the better everyone will feel.

Let’s now consider other issues. Where do customers enter from and will they be subjected to similar screening procedures as staff? Will the bank, based on its own guidance or that from a governmental authority, limit the number of people in the bank? These same issues may apply to vendors as the bank has HVAC, IT, vending machine servicers and the like in the bank daily. If so, signage and communication with your customers is advised. Many retailers now have markers on the floors as to paths to follow, and to indicate social distancing. If physical barriers are used, will these be a new high touch area requiring more cleaning? This may include access to the safe deposit areas, gates, doors and the boxes themselves.

If some staff will continue to work from home, are enhancements needed to the laptops they have, or to their own devices being used? Will the better devices be redeployed once some staff returns?

With all these precautions in place, develop steps to react to issues. When the bank is notified a customer has now tested positive, what process can be used to determine who that customer came in contact with, be it a teller, CSR, lender or the person working the safe deposit area? Will bank staff self-report if they test positive and were working in the bank last week, but rotated to work from home this week? The bank should have a notification process in place to advise staff that a person they are known or suspected to have had contact with has now tested positive and what steps they need to take. That first step may be simply contacting their medical professional to ask if they need to be or even can be tested, or if they need to seek their own care at home and self-quarantine, watching for any other developing symptoms.

Lastly, consider enforcement of all these new rules. Someone needs to be responsible to pause and politely offer a mask to an employee or customer who does not have one, or is wearing it improperly, following too closely, or doing any other “unsafe act” that could harm them, an employee, customer, and you. Staff can be encouraged to assist each other and customers, but the things that get done, are the things that get checked.

There is a lot of antiseptic checking in our futures before we are done with this.

Info on Oklahoma campaign accounts

By Pauli D. Loeffler

It’s an election year, and we are getting a lot of questions regarding setting up campaign accounts. There are several OBA Legal Briefs available online that will help answer your questions. The May 2016 Legal Briefs covers campaign committees, PACs and political party accounts for state, county, and municipal elections. That article provides information for federal elections as well. You will also want to review the July and August 2018 OBA Legal Briefs.

If you haven’t done so already, accessing the Legal Briefs archives will require that you register your email address at your bank on the OBA.com website. Once that’s accomplished, you will need to complete a routine login before clicking on the Legal Briefs link on OBA’s front page.

The Oklahoma Ethics Commission website contains useful information on ethics laws and rules for state, county, and municipal elections. It can be accessed at https://www.ok.gov/ethics/Resources/Laws/index.html. It alson has useful guides for those customers opening accounts who ask the bank questions. The guides can be found at https://www.ok.gov/ethics/Resources/Guides/index.html. As bankers, you can show these customers where to look for the answers, but you should not provide them with any legal advice on what to do with the information they find there.

Are savings transfer limits dead?

By John Burnett

Tucked in behind all the frantic news about COVID-19, stimulus payments, the Payroll Protection Program, the Federal Reserve Board’s herculean efforts to limit the economic damage caused by the pandemic and emergency business shutdown orders, and regulatory pronouncements with guidance on adjusted expectations in the pandemic environment, the Federal Reserve also issued an interim final rule effective on April 24 that removed the transfer and withdrawal limits included in the definition of “savings deposit” in Federal Reserve Board Regulation D, and announced that depository institutions (I’ll use “banks” in the rest of this article) can “suspend” enforcement of the six-transfer limit.

That news has provoked more than a few questions from bankers, and the Federal Reserve provided answers, but not all the answers. What does the Fed mean by “suspend”? Can we stop and not re-start? Can we suspend our fees for excessive transfers/withdrawals, or leave them in place? What do we do with our Form FR 2900 reports? What will this do to Call Reports and other reports that include savings deposit and transactions account numbers or balances? How long can we get away with not monitoring and controlling our customers’ savings and MMDA transfers? If and when we get back to it, do we have to have the same complicated “rules” that were in the old regulation?

Interim final rule

First, don’t be concerned that this is an “interim” final rule in the sense of “temporary and reversible.” “Interim” isn’t used here to indicate that the rule is only temporary and things will go back to the way they were. “Interim” is used in the sense of “temporary” only to get around the normal Administrative Procedures Act (“APA”) requirement for a series of steps before a final rule is issued. The norm is to start with a proposed rule, followed by a comment period of between 30 and 60 days, analysis of the comments, and a final rule. If it were not for the current medical and economic emergency, the Fed might have taken that normal route. But, as the Fed explained in the “Recent Developments” portion of the Discussion in the text that accompanied the rule in its April 28 publication (85 FR 23445), the Fed felt that, after it had eliminated reserve requirements on transaction accounts in March, “the retention of a regulatory distinction in Regulation D between reservable ‘transaction accounts’ and non-reservable ‘savings deposits’ is no longer necessary,” suggesting that the Fed planned to eliminate the distinction and would have done so using the normal APA process, but “financial disruptions arising in connection with novel coronavirus situation have caused many depositors to have a more urgent need for access to their funds by remote means, particularly in light of the closure of many [bank] branches and other in-person facilities.” The urgency factor caused the Board to act quickly by issuing an interim final rule on April 24. Under the APA, an interim final rule can become effective immediately, provide an “after the fact” comment period and be followed by a final rule at a future date (sometimes many months or even years later).

Therefore, there is no reason to believe that this interim final rule will be “undone.”

Suspending enforcement

The word “suspend” is used 13 times in the Discussion accompanying the rule at publication. Not once is the word “suspend” explained or defined. That means we have to look to a dictionary definition, and we find “to render temporarily ineffective,” “to stop for a period of time,” “to cause to stop temporarily (suspend bus service),” or “to set aside or make temporarily inoperative (suspend the rules).” The Fed didn’t use “end,” or “stop” or “discontinue.” It did, however, in one of the Board’s Savings Deposits Frequently Asked Questions [https://www.federalreserve.gov/supervisionreg/savings-deposits-frequently-asked-questions.htm], answer “Yes” in response to “May [banks] suspend enforcement of the six transfer limit on a temporary basis, such as for six months?”

That leaves us with a fairly strong impression that the Fed expects that banks will make their “suspension” of the limits temporary, and revert to some form of limitations at some as yet undefined time. But, in the spirit of full disclosure in this article, there is nothing in the interim final rule that speaks directly to the idea of returning to a limits regime (other than that one-word answer to the question in the preceding paragraph). That response would have been more revealing if it had been “Yes, and that is the path the Board expects will be taken.”

Definition of ‘transaction account’

In addition to removing the limits in the savings deposit definition, the Fed also modified the definition of “transaction account” in § 204.2(e), especially in paragraph (e)(4), where it now says that a transaction account includes “[d]eposits or accounts on which the depository institution has reserved the right to require at least seven days’ written notice prior to withdrawal or transfer of any funds in the account and … the depositor is permitted or authorized to make withdrawals for the purposes of transferring funds to another account of the depositor at the same institution (including transaction account) or for making payment to a third party, regardless of the number of such transfers and withdrawals and regardless of the manner in which such transfers and withdrawals are made. {Emphasis added]

Regardless of assurances in the Savings Deposits FAQs that banks can report savings accounts as transaction accounts or savings accounts (as if it doesn’t matter to the Fed), the “transaction account” definition suggests strongly that it will make a difference (else why bother with paragraph 204.2(e)(4)?). That’s another factor weighing in favor of making any suspension temporary.

Regulation CC

The other significant question raised by bankers (and not addressed by the Fed) concerns the connection between the new definitions of “savings deposit” and “transaction account” and the definition of “account” in Regulation CC § 229.2(a) (as explained in comment B. 229.2(a)-1):

The [Regulation CC definition of “account”] applies to accounts with general third party payment powers but does not cover time deposits or savings deposits, including money market deposit accounts, even though they may have limited third party payment powers. The Board believes that it is appropriate to exclude these accounts because of the reference to demand deposits in the EFA Act, which suggests that the EFA Act is intended to apply only to accounts that permit unlimited third party transfers.” [Emphasis added]

It appears that if a bank drops its savings account transaction limits permanently, it leaves itself open to litigation alleging that the bank can’t continue excluding its savings accounts from the coverage of Regulation CC, even if the Fed doesn’t adjust the Regulation CC definition of “account.” Of course, if the Fed re-draws that definition, non-limited savings accounts may clearly be subject to Regulation CC coverage.

For that reason, I recommend that banks that suspend their enforcement of the transfer limits plan to establish some form of transfer limits again, perhaps six to twelve months in the future.

There will be more on the Fed’s redefinition of savings accounts in a future Legal Briefs installment.