Thursday, November 30, 2023

Legal Briefs

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 ( 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:

Accepting OK Real ID receipts

By Pauli D. Loeffler

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

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

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

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

Special purpose credit programs

By Andy Zavoina


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

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

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

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

Special purpose credit programs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


BSA Revisions

By Andy Zavoina

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

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

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

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

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

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

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

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

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

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

CTR and SAR improvements

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

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

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



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:

CFPB Blog on rescinded Bulletin 2015-05:

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:


¶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., 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 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., 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:


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.


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


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.


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.


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 (, while the second addressed loan requests covered by the rule. ( 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” [] 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 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 It alson has useful guides for those customers opening accounts who ask the bank questions. The guides can be found at 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 [], 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.

April 2020 OBA Legal Briefs

  • Coronavirus and Assisting Customers
    • Modify Policies—COVID-19 addendums
    • Assisting borrowers
      • New loans
      • Loans past due or about to be
      • Limits on fee, penalties and interest
      • Regulatory reporting
      • Credit bureau reporting

Coronavirus and Assisting Customers

By Andy Zavoina (with Pauli Loeffler)

There is a risk balance that banks must follow so that in six months or at your next exam, you will say, “we helped” rather than “we were damned if we did, and damned if we didn’t.” I’ve heard one property manager say she received text messages from renters verifying that because of the coronavirus there is no rent owed for the next month. The press is advertising that evictions and foreclosures have been stopped and small business loans are available (even before the House passed the CARES Act). People do not grasp that a stoppage because courts are closed and collection actions are delayed to avoid “kicking someone who is down,” will at a time resume and the obligations to pay as agreed will mean past due payments must be paid. Enter regulatory notices that encourage lenders to work with customers. The New York Times had an article on March 22, 2020, that began:

U.S. federal and state financial regulators are encouraging lenders to help borrowers affected by the coronavirus, and will not penalize them for doing so…

The regulators said they will not criticize banks for ‘safe and sound’ loan modifications or direct the lenders to categorize them as ‘troubled debt restructurings’ —something that could affect their financial wellness.

That sounds helpful, but nowhere does it say a borrower will not be responsible to make a payment. It does say a bank must act in a safe and sound manner. If a bank does not, it will be held accountable. Historically, after some form of government bailout or immediate reaction to a crisis such as with the recent $2 trillion stimulus package, enforcement actions increase. Fraud happens. Sometimes it is intentional and sometimes it is not, but it is looked for. What can a bank do to assist its customers in these very strange times of massive business closings with so many customers without cash reserves and without a paycheck? This landscape is changing fast and information is being updated daily. Stay on top of your daily regulatory updates.

A few weeks ago I was asked about extending mortgage loans for borrowers for 90 days. My first thought was “we never extend mortgages due to all the paperwork and costs.” But my, oh my! White flags began flying and the government recognized that consumers were deep in critical times. Shelter in place orders have been extended and schools are staying closed. Workers are being laid off literally by the tens of thousands. This begs the question, is 90 days of relief enough? Banks are getting in a mode of “ready, fire, aim” as they try to meet the needs of borrowers and the CARES Act. You’ll read more on this below. The Act will give many mortgage borrowers nearly a year of forbearance. Ninety days just isn’t enough for many.

What can banks do to assist borrowers but do so in a safe and sound manner? We may have to assume “safe and sound manner” is a subjective term. It certainly has a different meaning based on the condition of the bank and its region during a COVID-19 economy than it did last December when borrowers simply wanted loan extensions for holiday bills. Times are different now, but what will be said about a bank’s reaction a year after the pandemic is over?

Modify Policies—COVID-19 Addendums

In June 2000 the FFIEC established policy standards under the Uniform Retail Credit Classification and Account Management Policy imposing controls that are still followed today. This policy:

1) Required banks to establish explicit standards that control the use of extensions, deferrals, renewals, and rewrites for closed-end loans
2) Allowed an additional re-age of open-end credits in formal workout or debt management programs that meet all other re-aging requirements; and
3) Extended the charge-off time frame for open-end and closed-end retail loans secured by one- to four-family residential real estate to 180 days past due.

The Federal Register (65 FR 36903, June 12, 2000, at defined standards on re-aging accounts. The term “re-age” is defined as “returning a delinquent, open-end account to current status without collecting the total amount of principal, interest, and fees that are contractually due.” The context of this policy is addressing troubled debts. But regulators began asking banks to have a policy addressing extending or deferring loan payments. I will use the term “extension” here to mean allowing a borrower to extend the loan by making an agreement with the lender to defer one or more periodic payments to the end of the contract. The amount of interest owed, or a specific fee is charged for this or may be waived under some circumstances. In the case of loans past due, what examiners did not want to see was a poor payment history and multiple extensions applied to a loan to bring it current without a plan for future payments. This was hiding past due accounts and was both misleading and an unsafe and unsound practice. Open-end loans were limited to one extension in a 12-month period and twice in five years. The June 2000 policy did not state that same limit for closed-end loans, but I have heard of examiners interpreting it to mean closed-end loans as well. In any case, a bank should have a policy or internal guidance on when extensions are allowed, why, how many may be applied at one time, how many are allowed in a year, over the life of the loan, and who can approve extensions as well as who can approve any exception to these internal requirements.

Criteria for extensions other than those offered during the holidays includes answering various questions similar to the underwriting process:

1) Why is the extension needed?
2) Will interest owed be paid at the time of the extension?
3) What is the recent payment history?
4) What is the plan for future payments, and how have financial conditions improved?
5) Is there loan collateral?
6) And particular to mortgages, is this in a flood zone (requiring signed disclosures), are mortgage documents necessary to be filed with the county, are we escrowing, and what happens to the accruals for those expenses?

Another issue deserving attention is an underwriting policy. A business loan may require several years of tax returns and other financials. In today’s CARES Act economy the policy needs to address new underwriting requirements. The lender’s highlights for the Paycheck Protection Program defines only four criteria to make a 100 percent Small Business Administration guaranteed loan:

1) verify that a borrower was in operation on February 15, 2020
2) verify that a borrower had employees and paid salaries and payroll taxes
3) verify the dollar amount of average monthly payroll costs
4) follow BSA requirements.

Obviously, there is more needed behind the scenes such as verifications of how many employees there are, etc. The SBA is getting pushback on some of these issues from big banks and is considering revising the guidance to increase acceptance by lenders. The loan programs are still developing as well as are compliance rules. It does make it difficult to follow this path when parts are being made up as we go. It’s important you keep abreast of the changes.

Your bank may have one or more policies addressing Troubled Debt Restructuring (TDR), extensions, and other workout issues. These may need an emergency addendum as it is unlikely any were created for the recent massive and critical changes in our economy.

Assisting Borrowers

What can your bank do today to assist borrowers? The information above leads us to this. In general, new loans can be made, HELOCs and other lines may be increased, and existing loans can be renewed, modified, or extended to assist your borrowers. While the demands are to react at a moment’s notice, the bank must act deliberately. Coordinate what is being done internally. It may not be necessary to have an amended policy board-approved prior to implementation for emergency purposes. Let management use its authority to react as needed and have the staff such as Compliance, Audit and lenders amend policies and procedures for appropriate approvals. Inform the bank’s CRA officer of the concessions being made to address customers affected by COVID-19 and keep examiners informed as to what the bank is doing on both the Lending and Operations sides of the bank.

New Loans

Section 1102 of the CARES Act addresses the Paycheck Protection Program. This is a commercial loan designed to provide a direct incentive for businesses to keep their workers on the payroll. These workers are your consumer and mortgage borrowers. The SBA will forgive loans if all the employees are kept on the payroll for eight weeks after the loan is made and the money is used for payroll, rent, mortgage interest, or utilities. The PPP will be available April 3 – June 30, 2020.

All federally insured banks can make PPP loans with a fast SBA approval. Banks can have lenders apply with the SBA online and we are hearing that in 36 to 48 hours lenders who are not yet SBA-approved can be approved. The bank can be paid a processing fee based on the loan balance for making these loans, based on tiers. Loans of $350K and less pay 5 percent to the lender, $350K to $2 million pay 3 percent and those greater than that pay 2 percent (check current information for any changes). The four underwriting criteria are outlined above.

You may also want to pay attention to bullet 1 in that underwriting list as to a date recognized as the beginning of the COVID-19 period. And if the bank is interested these PPP loans may be sold in the secondary market.

Banks can promote special loan products or the same products that were being offered a year ago. Rate considerations may be offered or deferred first payment dates. There are still qualified borrowers out there, but fewer. Some employees are more secure than ever and are creditworthy.

Loans Past Due or About to Be

Be proactive and communicate with your borrowers before they are past due. On March 22, 2020 the Fed, FDIC, NCUA, OCC and CFPB published an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This statement encourages banks to work with borrowers. It also provides encouragement to work with borrowers who “are or may be unable to meet their contractual payment obligations because of the effects of COVID-19.” Add emphasis to “are or may be” and consider seeking out borrowers in advance of a payment difficulty. The bank may offer a lot of relief when payments may be deferred, and the contract extended. It provides goodwill and avoids a bump in past due loans. The statement goes on to say the “agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs)” but it also points out that any modifications and actions taken must be consistent with safe and sound practices. The bank does not want to assist borrowers through special programs only to have those loans classified later as TDRs. Banks are still encouraged to work with classified and “special mention” loans as well.

The Statement went on to say “The agencies have confirmed with staff of the Financial Accounting Standards Board (FASB) that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not TDRs.” From the FDIC’s FIL-50-2013, “A TDR designation means a modified loan is impaired for accounting purposes, but it does not automatically result in an adverse classification. A TDR designation also does not mean that the modified loan should remain adversely classified for its remaining life if it already was or becomes adversely classified at the time of the modification.” So, a TDR doesn’t immediately require a classified loan status, but it is not far away. The bank may assume that borrowers who are current on payments are not experiencing financial difficulties at the time of the modification for purposes of determining a TDR status. When this is the case, no further TDR analysis is required for the loan.

Loan modifications and loan extensions may be a banks preferred options to address existing loans and avoiding past dues and the costs associated with them both in collection activity and additional ALLL reserves. Issues to keep in mind include training and applying the bank’s policy addendum and procedures consistently.

As to extensions of payments, consumer loan payments may be deferred either before or after default, but the agreement must be in writing. The bank can charge an extension fee, but it cannot charge both an extension fee and a late fee. The advantage— particularly if the borrower is more than 30 days late—is it will not be reported negatively to the credit bureau. The bank can contract for several extensions at once to advance the due date by several months, and then revisit the circumstances when payments are due to resume. The loans principal does not increase but interest continues to accrue.

Some issues to consider in your written extension agreements include requiring or reminding the borrower that insurance on collateral such as a vehicle must be maintained during this period. If your bank issues credit life or disability insurance, double check the policy and notify your borrower of any issues there. Some policies track only the originally scheduled amortization and do not extend coverage when there is a payment extension. A borrower extending a loan several times over the life of a loan may have no insurance for the last unscheduled payment periods which resulted from the extensions.

It is recommended that you accurately document the loan status when the extensions are granted, was it a 30 or 60 day or worse status, was the arrearage caused directly or indirectly by COVID-19 (document that briefly), and what are the prospects that once the extension period is over the borrower will be able to resume payments?

When on the loan desk my bank looked at the period the borrower was employed at their job. We often worked with borrowers in lower income positions who were employable at many places. For example, a person who was a cook or waitstaff was employable at many types of restaurants and unemployment periods would be brief as they often went from job to job. That is not the case today and these are some of the most unemployed folks during the current crisis. Documenting facts such as this may justify allowing multiple loan extensions at one time. If the coronavirus curve flattens in two months and the economy returns to a near normal state, positions for this group of workers will fill quickly. But at that time, those who have been unemployed may have rent and mortgage payments stacked up along with utilities, and most borrowers pay those bills before a signature loan at your bank. For this reason, a buffer month or two is recommended. This may be one of the reasons the CARES Act is providing such an extended period for mortgage extensions of up to a year.

How many deferrals/extensions should be granted? That can be up to the bank and the policy in effect. In 2019 that may have been two payment extensions in a year. In 2020 it may be three or six. It is recommended that management decide, based on its market, what is reasonable and reduce that to a policy.

Because we have limited guidance as to what an examiner may feel is acceptable, the Compliance Officer or a member of senior management, or both, may want to have a call with the bank’s examiner in charge and say, “this is what we are implementing” and explain why, and how many extensions will be allowed based on what circumstances. Then, what happens if the quarantine period is extended? Will more extensions be allowed? Don’t ask the examiner to approve your policy as they do not manage the bank, just ask what their impressions would be. This may provide the bank with an opportunity to avoid criticism later or hear that an even more flexible policy would be considered safe and sound. The intent here is not to hide any past due loans, but to work with good borrowers and help protect their credit ratings during these difficult times.

Keep in mind that most real estate secured loans are only subject to disclosure and remedy provisions of the U3C, but Reg Z does at least talk about “skip-a-payment” extensions and that neither late fees nor extension fees are considered finance charges. The written extension agreement would supersede application of payment provisions which usually state that payments are applied first to interest, then principal, and finally late fees. Extension agreements can be used with real estate secured loans and these can be done in the same manner as for U3C covered loans, and address escrows. Check with your forms vendor or counsel on the use of forms.
In the case of mortgages, the bank is extending the loan. That is a MIRE (Make, Increase, Renew or Extend) event and under the flood rules the bank may need to check the flood status of the property and if it is in a Special Flood Hazard Area, disclose that and have an acknowledgment from your borrower signed.

The bank needs to address escrows if there are any. Ask whether they must be paid, or may they go unpaid as well? I understand there are different approaches to this question. Some banks will not collect any part of the mortgage payments at this time and will adjust the final payment of the loan to include the extension fees, but I also hear about banks that are requiring the escrow portions to be paid and are staying in a 90- to 120- day range for extensions. While some banks are planning to capitalize interest, not all are. In any discussion with your EIC it may be wise to inquire about this, because the agencies don’t seem to be handling the nuances of the CARES Act, TDR and Generally Accepted Accounting Principles uniformly.

Section 4022 of the CARES Act will allow government-supported loan borrowers such as those with loans from Freddie, Fannie and the VA, to request a forbearance for 180 days if they were impacted by COVID-19, and at the end of that period another 180-day forbearance period can be requested. There are new rules to provide these extensions (modifications) and to show the loans as current, and not past due. More on that below.

Section 4022 is targeted at 1-4 family dwellings meeting certain qualifications. It must be a federally backed mortgaged meaning it is:

a) insured by the Federal Housing Administration
b) insured under section 255 of the National Housing Act
c) guaranteed under section 184 or 184A of the Housing and Community Development Act of 1992
d) guaranteed or insured by the Department of Veterans Affairs
e) guaranteed or insured by the Department of Agriculture
f) made by the Department of Agriculture; or
g) purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.

Many of the loans your bank is servicing in-house may not qualify for such a lengthy extension period as the government programs backing the covered loans adds to the safety and soundness of the loan, meaning there is less risk to the lender. Instead of six months, the bank may adopt a standard three or four payment limit or may factor the current loan to value ratio into the decision and base the period deferred in part on that. Like the extensions discussed above, I recommend documenting what happened and what is projected to happen.
For the loan qualified under Section 4022, during the covered period, a borrower experiencing a financial hardship due, directly or indirectly, to the COVID–19 emergency may request forbearance by:

a) submitting a request to the borrower’s servicer; and
b) affirming they are experiencing a financial hardship during the COVID–19 emergency

That’s all the CARES Act calls for. It does not allow for the any forms or questions, but this applies only to the government backed mortgages.

Limits on fee, penalties and interest

Section 4022 goes on to describe the servicer’s requirements. “Upon receiving a request for forbearance from a borrower…the servicer shall with no additional documentation required other than the borrower’s attestation to a financial hardship caused by the COVID–19 emergency and with no fees, penalties, or interest (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) charged to the borrower in connection with the forbearance, provide the forbearance for up to 180 days, which may be extended for an additional period of up to 180 days at the request of the borrower, provided that, the borrower’s request for an extension is made during the covered period, and, at the borrower’s request, either the initial or extended period of forbearance may be shortened.” Specifically mentioned are “fees, penalties, or interest” but escrow payments are not referenced. We hope there will be clear guidance on this, so banks will know whether escrow payments may or may not be suspended or postponed. Absent this, banks may need to run an analysis of what the cost of paying taxes and insurance will be to avoid surprises later. There will be more impact based on the number of extensions, amounts of escrow payments and the timing of the escrow funds paid out. The escrow analysis may indicate the bank will be making a large amount of interest free loans as borrowers repay the deficiencies and shortages slowly.

Apart from the CARES Act, if an Oklahoma mortgage states a maturity date or the maturity date is ascertainable (you or counsel needs to review your documents), Sec. 301 of Title 46 requires foreclosure to be commenced within six years of that date, so it is relatively safe to not file notice of extension for a short extension. An extension for a year would not be a short term. On the other hand, if the mortgage neither states a maturity date nor is it ascertainable from the mortgage, the mortgagee must file a notice of maturity within 30 years of the date of the mortgage. So, if it is a 30-year mortgage with no maturity date, a short extension in such case could impede the bank in a worst-case scenario. If the bank is unsure which applies, the best action is to file.

Whether the loan is a mortgage or consumer loan, a modification may the solution to a problem. The June 2016 Legal Briefs has an excellent article explaining the differences between a modification and a renewal/refinance. A new loan created by the latter would require all the Reg Z and TRID disclosures applicable to the loan. A modification does not, and this why it is the easier and less costly process. Payment extensions may be the simplest solutions, especially for consumer installments. Some banks are being proactive and contacting consumers to offer no cost, three payment extensions.

Regulatory reporting

There is more confusion based on guidance documents and, in this case, I’m referring to credit reporting. The document is the FDIC’s March 27, 2020 FAQs addressing working with borrowers (at In question 2, the FAQ discusses the credit reporting of loans which have had payment extensions. The first paragraph says, “Past due reporting status in regulatory reports should be determined in accordance with the contractual terms of a loan, as its terms have been revised under a payment accommodation or similar program provided to an individual customer or across-the-board to all affected customers. Accordingly, if all payments are current in accordance with the revised terms of the loan, the loan would not be reported as past due.” This makes sense because a loan that receives an extension advances the due date and is not contractually delinquent. The loan system would show it as current on regulatory reports and to the credit bureaus.

The second paragraph in questions 2 states, “For loans subject to a payment deferral program on which payments were past due prior to the borrower being affected by COVID-19, it is the FDIC’s position that the delinquency status of the loan may be adjusted back to the status that existed at the date of the borrower became affected, essentially being frozen for the duration of the payment deferral period For example, if a consumer loan subject to a payment deferral program was 60 days past due on the date of the borrower became affected by COVID-19, an institution would continue to report the loan in its regulatory reports as 60 days past due during the deferral period (unless the loan is reported in nonaccrual status or charged off).” This then indicates that if a borrower was, for example, one payment past due, and then lost his job due to a government-mandated closure and could not make his next two payments, the bank could extend only the two payments owed after the closure or at least would report it as a month past due. I do not see a bank handling one past due loan in two ways. The bank would collect what it can for three extensions in total. Systems will typically not advance a due date, but still report a loan as still delinquent. Note, though, that the reporting described in the FDIC’s FAQ is regulatory reporting, not reporting to credit bureaus.

Credit bureau reporting

The CFPB on April 1 provided credit bureau reporting guidance in its “Statement on Supervisory and Enforcement Practices Regarding the Fair Credit Reporting Act and Regulation V in Light of the CARES Act” and stated, “As lenders continue to offer struggling borrowers payment accommodations, Congress last week passed the CARES Act. The Act requires lenders to report to credit bureaus that consumers are current on their loans if consumers have sought relief from their lenders due to the pandemic. The Bureau’s statement informs lenders they must comply with the CARES Act. The Bureau’s statement also encourages lenders to continue to voluntarily provide payment relief to consumers and to report accurate information to credit bureaus relating to this relief.” This indicates that when a loan date is advanced due to an extension, COVID-19 or not, that is the correct way to report the loan. The CFPB does have authority over Reg V.

The CFPB also recognizes that loan departments are strained due to COVID-19 personnel shortages. It notes that if there are FCRA dispute investigations that are not handled in a timely manner the CFPB does not intend to cite this in an exam nor bring any enforcement actions because of it. Hopefully the other agencies will follow suit.

March 2020 OBA Legal Briefs

  • Corona virus and banking
    • Management’s actions
      • Update
      • Education
      • Resonsibilities
      • Travel
      • Security
      • IT
      • Vendors
  • Military lending update
  • Perfecting a security interest on a trailer
  • Tax season information in Legal Briefs

Coronavirus and banking

By Andy Zavoina

Let’s first set the stage for our discussion on the coronavirus. The coronavirus is a large family of viruses that range from the common cold to much more severe illnesses. COVID-19 is the strain we are discussing. It recently started in China and has quickly made its way around the globe. While a very fluid story, it has infected more than 87,000 people worldwide and killed almost 3,000 of them. Half the people think these stories are an overreaction and the rest believe not enough is being done. Everyone is talking about it and it’s getting more real daily as people in the U.S. are now dying from the COVID-19. As I started to write this Legal Brief article on a Friday there were infected persons in the U.S. but deaths were occurring in other countries, not here. Then, on Sunday it was announced that the first person died of it in Washington state. Later that day a second died there as well. By Monday afternoon the count was six. And by Tuesday, the count had risen to nine.

Those reading this do not remember the Spanish flu, which in 1918-1919 infected 500 million people (about one in three worldwide) and killed 50 million. The world was quite different then. But is that a good thing? Medicine has advanced and we are used to having vaccines when we need them, but we do not have one now and people are much more mobile and spreading this highly infectious virus. One interview I saw had a doctor saying that this was the flu and while it has the possibility of causing death, we had not seen a high percentage of that yet and it was difficult to treat as a result. China reports a mortality rate of just 3 percent from COVID-19. The Spanish flu was the 1918 pandemic virus with a 10 percent mortality rate.

Let’s look at some business issues, since we know people take business, and the revenue it yields, very seriously. The Mobile World Congress is a large tech convention dealing with the mobile industry and it would draw 100,000 people to Barcelona, Spain. It was canceled. The Olympics in Tokyo could actually be canceled if the outbreak is not contained, a member of the International Olympic Committee said. The S&P dropped 13 percent in the last week of February representing trillions of dollars in losses and likely your retirement plan is smaller as a result. The COVID-19 is not a pandemic – yet – but it is an opportunity for banks to revisit the pandemic policies collecting dust.

My point is, the COVID-19 outbreak has already impacted you and your bank, it will continue to do so in other ways, and the only way this global economy, this mobile society, and the branch on Main Street will contain it is by being smarter. What does this mean for our banks?

Remember 2007? The FFIEC released guidance for pandemic planning. The 10-page guidance document may be integrated with the bank’s business continuity plan or exist as a separate document as it does differ and includes different requirements. When was the current policy last updated? When was it last tested? What have we learned in the last dozen years, and what adjustments could be made to your policy? The guidance cited five specific items a plan should include:

1. A preventive program to reduce the likelihood an institution’s operation will be significantly affected by a pandemic event;
2. A documented strategy that provides for scaling pandemic efforts commensurate with the particular stages of a pandemic outbreak;
3. A comprehensive framework of facilities, systems, or procedures to continue critical operations if large numbers of staff members are unavailable for prolonged periods;
4. A testing program to ensure the institution’s pandemic planning practices and capabilities are effective and will allow critical operations to continue; and
5. An oversight program to ensure ongoing review and updates to the pandemic plan.

Thankfully we are not in a pandemic stage, but that does not lessen some people’s fear or the precautions they may demand. “People” in this case includes the bank’s customers, and the bank’s staff.

Management’s Actions

The bank’s policy on addressing a pandemic crisis needs to be reviewed, and updated if necessary because branches have changed, departments have moved, and more customers can bank online. What requirements in the policy have changed as a result of this progress?

Management needs to ensure that employees are educated on COVID-19 and know the difference between facts and myths, and are mindful of their surroundings. Bankers often educate staff at a meeting in the lobby or training room. So, first things first, employees who are not feeling well should not be “troupers” who come to work. They should stay home, and they certainly should NOT attend a group meeting. The bank may opt to video the meeting and make it available to staff who are absent. Announce the meeting -“We will hold a meeting at 8am in the training room this Thursday to discuss what is being done to address the safety needs for all staff and customers based on the health issues that are of concern to us all. If you believe you have the flu, a fever, dry cough, trouble breathing, and possibly pneumonia you should consult your doctor and not attend this meeting or come to work if you may be contagious.”

The meeting will not include refreshments unless steps are taken which prevent cross contamination. Consider the ill person who refills their cup by resting a carafe against the lip of their cup. The bank should reconsider the free coffee, cookies and donuts available in the bank unless these are individually served. We want the meeting itself to be a safe place and this applies to the customer lobby as well.
Management should reassure staff that it is monitoring the situation and is managing it to ensure the protection of everyone. Outline what the bank wants, hygiene from staff, travel restrictions, time away from the bank, telecommuting possibilities, providing resource links and sharing IT and security concerns. These are expanded in this article. Management also needs to ensure supervisors are trained to respond in a uniform manner to staff concerns.

Your policy should be scalable, and the bank can implement stage one at this time. Stage one may include ensuring that the bank has hand sanitizer stations throughout the bank and especially in teller areas where customers are greeted, in close proximity to staff and others and cash is handled routinely going from person to person. These need to be in place and working by the meeting.

Quick thoughts:

1. According to the CDC, a person who coughs has a six-foot bubble in front of them that could be affected by a cough. Just as we urge staff to stay home when they are ill, customers should do the same. Use remote deposit capture, internet banking and the drive-thru lanes when possible.
2. Hand sanitizer should contain at least 60 percent alcohol and should be available in many areas of the bank to anyone. Additional cleaning and sanitizing supplies should be available and janitorial staff may be asked to pay more attention or to use sanitizing cleansers where they were not used before.
3. Staff should regularly wash their hands with soap and water for at least 20 seconds.

Those are some basic points, but reminders are positive reinforcements because the bank does care about its staff. I’m sure you can add many items to this list.

There is no evidence COVID-19 can be transmitted from soft surfaces like currency, but it could survive on frequently-touched hard surfaces, such as a doorknob, for a few hours. Consider rubber gloves for staff as coin is a hard surface. Again, show staff the bank cares.
The above may sound very simple and it is. It is common sense and it is something that should be practiced daily, not just during flu season or as a reaction to an epidemic.

Management should be able to announce any confirmed case of COVID-19 to peers so they can take appropriate actions. But confidentiality of information is also required to comply with the Americans with Disabilities Act (ADA). Under ADA rules the bank would be advised to avoid health inquiries or requiring certain staff to have medical exams absent sufficient cause such as a direct threat to the health of others. An infected employee may be ADA protected. The bank’s Family Medical Leave Act (FMLA) policy can also come into play as someone diagnosed with COVID-19 will likely qualify as having a serious health condition. Human Resources is definitely part of the management team in the action planning stage. Accommodations beyond normal paid time off routines may be required. Similarly, any travel restrictions and requirements to work offsite should be discussed with counsel, applied uniformly, and not be targeted toward any employee based on any protected basis.

Does bank staff travel on official business to countries that are highly impacted by COVID-19 such as Italy, Japan, Iran or South Korea? Likely this is not the case, so no restrictions are necessary in the policy there. But what about vacations? Are any staff members planning on going to the Olympics in Tokyo? Are any visiting family in South Korea such as those in the military? Can the bank restrict what an employee does on vacation? What about when the employee returns to work the day after getting back in the country from one of these places?

Various employment laws will influence what the travel policy says on this (also see “Responsibilities” above) and highly impacted areas may have all travelers quarantined for the 14-day COVID-19 incubation period so what the bank opts for may be secondary. In any case, any employee traveling from or through a designated area should be forbidden from returning to work if they are put on an incubation period quarantine until that period expires and the employee is cleared by medical staff. But remember the traveler mentioned above in San Antonio. Ensure all staff understands the possible repercussions of such travel and what it may mean to coworkers. If every day of vacation is used on vacation, if the employee is placed in quarantine is that an excused absence, even if they know a quarantine may be coming? If the employee is in a higher-risk area, but not one that is designated by the authorities as requiring a quarantine, should the employee be allowed back to work? Some alternatives may include allowing the employee to telecommute. Perhaps the bank has a laptop that may be checked out and used for work from home securely or the employee will use additional vacation, sick or personal days while ensuring they are not a carrier. If they are out of time off, can other staff donate their accumulated days to this person? By educating all employees everyone will have a better understanding of the issues. What the bank doesn’t want is one employee to come back to work and five others to call out as a personal precaution.

“No hats, no hoodies” has been an issue for many years and many banks have signage to this effect at branch entrances. What is the bank to do if a customer comes in wearing a surgical mask? A bank robber in Georgia has done just that and robbed six banks. Perhaps additional signage is warranted at the doors:

“For the safety of staff and customers this bank requires customers to remove hats and hoods when in the bank. Protective surgical masks are included. If you feel the need to wear such protection, we ask that you use our drive-up or online facility.”

Why is this justified? Currently the Surgeon General and the CDC have agreed that face masks are not recommended for the general public in the U.S. The risk of catching the virus in the U.S, is low since there is little evidence of community transmission at this time. Many masks are not made for this type of use and if they are not properly fitted are ineffective. A man with a beard as an example can have a difficult time getting the proper fit and the mask is virtually useless as protection from a virus. Different masks offer different levels of protection as well. The better masks are not in sufficient supply to meet the demands of the general public. If the public as a whole purchased those masks, health care workers who are at a greater risk may not find them available. In some cases, a mask is recommended, such as for some cancer patients with low immune systems or someone who is ill with a cough or sneezing. This begs the question, is the lobby the best place to meet their banking needs? For these reasons, neither customers nor staff should need a mask inside the bank. Customers in the drive-up could easily and safely remove a mask while in a vehicle for identification purposes. Simultaneously the bank may find this an opportune time to advertise the features of online banking.

We will leave VPN and laptop configurations for the telecommuting staff to the IT department, but the IT-related risks extend beyond that. Let’s assume you have that skittish employee who can already feel the fever and cough coming on. They get an email from the CDC or World Health Organization (WHO) advising them they reside in a ZIP code where a person known to have contracted COVID-19 was recently travelling. The email goes on that while there is minimal risk that this person actually had contact with them, they should nonetheless take some basic precautions. They’re asked to click on the link for a list, or to download the attached PDF, and now IT really is scrambling.

Cybercriminals love using a disaster to fuel their efforts as fear drives people to do what they ordinarily would not. Now personal and even bank information, customer information, may be at risk. Sophos, a U.K. based internet security company, was warning readers in mid-February that emails from WHO were already circulating and were stealing individuals’ email credentials. The sender’s address may give it away, if the reader looks closely enough. While is a correct address, and, where some of these emails were coming from, are not. Kaspersky, another cybersecurity company, warned of phishing emails supposedly from the CDC which contained a link to a “CDC web page” because the CDC, “established a management system to coordinate a domestic and international public health response.” That sounds official and the link looked legitimate. A person could see what COVID-19 issues were near them. But this was a phishing attack designed to capture logon credentials of those following the link. There have been others, and certainly there will be more. Staff needs to be ever vigilant and skeptical. Typing the link themselves is more helpful, or just going to the website directly will yield most of what a person needs to know.

Normal precautions apply when reviewing email. Look closely at the sender’s real email address and the real link that is offered. Look for common spelling and grammatical errors, though the criminals are getting better about this. Never enter logon credentials on a site that may be suspicious, is unfamiliar and was unexpected. If any information was revealed and that is used elsewhere, go change it. And always use different passwords at different sites.

The bank has key vendors it is critically dependent on. Has the bank asked what they are doing to protect themselves? Some vendors are already emailing clients telling them the basic plans they have. Many of these are tech related and telecommuting is an option for many. The bank should be aware of what is being done by others.

On March 3, 2020, the FHA even emailed a list of links (FHA Info #20-16) to act as resources for lenders. “While the risk of infections for Americans remains low, we are encouraging FHA-approved lenders and other stakeholders in FHA transactions to make the information below available to your employees…” Hopefully more vendors will demonstrate a willingness to be proactive and share both resources and pandemic planning initiatives.

Military Lending Update

By Andy Zavoina

Just when we thought financing GAP insurance for servicemembers was going nowhere, the Department of Defense (DoD) surprised us again. Is this a game changer? I can only answer that by asking if the bank is a risk taker.

The DoD has not amended the Military Lending Act (MLA) but it has issued a new interpretive rule. This evades rulemaking requirements and is intended to amend existing guidance only. The DoD actually removed one piece of guidance and added another.

In July 2015, the DoD amended the MLA. It greatly expanded the loans that were subject to the Act. It also carved out some exceptions. The MLA requires certain disclosures, both orally and written, when loans meeting the definition of “consumer credit” are made. Disclosure requirements include:

1. A statement describing the Military Annual Percentage Rate (MAPR).
2. A duplicate requirement for Reg Z required disclosures.
3. A description of the payment obligation, already required by Reg Z.

Sections 232.3(f)(2)(ii) & (iii) exclude from the definition of “consumer credit” loans used to purchase a vehicle or personal property when the item purchased is the loan’s collateral and there are no additional monies loaned. So, making a loan to buy a car or a washer and dryer, when the loan is secured by the items purchased, and the loan proceeds are not used for any other purpose, is not considered “consumer credit.” They would be exempt from the disclosure requirements.

Section 232.4(b) imposes the 36 percent MAPR limit on “consumer credit.” The MAPR is more of an “all-in” interest calculation in that Reg Z excludes many items which the MAPR includes. This makes it easier to reach this 36 percent ceiling. So making a loan that is exempt can be advantageous to the lender.

The question is, where is the line drawn when defining the purchase price of a car or a washer and dryer. Using a car as an example, many lenders offer and finance Guaranteed Auto Protection (GAP) insurance to protect any low- or negative-equity position the borrower has in a car. The MLA allows negative equity in a trade-in situation as part of the purchase, but the DoD issued guidance in December 2017 denoting that GAP insurance would be considered additional monies beyond the purchase price of a car. This causes a loss of the exemption, so disclosure rules and the MAPR requirements must be met.

The industry immediately appealed the guidance and now, more than two years later, the DoD has removed its opinion. Does this mean that a lender can again look at the “front sheet” description of the vehicle and use the bottom-line calculation stating the purchase price of a car and assume that is the MLA’s version? Not really.

With this adjustment in the guidance, the DoD is reverting to the original 2016 Q&A #2 to “allow the Department to conduct additional analysis on this matter”. I’m not sure if that means the DoD is actively studying this or if it may review it in the future.

I believe that the path the DoD is on is to allow these charges to be included and for the loan to remain exempt. But the final word is not in yet, any more than when the Q&A was published that effectively prohibited inclusion of the fees in 2017. We thought we understood the rules and the guidance reversed what many believed was part of the purchase price. The same could happen again as the DoD now says it “takes no position on any of the arguments or assertions advanced as a basis for withdrawing the amended Q&A #2”. I’m not sure what that means but I am risk-averse. I would not want to build a portfolio where GAP is financed only to have the administration in Washington change and the CFPB to say that it’s some type of UDAAP issue or a judge to say that these MLA loans are in violation and may be voided per the MLA penalties section. Banks wanting to accept the risk will finance GAP and may or may not see long term profits from it. Ultimately it is management’s risk decision to make.

The original, now reinstated Q&A #2 does not directly address the issue of financing GAP insurance or other credit products. Instead, it states that “[a]ny credit transaction that provides purchase money secured financing of personal property along with additional ‘cash-out’ financing is not eligible for the exception under §232.3(f)(2)(iii) and must comply with the provisions set forth in the MLA regulation.” As a bank weighs the risk decision it must be able to justify what is consider cash-out, as that constitutes additional monies loaned beyond the purchase price. A case may be made either way.

An additional change to the Q&A guidance is the inclusion of Question #21 regarding the use of Individual Taxpayer Identification Numbers (ITINs). The DoD clarified that for the purposes of the MLA safe harbor provision, “an ITIN is a ‘Social Security number.’” ITINs have been added to the DMDC database lenders and credit bureau’s use for covered borrower verification purposes. Therefore, it is now clear that verifying the covered borrower status of dependents of servicemembers can rely on an ITIN instead of a Social Security number.

Perfecting a security interest on a trailer

By Pauli D. Loeffler

There seems to be some confusion on how to perfect the bank’s security interest in trailers under Oklahoma law. Does the bank perfect by lien entry or by filing a UCC-1? The use of the word “trailer” without further definition is part of the problem; however, the manner of perfection really depends upon whether registration of title is required under Oklahoma law (Title 47, statutes below), or is merely permitted under our statutes. If registration is required, then perfection is by lien entry, and filing a UCC does nothing. If registration is merely permitted or optional, as is the case for horse trailers, farm trailers, boat trailers, etc., perfection is by UCC filing, and lien entry does nothing, See IN RE: JENNIFER LYNN JACKSON, Debtor. SUSAN MANCHESTER, Trustee, Plaintiff, v. ARVEST BANK, Defendant. CERTIFIED QUESTION OF LAW. 287 P.3d 986 (2012)

¶18 The modified certified question presented by the United States Bankruptcy Court for the Western District of Oklahoma is answered with specific explanations relevant to the case at bar. Title may be properly issued by the Oklahoma Tax Commission to non-required trailers for the convenience of showing ownership. The use of title beyond this single purpose for non-required vehicles would be contrary to the general scheme and purposes of the Uniform Commercial Code as adopted in Oklahoma. The proper method for perfecting a security interest in collateral that is not required to be titled (but may be titled at the discretion of the owner) still is, and has been by the filing of a UCC-1 financing statement. [Emphasia added.]

The specific statutes to review to clarify which method to use are:


B. The owner of every vehicle in this state shall possess a certificate of title as proof of ownership of such vehicle, except those vehicles registered pursuant to Section 1120 of this title and trailers registered pursuant to Section 1133 of this title, previously titled by anyone in another state and engaged in interstate commerce, and except as provided in subsection M of this section. Except for owners that possess an agricultural exemption permit pursuant to Section 1358.1 of Title 68 of the Oklahoma Statutes, the owner of an all-terrain vehicle or a motorcycle used exclusively off roads or highways in this state which is purchased or the ownership of which is transferred on or after July 1, 2005, and the owner of a utility vehicle used exclusively off roads and highways in this state which is purchased or the ownership of which is transferred on or after July 1, 2008, shall possess a certificate of title as proof of ownership. Any person possessing an agricultural exemption permit and owning an all-terrain vehicle or a motorcycle used exclusively off roads or highways in this state which is purchased or the ownership of which is transferred on or after July 1, 2008, shall possess a certificate of title as proof of ownership. Upon receipt of proper application information by such owner, the Oklahoma Tax Commission shall issue an original or transfer certificate of title. Until July 1, 2008, any security interest in an all-terrain vehicle that attached and was perfected before July 1, 2005, and that has not otherwise terminated shall remain perfected, and shall take priority over any subsequently perfected security interest in the same all-terrain vehicle, notwithstanding that a certificate of title may have been issued with respect to the same all-terrain vehicle on or after July 1, 2005, and that a lien may have been recorded on said certificate of title. There shall be eight types of certificates of title:

Sec. 1102

As used in the Oklahoma Vehicle License and Registration Act:

6. “Commercial trailer” means any trailer, as defined in Section 1-180 of this title, or semitrailer, as defined in Section 1-162 of this title, when such trailer or semitrailer is used primarily for business or commercial purposes…

25. “Park model recreational vehicle” means a vehicle that is:

a. designed and marketed as temporary living quarters for camping, recreational, seasonal or travel use,

b. not permanently affixed to real property for use as a permanent dwelling,

c. built on a single chassis mounted on wheels with a gross trailer area not exceeding four hundred (400) square feet in the setup mode, and

d. certified by the manufacturer as complying with standard A119.5 of the American National Standards Institute, Inc.;

29. “Recreational vehicle” means every vehicle which is built on or permanently attached to a self-propelled motor chassis or chassis cab which becomes an integral part of the completed vehicle and is capable of being operated on the highways. In order to qualify as a recreational vehicle pursuant to this paragraph such vehicle shall be permanently constructed and equipped for human habitation, having its own sleeping and kitchen facilities, including permanently affixed cooking facilities, water tanks and holding tank with permanent toilet facilities. Recreational vehicle shall not include manufactured homes or any vehicle with portable sleeping, toilet and kitchen facilities which are designed to be removed from such vehicle. Recreational vehicle shall include park model recreational vehicles as defined in this section…

Tax season information in Legal Briefs

By Pauli D. Loeffler

The new online index to Legal Briefs articles makes it much easier to find every article discussing taxes written since January 2005 by using “find in page” (ctrl+f) and entering “tax” in the search box that pops up. However, there are some 43 instances of the word, so to save you some time, here are the ones that are most relevant:

May 2012: Tis the Season – For Tax Refund Fraud
January 2014: Handle tax refunds properly
February 2016: Tis the (tax refund) season (direct deposit)
March 2016: Tis the (tax refund) season – Part II (deceased payees, Oklahoma tax refund cards)
February 2018: Tax Refund Checks

February 2020 OBA Legal Briefs

  • Index to Legal Briefs now online
  • “Abusive” UDAAP Update – Policy Statement
  • Compliance Aids – Policy Statement
  • SECURE Act and IRAs
  • LIBOR – Transition Plans
  • HMDA Guides

Index to Legal Briefs now online

by Pauli Loeffler

There are 15 years (January 2005-January 2020) of OBA Legal Briefs articles available on the OBA’s website. These articles are like an all-you-can-eat buffet of information covering a wide range of topics including check warranties and reasons for returns, advertising free accounts, HMDA, flood insurance, SCRA, campaign accounts, late fees, garnishments and levies, and nearly the entire alphabet of federal regulations. Yes, there is a wealth of information available at your fingertips, but until now it was difficult to find the article you needed. Your OBA Compliance Team shared your frustration. The search box in the right-hand corner wasn’t of much use since it would return results for not only Legal Briefs but also for webinars and OBA news articles. Another issue was finding whether an article had ever been written on the subject. Since I have been with the OBA since June 2004, I pretty much knew what had and had not been covered over the last 15 years, but that wasn’t the case for the other members of the OBA Compliance Team or for our bankers.

Thanks to the extraordinary efforts of our legal extern, Roy Adams, we now have a cumulative index of all those articles, which will be updated as new articles are posted online.  In order to access the OBA Legal Briefs index, articles, Legal Links webpage and some of Elaine Dodd’s fraud articles, you will need to create an account through the OBA’s “MyOBA Member Portal” located next to the date in the upper left-hand corner of the main ( webpage. After registering, all you need to do is click the red “Access Legal Briefs” button and enter the email address and password you registered when asked. Click the hyperlink to the index, use the “Find in Page” command (Ctrl+F) and enter a search term. I admit the search feature is not perfect, but it is much better than what was available before.

Note that Legal Briefs is a four-page pull-out in the middle of the Oklahoma Banker, the monthly newspaper sent to our member banks. It is also available via email subscription, which is sent usually within a couple of days of our submission. To subscribe to the email edition, you will need to go to this link for purchase:  The online Legal Briefs edition is posted on the website about two weeks after the print versions are received.

“Abusive” UDAAP Update – Policy Statement

By Andy Zavoina

It has been nearly a decade since the Dodd-Frank Wall Street Reform and Consumer Protection Act added “abusive” to what was the Unfair or Deceptive Acts or Practices (UDAP) law. Initially there were very few questions over the Consumer Financial Protection Bureau (CFPB) and its new Unfair, Deceptive or Abusive Acts and Practices (UDAAP) as the focus was on the enforcement actions brought using UDAAP. In fact, there have been 32 enforcement actions which included an abusiveness claim from 2011 through 2019. Only two actions were solely on an abusive act so for the most part it appeared unfair and deceptive were closely related to abusive. But with new leadership at the Bureau came new questions, such as what is “abusive” and how does that differ from the existing restrictions?

The Federal Trade Commission handled UDAP claims for many, many years and provided guidance and cases with examples of what was unfair or deceptive. But there was no such track record for what was abusive. The “CFPB Consumer Laws and Regulations” document on UDAAP from October 2012 is based on section 1031(d) of the Dodd-Frank Act, and states the following:

“An abusive act or practice:

  • Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service or
  • Takes unreasonable advantage of:
    • A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
    • The inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or
    • The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”

Although abusive acts also may be unfair or deceptive, examiners should be aware that the legal standards for abusive, unfair, and deceptive are separate.”

Note that the guidance indicates that abusive is separate from unfair and deceptive even though these could be the same acts. There is subjectivity in this guidance and that is what seemed confusing for many bankers trying to follow the law and those who would enforce UDAAP.

In an effort to better define standards for what may be an abusive practice, the CFPB issued a Policy Statement on January 24, 2020. This provides the framework the CFPB will use to apply a standard in its supervision and enforcement activities. The Policy Statement says, “The Bureau wants to make sure that such uncertainty does not impede or deter the provision of otherwise lawful financial products or services that could be beneficial to consumers.” This statement hits home for many bankers as they may tend to take a conservative posture toward a new product or service and offer less than their customers actually want because of the fear of uncertainty. This uncertainty could limit products and services and increase costs to comply with the rules as a bank understood them.

To counter these inhibitors the CFPB explained that for clarity, it has three principles it intends to apply:

  1. Focusing on citing or challenging conduct as “abusive” in supervision and enforcement matters only when the harm to consumers outweighs the benefit, (this is also a test under the “unfairness” standard)
  2. Generally avoiding “dual pleading” of abusiveness and unfairness or deception violations arising from all or nearly all the same facts, and alleging “stand alone” abusiveness violations, and
  3. Generally seeking monetary relief for abusiveness only when there has been a lack of a good-faith effort to comply with the law. However, the CFPB will continue to seek restitution for injured consumers regardless of whether a company acted in good faith or not.

These principles under the Policy Statement are effective immediately.

The CFPB does indicate that there still exists the future possibility of future rulemaking if there is a need to better define standards for what will be considered “abusive.”

The Dodd-Frank Act gave the 50 state attorneys general and state banking regulators the authority to enforce UDAAP rules. Those entities are not bound by this Policy Statement because it was not done in a form which would bind them. While it would seem unlikely one of these would enforce the UDAAP rules inconsistently from what the CFPB is intending, it is possible.  Also, as a non-binding policy because it did not affect the law, the next Director of the CFPB could rescind this policy and create a different interpretation of the rule.

When your bank reviews products, services or conducts a periodic risk analysis, it should consider the defining rules the Dodd-Frank Act outlined as “abusive” and simultaneously consider the CFPB’s point in this new Policy Statement. Perhaps a little less conservatism could lead to a more widely accepted and needed product or service your customers want.

Compliance Aids – Policy Statement

By Andy Zavoina

On January 27, 2020, the Consumer Financial Protection Bureau published a Policy Statement on what it calls “Compliance Aids.” The Compliance Aids will act as official guidance from the CFPB. The Policy Statement explains the legal status and the effect of this new category of materials or Compliance Aids.

The CFPB noted that Compliance Aids “will provide the public with greater clarity regarding the legal status and role of these materials.” The Policy Statement does not alter the status of materials that the CFPB issued in the past but indicated that it may reissue certain existing materials as Compliance Aids “if it is in the public interest and as CFPB resources permit.”

For years the CFPB has issued useful guidance documents such as its “small entity compliance guides,” TRID forms with detailed explanations, executive summaries, FAQs and more. The Policy Statement makes it clear that this will apply only to materials which are clearly identified as a Compliance Aid. Some of the aforementioned documents will not enjoy the same legal status as an official Compliance Aid. This does not mean any of those documents will not be reissued or updated as Compliance Aids and the CFPB says that is a possibility if it is in the best interest of the public. It was also clear that these Compliance Aids will not determine the policies of any of the prudential regulators. (I will remind our readers that there may be a distinction between the policy of a regulatory agency other than the CFPB, and the CFPB’s controlling influence as the “owner” of the consumer protection regulations. I would believe that generally what the “owner” of the Reg says, goes, but there may be times when some issues will be open to interpretation and the CFPB could even carve out those exceptions for the other agencies.)

A designated Compliance Aid will be intended to provide clarity to the public and to the banks following these regulations. The Bureau notes that Compliance Aids will not rise to the level of a regulation or an official interpretation, both of which require issuance under the Administrative Procedure Act. “Compliance Aids present the requirements of existing rules and statutes in a manner that is useful for compliance professionals, other industry stakeholders, and the public” as per the Policy Statement. Like the TRID forms the CFPB issued, Compliance Aids may present practical suggestions demonstrating or illustrating how a bank (as an example) may go about complying with a specific requirement. However, the CFPB points out that a Compliance Aid may demonstrate one way to comply with a statute or regulatory requirement, but there may be alternative ways, as well. These Compliance Aids will not bind a bank into meeting its compliance requirements in the one way a Compliance Aid illustrated.  When there are multiple ways to comply, the Compliance Aid may show only one and the bank is free to use any other method so long as the stated regulatory requirements are met.

In short, these Compliance Aids will not have the force and effect of a regulation or law and compliance with a Compliance Aid is not mandatory for that reason. It is compliance with the regulations and laws that are required. A compliance Aid will be designed to accurately depict and explain one way to comply with a regulation or law. The CFPB does not intend to exercise enforcement actions against a bank or other entity which reasonably relied on a Compliance Aid as a guidance document.

This policy statement does not include rulemaking steps under the Administrative Procedures Act (such as proposal, comment period and final rule). It is intended to provide information and, like the UDAAP article also in this issue, it could be rescinded, particularly by another Director of the CFPB.

Compliance Aids will not be issued prior to February 1, 2020, as the Policy Statement identifies that as the effective date.  At the end of the day, a Compliance Aid is not a get-out-of-jail-free card. If used accurately and in good faith, those compliance efforts will go a long way toward avoiding compliance penalties, but it is always the underlying regulation or law which ultimately controls.


By Andy Zavoina

Setting Every Community Up for Retirement Enhancement (SECURE) Act. You just have to appreciate the government job of acronym writing. This article will act as an overview of some of the changes included in the new law and what your bank should have done or at least be doing to plan for the implementation of these changes. For detailed explanations bank staff handling Individual Retirement Accounts in the bank should seek out webinars, seminars or online classes to get the working details.

There was a large government spending package signed into law on December 20, 2019. As is often the case, there were non-spending bills attached, things that had nothing to do with government expenditures. The SECURE Act was one of them. IRA rules were in need of some tweaking and this will do much of that. It is hoped that some of these reforms will make it easier and more advantageous for Americans to start saving more for retirement.

Here are six key attributes to the SECURE Act. The Act:

  1. Repeals the maximum age for traditional IRA contributions, (it was 70 1/2),
  2. Increases the required minimum distribution (RMD) age for retirement accounts to 72 (it was 70 1/2),
  3. Allows long-term, part-time workers to participate in 401(k) plans.
  4. Offers more options for lifetime income strategies,
  5. Permits parents to withdraw up to $5,000 from retirement accounts without a tax penalty within a year of birth or adoption for qualified expenses,
  6. Allows parents to withdraw up to $10,000 from 529 plans to repay student loans.

One important point and popular question involves RMDs. These now begin at 72 years of age for individuals who turn 70 ½ in 2020 – any time during this year. Those who turned 70 ½ in 2019 and have begun receiving RMDs should generally continue doing so. If customers ask about this, they should be referred to their tax advisors and to watch for any IRS guidance. Those turning 70 1/2 in 2020 may also want to discuss income strategies with their tax advisor or financial planner as to withdrawal options.

With the SECURE Act, those over 70 1/2 who are still working may continue to contribute to their IRAs. One question we have seen was whether these folks can just have any RMDs reinvested automatically? Until the IRS says otherwise, we recommend an RMD go to the depositor as scheduled, and they can then determine if it will be reinvested. The paperwork trail is clear that way.

Inherited IRA distributions used to be able to be stretched out over the new owner’s single life expectancy. Now these must be taken within 10 years. That is, if the IRA owners dies in 2020 or later, the entire remaining balance must be distributed by the end of the tenth year. This may translate into larger lump-sum payouts at some banks. There are some exceptions to this rule, applicable to a surviving spouse, a minor child, or a disabled beneficiary, among others.

The SECURE Act allows an individual to take a qualified birth or adoption distribution of up to $5,000 from an IRA. The 10% early withdrawal penalty will not apply to these withdrawals, and it can be repaid as a rollover contribution to an applicable IRA. The distribution must be made during the one-year period beginning on the date on which a child of the individual is born or on which the legal adoption is finalized.

With the overview complete, let’s consider an action plan. Remember this was just passed in December 2019. Your IRA forms vendors should be in communication with you about changes and necessary amendments to conform to the SECURE Act.  If they haven’t contacted you, call them. These include contracts, distributions forms, beneficiary election forms and notices to customers to correct the 70-1/2 notices for those who no longer have to take RMDs because they were going to turn 70-1/2 in 2020. (The IRS has said that if you already sent out the notice using age 70-1/2, there is no problem if you advise IRA customers born after June 30, 1949 (these are the folks who weren’t 70-1/2 by December 31, 2019), no later than April 15, 2020, that no RMD is due for 2020.)

At the same time, you may want to remind IRA customers born after June 30, 1948, but before July 1, 1949 (people who turned 70-1/2 in calendar year 2019) who haven’t yet taken their 2019 RMDs, that they are still required to taken those distributions by April 1, 2020. The SECURE Act didn’t change their RMD start dates.

Training materials need to be updated and while that is happening, existing materials (brochures, IRA agreements, preprinted forms mentioning RMDs and age 70-1/2, scripts … you get the idea) that are outdated need to be identified and purged. System triggers that identify IRA customers at age 70-1/2 for RMDs need to be revised to age 72. I’m certain your checklist will expand and become much more detailed, but we wanted to identify the initial steps necessary now. When your customers ask about IRAs and want to entrust you with much of their life savings, they want to know that you know the current requirements and laws. It’s a trust issue. If you haven’t had training on this yet, we suggest you seek it as soon as possible.

A final note – You may have heard that the IRS has proposed updates to the life expectancy and distribution period tables that are used in calculating, among other things, the RMDs for IRA customers. That proposal was published on November 8, 2019, with a comment period that ended On January 7, 2020. A final rule hasn’t yet been issued, and the IRS suggested in the proposal the new tables won’t be used until tax year 2021. That’s a story for later.

LIBOR – Transition Plans

By Andy Zavoina

We have already had questions about preparing for the transition away from LIBOR rates and “what should we be doing?” Let’s explore a little of what this is, so you know where to find it, and what plan of action is necessary.

The London Interbank Offered Rate (LIBOR) was and is a commonly used index rate for many adjustable rate mortgage (ARM) loans. Even when I was at a small national bank, we had some lenders who, for various reason, wanted LIBOR as an index on the loans they made that had adjustable rate features. The OCC has a rule (12 CFR 34.22), which most banks, I believe, followed in one form or another, that required that the index not be controlled by the bank. The rule states that if a  national bank makes an ARM loan to which 12 CFR 1026.19(b) applies (i.e., the annual percentage rate of a loan may increase after consummation, the term exceeds one year, and the consumer’s principal dwelling secures the indebtedness), the loan documents must specify an index to which changes in the interest rate will be linked. This index must be readily available to, and verifiable by, the borrower and beyond the control of the bank. A national bank may use as an index any measure of rates of interest that meets these requirements. The index may be either single values of the chosen measure or a moving average of the chosen measure calculated over a specified period. A national bank also may increase the interest rate in accordance with applicable loan documents specifying the amount of the increase and the times at which, or circumstances under which, it may be made. A national bank may decrease the interest rate at any time.

LIBOR was a commonly used index as it met those criteria followed by national and other banks and lenders. The index ideally is in sync with market conditions and this preserves the banks’ interest income during fluctuating market conditions. But LIBOR was based on banking transactions and that market has changed at least partly to a scandal that included misuse and manipulation of the LIBOR rate itself. The result is that the financial regulator in the United Kingdom overseeing LIBOR has stated that it will likely disappear after 2021.

Banks looking for a reliable replacement index rate may look to the Alternative Reference Rates Committee, which is a working group created by the Federal Reserve. It recommends the Secured Overnight Financing Rate (SOFR) as a LIBOR replacement. SOFR is based on overnight reverse repurchase agreements that offer a deep and liquid market with far more transactions to use as a base, as compared to LIBOR. This is not a required alternative, just a suggested one. As noted above, within certain conditions banks have many options. If your bank sells mortgages, your investors may impose certain restrictions as well.

With almost two years before the change takes effect, there is time to plan your transition but expect borrowers to begin asking questions of you if LIBOR is their indexed rate. More importantly, what are you using on loans made today? There is little reason to be using a rate that is going away unless the bank has already determined it is the best rate to continue using until it can no longer be used. In those cases, loan documents should be crystal clear as to what the bank will do, and when, to change that rate with its borrowers. In fact, the existing loan documents will hopefully be uniform and address what steps the bank must take.

Following on this, the loan administration department should be able to produce a list of adjustable rate loans that use the LIBOR rate as an index. If there are none, keep it that way. Otherwise you will know the number and dollar amount of loans impacted by this index change. The identified loan documents may require a review by counsel as to amending the indexed rate. This is where we hope the terminology is uniform and sufficiently detailed so that the bank can identify a new index rate and substitute that with the new rate, and under what conditions. It may be that the bank has to wait until LIBOR is scheduled to be terminated or it may be able to be changed sooner. But borrowers will have a required amount of lead time and will need information about the rate. This may include where to find the rate, a comparison of the two rates over a given historical period, and when the change will take effect for each borrower. If your documents fail to adequately address the transition, bank counsel may be consulted so that an agreed upon notice of the change in terms can be created.

Getting this process underway and understanding the number of accounts requiring changes must be on the To-Do list for this year.

HMDA Guides

By Andy Zavoina

One of the first things a compliance professional does when they undertake a significant task like an audit or regulatory submission is to ensure they have the latest resources available. You must know that you are asking the right questions, know the correct thresholds for applicability and have the most current interpretive guidance. If you are a HMDA bank, you are preparing for a major submission – actually two. You are preparing your 2019 Loan Application Register (LAR), and you are starting your 2020 LAR for submission next year. Have you ensured you have the latest issuance applicable to your bank?

On February 4, 2019, the Consumer Financial Protection Bureau (CFPB) published “Reportable HMDA Data: A Regulatory and Reporting Overview Reference Chart for Data Collected in 2019.” The chart is intended to be used as a reference tool for data points required to be collected, recorded, and reported under Regulation C.

On March 7, 2019, the OCC issued Bulletin 2019-12. This was in concert with the FDIC and the Federal Reserve. Because these three agencies are part of the FFIEC, the information is the OCC Bulletin is not exclusive to national banks. What the Bulletin outlined were the key data fields on a banks’ LAR which are tested for HMDA compliance requirements.

Of 110 data fields, 37 have been identified as key fields. Examiners will typically test and validate these 37 key fields that reporting lenders are required to collect, record, and report. That certainly does not mean the other 73 fields can be wrong, but it does mean you want additional scrutiny on these 37 when you scrub HMDA data. For banks that qualify for a partial exemption from the HMDA data collection, your examiners will typically test and validate 21 of those 37 fields. The fields are identified in the Bulletin.

(To qualify for the partial exemption for closed-end mortgage loans, a bank must have originated, in each of the two preceding calendar years, fewer than 500 closed-end mortgage loans. To qualify for the partial exemption for open-end lines of credit, a bank must have originated, in each of the two preceding calendar years, fewer than 500 open-end lines of credit. The partial exemption is not available to banks that do not meet certain Community Reinvestment Act performance evaluation rating standards.)

On March 20, 2019 the FFIEC released the 2019 edition of “A Guide to HMDA Reporting: Getting It Right!,” for HMDA submissions due March 1, 2020. The 2019 edition reflects amendments made to HMDA by the EGRRCPA and the 2018 HMDA interpretive and procedural rule issued by the CFPB. The appendices provide additional implementation materials reporting lenders may find useful.

The FFIEC has the 2020 LAR submission software available on its website at

In September 2019 the CFPB published its “Filing Instructions Guide” (FIG) for data collected in 2020 and a new resource, the “Supplemental Guide for Quarterly Filers.” Both are available on the Bureau’s HMDA Help for Filers webpage.

On October 29, 2019, The CFPB announced its approval of a rule that finalized certain aspects of its May 2019 Notice of Proposed Rulemaking under HMDA. It extended for two years the temporary threshold for collecting and reporting data about open-end lines of credit. The rule clarified partial exemptions from certain HMDA requirements that Congress added in the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).

On December 20, 2019, the Federal Register included a final rule increasing the Regulation C (HMDA) asset-size exemption threshold for banks from $46 million to $47 million. Banks with assets of $47 million or less as of December 31, 2019, are exempt from collecting data in 2020. The rule is effective on January 1, 2020.

And in January 2020 the CFPB released an updated version of its “Home Mortgage Disclosure Act (HMDA) Small Entity Compliance Guide.” The new version reflects changes made by the Bureau’s rule in October to extend by two years the temporary threshold of 500 for reporting open-end lines of credit. This issuance includes the new thresholds for reporting, the rule and the updated guide clarified the partial exemptions from certain HMDA requirements under EGRRCPA. The partial exemptions will become effective in 2022 after the expiration of the complete exemption for loans made beneath the reporting threshold amounts.

Get the right tools and ensure everyone involved in the HMDA scrub is on the same page. Good luck with your submission and data collection. It is

January 2020 OBA Legal Briefs

  • New Home Buyer Savings Account
  • CFPB Supervisory Highlights
    • UDAAP & GAP
    • Credit cards
    • Credit reporting (furnishing)

New Home Buyer Savings Account

By Mary Beth Guard

I don’t recall what the last straw was with apartment living, but whatever it was spawned a very strong “we need to get our own house” feeling.  I may or may not have painted the apartment’s dining room a color that horrified our landlord.  It was definitely time to move, but we were young (ish – we were both out of law school) and had no money (we were making spit and had student loans with payments of $139.81 and $264.12 per month – small by today’s standards, but like I said, we were making spit).  We had zippity-doodah saved for a downpayment, so we sought help from Bank of Maternal Parents.  My folks agreed to loan us $5,000 to cover the downpayment and closing costs, paving the way for us to become homeowners.

This trip down memory lane was spawned by studying an amazing new law that went into effect in Oklahoma on January 1, 2020 – the Oklahoma First-Time Home Buyer Savings Account Act.  Oklahoma was one of the first ten states to enact this legislation that provides favorable tax treatment for funds set aside for down payments and/or closing costs, subject to certain parameters.  The best part is that your bank can offer these accounts without taking on a bunch of red tape and you don’t have to police them for compliance with the Act!  Your customers need to know about this tax-advantaged savings vehicle – and you need to know how it all works, so here we go!

First of all, let me just say that the realtor people who pushed this bill through, bless their pointy little heads, did not consult with us on the language.  It appears they used a pre-fab template that was developed in some other state years ago, because the law’s definition of “financial institution” includes entities that don’t exist in Oklahoma, such as “safe deposit company.”  Also, the first state to pass this legislation was Montana, way back in the 90s.  As you may have heard (yes, I am being sarcastic), the laws relating to real estate lending have changed a bit since then.  The text in the bill, however, was not updated to reflect TRID.  Instead of referring to a Closing Disclosure under Regulation Z, it talks about a settlement statement under RESPA!   Nonetheless, I am a huge fan of this new Act.

The law is intended to help first-time home buyers achieve homeownership by providing tax breaks for funds placed in special accounts and ultimately used for downpayment or closing costs by an individual who has never purchased, either individually or jointly, a single-family residence in the State of Oklahoma.  It is codified to Title 46 of the Oklahoma Statutes, Sections 311 through 318.

Before I get into the nitty gritty, let me set your mind at ease about any possible burden on banks from this new law.  There is none!  You don’t have to set up a new type of account for this.  You don’t have to have any new forms to use within the bank.  You don’t need any special wording in your deposit account agreement.  You don’t have to style the account in a special way or worry about whose SSN to use as the TIN.  You don’t have to designate the account as a home buyer savings account in your system or on the contract.  You don’t have to maintain a record of the beneficiary.  You do not need to determine whether the account meets the requirements for a Home Buyer Savings Account.  You have no responsibility for tracking the use of funds in the account or monitoring withdrawals.  You have no reporting obligations under this law.  It’s like this is a behind your back agreement between the taxpayer (account holder) and the Oklahoma Tax Commission.  The Tax Commission is in charge of ensuring the legal requirements are met for the tax breaks to be earned.  How awesome is that?  You simply open an interest-bearing savings account for your customer like any other interest-bearing savings account.  Nothing special from your end.

Your mission, should you choose to accept it, is merely to increase awareness of the new law and its benefits.  Knowing where to point the customer to find the statutes and being able to answer basic questions about the Act will be a great service.

What your customer is going to do is file a form with the Oklahoma Tax Commission, giving that agency all of the necessary information about the account.  The form is Form 588.  It’s an easy one pager.  It can be submitted any time after the account was opened, but no later than April 15 of the year immediately following the calendar year in which the account was opened.  (In other words, it would have to be sent to the Tax Commission by April 15 of 2021 for an account opened this year.)  On the form, they will give information about the account holder(s), when the account was opened, the account number and bank routing number, and the name and SSN of the designated beneficiary.  The form includes a declaration made under penalty of perjury that the information is true, correct, and complete.  The form can be accessed here:  It is a fill-in-the-blank PDF.

There will be other forms (at least one) coming out from the Tax Commission at a later point in time because there is other information that must be provided to the OTC by the accountholder and a form is the most feasible way to handle the submission.  To get the tax breaks, the customer has to submit to the Tax Commission with their Oklahoma income tax return a form that contains detailed information regarding the home buyer savings account.  They will have to list transactions that occurred on the account during the tax year and they will have to furnish a copy of the 1099-INT.  Also, when funds are withdrawn from a home buyer savings account, the accountholder will be required to furnish the OTC a detailed account of the eligible costs toward which the account funds were applied and a statement regarding the amount of any funds remaining in the account.

Funds cannot be withdrawn for any purpose other than eligible costs (again, you do not have to inquire, monitor, track, or worry about this – it’s your customer’s burden).  The customer does have the authority to close a HBSA at one institution and put the money into a HBSA at another institution.

Any individual may establish a home buyer savings account, either as an individual account or a joint account.   The tax breaks go to the account holder.  The account holder may be the person who aspires to be a home buyer themselves, in which case they would name themselves as the qualified beneficiary, or the account holder can instead name someone else as qualified beneficiary.  For example, if this law had been in effect in the ancient time when I was going to buy my first house, my parents could have set up the account and named me as the qualified beneficiary.  That would have given them the tax benefits and provided the funds to me for the eligible costs.  I could have set one up and been both the account holder and qualified beneficiary.  A person may be named qualified beneficiary on more than one account, but the same account holder cannot have multiple accounts for the same beneficiary.

If the account is going to be a joint account, the joint owners must file joint tax returns.  If they file separately, they cannot have a joint Home Buyers Savings Account – they don’t meet the requirements.  Again, that is something the OTC oversees, and is not something you have to ask about or worry with.

Just one qualified beneficiary can be designated on an account.  (That is so smart and it eliminates all kinds of potential problems, such as what would happen if there were two beneficiaries and they got a divorce before the funds could be used to buy a house.  I can imagine all sorts of scenarios where having more than one beneficiary on an account could prove disastrous.)  There is one point in the statute where it refers to multiple beneficiaries, but don’t be misled by that.  It’s in paragraph 5, where it’s talking about all the things a financial institution shall not be required to do.  It says you don’t have to “Designate an account as a home buyer savings account, or designate the qualified beneficiaries of an account…”  The reason it refers to more than one is not because there can be multiple, but because the designated beneficiary can be changed over the life of the account.  Let’s say parents set up an account and name their eldest child, Ted, as the designated beneficiary.  Ted ends up moving to Seattle, so they change the beneficiary designation to their daughter Phoebe who lives here and plans to buy a house here.   There is no limit to the number of times the beneficiary designation can be changed.  There is a space on Form 588 for documenting the change.  Your customer will fill out the form and timely file it with the OTC.  It is totally unlike an authorized signer situation where every time a customer changes an authorized signer you have to be in the big middle of it.

I’ve talked about parents a lot, but let me be clear – anyone can set up this type of account, either for themselves or for any third party.  I helped my niece buy her first house.  If I had another niece or nephew or friend that was going to buy a house in Oklahoma as a first-time home buyer and I wanted to help, this law would give me a powerful incentive to do so by giving me a tax break for my trouble.  .

Looking at the definition of first-time home buyer, several things struck me.  First, the home buyer must reside in this state.  That means that an Oklahoma resident cannot set up this type of account and name a beneficiary who lives outside Oklahoma.

Second, an individual can be a qualified beneficiary if he has never purchased a single family residence.  If he has previously purchased a duplex, triplex, quadraplex, or multi-family dwelling – OR if what he purchased before was not used as his principal residence — he can still be considered a “first-time home buyer.”

Third, previous purchases of a single family residence are only disqualifying if they were in Oklahoma!  If someone lived and owned property in another state previously, it’s the dawn of a new day when they move to Oklahoma.  They could be a qualified beneficiary of a First-Time Home Buyer Savings Account (let’s call it HBSA, okay?) as they begin anew in our state.  In case you’re wondering, the term “single-family residence” means “a single family residence owned and occupied by a qualified beneficiary as the qualified beneficiary’s principal residence, which may include a manufactured home, trailer, mobile home, condominium unit, or cooperative.”  They get a demerit for using the term in the same term’s definition.  Worse than that, because they have tied eligible costs to the settlement statement under RESPA, it is not entirely clear whether the account could be used in connection with the purchase of an unaffixed manufactured home, trailer, or mobile home.  But the question of whether it’s all about the dirt – or not – is not yours to answer.  It’s between your customer and the Oklahoma Tax Commission.  You are not the Home Buyer Savings Account police!

Fourth, the law doesn’t address a situation where two or more people are purchasing property jointly and only one of them would qualify as a first-time home buyer.  I believe the person who meets the definition of first-time home buyer can be a qualified beneficiary of a HBSA, even if their co-purchaser could not be.  Since only one qualified beneficiary is allowed per account, the person who is qualified could be the beneficiary.  Yes, that would inure to the benefit of the other co-purchaser, who is not a first-time home buyer, but that is simply not a problem.

Let’s look at the tax breaks.  There is a deduction and there is an exclusion.  Every dollar contributed to the HBSA (up to $5,000 if the account has an individual owner or up to $10,000 if a married couple filing a joint return owns the account) can be deducted from the account holder’s  taxable income for Oklahoma income tax purposes per tax year.  Interest earned on the account is excluded from the account holder’s taxable income for Oklahoma income tax purposes.

If someone other than the account holder deposits money into the HBSA, that person doesn’t get any tax benefit.

Can this type of account be maintained forever?  No, there is a limited shelf life.  Fifteen years is the maximum.  Any funds in a HBSA that are not expended for eligible cost by December 31 of the last year of a fifteen-year taxable period must thereafter be included in the account holder’s taxable income.

There is also a dollar amount cap on the tax break.  An account holder may claim the deduction and exclusion for an aggregate total amount of principal and earnings not to exceed $50,000.  So, that’s up to $5,000 per calendar year (or $10,000 if it is a joint account), up to a max of $50,000.  For whatever reason, the maximum is the same, whether there are individual accountholders or joint accountholders.

The tax breaks are only earned if the principal and earnings of the account remain in the account until a withdrawal is made for eligible costs related to the purchase of a single-family residence by a qualified beneficiary.  If the accountholder ends up wanting or needing to use the funds for some other purpose – poof goes the tax deduction and exclusion.

What are “eligible costs”?  The down payment and allowable closing costs.  Hmmm.  So what are “allowable closing costs”?  They include any “disbursement listed on a settlement statement for the purchase of a single-family residence in Oklahoma by a qualified beneficiary.”  The term “settlement statement” is a specially defined term.  It means “the statement of receipts and disbursements for a transaction related to real estate, including a statement prescribed under the Real Estate Settlement Procedures Act of 1974, 12 U.S. C. 2601 et seq., as amended, and regulations thereunder.”  What prevents this old moldy reference from being a fatal flaw (in my opinion, and remember that I am not wearing any kind of judicial robe) is that it says “including a statement prescribed under…”  It is an example, an option.  It is not the exclusive document – which is a darn good thing, since RESPA has been displaced as the source for the closing papers.

Can your bank charge a fee for the HBSA?  Yes, and it can be deducted from contributions to the account.

What if the customer dies?  If the accountholder dies, the funds are handled according to the deposit account agreement and law.  If it is a joint account with right of survivorship, the surviving joint tenant becomes the owner by virtue of the survivorship provision in the contract and the account can still be used as a HBSA, but the tax break will max out at $5,000 per year thereafter, rather than $10,000.  Can an account like this have POD beneficiaries?  I see nothing to prevent that because from the financial institution’s standpoint, it is a plain vanilla savings account.  The customer might not even inform you that it is being used by them as a HBSA!  If the customer designates one or more POD beneficiaries, the funds would be paid out to them as normal under Section 901 of the Banking Code.  If the sole accountholder (or sole remaining accountholder) has NOT designated POD beneficiaries, then it’s like any other instance where an individual account owner dies and there are no beneficiaries.  The funds would belong to the estate of the deceased depositor.  It would then either need to go through probate, or if the amount was under $50,000 and the individual did not leave a will, the heirs could get the money after submission of a proper affidavit of heirs under Section 906 of the Banking Code.  If probate is not desired and Section 906 won’t work, the other alternative is for the heirs to see if the other small estate provision – the one in Title 58 of the Oklahoma Statutes, Section 393 – could be applied.

Um, how about the qualified beneficiary if the accountholder is not the beneficiary and the accountholder dies?  Basically, too bad, so sad.  The funds do not pass to the qualified beneficiary.  The funds don’t get held in some sort of limbo waiting for the qualified beneficiary to purchase a house.  They are simply an asset of the dead accountholder’s estate – or property of POD beneficiaries, if there are any.  The Tax Commission takes a hickey, too, to the extent of any tax break the accountholder had already received.  If you know the account is a HBSA and the accountholder is saving the funds for someone else who is a qualified beneficiary, you might want to explain that they have the option to designate the qualified beneficiary (or anyone else) as POD beneficiary.

We think this new account will be very popular!

CFPB supervisory highlights

By Andy Zavoina

The CFPB released its latest Supervisory Highlights in mid-September. This series of documents provides information on enforcement and supervisory actions based on the Bureau’s findings in compliance examinations. The most recent issue covers exam findings between December 2018 and March 2019. Areas of interest included auto loan originations, credit cards, and debt collections. Reviewing the CFPB’s findings is like listening attentively at an exit review after an exam. There are comments on things that were wrong – violations of law – and comments on things that a bank may want to consider twice before doing it again. Often you hear hints about practices that are subjective and sometimes those same practices are major points in the next exam.


The CFPB expands on the FTC Act’s “UDAP” provisions to add a second “A” for “abusive” acts. The Bureau considers an act or practice abusive if, among other things, the practice takes unreasonable advantage of a consumer’s lack of understanding of the material risks, costs, or conditions of a product or service. In this issue of Supervisory Highlights, the product under discussion is Guaranteed Asset Protection (GAP) insurance, which is often sold but thought by many to be over-priced insurance, especially when compared to a policy purchased directly from an agent rather than as part of a purchase transaction from a vehicle dealer.

GAP coverage is intended to bridge the gap between the collateral’s actual value and the loan amount when the Loan to Value (LTV) ratio is high. Many borrowers have minimal down payments and finance most of the cost of a vehicle. If there is an accident or theft and the vehicle is damaged or stolen, GAP helps pay what the auto insurance does not, based on the value of the vehicle.

What the CFPB found was that lenders sold GAP coverage to borrowers with low LTVs. In these cases, the borrower is paying a high premium for coverage which is not necessary or is of minimal value. By buying this coverage, the consumer is deemed to have demonstrated that “lack of understanding” about a financial product mentioned above. The Bureau felt the lenders took “unreasonable advantage of the consumers’ lack of understanding of the material risks, costs, or conditions of the product.” Yes, this means the financial institutions were found to have violated UDAAP principals. Like an investment professional, lenders need to determine if a product or service is a good fit for the consumer and the loan circumstances warrant the product or service. Some lenders are instead focused on the value of the sale and the income being generated, instead of consumer protections. These lenders have now taken remedial actions to help cure their UDAAP problems – reimbursing consumers for the premiums for GAP coverage they should not have been sold.

What could your bank do to avoid being accused of “abusive” GAP-sales practices? It could ensure lenders are trained to do what is best for the consumer and the bank. Often there is little or no consideration for the consumer as the emphasis is on retail sales. There should be a minimum LTV ratio established below which GAP coverage is not warranted or sold. That’s the message the Bureau sends to the industry with its discussion of overzealous GAP insurance sales, and the lesson to be learned from the mistakes of the lenders whose practices were described in that discussion

Credit cards

Triggering and triggered advertising terms

A basic tenet in compliance is that things like disclosures and advertisements must be “clear and conspicuous.” What the CFPB found in some credit card advertisements were triggered terms that were not clear or conspicuous. This is valuable information for us because we don’t hear a lot of guidance when it comes to advertising, and here the Bureau is discussing enforcement actions.

As a reminder, Regulation Z section 1026.16(b) has triggering terms for advertisement for open-end credit, and the terms that must be disclosed when the triggering terms are used:

When any of the following “triggering” terms is included in an ad—

  • The periodic rate used to compute the finance charge or the annual percentage rate;
  • A statement of when the finance charge begins to accrue, including the “free ride” period (if any);
  • The method of determining the balance on which a finance charge must be imposed;
  • The method of determining the finance charge, including a description of how any finance charge other than the periodic rate will be determined; and
  • The amount of any charge other than a finance charge that may be imposed as part of the plan.

then the following “triggered” information must also be included—

  • Any minimum, fixed, transaction, activity or similar charge that could be imposed;
  • Any periodic rate that may be applied expressed as an “annual percentage rate” using that term or the abbreviation “APR;”
  • If the plan provides for a variable rate, that fact must be disclosed; and
  • Any membership or participation fee.

We are often asked, “can we make the triggered disclosures via a link when using online ads?” The answer is yes. Both Reg DD and Reg Z allow a bank to show the disclosures, clearly and conspicuously, on the ad with the triggering terms, or to have them one-click away. But just as the triggered disclosures must be clear and conspicuous, so must the link to them if that is how they are to be viewed. What the Bureau found was that one or more lenders made consumers click on links that were neither clear nor conspicuous, and then navigate through an online application before being able to see the triggered disclosures. And the application was eight pages long!

When is the last time you reviewed your online advertising?

Offsetting payments

Another credit card issue was offsetting payments. Generally, Reg Z prohibits setoff from a consumer’s deposit account for a credit card debt (See sections 1026.12(d) and 1026.12(d)(2)). Offsets are permitted, but there must be an affirmative agreement with the consumer and it must be in account opening disclosures. Simply saying the bank has the right to setoff will not meet the requirements of the regulation and commentary. For a security interest to qualify for this exception, the consumer must be aware they are granting a security interest, that it is a condition for getting the credit card and they must specifically intend to grant a security interest in the deposit account. This is often done on deposit-secured card accounts.

The Bureau found violations of these requirements. Without proper training and careful labeling of past-due credit card accounts, a collector may believe “he who has the gold, makes the rules,” and that setoff is the right thing to do for a past due account. Have your collectors (and any third-party collectors you use) been trained about the rule against setoff of past due credit card payments? Do you carefully label such accounts so your collectors will know the accounts don’t allow setoffs?

Speaking of secured credit cards, another UDAAP finding was that some secured credit card lenders made false claims that so long as the account was in good standing, after a stated period the secured cards would become unsecured cards. But the card issuers were not releasing their security interests in the accounts.

Yet another credit card issue was found that relates to the “D” UDAAP (for “deceptive”). An act or practice that is “deceptive” includes any practice which “(1) misleads or is likely to mislead the consumer; (2) the consumer’s interpretation is reasonable under the circumstances; and (3) the misleading act or practice is material.” What the CFPB found was that, “…credit card issuer(s) misled or were likely to mislead consumer credit card holders by sending collection letters that suggested that the issuer(s) could repossess consumers’ automobiles, or foreclose on homes, securing loans or mortgages owned by the issuer(s). In fact, the issuer(s) did not repossess any vehicles or foreclose on any mortgages in connection with delinquent credit card accounts, and it was against the policies of the issuer(s) to do so.” So idle threats were made which had no basis of reality and it was a fear tactic which would also violate the Fair Debt Collections Practices Act.

While the UDAAP violations cited in the report involved credit card debt, the principle can apply to other collection activities as well.

Credit reporting (furnishing)

Entities that report information to credit bureaus have certain responsibilities under the Fair Credit Reporting Act. One of those responsibilities is to investigate disputed information. The Bureau found some credit reporters failed to investigate disputes in a timely manner or failed to even complete an investigation.

Remedial action for these violations includes establishing and implementing enhanced monitoring activities, approving policies and procedures that will include compliance with furnisher-specific requirements, and providing validation of all corrective actions.

Summing up

At the end of the day, a bank’s management and compliance officer should ask themselves if any of the issues described in the Bureau’s Supervisory Highlights could apply to their bank and the products and services it offers. Does your bank offer any of the products or services mentioned by the Bureau? Is your bank (or a third party engaged on its behalf) involved in any of the acts or practices cited by the CFPB as a problem? If so, take corrective action before your regulator finds similar problems in an exam.

December 2019 OBA Legal Briefs

  • These OREOs are no treat!
  • Privacy: It’s for bank info, too
  • Managing returns of duplicate payments

These OREOs are no treat!

By Andy Zavoina

The Office of the Comptroller of the Currency (OCC) issued an enforcement order against Citibank, N.A. in October 2019 and imposed a $30 million civil money penalty because it violated the holding period allowed for the Other Real Estate Owned (OREO) — the real property on which it had foreclosed, but not disposed of.

Each regulatory agency has its set of rules for this. 12 U.S.C. § 29 and 12 C.F.R. § 34.82 provide that a national bank cannot hold OREO for a period longer than five years. I have seen exceptions to this in the past based on the bank’s efforts to maintain the property and actively offer it for sale and on the real estate market the property is in. Files must be well documented and organized explaining what the bank has done, what it is doing and what the projections are for the property. That was not the case at Citibank, according to the OCC’s order.

In this case the bank had more than 200 instances in which the allowed holding period was exceeded between April 2017 and August 2019. The OCC Consent Order (AA-EC-2019-67) indicates that the bank had reviewed its processes and its portfolio of OREO as early as 2015 and identified these violations. However, the bank failed to implement a cure process. The OCC noted that the bank had deficient controls over and monitoring of the OREO portfolio and “lacked adequate policies, procedures, and processes to effectively identify and monitor the holding period for OREO assets.”  After the early identification in 2015, the bank indicated it was committed to correcting the deficiencies and it requested extensions to the holding periods. But these requests were not timely and in fact resulted in additional violations.

In April 2017 the OCC formerly told the bank its OREO internal controls were still decentralized, ineffective and inadequate.  Since then the bank continued to request holding period extensions. The bank made continued promises but failed to meet its goals.

As a result, the bank was ordered to pay a civil money penalty of $30,000,000.

As is often the case with “issues” in general, whether they be compliance, or safety and soundness oriented, examiners identified problems or confirmed a self-identification of them and agreed to a committed solution. But when a bank fails to meet the accepted cure and time benchmarks, the problem is only exacerbated. Without senior management’s involvement and communication with the board, the necessary resources may not be made available or other complications may arise. In those instances, continued communications (think updates) with the bank’s regulatory agency are vital. What has changed, and what can be done to get the cure process back on track must be discussed. In the case of the CMP above, this communications effort appears to have failed and repeated warnings were not adequately addressed.

Let’s revisit some basics of OREO management and suggest that each bank should ensure any OREO it has is being correctly managed and there are alarms set to go off so that the proactively handles its portfolio and has no need to reactively request an extension when it is then too late to do so.

As the bank assumes ownership of the property one of the first steps it should follow is to take physical control of the property. Just as the bank demands insurance on collateral it loans on, it should similarly have coverage for its own property to adequately insure itself for all the risks it needs to mitigate. It needs to assess the current situation, including whether there are tenants in the property, whether the former owner is one of those tenants, and whether evictions will be required (if they are even allowed) or will this be an income producing property, or both? The condition of the property must be evaluated and there may be needed improvements required. If the bank is stepping into the prior owner’s shoes, it needs to understand if there are required leasehold improvements or developer’s obligations it must adhere to. Are there any environmental hazards that must be addressed such as underground fuel tanks, or any other safety issues that pose a greater liability to the bank and were not addressed by the prior owner? Will the bank manage this property or outsource this to a property management company? A current appraisal and market analysis indicating the expected holding period is a must.  A management company can not only collect rents and advertise space available, but also prioritize any list of needed improvements and have them done. Outsourcing is not always necessary but may be especially helpful on commercial properties. There is no single set of rules as the bank’s condition and familiarity with the property and the market it is in will help dictate what needs to be done. This is a key reason all banks should have guidance established in advance in the form of a policy and procedure on the handling of OREO.

Understanding the property and the bank’s obligations will be vital to the management and sale of the property as well as its value. If the property has rental spaces, having those profitably filled will make selling it as an ongoing concern easier. If clearing out tenants, renovating and using the property for a different purpose makes more sense, planning must be done in advance.

While the bank may be anxious to sell the property immediately, could there be any advantages to holding the property for a period of time? This could be an issue if there is an expected development of nearby property that could increase the value of this OREO now owned by the bank. That could represent a gain on sale and income for the bank.

In addition, once the bank has the property, it needs to determine if the bank itself will hold title or transfer ownership to a holding company or separate entity created for this purpose. There may be benefits financially and for accounting purposes that need to be explored. This is the bank’s decision.

For example, assume that the bank has ownership of a single-family residence and wants to sell the property because it is vacant. How recent is the appraisal, has the area changed since the last appraisal, and should it obtain a new one now or update the existing appraisal so it has a firm idea of what it will sell for? A Realtor may conduct a market analysis to assist in this valuation. A property inspection is also advised. The bank wants to ensure it has clear title, understands the value of the property and as the owner, determine when it is best to offer it for sale. Again, prioritize any repairs or improvements that facilitate the sales goal and the asking price of the property. Evaluate the sale “as-is” and with improvements, balancing the costs and time to hold the property. Document all these efforts and the Realtor’s opinion of the market trends in this area.

Remember that 12 C.F.R. § 34.82 requires a national bank to dispose of OREO “at the earliest time that prudent judgment dictates but not later than the end of the holding period (or an extension thereof) permitted by 12 U.S.C. 29.” Other agencies will have similar rules. The paper or virtual OREO checklist the bank uses should start with the date the property is acquired. That is the key date for the five-year holding period.

According to the OCC’s OREO handbook, the property’s value should be “recorded at the fair value of the property, less the estimated cost to sell and this amount becomes the new cost basis of the property. The amount by which the recorded amount of the loan exceeds the new cost basis is a loss and must be charged to the allowance for loan and lease losses (ALLL). The recorded amount of the loan is the loan balance adjusted for any unamortized premium or discount and unamortized loan fees or costs, less any amount previously charged off, plus recorded accrued interest.” While rare, there could be a gain when the OREO is booked. Before recording a gain, verify the values.

Your regulatory agency’s OREO exam guide may indicate when a new independent appraisal or evaluation is required. The guidance may also indicate how often a new valuation is needed, as updates may be required depending on the circumstances.  The OREO must be carried at the lower of cost or fair value, less the estimated cost to sell. Any changes in the valuation or sale costs should be well documented.

Remember that, as the property owner, income and expenses for the OREO are included in the Call Report as income and expenses. These do not get added to or subtracted from the amount the OREO is booked for. It is easy to see a bank apply rental income against the booked value and hedge its bet as to the sales amount or to reduce pressure to force a sale. But that would be inappropriate even if it were later seen as a gain on sale.

When the end of the five-year holding period approaches, the bank may request one or more extensions. In total they can be five years, which would be a total of 10 years for the bank to have liquidated the property. The bank must be able to demonstrate that it has made a good-faith effort to dispose of the property within the initial five-year period or that disposal of the property within that initial period would be detrimental to the bank. Discussion with the bank’s regulatory agency well in advance of the expiration of the current holding period would be advised and the agency can provide an idea of the time required for an extension approval.

When it comes to OREO, whether the bank has no properties currently, or many, each bank should ensure it is prepared. There are many nuances as to valuations, what an asset’s value is booked as, the handling of income and expenses, how a gain or loss will be accounted for, as well as the management of the property. One goal – sell the property – should always be on the forefront. And as is common in the loan area, document, document, document. The bank must have processes in place, and those processes must be periodically verified to ensure they follow regulatory requirements and are working. If your bank acquires another bank, how was the OREO handled by the acquired bank and have the OREO files been reviewed? We have already established 30 million times that examiners are serious about this.

Privacy: It’s for bank info, too

By Andy Zavoina

You may have heard the phrase “loose lips sink ships,” which was widely used during World War II. It meant that even saying something that seemed harmless in the wrong area and overheard by others could lead to a catastrophe, especially when combined with other bits of information. In some cases, the ship that gets sunk could be a bank employee. All employees need to be reminded that privacy of information gained in the day-to-day work environment extends beyond a customer’s non-public, private information.

There were two separate OCC enforcement actions that were taken in September and October 2019 and made public in November. The first involved Amie Dorman (AA-EC-2019-50). She was working for Morgan Stanley Private Bank, N.A. out of Salt Lake City, Utah, and Morgan Stanley Bank, N.A. out of Purchase, New York.

Dorman was Executive Director of the Global Regulatory Relations Group at Morgan Stanley from approximately September 2014 to August 2017. In that capacity she was provided non-public OCC information concerning the banks and was involved in the banks’ responses to regulatory concerns and supervisory findings. This meant she genuinely participated in the affairs of the bank and is subject to rules concerning what she knew. When she left Morgan Stanley in 2017 Dorman, “retained confidential Morgan Stanley documents, of which at least 18 contained non-public OCC information regarding one or both Banks” as noted in the enforcement action.

She was later employed by another bank where some of those confidential documents were not only stored, unsecured, but also used. Quoting from the OCC order, “Respondent utilized documents containing non-public OCC information and kept the documents unsecured in her office, thereby disclosing them.” Does this mean that by having the documents in her office they were considered “disclosed” or that she used some of this information and that was in fact the disclosure? The answer may be academic as there should be no reason for an employee to leave one bank with confidential information and documents from that bank’s regulator, specific to that bank.

This was considered a violation of 12 CFR § 4.36(d), which protects information that the OCC need not even reveal under a Freedom of Information Act request, or information that has not yet been published. This type of information generally includes information on the supervision, licensing, regulation, or examination of a bank, an investigation or enforcement action, bank information and information about a third party.

I can’t speculate on what information was shared, or retained and stored, or how it drew the attention of the OCC. But I can visualize a person’s new bank trying to capitalize on a new hire’s experience or that new hire offering information as a demonstration of what an asset they can be. Perhaps remembering concepts in general should be enough without documentation to back it up. Dorman was ordered to pay a civil money penalty of $7,500.

That seems like an isolated case. But remember there were two separate but similar orders here. The October Consent Order (AA-EC-2019-49) involves Roseann McSorley, a former Managing Director and Chief Administrative Officer of Oversight and Controls at JPMorgan Chase Bank, N.A. Columbus, Ohio.

In this case the OCC was initiating a CMP under 12 CFR § 4.32(b) based on its findings that McSorley disclosed some confidential OCC information involving JPMorgan Chase, which she left in 2016, while employed at a new bank. Documents containing non-public OCC information on her old bank were made available to one or more employees during meetings or discussions, and she shared them via text message. To complicate matters, McSorley was questioned twice by bank investigators about having JPMorgan Chase documents and she denied having any. The bank tried to retrieve its documents. McSorley initially did not respond, but eventually did return them. As in the prior case a CMP was assessed, this time for $35,000.

Bank employees, especially officers, often have confidential information about their bank or can access it. When leaving one bank for another, they may assume there is no loyalty to the former employer and that the experience and knowledge they gained is their “property.” These two cases contradict that thought process and remind us that confidential information about a bank is confidential! It is not to be shared. Documents, whether on paper or electronic, are not the property of an employee, former or otherwise, and are not to be taken from the bank.

Perhaps these are good training examples for an employee meeting, reminding all staff of the restrictions on them and the need to respect the privacy of the bank as well as that of customers. And don’t forget senior management when providing that training. The two individuals to whom the OCC issued these enforcement actions appeared to have significant roles at their respective former banks.

Consider also that your bank’s Ethics Policy should address the importance of maintaining the confidentiality of non-public regulator information and other bank information in general.

Managing returns of duplicate payments

By John S. Burnett

When a bank’s customer writes a check, it’s the customer’s intention that the payment ordered by the check be completed once – and only once – to the payee and for the amount identified on the check. But in today’s multichannel payment environment, in which a check can be presented in its original form, as an ACH check conversion item, or as a remote-deposit or mobile-deposit captured image, the potential for multiple presentments of the payment order have increased, much to the frustration of both the check issuers and the depositary and paying banks involved.

The reason for the increase in multiple presentments is found in the fact that whenever a check is converted into an ACH entry or truncated when deposited as an image, the check itself isn’t given to the banking system in order to collect the funds represented by the check. Instead, checks that are converted to ACH entries (e.g., ARC or BOC check conversion entries) or deposited as images using merchant remote deposit capture (RDC) equipment or deposited as mobile deposits remain with the person (merchant or individual) making the deposit. The security for the original checks can range from strict to lax, depending on the merchant and controls on that security required by the originating depository financial institution (ODFI) for ACH conversions or truncating bank in the case of RDC deposits. In the case of mobile deposits, especially mobile deposits by consumers, the security is virtually non-existent. Whether through dishonesty or mistake, these checks have the potential for being used more than once. And mobile deposits have the biggest potential for “double dipping” as a percentage of total mobile deposits processed.

Terms: For the remainder of this discussion, I will use “ACH” to mean any check conversion entry to ACH format, “check” to mean a check deposited in paper form at a depositary bank,  “image” to mean a check that’s been captured and deposited as an image, and “truncating bank” as the depositary bank that accepts that image.

Returns by the midnight deadline

Much has been done by the Federal Reserve, clearinghouse associations, third-party processors, and in-house systems to detect duplicate presentments of different forms of the same original item whether they occur on the same processing day or on different days.  If yours is the paying bank, and you or your third-party processor identifies a duplicate payment in time to return it by your midnight deadline (if it’s a payment of a “check” or of an “image”) or in time to meet the return deadline for the returned “ACH” to be available to the ODFI by the start of business on the second banking day following the Settlement Date for an ACH, you are in the best position. It’s a standard, no-hassle process for check or ACH returns.

If it’s a “check” or an “image” you are returning, you handle it as you handle any other check return but use the ‘Y’ return reason code to indicate it’s a duplicate presentment. The other presentment (the one you aren’t returning) can be an ACH conversion entry for the same check, an “electronic check” or a “check.” If both the first and second presentment occur on the same day, pick one to be paid and return the other.

If you need to return an ACH that’s a duplicate presentment, use the R39 return code (improper source document/source document presented for payment) if an ARC, BOC or POP ACH entry and the source document to which it refers have both been presented for payment and posted to the Receiver’s account. You don’t need a Written Statement of Unauthorized Debit (WSUD) to make this return.  How can such a duplicate payment occur? A merchant could mistakenly (or fraudulently) run a check or checks through his MICR-capture equipment to initiate the ACH entry or entries and deposit the original checks, too.

After the midnight deadline

Even with all the system enhancements at many levels to detect duplicate presentments, there are some that make it to the paying bank undetected.  There is a “grace period” allowed for identifying and returning them, but it can vary depending on the type of payment. These returns aren’t as straightforward as those completed before the midnight deadline.

Clearly, once you’ve paid one presentation of the check item, your customer should not be charged for a subsequent presentation, regardless of the form it takes (“ACH,” “check” or “image”).

The UCC and checks or images that are duplicate payments

Under UCC section 4-406, your customer “must exercise reasonable promptness” in examining account statements and/or items to identify any payment that was not authorized because of an alteration or because a purported signature by or on behalf of the customer was not authorized. That would include a duplicate payment of an authorized item (the first payment was authorized; the second wasn’t).  If the customer identifies a second payment of the same item that hasn’t been reversed and the item returned, UCC section 4-406(c) provides that the customer must “promptly notify” the bank. Your account agreement may include language defining “reasonable promptness” and “promptly notify.”  If the customer fails to notify the bank of a duplicate payment within one year after the statement or items are made available to the customer showing that payment, the customer loses the right to make the claim. Whether the bank is responsible to the customer is a matter of law and contract, not related to whether the bank can return the item in question.

Note that ARC, BOC and POP entries are EFT items  under Regulation E when a consumer account is involved, and your consumer customer has rights under Regulation E’s §§1005.6 and 1005.11 that you must comply with if the consumer claims that one of those EFTs was not authorized. The rules under Regulation E aren’t set out in this article but must be followed whether or not your bank is able to return one or more unauthorized ACH items that are EFTs.

Extended ACH return period

If the customer makes a prompt claim, the bank can return an ARC, BOC or POP “ACH” payment within the ACH “extended return period” if the customer provides a WSUD. The extended return period requires that the returned entry be available to the ODFI at the start of the banking day following the 60th calendar day following the Settlement Date of the entry being returned. In these cases, use the R37 (source document presented for payment) return entry when returning an ARC, BOC or POP entry.

If the entry involved is an RCK entry, it is not subject to Regulation E, but is subject to the UCC provision described earlier, and if the customer provides a WSUD, you can use the R53 return code (Item and RCK entry presented for payment) within the ACH extended return period. This entry would be subject to the UCC provision described earlier.

Returning checks and images that are duplicate payments

Federal Reserve Check Services offers an extended adjustment procedure for duplicate payments that are either “checks” or “images.” Other check clearinghouses may have similar procedures, but this discussion outlines the adjustment process offered by the Fed. Refer to the Check Adjustments Quick Reference Guide ( for details of the process, which varies depending on the level of Check Services a bank uses.

A Paid Item (“PAID”) adjustment request can be initiated to request a credit entry for an item that is being refused either because it is the original check (or the legal equivalent, i.e. a substitute check, electronically created item or image received in as cash or return letter or a photocopy and the other item has already paid (the same day or earlier).  If you make the claim within 6 calendar months of the cash letter date of the item, you should receive a same-day credit entry to your bank’s reserve account. The depositary bank will be charged for the item.

If you make your claim after 6 months but within the one calendar year, the Fed will provide information you can use to deal directly with the offsetting institution.

This method cannot be used more than one calendar year after the cash letter date of the item.

If your bank clears checks and receives cash letters from a clearinghouse, investigate whether the clearinghouse provides adjustment services similar to those offered by FRB Check Services.

Finally, we’ll discuss what your bank can do if it has received back an item unpaid, and a remote deposit capture or mobile deposit of a check is involved.

Reg CC’s indemnity provision for “image” returns

Section 229.34(f) of Regulation CC creates an indemnity provision involving “images” of checks captured under RDC and mobile deposit agreements. A depositary bank that—

  • is a “truncating bank” because it accepts deposit of an electronic image or other information related to an original check [a remote-deposit-captured or mobile-deposited check],
  • does not receive the original check,
  • receives settlement or other consideration for an electronic check or substitute check related to the original check, and
  • does not receive a return of the check unpaid

indemnifies a depositary bank that accepts the original check for deposit for losses incurred by that depositary bank if the loss is due to the check having already been paid.

But, the depositary bank may not make an indemnity claim under this provision if the original check it accepted for deposit bore a restrictive indorsement inconsistent with the means of deposit, i.e., it was indorsed using words like “Mobile deposit only” when the check is being deposited at a teller station or drive-up window.

If your bank receives a return of a deposited check due to duplicate payment (and you took the original check for deposit), and you determine that the check was mobile deposited before you took the check for deposit, and cannot recover all of the check amount from your customer, you should contact the paying bank to ask for information on the bank that accepted the mobile deposit. Assuming the check wasn’t already indorsed “for mobile deposit,” or with words to that effect, at the time you took it for deposit, you can make a direct indemnity claim upon the bank that took the mobile deposit of the check, up to the amount of your loss, plus interest and expenses.

See Regulation CC, section 229.34(f) for the indemnity provision and section 229.34(i) for indemnification amounts.

The indemnification provision is imposed on RDC and mobile-deposit accepting banks and in favor of depositary banks taking an original check because RDC and mobile deposits increase the risk in the payment system for losses due to duplicate presentments and payments.

Note that a mobile-deposit accepting bank that has received a mobile-deposited item back unpaid is not subject to the indemnity provision. For example, if the same check is mobile deposited (in order) at Bank A and Bank B and then deposited in paper form at Bank C, and Banks A and C both receive their items back unpaid, Bank B would indemnify Bank C for a loss. Bank A doesn’t provide an indemnity because its item was returned unpaid for duplicate payment. Bank B doesn’t receive an indemnification because it didn’t take the original paper check for deposit.


November 2019 OBA legal briefs

  • Medical marijuana state question 788 and banking issues

Editor’s note: This month’s Legal Briefs section has been ceded to one of the OBA’s strategic partners, McAfee & Taft, to allow their insight on medical marijuana and the resulting banking issues. As a disclaimer, however, the following does not necessarily reflect the views or advice of the OBA, its legal department or its members. It’s simply meant as an opportunity to get more information out from a credible source on an important, timely topic.


by Robert T. Luttrell, III, McAfee & Taft

Generally, bankers are interested in knowing that their customers are not conducting illegal activities. There are legal and reputational risks to the bank otherwise. Because of the recent activity around the legalization of industrial hemp and the ubiquitous sale of its derivative CBD, the following reviews the background of the criminalization of marijuana (and its cousin industrial hemp); to what extent is industrial hemp cultivation, processing and sale legal federally and in Oklahoma; and what legislative relief may coming.


Cannabis was widely used as a medicine in the United States. And hemp was used for its fiber to be used in industrial products. The states and federal government ended that practice with state-level bans and the Federal Marijuana Tax Act of 1937. Since the Controlled Substances Act was enacted in 1970 “marihuana” (which definition included hemp) has been a Schedule 1 drug (Schedule 1 drugs also include heroin and LSD). Consequently, almost any activity involving growing, processing, transporting, possessing or dispensing marijuana is illegal. As is almost any activity related to the proceeds of these activities. Violators are subject to criminal penalties ranging from 10 years to life and fines up to $2,000,000

Nevertheless, the states began to legalize marijuana in some form. Texas was the first state to reduce possession of small amounts of marijuana to misdemeanor status in 1973. This decriminalization phase ran until 1978. California legalized medical cannabis in 1996. Colorado and Washington were the first states to adopt a recreational cannabis regime in 2012. Oklahoma legalized “medical” marijuana in 2018. Now 26 states have decriminalized small amounts of marijuana. This generally means possession is a civil or local infraction or lowest class misdemeanor with no possibility of jail time. Fourteen states and territories have legalized recreational marijuana. Thirty-four states have some form of medical marijuana program.

Then, the federal government legalized industrial hemp grown under certain programs starting in 2014.


On June 26, 2018, Oklahoma approved State Question 788 which added statutes legalizing marijuana. Among other things, it gave the Oklahoma State Department of Health 30 days to develop applications for licenses and post them to its website.

The Oklahoma Medical Marijuana Authority reported that as of October 1, 2019, 205,899 patient licenses (just over 5% of the state’s population and the highest in the country) and 1,434 caregiver licenses had been issued. There were also 4,063 grower licensees, 1,651 dispensary licensees and 1,168 processor licensees.;

Marijuana sales topped $23 million in May, 2019 and the state collected more than $1.6 million in excise taxes and $2 million in state and local taxes. Total state tax collections were almost $10.7 million. This growth has been attributed to low barriers to entry on the commercial side and lack of a requirement to have a specific medical condition on the user side.

A number of legislative enactments followed SQ788 to do things like: decriminalizing possession of small amounts of marijuana (1.5 ounces); cleaning up the language of SQ 788; tightening some of the restrictions; transferring marijuana licensing to a newly created Oklahoma Medical Marijuana Authority; setting rules for the disposal of marijuana waste; setting rules for the disposal of marijuana inventory in the event of death, insolvency, bankruptcy of the license holder and for foreclosure of a security interest or by a receiver; and applying tobacco smoking limitations to smoking marijuana. The principal bill was House Bill 2612, the Oklahoma Medical Marijuana and Patient Protection Act, more commonly called the “Unity Bill”. It became effective on August 29, 2019. See also House Bill 2601; House Bill 2613, Senate Bill 31, Senate Bill 162, Senate Bill 532, Senate Bill 811, Senate Bill 882, Senate Bill 1030. See, 63 Okl. Stat. § 420 et seq. & OAC 310:681-1-1 et seq.

As a result of the passage of so many bills in the same legislative session, there are some inconsistencies that may need to be reviewed in particular cases. For example, Senate Bill 162, Senate Bill 1030, and House Bill 2601 all became effective November 1, 2019 and all amended 63 Okl. Stat §420. Senate Bill 162 and House Bill 2601 both contain the same subsection B reading:

B. Possession of up to one and one-half (1.5) ounces of marijuana by persons who can state a medical condition, but are not in possession of a state-issued medical marijuana license, shall constitute a misdemeanor offense with a fine not to exceed Four Hundred Dollars ($400.00).

However, in Senate Bill 1030, subsection B adds that no prison sentence may be imposed, that only a citation may be issued and that if the violator written promise to answer as specified in the citation, the police must release the person upon personal recognizance. Since these bills became law at the same instant, there is no way to tell whether the restriction on a prison sentence will be applied.

There are a number of commercial marijuana license categories, all of which relate to handling marijuana, although several do not involve growing, processing or dispensing marijuana.

Transportation licenses
Transportation licenses permit the holder to transport marijuana from an Oklahoma licensed dispensary, licensed grower, or licensed processer, to an Oklahoma licensed dispensary, licensed grower, licensed processor, or licensed researcher. Cannabis must be transported in a locked container, shielded from public view, and clearly labeled “Medical Marijuana or Derivative.”

Commercial Establishment License
A commercial establishment license covers dispensary, grower, processor, or researcher and is shall be issued for a period of twelve (12) months.

Medical marijuana waste disposal license
The holder of a Medical marijuana waste disposal license shall be “entitled to possess, transport and dispose of medical marijuana waste.” “Medical marijuana waste” is “unused, surplus, returned or out-of-date marijuana and plant debris of the plant of the genus Cannabis, including dead plants and all unused plant parts, except the term shall not include roots, stems, stalks and fan leaves.” 63 Okl. Stat. §428.

Medical marijuana testing laboratory license
“A medical marijuana testing laboratory may accept samples of medical marijuana, medical marijuana concentrate or medical marijuana product from a medical marijuana business for testing and research purposes only, which purposes may include the provision of testing services for samples submitted by a medical marijuana business for product development.”

The State Department of Health can require medical marijuana businesses to submit samples to a medical marijuana testing laboratory for testing.

Ownership of Licensees
Oklahoma requires that 75% of all principals of a marijuana license holder be Oklahoma residents. That may not be enforceable.

On June 29, the Supreme Court of the United States released its opinion in Tennessee Wine & Spirits Retailers Association v. Thomas, 588 US ___ (2019). Tennessee had a statute requiring all applicants for a license to operate a retail liquor store to have been a resident of Tennessee for 2 prior years, for a renewal license be a resident for 10 years and that all stockholders of corporate applicants be residents. SCOTUS held these requirements violated the dormant commerce clause.

“Under our dormant Commerce Clause cases, if a state law discriminates against out-of-state goods or nonresident economic actors, the law can be sustained only on a showing that it is narrowly tailored to “‘advanc[e] a legitimate local purpose.’”

If we viewed Tennessee’s durational-residency requirements as a package, it would be hard to avoid the conclusion that their overall purpose and effect is protectionist. Indeed, two of those requirements—the 10-year residency requirement for license renewal and the provision that shuts out all publicly traded corporations—are so plainly based on unalloyed protectionism that neither the Association nor the State is willing to come to their defense. The provision that the Association and the State seek to preserve—the 2-year residency requirement for initial license applicants—forms part of that scheme. But we assume that it can be severed from its companion provisions, see 883 F. 3d, at 626–628, and we therefore analyze that provision on its own. Since the 2-year residency requirement discriminates on its face against nonresidents, it could not be sustained if it applied across the board to all those seeking to operate any retail business in the State.”

Even though it is doubtful that the federal courts would deal with this issue, Oklahoma state courts could apply this rule to invalidate the residency requirement. That might become important as the business matures and outside players want to come into the state to acquire existing licensees.

Federal Law

Restraints on Prosecution
Because of the federal law implications, why, then, do people seem to feel comfortable dealing in marijuana or accepting the proceeds from marijuana in payment for product or services or for deposit or as rent? There are a number of constraints on federal agencies respecting their prosecution of marijuana related crimes.

Cole Memo
Under the Obama Administration, the Department of Justice (DOJ) took a forbearance approach to much of the marijuana-related activities (both medical and recreational) rather than pursuing all activities that violate the CSA. In August 2013 the DOJ issued what is known as the Cole Memorandum advising U.S. Attorneys that their offices should focus their limited resources on the following marijuana-related crimes:

A. Preventing the distribution of marijuana to minors;B. Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
C. Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
D. Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
E. Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
F. Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
G. Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
H. Preventing marijuana possession or use on federal property.

The Sessions Memo
The Federal position changed in January 2018 when the Cole Memorandum was rescinded by Attorney General Jeff Sessions. U.S. Attorneys were advised that the decision on whether to prosecute marijuana-related crimes should be guided by the DOJ’s traditional principles that apply to all criminal prosecutions.

A. Federal law enforcement priorities as established by the DOJ;
B. The seriousness of the crime;
C. The deterrent effect of criminal prosecution; and
D. The cumulative impact of particular crimes on the community.

The DOJ asserts that this merely returned the USAs to the position prior to the Cole Memo and that this does not represent a change. This is the guidance they had before the Cole Memo and, says the DOJ, the Cole Memo was unnecessary.

AG Barr’s Position
During a Senate hearing, William Barr said of the current state of affairs:

“The situation that I think is intolerable and which I’m opposed to is the current situation we’re in, and I would prefer one of two approaches rather than where we are. Personally, I would still favor one uniform federal rule against marijuana but, if there is not sufficient consensus to obtain that, then I think the way to go is to permit a more federal approach so states can make their own decisions within the framework of the federal law and so we’re not just ignoring the enforcement of federal law…. I would like to see Congress address this issue.”

Consolidated Appropriations Act of 2018 (also referred to as the Rohrabacher-Farr Amendment or the Blumenauer-McClintock-Norton Amendment)

Congress used the 2015 and 2016 appropriations bill to further limit enforcement of federal marijuana laws in states that have legalized medical or recreational marijuana. And, like “old Man River” it just keeps rolling along having been continued in appropriation bills or by continuing resolution since. The current version is contained in Consolidated Appropriations Act of 2019 (Pub.L. 116–6) Sec. 537 which was effective until September 30, 2019. Now continued until November 21, 2019 (Continuing Appropriations Act, 2020 (HR 4378) (Pub. L. 116-59 §§101(2) &106(3))

SEC. 537.
None of the funds made available under this Act to the Department of Justice may be used, with respect to any of the States of …Oklahoma… to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.

The same provision is included in the FY 2020 Commerce, Justice, Science And Related Agencies Appropriations Bill §531 which would take the prohibition through 2020. But it also contains a provision (§550) which would restrict funds being used to interfere in any marijuana regime, whether or not medical.

We should note that the term “medical” is not defined in the bills. To be truly “medical,” marijuana would have to have an accepted medical use. The FDA in 2016 found that “[T]he available evidence is not sufficient to determine that marijuana has an accepted medical use.” This means that marijuana has been determined to have “a high potential for abuse,” “no currently accepted medical use in treatment in the United States,” and “a lack of accepted safety for use of the drug or other substance under medical supervision.”

It could be argued that, because of Oklahoma’s lack of a “presenting condition”, there is not enough “medical” in Oklahoma to make the marijuana laws “medical” notwithstanding the name.

Effects of restrictions. lying on these appropriations bills, defendants in several federal marijuana prosecutions in California and Washington moved to dismiss their cases. On August 16, 2016, in United States v. McIntosh, 833 F.3d 1163 (9th Cir., 2016), a panel of the Ninth Circuit held that the appropriations bills entitled marijuana defendants to an evidentiary hearing “to determine whether their conduct was completely authorized by state law, by which we mean that they strictly complied with all relevant conditions imposed by state law on the use, distribution, possession, and cultivation of medical marijuana.” The panel deferred to the district courts on remand to decide what remedy would be appropriate, noting the transitory nature of the potential relief

Pending Legislation.

Safe Banking Act of 2019
The “Secure And Fair Enforcement Banking Act of 2019”, HR 1595 (“SAFE Banking Act of 2019”) was passed by the House on September 25, 2019 on a vote of 321 to 103 and has been referred to the Senate. It does not legalize marijuana. It restricts action which can be taken against depository institutions and ancillary business that deal with marijuana related firms. To obtain the benefits of the Act, the covered entity must be dealing with a “Cannabis-Related Legitimate Business”. That is,

“a manufacturer, producer, or any person or company that—

(A) engages in any activity described in subparagraph (B) pursuant to a law established by a State or a political subdivision of a State, as determined by such State or political subdivision; and

(B) participates in any business or organized activity that involves handling cannabis or cannabis products, including cultivating, producing, manufacturing, selling, transporting, displaying, dispensing, distributing, or purchasing cannabis or cannabis products.” §14 (4).

Cannabis is “marijuana” as defined in the CSA A cannabis product is “any article which contains cannabis” §14(2) & (3).

In respect to a customer of a depository institution that is a cannabis-related legitimate business, federal banking regulators may not:

1. take adverse action related to deposit insurance,
2. discourage the offering of financial services, or
3. take adverse or corrective supervisory action on a loan.

For ancillary businesses, proceeds from a transaction involving activities of a cannabis-related legitimate business are not considered proceeds from an unlawful activity.

Depository institutions, insurers and their officers, directors and employees, cannot be held liable under any federal law for providing financial services to a cannabis-related legitimate business.

Collateral is not subject to forfeiture.

The FinCEN is required to issue SAR related guidance and examination procedures consistent with the Safe Banking Act.

Federal banking regulators must:

1. confirm “the legality of hemp, hemp-derived CBD products, and other hemp-derived cannabinoid products, and the legality of engaging in financial services with businesses selling hemp, hemp-derived CBD products, and other hemp-derived cannabinoid products,” and

2. “provide recommended best practices for financial institutions to follow when providing financial services and merchant processing services to businesses involved in the sale of hemp, hemp-derived CBD products, and other hemp-derived cannabinoid products.”

The Strengthening the Tenth Amendment Through Entrusting States Act has been introduced in the Senate. It would return to the states and Indian tribes the right to control the “manufacture, production, possession, distribution, dispensation, administration, or delivery of marihuana.” It has gone nowhere.

Where does industrial hemp and it derivative CBD fit?

The most movement has been in regard to industrial hemp.

Hemp Specific Legislation
The Agriculture Improvement Act of 2018 (Public Law 115–334) (the “2018 Farm Bill”) became law on December 20, 2018. The Agricultural Act of 2014 (P.L. 113-79) (“2014 Farm Bill”) was became law on February 7, 2014. Both have provisions relating to hemp. Both define industrial hemp as:

the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis. (7 USC §§ 5940 and 1639o).

Exclusion from the definition of marijuana?
On the federal level, the 2018 Farm Bill excludes hemp from the definition of marihuana in the CSA with no apparent restriction on how or where it is produced. This raises an interesting issue in that hemp production is only permitted under the 2014 Farm Bill under a state pilot program and under the 2018 Farm Bill in accordance with a USDA plan or an approved State or tribal plan. The 2014 Farm Bill authorization remains in effect until one year after the USDA adopts its rules. Hemp may be produced under the 2014 Farm Bill notwithstanding the CSA, but is not excluded from the definition of marijuana by that bill. It appears that the 2018 Farm Bill declassified industrial hemp grown under the 2014 Farm Bill as well as that grown under the 2018 Farm Bill. There are penalties in the 2018 Farm Bill for cultivating hemp not in conformance with a plan. But there are none in the 2014 Farm Bill because before the 2018 Farm Bill that would have made the hemp grower subject to the CSA. One of the penalties in the 2018 Farm Bill is the referral of the offender to the Attorney General of the United State and, in Oklahoma, the state Attorney General. There seems to be no reason to do this if there are no penalties except loss of privileges under the program. But, there do not seem to be any.

In Oklahoma, industrial hemp is excluded from the definition of marijuana under certain circumstances.Two amendments to the definition of marijuana in 63 Okl. Stat. §2-101(23)(h) were adopted in the last legislative session which cloud the matter. One was by Laws 2019, SB 868, c. 91, § 10, emerg. eff. April 18, 2019 (“Version 1”) and by Laws 2019, SB 848, c. 428, § 16, emerg. eff. May 21, 2019 (“Version 2”). They both exempt “industrial hemp” from the definition of marijuana.

Version 1 exempts “h. industrial hemp…and any part of such plant…which shall only be grown pursuant to the Oklahoma Industrial Hemp Program and may be shipped intrastate and interstate.”

Version 2 exempts “h. industrial hemp… and any part of such plant…which shall not be grown anywhere in the State of Oklahoma but may be shipped to Oklahoma pursuant to the provisions of subparagraph e or f of this paragraph.”

Since Version 2 became effective last, it seems that industrial hemp grown in Oklahoma is not exempt from the definition of marijuana in Oklahoma. I am confident that this is not what the Legislature intended. But, I think because of the effective dates of the Acts, this is what happened. I have been told that this will be cleaned up next session. I don’t know how a court would handle this in the interim. It is inconsistent to have an Industrial Hemp Pilot Program to grow hemp in Oklahoma and have penalties for growing hemp in Oklahoma.


“Retail sales of industrial hemp and hemp products may be conducted without a license so long as the products and the hemp used in the products were grown and cultivated legally in this state or another state or jurisdiction and meet the same or substantially the same requirements for processing hemp products or growing hemp.” 63 Okl. Stat. §1-1431(C).

Transportation of hemp and hemp products produced under the 2018 Farm Bill can be transported through any state or Indian Tribal lands whether or not legal in that jurisdiction. §10144. Except that, as noted above, the only authority to transport Oklahoma hemp is in the version of 63 Okl. Stat. §2-101(23)(h) first effective, now repealed.

2018 Farm Bill

The hemp grower must be licensed in an USDA approved state or Indian tribal plan or, absent such a plan, by the USDA under a plan established by the USDA. The USDA published its Interim final rule effective on October 31, 2019. The USDA will continue to receive comments and you should expect the rules to change. Some interesting items in the rule:

1. Samples for testing must be collected with 15 days of anticipated harvest. Oklahoma has not set a schedule and Washington has a 30 day schedule and has trouble meeting it.
2. Sampling must “be sufficient at a confidence level of 95 percent that no more than one percent (1%) of the plants in the lot would exceed the acceptable hemp THC level.
3. The “Acceptable Hemp THC level” could test above .3% THC and still be hemp depending on the confidence level of the test. The USDA is considering establishing a hemp laboratory approval process for this reason.
4. Hemp testing a 0.5%THC or below will not be subject to action under a plan. Nevertheless, hemp testing above .03% must be collected and destroyed by a person authorized under the CSA to handle marijuana.

Oklahoma has adopted an Industrial Hemp Program and a set of rules. But, it has not been approved by the USDA. So, Oklahoma is still operating under the 2014 Farm Bill.

2014 Farm Bill

The 2014 Farm Bill authorized state pilot programs to “study the growth, cultivation, or marketing of industrial hemp.” Oklahoma authorized such a program. 2 Okl. Stat. §3-401 et seq. Colleges are authorized to contract for the production of hemp. The OSDA licenses the operation. The license application shows the intended use and disposition of the crop. So, to determine if the industrial hemp is being grown in accordance with the Oklahoma Pilot Program it is necessary to:

Review the license,
Review the license application,
Ensure that the activity is taking place on the described real estate,
Ensure that the activity is covered by the license,
Review any test reports’ and
Review harvest reports.

Hemp in Oklahoma is eligible for crop insurance.

What about CBD?
There are least 113 cannabinoids in the plant Cannabis sativa L. The most well known is (was?) delta-9 tetrahydrocannabinol (“THC”) which is the principal psychoactive constituent of cannabis (and a controlled substance on its own divorced from the marijuana plant). One of others, Cannabidiol (“CBD”), is reputed to have medicinal qualities. The FDA has approved a CBD containing prescription drug, Epidolex, for the treatment of two seizure conditions: Dravet syndrome and Lennox-Gastaut syndrome.

CBD being an extract of the “marihuana” plant is, along with THC, a Schedule 1 Controlled Substance and cannot be legally grown, processed or sold. That is, unless the CBD isn’t a Schedule 1 Substance.

CBD (and, hence, CBD oil) is not a Schedule 1 substance if it is made from industrial hemp. Oklahoma has made industrial hemp farming legal. So have a number of other states. Assuming away for a moment the conflicting amendments and assuming that a court holds or the legislature confirms that Version 1 applies, CBD oil derived from industrial hemp is not a controlled substance under certain circumstances.

There are some obvious problems. The 2014 Farm Bill is silent on how to obtain or transport hemp seeds. The 2014 Farm Bill does not define “research”. The 2014 Farm Bill does not specifically address the legality of hemp’s constituent compounds such as CBD.

Colorado CBD as an example

Oklahoma Version 1 of 63 Okl. Stat. § 2-101(23)(h) would make Colorado CBD not legal because is was not a “part of such plant…grown pursuant to the Oklahoma Industrial Hemp Program.”

Oklahoma Version 2 would make Colorado CBD not legal because is was not “shipped to Oklahoma pursuant to the provisions of subparagraph e or f of this paragraph.”

And for CBD, it may be shipped into the State only under e & f.

“e. for any person participating in a clinical trial to administer cannabidiol for the treatment of severe forms of epilepsy pursuant to Section 2-802 of this title, a drug or substance approved by the federal Food and Drug Administration for use by those participants,

f. for any person or the parents, legal guardians or caretakers of the person who have received a written certification from a physician licensed in this state that the person has been diagnosed by a physician as having Lennox-Gastaut Syndrome, Dravet Syndrome, also known as Severe Myoclonic Epilepsy of Infancy, or any other severe form of epilepsy that is not adequately treated by traditional medical therapies, spasticity due to multiple sclerosis or due to paraplegia, intractable nausea and vomiting, appetite stimulation with chronic wasting diseases, the substance cannabidiol, a nonpsychoactive cannabinoid, found in the plant Cannabis sativa L. or any other preparation thereof, that has a tetrahydrocannabinol concentration of not more than three-tenths of one percent (0.3%) and that is delivered to the patient in the form of a liquid,”

So, almost all of the CBD where ever it is being sold is illegal.

Interstate Transportation
The Consolidated Appropriations Act of 2019 (Pub.L. 116–141) (effective until September 30, 2018; now also continued to December 7, 2018) prohibits the use of funds to contravene the Farm Bill:

Sec. 729

None of the funds made available by this Act or other Act may be used—
(1) in contravention of section 7606 of the Agricultural Act of 2014 (7 U.S.C. 5940); or

(2) to prohibit the transportation, processing, sale, or use of industrial hemp, or seeds of such plant, that is grown or cultivated in accordance with subsection section 7606 of the Agricultural Act of 2014, within or outside the State in which the industrial hemp is grown or cultivated.

Health Claims

2018 Farm Bill preserved the Food and Drug Administration’s authority to regulate products containing cannabis or hemp. The FDA has approved CBD in the drug Epidiolex for treatment of Lennox-Gastaut syndrome or Dravet syndrome in patients 2 years of age and olderand THC in the drugs Marinol and Syndros. Consequently, the FDA’s position is that:

“Under the FD&C Act, any product intended to have a therapeutic or medical use, and any product (other than a food) that is intended to affect the structure or function of the body of humans or animals, is a drug. Drugs must generally either receive premarket approval by FDA through the New Drug Application (NDA) process or conform to a “monograph” for a particular drug category, as established by FDA’s Over-the-Counter (OTC) Drug Review. CBD was not an ingredient considered under the OTC drug review. An unapproved new drug cannot be distributed or sold in interstate commerce.”

The FDA has sent warning letters to that effect.

Unsurprisingly, the FDA takes the position that, since CBD is an approved drug, it is illegal to label products containing CBD as a dietary supplement.

Any manufactured product containing CBD must include on its label:

1. The country of origin of the cannabidiol; and
2. Whether the cannabidiol is synthetic or natural. 63 Okl. Stat. §1-1431(A).

The FDA takes the position that, since CBD is an approved drug, it is illegal to put it in human or animal food.

“The addition of derivatives of hemp, including hemp-derived cannabidiol, to…products intended for human or animal consumption shall be permitted without a license and shall not be considered an adulteration of such products.” 63 Okl. Stat. §1-1431(C). But, any establishment selling or manufacturing marijuana or CBD products included in foodstuffs or ingested orally as a major component of their business operation is a “Food Establishment” and is subject to 63 § O.S. 1-1118 and is required to obtain a food license.

Businesses extracting CBD or processing or warehousing food items containing CBD are subject to the licensing and inspection requirements of 63 O.S. § 1-1119 and OAC 310:260.


“A cosmetic is defined in 201(i) as “(1) articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body or any part thereof for cleansing, beautifying, promoting attractiveness, or altering the appearance, and (2) articles intended for use as a component of any such articles; except that such term shall not include soap.”

Under the FD&C Act, cosmetic products and ingredients are not subject to premarket approval by FDA, except for most color additives. Certain cosmetic ingredients are prohibited or restricted by regulation, but currently that is not the case for any cannabis or cannabis-derived ingredients.”

“The addition of derivatives of hemp, including hemp-derived cannabidiol, to cosmetics, personal care products…shall be permitted without a license and shall not be considered an adulteration of such products.” 63 Okl. Stat. §1-1431(C).


Legalized marijuana presents challenges for bankers. Until Congress acts any business having a relationship with marijuana or its proceeds fraught. So, too, with industrial hemp and CBD until the USDA issues its final rules and Oklahoma both corrects conflicts in its statutes, conforms its plan to the final rules and receives USDA approval. So, proceeding cautiously should be the rule. Stand by you will get the latest news from the OBA.