Tuesday, December 5, 2023

Legal Briefs

July 2018 OBA Legal Briefs

  • Reefer madness
  • Update: campaign committee, PAC and political party accounts
  • More on the Beneficial Ownership Rule
  • Policies – Part 2
  • AML/BSA Q&As

Reefer madness

By Pauli Loeffler

Even before State Question 788 passed, we received a lot of questions about banking marijuana related businesses (“MRBs”) mostly dealing with businesses selling CBD (short for “cannabidiol”) oil, and medical marijuana (“MMJ”) will shortly be available by prescription.

CBD Oil. Many banks are dealing with customers selling THC-free (no THC detectable) CBD for which no prescription is needed. The customer who markets THC-free CBD needs to ensure that the product sold has been independently tested, and the test results to show it is THC-free, to be legal.

What makes all this so complicated is that the cannabis sativa plant produces numerous compounds including THC (“tetrahydrocannabinol” – the psychoactive compound) which causes the high as well as CBD (non-psychoactive). In other words, the plant used to produce hemp (used for rope, cloth, etc.) is the same plant used to produce medical marijuana. Plants whether grown for hemp or marijuana contain both THC and CDB, but the difference is hemp legally grown by a licensed grower can only have a very low concentration of THC when tested (.3% in Colorado – in fact one hemp grower’s entire crop had to be destroyed when it exceeded the limit). On the other hand, medical (and recreational) marijuana is cultivated for high THC of 12% or higher. The sticky part is whether THC-free CBD is “marijuana related,” and if so whether this is marijuana related business. This is something the bank needs to ask its examiner.

Other issues concern the FDA and the FTC. The FDA’s interest is that CBD is not marketed as a drug without preapproval, that is, not offered and intended to diagnosis, cure, mitigate, treat, or prevent disease. The FTC is interested in truthfulness of claims regarding health benefits made without competent and reliable scientific testing as well as deceptive advertising. Both the FDA and the FTC can freeze and take assets of the marketers.

An additional complication which applies not only to CBD oil retailers (if such customers are MRBs) but also to MMJ growers and dispensaries is the fact that, although FinCEN issued guidance regarding MRBs, the guidance was based on the Department of Justice’s Cole Memo which was rescinded in January this year, so there is some question whether the guidance is still valid. You will want to read these two articles:



I would also add that I’ve seen a display of CBD oil at the WalMart checkout counter and elsewhere. It is quite possible that several of your current customers are also selling it.

There is one more consideration:  If the customer is selling the product online, there may be the additional problem of charge-backs. I am aware of a consumer’s ACH to purchase CDB oil being denied for risk by the processor.

MMJ. Mary Beth is in the planning stage to present some sessions for the OBA on what may be done and under what conditions, as well as what cannot be done. Hopefully, these plans will be solidified soon and on the OBA calendar.

At this point, the bank has to make a policy decision on whether or not to bank MRBs. At the end of the day, the federal laws prohibit banking an illegal business. There are proposed rules for licensing growers, processors, dispensaries, transporters, and patients. All growers, processors, and dispensaries must register with the Oklahoma Bureau of Narcotics and Dangerous Drugs. The Final Draft of the Rules can be found here. The Rules are 76 pages long and are slated for a vote by the board of the Oklahoma State Department of Health (“OSDH”) on July 10, 2018, which will be live-streamed. Once the Rules are approved, applications will be available July 26, 2018 (see FAQs). OSDH will not accept or process applications until August 25, 2018. The OSDH will respond to all applicants within 14 days on the denial or approval of the completed application packets.

One thing to keep in mind is dispensaries are cash intensive and will generally have ATMs on the premises.


Update: campaign committee, PAC and political party accounts

By Pauli Loeffler

Although I covered this topic in the May 2016 OBA Legal Briefs, since we are getting numerous calls and emails, I am taking this opportunity to reiterate a couple of points and provide an update on a rule change that has occurred.

All accounts need an EIN.  A recurring question we receive is whether the candidate’s social security number can be used as the tax identification number on the account. The answer is:  No! An EIN is required.  If a candidate shows up saying otherwise or directs the banker setting up the account to the Q&A  on the Oklahoma Ethics Commission’s (OEC’s) webpage, the customer and the banker might believe otherwise.

While it is true that the OEC does not require an EIN, the IRS has the final word:

Political parties; campaign committees for candidates for federal, state or local office; and political action committees are all political organizations subject to tax under IRC section 527…

A political organization must have its own employer identification number (EIN), even if it does not have any employees.

Authorized signers/debit cards. There was a change in Rule 2.95 Campaign Depository Account Requirements, effective May 26, 2017. 

Rule 2.95. Campaign Depository Account Requirements.

Every candidate committee, political action committee and political party committee shall maintain a campaign account in each campaign depository in the name of the committee as it is registered with the Commission. All contributions to a committee except in-kind contributions, including contributions by a candidate to his or her candidate committee, shall be deposited in a campaign account. All expenditures made by a committee shall be made on a check or by debit card, signed by the candidate, Treasurer or Deputy Treasurer of a candidate committee and by the Treasurer or Deputy Treasurer of a political action committee. Provided, however, a candidate may authorize other individuals to sign checks or debit cards for the candidate’s committee; however, the candidate, the Treasurer and Deputy Treasurer shall remain responsible for the lawful expenditure of committee funds. Checks for a political action committee shall include the identification number of the committee assigned by the Commission. A campaign account may earn interest paid by the financial institution in which the account is maintained, but campaign funds shall not be invested in any other way. Contributions from corporations, labor unions, a limited liability company that has one or more corporate members or a partnership that has one or more corporate partners shall not be commingled with other contributions made to a candidate committee, a limited committee or a political party committee.


More on the Beneficial Ownership Rule

By John S. Burnett

To follow up on May’s Legal Briefs, here is some additional important information on FinCEN’s Beneficial Ownership requirements.

FinCEN’s temporary ‘exceptive’ relief

Bankers across the country must have grabbed FinCEN’s attention, somehow, about automatic rollover CD and loan renewals, because just days after the May 11 “applicability” date for FinCEN’s Beneficial Ownership Requirements rules, the agency issued “temporary limited exceptive relief” in the form of a 90-day delay (from May 11 until August 9. 2018) in the applicability date for certificate of deposit and loan accounts that automatically roll over or renew, established before May 11. In its Ruling FIN-2018-R002 (https://www.fincen.gov/sites/default/files/2018-05/FinCEN%20Ruling%20CD%20and%20Loan%20Rollover%20Relief_FINAL%20508-revised.pdf}, FinCEN said that, during the delay, it would determine “whether and to what extent additional exceptive relief may be appropriate” for such accounts.

I am not aware of any loan services or products that automatically renew. As a practical matter, then, FinCEN’s exceptive relief really only applies to auto-rollover CD accounts. You should be obtaining certifications of beneficial ownership in connection with loan renewals. Those certifications should include the statement by the legal entity that it will notify the bank in the event of any change in the ownership information they are certifying. That will allow future renewals of that loan only without recertification.

You should assume that there will be no extension of the exceptive relief, or additional relief forthcoming, and continue to press legal entities with CD accounts to provide you with certifications of beneficial ownership in advance of their next maturity date that falls on or after August 9. You also should obtain with each of those certifications the legal entity’s statement that it will notify the bank if any of the information in the certification changes.

Most importantly, remember that the agreement to notify the bank in the event of a change in beneficial ownership information only applies to the specific CD or loan in connection with which you obtained it. It does not apply to other CDs or loans of that entity customer. It also does not apply to any new CDs opened by, or extensions of credit made to, those entity customers. You still must obtain a certificate (with the agreement to notify the bank) for each new CD account (new money) or new extension of credit (non-renewal).

Entity as trustee of owner

In May’s discussion, you saw that, when a trust is the beneficial owner of the legal entity customer, the individual trustee is to be identified as the beneficial owner (his/her name (labeled as “trustee” if possible), address, DOB and SSN or other identifying number), and if there are co-trustees or multiple trustees, identify only one of them. But what if the trustee is an entity, such as a bank trust department or a law firm? Question 20 in the April 3, 2018, FAQs informs us that when a trust owns 25% or more of the legal entity customer, “the beneficial owner for purposes of the ownership prong is the trustee, regardless of whether the trustee is a natural person or a legal entity,” but … “where a natural person does not exist for purposes of the ownership prong, a natural person would not be identified.” Since only natural persons are to be identified as beneficial owners, no individual should be identified as the owner of the trust’s “piece” of the legal entity customer. You do, however, have to obtain the name of a control-prong individual for the legal entity customer.

Estates as customers

Do you need to obtain beneficial ownership information for a decedent’s estate? What happens if 25% or more of a legal entity customer is owned by the estate of a deceased individual? Is the personal representative of the estate identified as the beneficial owner? Are the heirs in the will also beneficial owners? Those are all questions we’ve received concerning the Beneficial Ownership rule.

Those questions are great examples of a need to go back to the definitions in the regulation. In these questions, there is an evident misunderstanding of what a “legal entity customer” is. Apparently, there is confusion between a need to probate an estate via the state’s court system and the filing of documents with the Secretary of State (or similar office) to form a legal entity. Those are two entirely different and separate processes. One is a beginning; the other, an ending.

A decedent’s estate is not a legal entity customer under the Beneficial Ownership rule. So, if you are opening an account for an estate, rule simply won’t apply.

Estate as owner of a legal entity customer

If John Jones is the 100% beneficial owner of Jones & Sons, Inc., on June 10, and dies on June 15, on June 16 John Jones’s estate will be the beneficial owner (for the ownership prong) if your bank has to renew a loan to Jones & Sons, Inc., pending settlement of the estate. Following the example of a trust as owner previously discussed, the estate’s personal representative should be listed as the beneficial owner. There will also be a control prong individual, who may or may not be the personal representative, depending on whether the company continues to operate.

If ownership of Jones & Sons, Inc., is transferred from the estate to James Jones and John Jones Jr. when the estate is settled, they then become the beneficial owners of the business, but not until they actually have ownership of the company (when the corporate stock is transferred from the estate to them).


Policies – Part 2

By Andy Zavoina

In Part 1 of this article (May 2018 Legal Briefs), I discussed how important policies and procedures can be by using the pending Department of Justice suit against a southern California auto dealer to illustrate what can happen when you fail to have a key policy and procedures to implement it.

In Part 2, I’ll discuss a list of key bank policies and some basics on writing and maintaining them.

Policies lists

A policies list should include those technically required, and those that the bank has determined it needs based on the business it does. There is no “one size fits all” listing of policies because policies should be based on the products and services offered, the volume of each and the clientele of the bank.

Banking agencies do not have detailed lists of the policies actually required to operate a bank. I do have a list of policies the Office of the Comptroller of the Currency (OCC) requires of a de novo bank plus new additions created by new and revised laws. This should be an excellent starter document to compare against a list of policies your bank has.

  1. Lending
  2. Funds Management, Investment Securities, & Interest Rate Risk
  3. Fiduciary (Trust banks)
  4. Capital
  5. Internal/External audits
  6. Insider Activities (Reg O) *
  7. Compliance Program *
  8. Branch Closing *
  9. BSA (AML/CDD/EDD/CIP, including beneficial ownership) *
  10. Securities Transactions (for Broker-Dealers)
  11. Board Supervision
  12. Disaster Recovery *
  13. Privacy and Security *
  14. SAFE policy (see 12 CFR 1007.104) *
  15. FCRA (see 12 CFR 1022.42(a)-(c) and App E integrity of info) *
  16. FCRA (see 12 CFR 1022.82(c) (address discrepancies) *
  17. RESPA (see 12 CFR 1024.38(a) – requires reasonable policies and procedures) *

An “*” indicates a policy Compliance is often involved in. Newer requirements include a citation.

Writing and maintaining policies

Policies are often written by bank staff, reviewed by management and approved by the bank’s board. A policy should be succinct as it is broad and provides general guidance on the bank’s requirements. A procedural document on the other hand is very detailed, describes finite steps the bank requires to comply with the policy and is approved by management because it may change more frequently than a policy. In the end both documents must be employed throughout the bank and each improves decision making and answers common questions.

A common question on policies is how to keep them current and how often they need to be updated and approved. I recommend coordinating with the entire bank, Lending, Operations, Finance, Marketing, Compliance, etc. One person should be a Point of Contact (POC) for all of these policies but that does not make this person responsible for each. Create a list and include information such as the policy name, responsible department, the senior manager over the department and therefore the policy, and the date it was last updated. Break the list down so that at the board’s request, these are presented annually, semiannually, quarterly or monthly by dividing the policy count by the periods available for review.

If there is a new policy requirement or a revision such as the beneficial ownership rules added to the Bank Secrecy Act, those must be approved to implement the policy revisions as soon as possible. All others should be reviewed annually, even if the implementing rule or regulation has not changed. This is because the board needs an opportunity to revisit them and ensure that each is still guiding the bank in the direction the board wants to go.

The POC with the master list should be able to schedule the policies for review and inform the responsible areas a few months in advance that a policy they are responsible for will be reaffirmed at board meeting on a scheduled date. They should be updated as needed so that at least a month in advance the board can be advised which polices they will see at their next meeting, specified by date. If the bank has an intranet or other media to provide copies electronically, use that or indicate where and when copies will be available for review in advance of the meeting. In either case, contact information for a person knowledgeable about the policy should be listed in case the director has any questions. Then on the meeting date, the vote on the policy is fast and simple although it is advised that the knowledgeable persons on the policies being reaffirmed be available for last minute questions from board members.



By John Burnett

With enactment (as Public Law 215-174) of the Economic Growth, Regulatory Relief, and Consumer Protection Act, formerly known as S. 2155, we received the expected flurry of questions about what section 104 of the Act (Home Mortgage Disclosure Act Adjustment and Study) means for smaller-volume HMDA filers.

The Bureau, FDIC and OCC have issued some preliminary guidance information on the impact of section 104 on HMDA filing. If your bank is a HMDA reporter and you think it meets the criteria for the partial filing exemption in Section 104 for small reporters (originated fewer than 500 closed-end loans or fewer than 500 open-end loans in each of the two preceding calendar years, and didn’t receive a rating of “needs to improve” in its two most recent CRA evaluations or a rating of “substantial noncompliance” in its more recent CRA evaluation), don’t change what you’ve been doing, yet.

Section 104 provides a partial exemption to qualified financial institutions (see previous paragraph), allowing them to omit from their filings SOME of the data fields that were added to HMDA filing requirements under Regulation C beginning with 2018 data filed in 2019. Exactly what that means for HMDA filers isn’t crystal clear yet, but here’s what we do know, based on the guidance from the Bureau, FDIC and OCC:

  1. There will be no change in the LAR format for data collected in 2018. The same data fields will be filled by filers who are not affected by section 104 and those who receive the partial exemption.
  2. Filers with the partial exemption will enter an “exemption code” for the affected fields.
  3. The exemption code and the affected fields will be specified in a revised Filing Instructions Guide (FIG) that the Bureau expects to release later this summer.
  4. All LARs use the same HMDA platform. A beta version of the HMDA platform for submission of 2018 data will be available later this year for filers to test.
  5. Banking agencies have said they will not require resubmission of 2018 data reported in 2019 unless there are material errors, and that they don’t anticipate penalties for errors on 2018 data as long as there is a good faith effort to comply.

What you should be doing now

First, go back to the start of this article to find the criteria that qualify a “small reporter.” Check your origination numbers for closed-end and open-end HMDA-subject loans and dig out your two most recent CRA evaluation ratings. If you qualify as a small reporter, start talking with your vendor for the software you use to create your LARs for submission to find out what plans it has, if any, to make the change-over as easy as possible (even positive changes take effort). And keep your eyes peeled for the promised updated Filing Instructions Guide, due later this summer.


By Paul Loeffler

We get a lot of emails on a variety of topics at compliance@oba.com. This month, we are going to share some touching on the Anti-Money Laundering/Bank Secrecy Act.


Q. We received cash from a law firm that deposited $12,500; $10,000 went into the operating account and $2,500 into the IOLTA account. Do we need to ask the law firm for information on who the $2,500 benefited, or are we ok since it is under $10,000?

A. You report both deposits because they are conducted by the same individual (and because they are both conducted on behalf of the law firm). Because you have to report the IOLTA deposit, you must report the person on whose behalf it was completed. There are two such persons: the law firm and the law firm’s client.

Q. We have a new DBA account that has filed for a fictitious registration in Oklahoma with an Oklahoma address. The parent entity is organized in Texas. Do we use the Texas information and address for the parent, the Oklahoma address and the Oklahoma Secretary of State filing number for the fictitious name?

A. If you are asking about item 20 (source used to verify identity), use the Texas documents because you are reporting on a Texas entity.

Q. How do you complete CTR in the following scenario?

Customer withdraws 10,000 at teller, $140 at bank owned ATM, and  $140+$3 fee at foreign ATM.

Do you include the Foreign ATM amount? If so, do you add a second location page with the $143 on the cash out in item #42?

A. Since you know about it, you file on it. Add a second location page with the foreign ATM, showing a withdrawal of $140 (the $3 was a fee, and s/he didn’t get it in cash).

Q. Do we need to list the beneficiary as the name of the revocable trust (the account name) with the trustee as the conductor? Both have the conductor and the trust use the same Tax Identification Number. The bank’s processor will not allow us to use both.

A. If the trustee is the grantor, the transaction really only benefited the trustee as an individual. I would ignore the trust altogether.

Q. We have a County Inmate Trust account (the County deputies bring in the cash, and we had a cash transaction that triggered the teller to do a CTR. The Tax Identification Number for the account is for the County Treasurer. We think this would be exempt from CTR reporting but just wanting to make sure.

A. The account is held by an exempt “person,” a unit of local government. However, the title of the account suggests that the cash was being deposited on behalf of individuals (inmates). If more than $10,000 in cash was deposited on behalf of any one or more individuals, you would file and include information on those individuals.

Q. With the new CTR form, it is required to show the amount of cash transacted at each branch. I have a situation that cash transactions at foreign ATMs done on the same day which require a CTR. My question is how and where should I show the cash on the locations since they were not done at our bank owned ATMs?  I included it in the bottom section as cash out but received an error saying branch totals had to equal total amount of cash out.  I hope this makes since.

A. Completing the Part III (Transaction Location) portion of a CTR involving a foreign ATM (I assume you refer to an ATM not owned by your bank, not an ATM outside the U.S.) is something that FinCEN is decidedly unhelpful with. A good friend who sent FinCEN an email with detailed questions about such an ATM transaction got a voice mail that didn’t offer much guidance other than “you should be able to get this information.”

Here’s what I suggest:

Item 38 – If the ATM is a bank ATM, select depository institution. If it’s not a bank ATM or if you don’t know who owns/operates it, select “Other” and insert “Non-bank ATM” in the “Other (specify): field

Item 29 – If it’s a bank and you know who its regulator is, select it. Otherwise, use “Unknown”

Item 38 – No entry

Item 30 – Insert what you know about the name of the ATM owner/operator, whether it’s a bank or not

Item 32 – Check the unknown box

Items 32 – 35 – Address of the ATM from your transaction info

Item 36 – Look up the ZIP Code on the USPS website. Use only five digits.

Item 37 – Select the USA or territory name. There is no instruction for completing this field if the ATM is outside the US and territories.

Item 40 – No entry

If you can’t complete the CTR with that information, contact FinCEN for guidance.


Q. We received a multi-county Grand Jury Subpoena with a list of documents including any Suspicious Activity Reports filed. I know we must comply with the Right to Financial Privacy Act both Federal and State. However, our legal counsel found the following information, which I’ve never seen before, below. There are no SARs for this particular customer, but would you recommend I notify the FDIC about the request?

12 CFR §353.  Reports and Records.

(g)  Confidentiality of suspicious activity reports. Suspicious activity reports are confidential. Any bank subpoenaed or otherwise          requested to disclose a suspicious activity report or the information contained in a suspicious activity report shall decline to produce the suspicious activity report or to provide any information that would disclose that a suspicious activity report has been prepared or filed citing this part, applicable law (e.g., 31 U.S.C. 5318(g)), or both, and notify the appropriate FDIC regional office (Division of Supervision and Consumer Protection (DSC)).

A. I do suggest that you notify the FDIC. They may want to remind the issuing district attorney of 31 U.S.C. 5318(g). In your answer to the subpoena, you can simply answer that the bank has not filed any SARs on the target of the subpoena.

If, as you research for the subpoena, you identify activity in your customer’s accounts that you believe to be suspicious, you may decide to file a SAR after responding to the subpoena. Make certain that you do not mention the subpoena in the SAR.

Q. I have a customer that is bringing in checks written on the same date and in consecutive number order all written under $8,000.00 from a local business. This structuring is avoiding CTRs. The question is should I file the report on both the business and the customer together in one SAR or should it be two separate SARs?

A. The pattern of this activity certainly looks like structuring. If your customer is cashing the checks, you would, of course, be filing CTRs when appropriate. But if your customer is scheduling the cashing of the checks so that no more than one check is cashed each business day, it really looks suspect.

This is all part of one pattern of activity, regardless of the “players.” It would be more helpful to law enforcement — should they choose to follow up — if you pack this into a single report so that both parties are identified, even if one isn’t mentioned until the narrative.

June 2018 OBA Legal Briefs

• Deregulation is a reality
• Consumer loan dollar amounts adjust July 1

Deregulation is a reality

By Andy Zavoina

On May 24, 2018, President Trump signed into law, the “Economic Growth, Regulatory Relief and Consumer Protection Act” (the “Regulatory Relief Act,” P. Law 115-174, formerly S. 2155). It eases some of the regulatory restrictions imposed since the financial crisis and by the Dodd-Frank Act. It was written to assist small and medium sized banks, but it’s not all news of deregulation as it also brings back and makes permanent some other requirements. This article will provide an overview of what the Regulatory Relief Act will do for compliance and why it should be reviewed for your compliance management planning.

The Act is broken into six sections, or Titles, dedicated to separate topics — mortgage credit, access to credit, protections for veterans, consumers and homeowners, holding companies, capital, and student borrowers. This article will highlight changes important to compliance and generally discuss other areas so that for change management it can more easily be determined who in the bank needs to provide attention to them. Several sections not relating to banks are omitted in this overview.

Different sections will have different implementation dates. Some changes were effective upon enactment while others have scheduled dates and still others will require action from regulatory agencies and new rules. Of the sections with effective dates, the delays range from 30 days to 18 months or more. It’s important to note that just because a change is effective now, it may not be necessary (or even possible) to change a policy or procedure until the regulatory agencies publish new rules or modify existing ones.

Title I comprises nine sections designed to amend laws that are believed to have hampered mortgage loan production and reduced the availability of mortgages to consumers.

Section 101 effectively creates a new qualified mortgage option for banks with assets of less than $10 billion that originate and hold the mortgage in its portfolio, and consider and document the borrower’s qualifications including income, debts, and other financial resources available. The Ability to Repay analysis need not include Reg Z’s Appendix Q. Terms of the mortgage must comply with requirements pertaining to prepayment penalties and fees, and there could be no negative amortization or interest-only terms.  Such a mortgage, if later sold, must be transferred to a similarly qualified lender or it will lose its status under this qualified mortgage option.

Section 102 — [Omitted]

Section 103 amends FIRREA to exempt loans under $400,000 from general requirements for independent home appraisals in rural areas where the bank has contacted three state-licensed or -certified appraisers who could not complete an appraisal in a reasonable amount of time. Without an appraisal, the ability to sell a loan would be restricted.

Section 104 amends HMDA so that banks originating fewer than 500 closed-end mortgages and fewer than 500 open-end mortgages in each of the last two years and Satisfactory or better CRA ratings will submit data under something similar to pre-2018 rules. This section is effective immediately but will still require CFPB action because we don’t know if the reporting change is retroactive to the first of the year, or how the change will be implemented.

Section 105 –allows a credit union to extend a member business loan with respect to a one- to four-family dwelling, regardless of whether the dwelling is the member’s primary residence. The NCUA has already amended its rules to implement this change.

Section 106 amends the SAFE Act to allow certain state-licensed mortgage loan originators licensed in one state to temporarily work in another state while waiting for approval in that new state.  MLOs who move from a bank where licensing was not required to a nondepository institution (where they do need to be state licensed) get a grace period to complete the necessary licensing. This section is effective in November 2019, 18 months after enactment.

Section 107 — [Omitted]

Section 108 – Banks with assets of less than $10 billion and which made 1,000 or fewer first lien mortgages annually on principal dwellings will be exempt from TILAs escrow requirements. This change requires a Bureau Regulation Z amendment before it’s effective.

Section 109 – Current TRID rules require a three-day waiting period between the delivery of the Closing Disclosures and the actual closing. If a redisclosure is required, the three-day period may have to restart. Reg Z will be amended to  allow a waiver of this period if the APR is decreasing due to a second offer of credit from the lender.

Title II has 17 sections and focuses on regulatory relief for community banks and increasing access to credit for their customers. Many of these provisions are based on reducing or creating thresholds that are favorable to smaller banks.

Section 201 will provide community banks a less complex capital and leverage regime.

Section 202 amends the Federal Deposit Insurance Act to exclude reciprocal deposits of an insured depository institution from certain limitations on prohibited broker deposits within specified limits. This change will allow smaller banks previously hampered by FDIC premiums to compete with larger banks for larger deposit accounts.

Section 203 amends the Bank Holding Company Act to exempt community banks from the “Volcker Rule,” which prohibits banking agencies from engaging in proprietary trading or entering into certain relationships with hedge funds and private-equity funds. The exemption is for banks with less than $10 billion in assets, and trading assets and liabilities of not more than 5% of total assets.

Section 204 eases Volcker Rule restrictions on entity name sharing in specified circumstances.

Section 205 will allow depository institutions with less than $5 billion in assets to satisfy reporting requirements with a shorter or simplified Call Report for the first and third quarters of each year.

Section 206 will permit federal savings associations with assets under $20 billion to operate under the OCC with the same rights and duties as national banks, without requiring a change in charter. OCC regulations will be required to complete this change.

Section 207 Increases the threshold separating small bank and savings and loan holding companies for supervisory purposes from $1 billion to $3 billion in the Fed’s “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement.”

Section 208 will include American Samoa, the Commonwealth of the Northern Mariana Islands, and Guam in the definition of “State” in the Expedited Funds Availability Act. Reg CC’s one-day extension for certain deposits in noncontiguous states or territories will also apply to these territories. Effective 30 days after enactment, or June 23, 2018.

Section 209 — [Omitted]

Section 210 raises the asset threshold from $1 billion to $3 billion allowing more banks to be eligible for an 18-month examination cycle. Regulators will have to determine if qualified banks already scheduled for an exam under the 12-month cycle will be rescheduled for the longer 18 months.

Section 211 — [Omitted]

Section 212 — [Omitted]

Section 213 permits banks to use a scan of, make a copy of, or receive the image of a driver’s license or identification card in connection with new accounts established via the Internet. (It is not immediately clear if this authority allows a military identification card to be copied.)

Section 214 allows a bank to classify certain commercial credit facilities that finance the acquisition, development, or construction of commercial properties as regular commercial real estate exposures instead of high volatility commercial real estate (HVCRE) exposures for risk-weighted capital requirement calculations, and limits the federal banking agencies’ ability to impose higher capital standards with respect to HVCRE exposure.

Section 215 requires the Social Security Administration (SSA) to develop a database for verification of consumer information upon request by a certified financial institution.  Verifications will be provided only with the consumer’s consent (electronic signatures permitted) and in connection with a credit transaction or other circumstance under FCRA § 604. Users of the database shall pay system costs as determined by the SSA.

Section 216 – Treasury will report on the risks of cyber threats to banks and capital markets.

Section 217 – The Federal Reserve Act will be amended to lower the maximum allowable amount of surplus funds of the Federal Reserve banks.

Title III will impact the credit reporting industry and access to credit especially by servicemembers, veterans, students and those borrowing for energy efficiency projects.

Section 301 will increase the length of time a consumer reporting agency must (under FCRA) include a fraud alert in a credit file from the current 90 days to at least one year.

It will also require consumer reporting agencies to provide a consumer with free credit freezes and to notify them of this availability. Also creates requirements related to the protection of the credit records of minors.  This section is effective 120 days after enactment, or September 21, 2018.

Section 302 will require that medical debt may not be included in a veteran’s credit report until one year has passed from when the medical service was provided. It also provides enhanced abilities for veterans to dispute medical debts to be covered by VA. It also requires credit reporting agencies to provide free credit monitoring to active duty military members that would alert them to material changes in their credit scores. This section is effective one year after enactment, or May 24, 2019.

Section 303 will provide immunity from liability to appropriately trained individuals at banks who, in good faith and with reasonable care, disclose suspected financial exploitation of a senior citizen to a regulatory or law-enforcement agency. The bank will not be liable with respect to the disclosures made. Training is required before immunity is provided; the bank may provide that training.

Section 304 repeals the sunset provision of the Protecting Tenants at Foreclosure Act (which expired 12/31/2014), restoring notification requirements and other protections related to the eviction of renters in certain foreclosed properties. Effective 30 days after enactment, or June 23, 2018.

Section 305 — [Omitted]

Section 306 – [Omitted]

Section 307 – The CFPB must extend ability-to-repay regulations to Property Assessed Clean Energy (PACE) loans, which retrofit homes for energy efficiency but are often financed at high interest rates.

Section 308 – [Omitted]

Section 309 is intended to enhance consumer protections for veterans. The VA may not guarantee a refinanced home loan, unless a specified minimum time period has passed (210 days after the existing loan’s first payment, and the date the sixth payment is made) between the original loan and the refinancing. The borrower must to be able to “recoup” upfront fees in the form of lower monthly payments within 36 months. The new interest rate must be a certain minimum level below the rate of the original loan and the lender would have to provide the borrower with a net tangible benefit test showing how that the borrower would benefit from the refinancing. This section is effective as of enactment although the VA has 180 days to write implementing regulations.

Section 310 affects the use by FNMA and Freddie Mac of credit scores as a condition for purchase of a mortgage. This section is effective 180 days after enactment, or November 20, 2018.

Section 311 – The GAO is directed to report on foreclosures, homeownership, and mortgage defaults in Puerto Rico before and after Hurricane Maria.

Section 312 – [Omitted].

Section 313 – The one-year grace period during which a servicemember is protected from foreclosure after leaving military service is made permanent in the Servicemembers Civil Relief Act (SCRA).

Title IV is targeted at large banks and addresses changes in Bank Holding Company (BHC) rules.

Section 401 – The Financial Stability Act of 2010, is amended with respect to nonbank financial companies supervised by the FRB and certain bank holding companies, to:

  • increase the asset threshold at which certain enhanced prudential standards shall apply, from $50 billion to $250 billion, while allowing the FRB discretion in determining whether a financial institution with assets equal or greater than $100 billion must be subject to such standards;
  • increase the asset threshold at which company-run stress tests are required, from $10 billion to $250 billion;
  • and increase the asset threshold for mandatory risk committees, from $10 billion to $50 billion.

This section is effective 18 months after enactment, or November 2019.

Section 402 requires the appropriate federal banking agencies to exclude, for purposes of calculating a custodial bank’s supplementary leverage ratio, funds of a custodial bank that are deposited with a central bank. The amount of such funds may not exceed the total value of deposits of the custodial bank linked to fiduciary or custodial and safekeeping accounts.

Section 403 – The Federal Deposit Insurance Act will now require certain municipal obligations to be treated as level 2B liquid assets if they are investment grade, liquid, and readily marketable. Under current law, corporate debt securities and publicly traded common-equity shares, but not municipal obligations, may be treated as level 2B liquid assets (which are considered to be high-quality assets).

Title V addresses capital formation. It is omitted from this overview.

Title VI provides protections for student borrowers.

Section 601 amends TILA (and Reg Z) to revise provisions relating to cosigners of private student loans. Specifically, this prohibits a creditor from declaring a default or accelerating the debt of a private student loan on the sole basis of the death or bankruptcy of a cosigner to such a loan and directs loan holders to release cosigners from any obligation upon the death of the student borrower. (This makes private student loans more like federal student loans.) Affects loan agreements entered into on or after November 20, 2018.

Section 602 – The FCRA will allow a person to request the removal of a previously reported default regarding a private education loan from a consumer report if the lender chooses to offer a loan-rehabilitation program that requires a number of consecutive on-time monthly payments demonstrating renewed ability and willingness to repay the loan, and the consumer meets those requirements. A consumer may obtain such rehabilitation benefits only once per loan.

Section 603 – The Financial Literacy and Education Commission will establish best practices for teaching financial literacy skills at institutions of higher education.

Consumer loan dollar amounts adjust July 1

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 U.S. Consumer Price Index for Urban Wage Earners and Clerical Workers.   You can download and print the notification from the Oklahoma Department of Consumer Credit by clicking here.  You will also be able to access it on the OBA’s Legal Links page under Resources once you create an account with the OBA. In fact, you can access the Oklahoma Consumer Credit Code as well as the changes in dollar amounts for prior years from that webpage.

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, 2018, the amount provided under (b) will increase by $.50 to $25.50.

Late fees for consumer loans must be disclosed under both the UC3 and Reg Z. In order for a bank to be able to impose any late fee, the consumer must agree to it in writing. Any time a loan is originated, deferred or renewed, the bank is given the opportunity to obtain the borrower’s consent in writing to the new $25.50 portion of the late-fee formula.  However, if a loan is already outstanding and is not being modified or renewed, a bank has no way to increase the amount of late fee that the consumer has previously agreed to pay a set 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 was $1,500.00 but is adjusting to $1,530.00 for loans consummated on and after July 1, 2018.

Section 3-508B provides an alternative method of imposing a finance charge to that provided for § 3-508A loans. NOTE: The section prohibits the imposition of additional fees. No insurance charges, application fees, documentation fees, processing fees, returned check fees, credit bureau fees, or any other kind of fee is allowed  other than late or deferral fees. Further, no credit insurance 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.  The bank must also take into consideration that existing loans made under § 3-508B cannot be refinanced as or consolidated with § 3-508A loans, or vice versa.

As indicated above, § 3-508B can be utilized only for loans not exceeding a certain dollar amount which will be $1,530.00 on July 1. Further, substantially equal monthly payments are required. § 3-508B is a difficult statute to parse and understand, and I hope to make it understandable, but I have to re-educate myself annually.

The first scheduled payment cannot be due less than one 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 (so far, so good). 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 $152.64 and $357.00 and $20 for loan amounts $357.01 – $1,530.00. Here is a slightly modified version of the statute that you may enable a better understanding of these math intensive loans:

(1) On loans having a principal of $1,530.00 or less, a supervised lender (banks and licensed lenders) may charge in lieu of the loan finance charges specified in Section 3-508A, the following amounts:

(a) on any amount up to and including 152.95, a charge may be added at the ratio of $5.10 for each $25.50 of principal;

(b) on any loan in an amount in excess of $152.96 up to and including the amount of $178.50, there shall be allowed an acquisition charge for making the loan not in excess of one-tenth (1/10) of the amount of the principal. In addition thereto, an installment account handling charge shall be allowed not to exceed $15.30 per month;

(c) on any loan of an amount in excess of $178.51 but not more than $375.00, there shall be allowed an acquisition charge for making the loan not in excess of one-tenth (1/10) of the amount of the principal. In addition thereto, an installment account handling charge shall be allowed not to exceed $17.85 per month;

(d) on any loan of an amount in excess of $375.01 but not in excess of $510.00, there shall be allowed an acquisition charge for making the loan, not in excess of one-tenth (1/10) of the amount of the principal. In addition thereto, an installment account handling charge shall be allowed not to exceed $20.40 per month.

(e) on any loan in an amount in excess $510.01 of up to and including the amount of $765.00, there shall be allowed an acquisition charge for making the loan not in excess of one-tenth (1/10) of the amount of the principal. In addition thereto, an installment account handling charge shall be allowed not to exceed $22.95 per month;

(f) on any loan of an amount in excess of $750.01 but not more than $1,530.00, there shall be allowed an acquisition charge for making the loan not in excess of one-tenth (1/10) of the amount of the principal. In addition thereto, an installment account handling charge shall be allowed not to exceed $25.50;

(2) The maximum term of any loan made under the terms of this section shall be one (1) month for each Ten Dollars ($10.00) of principal up to a maximum term of eighteen (18) months. Provided, however, that under subsections (e) and (f) the maximum terms shall be one (1) month for each Twenty Dollars ($20.00) of principal up to a maximum term of eighteen (18) months.

(3) The minimum term of any loan made under the terms of subsections (b) through (f) of this section shall be no less than sixty (60) days. Any loan made under the terms of this section shall be scheduled to be payable in substantially equal installments at not less than thirty-day intervals, with the first installment to be scheduled to be due not less than one (1) calendar month after the date such loan is made.

(4) Loans made under this section may be refinanced or consolidated according to the provisions of this section, notwithstanding anything in this act to the contrary. When a loan made under this section is refinanced or consolidated, installment account handling charges on the loans being refinanced or consolidated must be rebated pursuant to the provisions regarding rebate on prepayment (Section 3-210 of this title) as of the date of refinancing or consolidation. For the purpose of determining the amount of acquisition and installment account handling charges permitted in relation to the refinancing or the consolidation of loans made under this section, the principal resulting from the refinancing or consolidation is the total of the unpaid balances of the principal of the loans being refinanced or consolidated, plus any new money advanced, and any delinquency or deferral charges if due and unpaid, less any unearned acquisition and installment account handling charges imposed in connection with loans being refinanced or consolidated.

(5) On such loans under this section, no insurance charges or any other charges of any nature whatsoever shall be permitted.

(6) Except as otherwise provided, the acquisition charge authorized herein shall be deemed to be earned at the time a loan is made and shall not be subject to refund. Provided, however, in a loan made under this section which is prepaid in full, refinanced or consolidated within the first sixty (60) days, the acquisition charge under this section will not be fully earned at the time the loan is made, but 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. On the prepayment of any loan under this section, the installment account handling charge shall be subject to the provisions of Section 3-210 of this title as it relates to refunds. Provisions of Section 3-203 of this title as it relates to delinquency charges and Section 3-204 of this title as it relates to deferral charges shall apply to loans made under the section.

Lenders making “508B” loans should be careful and promptly change to the new dollar amount brackets, and the new permissible fees within each bracket on July 1st. Because of peculiarities in how the bracket amounts are adjusted, using a chart with the old rates after June 30 (without shifting to a revised chart) might result in excess charges for certain small loans and violations of the U3C provisions. The Department of Consumer Credit has provided a 3-508B Loan Chart including Refunds in prior years, and there will be a link on the OBA’s “Oklahoma law-related links” page when it is provided.

American Bank Systems (“ABS”) used to annually update its § 3-508B pricing calculator but hasn’t done so since 2015, but since there were no changes in dollar amounts for 2016, it was accurate until July 1, 2017. However, ABS did provide a § 3-508B “Loan Pricing Matrix” for 2017, (link on OBA Legal Link webpage) and hopefully will do so again for 2018. ABS also has provided a § 3-508A “Maximum Annual Percentage Rate Chart” for many years including 2017, and once it is out for 2018, a link will be provided on the OBA Legal Links page for this handy Matrix.

3-511 Loans

I get calls when lenders get a warning from their loan origination systems that a loan may exceed the maximum interest rate, but invariably 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, for which loan amounts also adjust annually. Here is the section with the amounts as effective for loans made on and after July 1, 2018, in bold type. The italicized portion of the statute is nearly always the reason for the notification:

Supervised loans, not made pursuant to a revolving loan account, in which the principal loan amount is $5,100.00 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 $1,530.00, or

(b) over a period of not more than thirty-seven (37) months if the principal is $1530.00 or less.

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 $5,000.00 and increases to $5,100.00 on July 1.

May 2018 OBA Legal Briefs

  • Beneficial ownership rules update
  • Policies
  • Appraisals

Beneficial ownership rules update

By John S. Burnett

By the time you read this, the May 11, 2018, compliance date for FinCEN’s Beneficial Ownership requirements will be only a couple of days away or already have past. As you know by now, FinCEN issued a second set of FAQs on the Beneficial Ownership requirements and the rest of its Customer Due Diligence rule on April 3. And, as the compliance date looms closer and closer, the number of questions that we have fielded on the rule has grown ever larger.

In this article, I will address some of the questions we have handled most often, from Oklahoma bankers and others.

Under the rule, when a legal entity customer opens a new account on or after May 11, 2018, the bank must obtain from the legal entity customer the names and identity information of up to four beneficial owners of the legal entity and of an individual in control of the entity. The bank then has to verify the identities of those individuals and maintain records of the information supplied by the customer and of the bank’s verification.

To understand the rule, you have to know what types of customer relationships are covered, what constitutes a new account and what the terms “legal entity customer” and “beneficial owner” mean.

Accounts covered

What is an account under the Beneficial Ownership requirements? The list is exactly the same as the list of accounts covered by the Customer Identification Program (CIP) requirements. In fact, rather than provide a separate definition, the Beneficial Ownership rule says to use the definition in § 1020.100(a) of FinCEN’s regulations, which is the definition of account for purposes of the CIP rules.

A formal banking relationship established to provide or engage in services, dealings, or other financial transactions including a deposit account, a transaction or asset account, a credit account, or other extension of credit. Account also includes a relationship established to provide a safety [Sic; should be “safe”] deposit box or other safekeeping services, or cash management, custodian, and trust services.”

There are some exceptions to the definition. If there is no formal banking relationship established, there is no account. So, check cashing, wire transfers and sales of checks or money order aren’t “accounts.” Also excluded are accounts that the bank “acquires through an acquisition, merger, purchase of assets, or assumption of liabilities,” and accounts opened for the purpose of participating in an employee benefit plan under ERISA.

Related question: If your bank purchases a loan to a legal entity customer from an auto dealer, do you need to obtain beneficial ownership information on the legal entity customer?

Answer: It depends. If the dealer is the creditor and you purchased the loan, the transaction qualifies as a “purchase of assets” for exclusion from the definition of “account,” and won’t be subject to the beneficial ownership rules. But if the dealer extends the credit as your agent, the bank is the creditor, the loan transaction is an account under the CIP and beneficial ownership rules, and you will have to obtain a beneficial ownership certification from the legal entity customer.

New account

The beneficial ownership rule doesn’t apply to accounts opened before May 11, 2018 (you may need to obtain beneficial ownership information on some of these pre-existing accounts later). It applies to new accounts on or after May 11. It’s important to understand that FinCEN’s definition of “new account” doesn’t agree with a banker’s perspective. That’s because FinCEN considers loan renewals and renewal of auto-rollover certificates of deposit to be new accounts, too. On the other hand, bankers often refer to an extension of a safe deposit box lease as a renewal, but FinCEN has not said that a lease extension is a new account. That’s because there isn’t really a renewal involved. There is only a periodic payment on an “at will” lease.

If loan renewals and rollovers of CDs are new account events, does your bank need to obtain a new certification of beneficial ownership for each renewal or rollover if the account relationship is with a legal entity customer? Not necessarily! FinCEN created an optional “workaround” that you can use to avoid having to get a new certification with each rollover or renewal. You can have the legal entity customer sign a statement on or with the next certification (or a later certification if you don’t add it to the first certification after May 11) that the legal entity customer agrees to notify your institution if any of the information on the certification changes. That statement will allow that certification to cover the current and all future rollovers/renewals of the CD/loan until the legal entity customer notifies you the information has changed or until your bank has reason to believe that it’s no longer correct.

Without the statement, you will need a new certification of beneficial ownership at each rollover/renewal of the account.

Legal entity customer

The beneficial ownership requirements only apply to a “legal entity customer” as that term is defined in the regulation. A legal entity customer is a—

  • Corporation
  • Limited liability company (LLC)
  • Other entity created by the filing of a public document with a Secretary of State or similar state office, including a business trust, or any similar entity formed under the laws of a foreign jurisdiction
  • General partnership
  • Limited partnership

“Legal entity customer” does not include a sole proprietorship (including a sole proprietorship of spouses, when allowed under state law, who have not formed a partnership), an unincorporated association, or natural persons opening accounts on their own behalf. A trust (other than a statutory or business trust created by a public filing with a Secretary of State or similar office) is also not a legal entity customer.

Excluded entities. There is also a lengthy list of specific exclusions from the definition of legal entity customer in § 1010.230(e)(2) of the regulation. The list includes businesses that are legal entities that are subject to federal or state regulation and information on their beneficial ownership and management is available from federal or state agencies. You should review that section of the regulation for the complete list, but I’m highlighting here three groups in that list, because of the numbers of questions we have received about them.

The first group of excluded entities includes financial institutions regulated by a federal functional regulator (Federal Reserve Board, OCC, FDIC, NCUA, etc.), banks regulated by a state banking regulator, bank holding companies, and savings and loan holding companies.

The second group includes state-regulated insurance companies. These are companies that issue insurance policies, not insurance agencies that sell those policies.

And the third group are “persons” that are exempt from CTR filing requirements under § 1020.315(b)(2) through (5) of FinCEN’s regulations. These are commonly referred to as “phase one” CTR exemptions, which include:

  • Any department or agency of the United States, of any State, or of any political subdivision of any State. This includes federal agencies, a state, the District of Columbia, a tribal government, state agencies, county, city or local government bodies, public school districts, etc.
  • An entity established under federal, state or local law or under an interstate compact between two or more states, that exercises governmental authority
  • Any entity other than a bank whose common stock or other equity interests are listed on the New York Stock Exchange, American Stock Exchange or whose common stock or equity interests have been designated as a Nasdaq National Market Security (with exceptions noted in the rule) and subsidiaries of such entities at least 51% owned by such entities.

If any of the excluded entities opens a new account with your institution, you are not required to obtain beneficial ownership information from them.

Beneficial owner

There are two “prongs” in the regulation’s definition of “beneficial owner,” the ownership prong and the control prong.

Ownership: An individual who owns, directly or indirectly, 25% or more of the equity interest in the legal entity customer. Direct ownership means the individual’s equity interest in the legal entity is not through another entity such as a trust, corporation, LLC, etc. Indirect ownership means that the individual is an owner of an entity that is an owner of the legal entity customer.

Example 1: John Jones, Mary Smith and Harry Comick each own 1/3 of ABC Inc. John, Mary and Harry are direct owners, each with a 33-1/3% interest, and each would be a beneficial owner of ABC Inc.

Example 2: DEF LLC is 50% owned by DEF Inc. and 50% owned by Jones & Smith, Inc. There are no individuals with direct ownership of DEF LLC. The sole owner of DEF Inc. is Harry Comick; Mary Smith and John Jones each own half of Jones & Smith, Inc. Therefore, Comick, Smith and Jones are (indirect) beneficial owners of DEF LLC. Harry Comick owns all of DEF Inc. and its 50% ownership of DEF LLC, so he is a 50% beneficial owner of DEF LLC. Mary Smith and John Jones each own half of Jones & Smith, Inc., and its 50% ownership of DEF LLC, so they are each 25% beneficial owners (50% of 50%) of DEF LLC.

There may be so many individual owners (directly or indirectly) that none of them owns 25% of your legal entity customer. In such cases, there would be no individuals identified as a beneficial owner under the ownership prong. And, because 25% ownership is the threshold for listing a beneficial owner, there won’t be more than four such individuals under the ownership prong.

Some banks may have adopted a risk-based policy of identifying individuals with less than 25% ownership (for example, they may use an ownership percentage threshold of 20% or 10%), and they may list more than four beneficial owners under the ownership prong. Such banks are exceptions. The regulation requires that the threshold can’t be greater than 25%, and most banks will use the 25% threshold.

If a trust owns directly or indirectly 25% or more of a legal entity customer, the regulation requires that the trustee (one trustee if there is more than one) of the trust be listed as the beneficial owner (labeled as trustee), and you don’t need to get any other information on owners of the trust.

If an excluded entity (one listed in § 1010.230(e)(2), discussed earlier) is a direct or indirect owner of 25% or more of the legal entity customer, no individual needs to be identified as a beneficial owner with respect to the excluded entity’s ownership.

Beneficial owners may be, but do not have to be, signers on the account being opened or other accounts of the legal entity customer.

There are two “special cases” in the regulation for which you aren’t required to obtain ownership prong information from a legal entity customer:

  • A pooled investment vehicle operated or advised by a financial institution that’s not an excluded entity under § 1010.230(e)(2), because ownership of these vehicles is so fluid and frequently changing that it’s impractical to track.
  • Any legal entity that is established as a nonprofit corporation (or similar entity) and has filed organizational documents with the appropriate state authority, since such entities don’t have owners. Approval as a charity under IRS rules is not a requirement.

Legal entity customers fitting either of those “special case” descriptions must, however, provide the name of a control-prong individual (see below).

Control: The rule also defines as a beneficial owner under the control prong a single individual with significant responsibility to control, manage, or direct the legal entity customer. Examples in the regulation include an executive officer or senior manager (chief executive officer, chief financial officer, chief operating officer, managing member, general partner, president, vice president, treasurer) or other individual who regularly performs similar functions.

The title of the individual is not important (although it is one of the pieces of information to be collected); the individual’s duties or responsibilities for the legal entity customer are what matters. In the case of a local office, store or branch (not a franchisee) of a larger company, the control prong individual won’t be a local manager. He or she should be someone at the corporate level with control, management or direction responsibilities.

The individual identified under the control prong may be, but does not have to be, a signer on the account, and may or may not be an owner of the entity.

Two-part process

The legal entity customer (the individual opening the account) is to provide the names and identity information for the individuals identified under the ownership and control prongs of the rule. The information to be supplied includes the same information you are to collect on an individual open a new account under the CIP rules:

  • Name (and title for control-prong individual)
  • The individual’s residential or business street address (the same rules applicable to the CIP address requirement apply here)
  • Date of birth
  • Identifying number (SSN for U.S. persons; SSN, passport number and issuing country, or other similar number, including an alien ID card number or the number and issuing country of any other government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard).

The representative of the legal entity customer must certify, to the best of his/her knowledge, the completeness and accuracy of the information provided.

The bank is required to verify the identity of the individuals listed in the certification. The bank is not required to make its own inquiry into the beneficial ownership of the entity unless it has information leading the bank to doubt the completeness or accuracy of the information provided.

The bank’s verification of the identity of the individuals should use methods similar to those used in the bank’s CIP (the same rules describing the resources to be used apply to both CIP and Beneficial Ownership). They don’t have to be identical processes. For example, you are permitted under the Beneficial Ownership rules to accept a copy of an ID document, and you cannot use a consumer report (as defined under the Fair Credit Reporting Act), because you don’t have a permissible purpose to pull such a report under these rules. You may use identity-verification services that provide information that isn’t a consumer report.


You are required to obtain a certification of beneficial ownership at or prior to the time the new account is opened. This includes renewal or rollovers of loans and auto-rollover CDs (but see the “workaround” discussion under “New accounts” earlier in this article).

If the legal entity customer does not provide a certification of beneficial ownership at or prior to opening the account, the account should not be opened. There is no grace period. If you aren’t able to get a certification of beneficial ownership at or before a loan renewal or CD rollover, you should not complete the loan renewal or CD rollover unless an earlier certification included the statement described in the “workaround” discussion and you don’t have information calling the earlier certification into question.

Ideally, the bank’s verification of identities will also be completed before the new account is opened. However, you can permit it to be completed within a reasonable time after the new account is opened. You should keep that reasonable time as short as possible.

If you are unable to verify the identity of an individual listed as a beneficial owner (ownership or control prong), you must take steps to check the information supplied by the legal entity and other reasonable extra steps (including, perhaps, contacting the individual owner(s)) to complete the verification. If the extra steps still don’t complete the verification of identity, your bank should have a procedure in its program for closing the account, when possible. At minimum, no renewal or rollover of the account should be permitted until verification of identity of the owner(s) can be completed.

Form, format and content of certification

You do not have to use the form in Appendix A to § 1010.230. The Appendix A form is not a “safe harbor” form. Its principal purpose is to indicate the information that is to be supplied by the legal entity and to indicate the need for a certification of that information. It also includes instructions to the legal entity’s representative that you should consider including in whatever form and format your bank uses.

You can collect the beneficial ownership information from the legal entity in any way you wish as long as you are able to document the certification and comply with the recordkeeping requirements of the rule, which are virtually identical to those applicable to CIP records.


By Andy Zavoina

Before your eyes begin to glaze over I need to explain to you why I am writing about policies your bank must have (and those it should have). There are few “required” policies and many, many more policies your bank should have based on what your bank does in the marketplace. Policies provide direction to staff, typically from senior management and the board of directors. They are based on the goals of the bank, its strategic plan for where it wants to be in the future and how it wants to get there. Policies answer questions.

An examiner or consultant may suggest the bank have a policy on a topic for one of three reasons:

  1. It is a requirement in a law or regulation.
  2. It would be good to have this guidance because this issue comes up frequently.
  3. It would be good to have this guidance because this issue comes up infrequently, but the risks due to non-compliance are high.

Here is the impetus for this article, and it is IMPORTANT. The Department of Justice (DOJ) has sued an auto dealer because it repossessed one vehicle without a court order. It was aware of the borrower’s military status, but it had no Servicemembers Civil Relief Act (SCRA) policy. The DOJ maintained that, absent a policy and procedures, the lender does not know if it has violated the law other times. Although there has been only one complaint, DOJ is proceeding as though there is a pattern or practice of violations.

For years bankers have heard that examiners want banks to have a policy addressing the SCRA. National banks have been told to expect exams on the SCRA each time examiners are in the bank. Many banks have told me they have very few or no SCRA designated loans. This puts the need for a policy pertaining to the SCRA in category three above.

I must ask those banks: Without a policy or procedures, how does a bank employee know when a customer calls and mentions “active duty” or “joining the service” or anything similar, whether the whole account relationship needs to be flagged as subject to SCRA protections? How does the bank know before it implements a repossession order or foreclosure proceedings whether a borrower is protected under the SCRA? Policies and procedures are called for because they can guide employees to listen for buzzwords about being in the service, to search the military database to verify SCRA protected status, to recognize that the protections on a vehicle are different than those on a mortgage and to understand that an overdraft and a safe deposit box may also be subject to SCRA protections.

What about banks that do very little business with servicemembers? I recently asked a banker if her bank had a National Guard unit nearby, and she answered “Yes.” So, they have a lot of National Guardsmen but few active duty military. Bear in mind that in April 2018, the Defense Secretary signed an authorization, as requested by the president, for up to 4,000 National Guard troops to be activated for border security. These guardsmen will be activated but likely for short periods of time. Many guard units could be activated to protect the border on a rolling basis.

Revisiting the definition of “military service” in the SCRA and commentary I have added from my teaching documents, National Guard and military service includes, “service under a call to active service authorized by the President or the Secretary of Defense for a period of more than 30 consecutive days under section 502(f) of title 32, United States Code, for purposes of responding to a national emergency declared by the President and supported by Federal funds (normally Title 32 activation is not for more than 30 days and often Title 32 is not considered military service);”

Each bank would need to be familiar with the orders, but these Guardsmen will be paid by federal dollars based on what I have read and are being called up by the president and there is a good chance that if they serve more than 30 days they could be entitled to these SCRA protections. This means it is an excellent time to revisit the SCRA if the bank has not done so recently.

The March 28, 2018, case that prompted this article is United States vs California Auto Finance (CAF), Case No. 8:18-cv-00523. CAF is a large sub-prime lender in Southern California and the southwest. The suit alleges CAF repossessed a servicemember’s car after being made aware the borrower was in the service.

Andrea Starks purchased a car in Glendale, AZ in September 2015. She made her first payment in October 2015 which was pre-service and meets the requirements for SCRA protection. She enlisted in April 2016 and reported for active duty on May 9, 2016, the same day her vehicle was repossessed. Two days after enlisting she provided CAF with a copy of her orders. She would not have been protected as a reservist being called to active duty based on receipt of her orders, but rather when she met the definition of “military service” which, in this case, would be when she was paid by the government. Had the vehicle been repossessed the day before, Starks would not have been technically protected. CAF sold the vehicle on or about May 25, 2016.

This was the single complaint against CAF made by Starks to the DOJ in November 2016. There were no other complaints against CAF mentioned. In describing the violations committed by CAF, the DOJ explains the facts it reviewed in its investigation, which began in December 2016.

  • The Defense Manpower Data Center (DMDC) is a free database allowing lenders to determine is a person is protected under the SCRA. The CAF did not verify her status prior to repossessing the vehicle. (It would be interesting to know if Starks would have been shown as currently serving, being her first day.) Regardless, CAF had already been given a copy of Starks orders by Starks herself.
  • This was pre-service debt under the SCRA.
  • No court order was obtained prior to the act of repossessing the vehicle.
  • The CAF believed at the time, and still as of this court filing, that only deployment orders would have provided protections to a servicemember. (This is incorrect. It is the act of serving, whether that be in the continental United States or overseas.)
  • The CAF had and still has no policies or procedures to provide staff with SCRA compliance guidance.
  • Because of a demonstrated lack of knowledge and guidance (the policy or procedures) the DOJ stated they “may have repossessed motor vehicles without court orders from other servicemembers” and as such viewed this as a pattern or practice of violating the SCRA protections and requirements of the SCRA. This means that Starks and other servicemembers have suffered damages.
  • The actions of CAF were “intentional, willful, and taken in disregard for the rights of servicemembers.”

This case begs for a discussion on the requirement for having a policy and procedures. Of the three reasons stated above, the SCRA would fit under reason two or three because there is no legal requirement for a policy in the Act. Examiners have been urging banks to create them and to ensure that repossession and foreclosure procedures are expressed, trained on and followed under the SCRA rules. Some banks may have resisted creating such documents because it would be one more thing to keep up with and they didn’t feel it was needed because it wasn’t required, and the low volume of accounts did not demand it. The DOJ might be accused of practicing regulation by enforcement. In many cases however, a servicemember can be viewed as close to a protected person under fair lending laws as any minority because they do have unique rights that lender must be aware of. The fact that the lender violated the law, expressed a misunderstanding of the requirements, and demonstrated no desire to immediately remedy the issues it created did not help. The CAF did not create a policy or procedures to provide guidance or repossession requirements and it did not attempt to replace the vehicle or compensate Starks when the problems came to light.

It is important to note the fact that the CAF is not being penalized because it did not have an SCRA policy which is not legally required; it is being pursued because it incorrectly interpreted the SCRA requirements, had no guidance information from which to operate, and did not attempt to correct those deficiencies after it was being investigated for violations. Another important note is that “ignorance is not bliss.” Because there was no policy or procedures to follow, CAF could not say it has tracked or provided special handling for SCRA protected loans. Even though there was only a single complaint against CAF, its own lack of knowledge is forcing the CAF to prove it is innocent on multiple counts of a violation. There is no evidence proving this repossession and sale was part of a pattern or practice, but the CAF cannot prove otherwise. Whether you agree with the DOJ position or not, the CAF will pay to settle this claim or pay to prove its innocence.

In Part 2 to this article, I’ll provide a list of key bank policies and discuss how policies can be written and kept current.


By Andy Zavoina

On April 2, 2018, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a final rule that increased the threshold for commercial real estate transactions requiring an appraisal from $250,000 to $500,000.

Originally the 1994 figure of $250,000 was going to be raised to $400,000 but it was determined that the $500,000 limit would further reduce the regulatory burden and the number of transactions requiring appraisals while not exposing the loans to excessive risk.

The bank may now use evaluations for those loans up to the new limit if desired. Evaluations can provide the market value of real estate that will secure a loan while avoiding the need for a formal appraisal prepared in accordance with the Uniform Standards of Professional Appraiser Practices (USPAP). They do not have to be completed by a state licensed or certified appraiser. Evaluations can both expedite the loan process and reduce costs when commercial real estate is involved.

Note that this change is for commercial accounts and not loans for 1-4 family residential properties.


April 2018 Legal Briefs

  •  Watch that tax advice!
  • Credit reports are changing again
  • Telephone Consumer Protection Act – Update
  • Sellers’ cost on borrowers’ closing disclosures

Watch that tax advice!

By Andy Zavoina

When it comes to tax deductibility, “watch that tax advice.” Let’s get straight to the point, considering it is April and income taxes are due. I want to caution banks, and especially their marketing departments and lenders about providing any tax advice, implied or express. “Sure, we can hook you up with a home equity loan, and the interest you pay is all deductible, so you get that added benefit” are words that should never be spoken by your bankers or seen in your advertisements.

That said, I am not a tax adviser and am not providing any tax advice in this article. As a non-expert on taxes, I am providing information based on what I have read and understand. Banks should consult their own tax advisers to better understand the implications of the changes to the tax laws.

Let’s first revisit § 1026.16(d)(4) of Regulation Z, which addresses advertising requirements for home equity plans in Reg Z and in particular, any mention of the tax implications. The regulations states:

An advertisement that states that any interest expense incurred under the home-equity plan is or may be tax deductible may not be misleading in this regard. If an advertisement distributed in paper form or through the Internet (rather than by radio or television) is for a home-equity plan secured by the consumer’s principal dwelling, and the advertisement states that the advertised extension of credit may exceed the fair market value of the dwelling, the advertisement shall clearly and conspicuously state that:

(i) The interest on the portion of the credit extension that is greater than the fair market value of the dwelling is not tax deductible for Federal income tax purposes; and

(ii) The consumer should consult a tax adviser for further information regarding the deductibility of interest and charges.

The commentary to this section (16(d)-3) goes on to say:

An advertisement that refers to deductibility for tax purposes is not misleading if it includes a statement such as “consult a tax advisor regarding the deductibility of interest.” An advertisement distributed in paper form or through the Internet (rather than by radio or television) that states that the advertised extension of credit may exceed the fair market value of the consumer’s dwelling is not misleading if it clearly and conspicuously states the required information in §§ 1026.16(d)(4)(i) and (d)(4)(ii).

This is more important now than ever, even though this language has been in Reg Z for many years, and here is why. On December 22, 2017, the president signed the Tax Cuts and Jobs Act (TCJA), the first piece of major tax legislation in over 30 years. The $1.5 trillion tax code rewrite was described as “historic” and about jobs. Soon after the Act was signed into law, many companies, including banks, were announcing bonuses for employees. But even if some tax programs are helpful, you can bet there is another side that is detrimental to some folks. Interest deductions will likely be a part of this balance sheet – in the detrimental column.

While the tax code changed, interpretations are still based on defined terms and many of those terms remained the same. In Section 163(h) of the Internal Revenue Code it says that no deduction for personal interest is allowed to an individual. But there are some exceptions to this rule that have been unofficial selling points for home ownership and equity loans. For many years interest paid for a “qualified residence” was an allowable federal income tax deduction. What is considered “qualified residence interest” includes the interest expense for the acquisition of a qualified residence and interest paid on a home equity loan. For married taxpayers there was an aggregate limitation of $1,000,000 of debt for deductibility. A reduced limitation of $100,000 applied to home equity indebtedness.

So, now we also need to define “acquisition indebtedness” which is the debt incurred to acquire, construct or substantially improve any qualified residence when the loan is secured by that residence. Further, a “qualified residence” is the principal residence of the taxpayer and one other residence. Home equity indebtedness is any debt (other than the already defined acquisition indebtedness) secured by a qualified residence.

Again, there are specific limitations in the prior tax code allowing a married couple to have $1,100,000 in qualified residence interest debt of which $100,000 could be used for purposes other than acquisition indebtedness, commonly an equity loan. Acquisition indebtedness includes refinanced debt, but only to the extent of the debt prior to the refinance.

You may recall hearing some commenters on the TCJA say it was good for now, when the companies were announcing bonuses, but watch out for the future. The reason the numbers above for debt and interest qualifications are important is because there are two key areas that are changing. These changes are temporary for now and will be in effect through 2025.  The limitation on the amount of acquisition indebtedness that qualifies for the deductibility of interest for married taxpayers is now $750,000. The limitation applies for 2018 and beyond and is applied to acquisition indebtedness incurred after December 14, 2017. Acquisition indebtedness incurred before December 15, 2017, continues to be capped at $1,000,000.

Another change applies to those home equity loans. Originally interest on home equity indebtedness was thought to be non-deductible beginning in 2018. But on March 19, 2018, the IRS issued a statement that interest paid on home equity loans is still deductible under the new tax law if it is used for home improvements. Emphasis is on the “if it is used for home improvements” part of that statement.

The Tax Cuts and Jobs Act of 2017, enacted December 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan,” according to the IRS statement. “Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.

And this is exactly why borrowers need to see or hear “You should consult a tax adviser for further information regarding the deductibility of interest and charges” when you advertise your mortgage and equity loans. Failure to qualify any indication of deductibility in your ads may be considered a deceptive practice.

As the new rule is understood, an equity loan used for a qualified purpose still enjoys a tax deduction. There is no grandfathering, however, meaning that your home equity borrowers writing off interest as they file their returns for last year, may not be able to do so again.

Here is a question that banks should begin to consider, and ask of the IRS and elected officials, because clarification will be needed. Let’s assume you have a borrower with a home equity loan now. Will there be changes in Form 1098 reporting for 2018 interest? Will borrowers have to indicate what portion of their home equity loans represent home acquisition costs, and lenders report deductible and non-deductible interest? Or will we stick with the current practice of reporting all the interest paid on equity loans, with the responsibility on the taxpayer to determine how much can be deducted? I do not believe many core systems will compute the interest separation based on the purpose now, meaning major work could be required. Answers will be needed before any new coding is done.

More questions: Will borrowers even want home equity loans when deductibility is no longer an advantage? Will they begin paying down home equity loans faster than they have historically, and how will you factor these considerations into your next budget forecasts? Your home and home equity borrowers may also want answers if they are not aware of the changes when they file next year. How will you respond?


Advertisements – State something to the effect of “You should consult a tax adviser for further information regarding the deductibility of interest and charges.”

Training – To respond to customer’s questions with “The tax laws have changed, and you should consult a tax adviser for further information regarding the deductibility of interest and charges.”

Considerations – Does the bank want to urge banking associations and elected officials to seek out answers on the tax reporting requirements that may be changed in nine short months?

Budget – Determine through internal and external resources what the bank projects as to the future of home equity products currently offered. Will they rise, fall, need adjusting for maximum appeal, etc.?


Credit reports are changing again

By Andy Zavoina

The National Consumer Assistance Plan (NCAP) is an initiative of the big three credit reporting agencies, Equifax, TransUnion and Experian. It was launched in 2015. The NCAP’s goals include improving data accuracy and quality and making it easier for consumers to understand their credit information. Several of the current goals coincide with the multistate investigation and subsequent legal agreement in 2015 between the three credit reporting agencies and 31 state attorneys general. Four of the accomplishment listed on the NCAP website include:

  1. Allowing consumers who obtained a free report and challenged entries to obtain another free report sooner than waiting a year to see the effects of any adjustments.
  2. Having a 180-day waiting period before medical debt information is reported, allowing time for insurance companies to remit payments
  3. Omitting debts from credit reports which were not a result of a contract or other agreement (such as parking tickets or traffic fines)
  4. Paying special attention to the credit report files of victims of fraud who have items reported against them that are not theirs, and improving communications about credit disputes.

It was also NCAP which just over a year ago established new standards for the reporting of public records information on consumers’ credit files. Effective July 2017, civil judgments and tax liens require at least the consumer’s name, address and Social Security number or date of birth to be considered sufficiently verified and identified to be placed on a consumer’s credit report, and the data furnisher of that public record information must visit the applicable courthouse at least once every 90 days to obtain newly filed and updated public records so that it is known the data is current.  Early estimates were that 95 percent of the civil judgments and more than 50 percent of tax liens were going to be dropped for failing to meet these new standards and that credit scores could increase as a result. It was later believed that essentially all civil judgments were removed but that when these problems existed on a credit report, there were other problems on the credit report and credit scores would increase minimally.

The Consumer Financial Protection Bureau released a study entitled “Public Records” in February 2018 that stated, “when all judgments were eliminated from records in July, the credit scores of consumers with active civil judgments increased. For those with an active judgment (about 8 million consumers), 65 percent experienced an increase in credit score greater than 5 points. For those with only inactive judgments (about 2 million consumers), 46 percent experienced such an increase in credit score. The score changes for both civil judgments and tax liens show that consumers with these public records generally experienced score changes that were either around zero or 15 points.” The CFPB put consumer credit scores in five categories: deep subprime, subprime, near prime, prime and super prime. After studying credit reports over a four-month period, it found 75 percent did not move up a category as a result of the data exclusions. Of consumers who did see an improvement in their credit scores, particularly those in the deep subprime to subprime category, about 6 percent saw an increase to near prime or above from June until September as the omissions took effect. Only 0.24 percent of ALL consumers with credit reports saw an increase.

Phase two of NCAP is about to take effect. Equifax, Experian, and TransUnion will stop reporting tax lien data and all tax liens will be removed from consumer credit reports in April 2018. That will remove an estimated 5.5 million tax liens and more consumers’ credit scores may creep up another few points. Bankruptcy reports are the public records that will remain and those have basically been unchanged.


Telephone Consumer Protection Act – Update

By Andy Zavoina

The Telephone Consumer Protection Act (TCPA) is in the news again. There was a court ruling last month that can affect your bank. Unfortunately, the ruling prompted more questions than it answered. Here’s a little background on both the TCPA and the ACA International case.

The TCPA applies to your bank when it makes calls to consumers. The TCPA regulates and restricts the use of artificial or prerecorded voice calls to make unsolicited telemarketing calls or faxes to residential telephone lines, or to call or text cell phones. It also prohibits the making of any non-emergency call using an automatic dialing telephone system (ADTS) without prior express consent. Keep reading because how an ADTS has been defined may surprise you (and we all know that definitions can make all the difference in the world)!

The Federal Communications Commission (FCC) is not a government agency that bankers routinely follow. The FCC is, however, the agency with “ownership” over the TCPA. Under Chairman Tom Wheeler, the policies of the FCC expanded the reach of the TCPA to the point that the judge in the ACA International case concluded that by definition, the FCC had made every smartphone in the country a federally-regulated autodialer.

The TCPA defined an “automatic telephone dialing system” (the ATDS or an autodialer) as “equipment which has the capacity to store or produce telephone numbers to be called, using a random or sequential number generator, and, to dial such numbers.” That definition appears specific, but the FCC interpreted much more broadly.

In 2003, the FCC ruled that “predictive dialers” include equipment that can dial numbers, and when attached to certain software, assist in connecting an available agent to the calls. They concluded predictive dialers were autodialers under the TCPA because such equipment “had the capacity to dial numbers without human intervention.” In 2015 the FCC’s TCPA Declaratory Ruling and Order attempted to update its interpretations of the TCPA, which were technologically obsolete. It redefined which equipment fell within the definition of “autodialer,” specified liability for calls to reassigned telephone numbers, and provided consumers with a right to revoke consent by any reasonable means. The definition created by this ruling expanded the reach of the TCPA to regulate virtually any software-enabled dialing device and a cell phone meets the 2015 description. The FCC’s rulings defining a vague term like ATDS, were given deference by courts and are used by those suing a company accused of violating the TCPA.

The FCC’s goal in using these definitions was to give itself the ability to enforce the law against unscrupulous telemarketers. But it opened the door for private TCPA lawsuits against companies that were trying to discuss products and services with their customers at phone numbers they had been provided.

The TCPA is also intended to prevent calls to cell phones without the express consent of the “called party.” If you violate that restriction, recipients of unlawful calls or texts may seek injunctive relief in a private action, but most likely will go for the wallet. Liability for a violation is the greater of actual damages or statutory damages of $500 per violation or treble damages, $1,500, for willful or knowing violations.

As to violations, an FCC ruling stated the, “TCPA requires the consent not of the intended recipient of the call, but of the current subscriber.” This meant that if the bank had permission to call Customer A’s cell phone, and the number is now reassigned to someone else without the bank’s knowledge, that “someone else” should not be called. If they are called, the FCC said a caller — the bank in this example — has one chance to get it right; “callers who make calls without knowledge of reassignment and with a reasonable basis to believe that they have valid consent to make the call should be able to initiate one call after reassignment as an additional opportunity to gain actual or constructive knowledge of the reassignment and cease future calls to the new subscriber… If this one additional call does not yield actual knowledge of reassignment, we deem the caller to have constructive knowledge of such.” Even with permission, frequent reassignment of cell phone numbers made lawsuits too big a risk for some banks

ACA International represents third-party collection agencies, law firms, asset buying companies, creditors and vendor affiliates. A number of companies including ACA International petitioned the FCC for clarification and to draw differences between autodialers and predictive dialers. That did not happen, and a lawsuit was initiated. In the ACA International v. FCC suit the concern was the over-reaching definitions and rulings concerning autodialers, reassigned numbers, and revocation of consent.

After a lengthy court battle, the U.S. Court of Appeals for the District of Columbia Circuit overturned two controversial portions of the FCC’s 2015 Telephone Consumer Protection Act Order.

The definition of an ATDS and the provision on calls to reassigned numbers are of particular concern to bankers, because they hobble a bank’s ability to send time-critical, non-marketing messages to customers, including alerts concerning suspicious activity, data security breach warnings, low balance alerts, etc., using cell phone calls or text messages.

The court set aside the FCC’s definition of an ATDS because of its “unchallenged assumption that a call made with a device having the capacity to function as an autodialer can violate the statute even if autodialer features are not used to make the call.” The court found the FCC’s interpretation that all smartphones qualify as autodialers is unreasonably and impermissibly expansive. This will offer some protection to your bank’s legitimate marketing efforts with customers through traditional calling methods which do not actually use auto-dialers.

The other critical issue concerns reassigned numbers and consent. The court eliminasted the FCC’s treatment of reassigned numbers in its entirety, finding it could not, without consequence, void the one-call safe harbor, but leave in place the FCC’s interpretation that the “called party” refers to the current subscriber, and not the intended recipient.

The court upheld the FCC’s ruling that a person can revoke consent through any reasonable means by clearly expressing a desire to receive no further calls or texts.

The court’s ruling does not replace the FCC’s definition of an autodialer or the treatment of reassigned numbers, but essentially voided the interpretations and requires the FCC to issue new ones.

The setting aside of “reassigned numbers” will have at least short-term relief, although the FCC likely will take this issue up again, and could adopt a strict-liability standard. In addition, the ongoing ability for consumers to use “reasonable” opt-out methods will likely continue to be litigated. TCPA compliance remains important and high-risk, with a private right of action and statutory damages. Accordingly, all text message campaigns should be carefully vetted for full compliance.


Sellers’ costs on borrowers’ closing disclosures

By John S. Burnett

When a specific question becomes a “trending” topic in our work, it often becomes the basis of one of our monthly Legal Briefs articles. This month, we take on the question of who gets which information as part of the closing disclosures that are issued under the TRID rules in Regulation Z when the loan is financing the purchase of the property securing the loan. From what we have read, there is more than a little confusion about who gets disclosures of what costs, and about disclosing at all certain seller and third-party costs.

More than just the loan costs

To begin with, when it first introduced the TRID rule in Boston in 2013, the Bureau said that, in addition to combining the early and closing disclosures required by Regulation X under the Real Estate Settlement Procedures Act (RESPA) and by Regulation Z under the Truth in Lending Act (TILA), the TRID disclosure requirements would expand the scope of the disclosures to include the costs involved in not only the loan, but also the other costs involved when the loan is a consumer transaction financing the purchase of real estate.

So, what are the options for providing all this information, and to whom? The CFPB’s rule provides for three ways to deliver the closing disclosure.

Option 1: Same disclosure for borrower and seller

The most basic closing disclosure option is to create a single form that includes the disclosures for both the consumer/borrower/buyer and the seller. This option has its origins in the combined buyer/seller Settlement Statement on the old HUD-1 form. This format, using Regulation Z Model Form H-25(A) without any of the modifications permitted in section 1026.38(t), includes all the required disclosures on a single five-page form, revealing the particulars of the loan transaction and the costs of the underlying real estate purchase transaction to both the buyer and the seller of the property and to any other person entitled to a copy of the disclosures.

Option 2: Standard disclosure, with portions blank

Under § 1026.38(t)(5)(v) Separation of consumer and seller information, a creditor can use the standard disclosure forms for transactions involving a seller, but withhold selected information from the copy provided to the consumer/borrower/buyer and from the copy for the seller, in the interests of confidentiality.

Specifically, separate copies of page 3 of the closing disclosure can be issued to the borrower and seller, omitting the seller’s transaction information on the right side of the Summary of Transactions table from the copy given to the borrower/consumer (this is the only part of the seller’s information that can be omitted from the borrower’s closing disclosure). The borrower’s transaction information on the left side of the Summary of Transactions table can be omitted from the copy given to the seller. You can also leave blank the Calculating Cash to Close table on the seller’s copy of page 3.

On page 2 of the closing disclosure, the information on costs paid by the consumer/borrower can be left blank on the seller’s copy of the page. The borrower’s copy, however, must show costs paid by the borrower, the seller and third parties.

On page 1 of the seller’s copy of the closing disclosure, you can omit the statement “This form is a statement of final loan terms and closing costs. Compare this document with your Loan Estimate.” You can also leave blank the name of the lender in the Transaction Information box and all of the Loan Information box. The rest of page 1 (Loan Terms, Projected Payments and Costs at Closing) can also be left blank on the seller’s copy.

Page 4 of the Closing Disclosure can be eliminated altogether from the seller’s copy.

Page 5 of the seller’s copy can be left blank except for the large question mark and the paragraph about questions adjacent to it, and the Contact Information for the real estate broker(s) and settlement agent (the columns for the lender and mortgage broker can be left blank).

Not surprisingly, this option isn’t used by many lenders.

Option 3: Modified seller’s closing disclosure

Many, if not most, lenders use a third option permitted by § 1026.38(t)(5)(vi) that uses a modified closing disclosure form (Model form H-25(I)) for a seller or third party that omits unused portions of the standard form, rather than simply leaving those portions blank.

Costs disclosed on page 2

We’ve already seen that nothing gets omitted from page 2 of the form. There don’t appear to be many problems with where to report the loan-related costs found in sections A, B and C, or what gets included there.

As for sections E, F, G and H in the Other Costs part of the page, here’s what § 1026.38(g) has to say, in its introductory paragraph (emphasis added):

(g) Closing cost details; other costs. Under the master heading “Closing Cost Details” disclosed pursuant to paragraph (f) of this section, with columns stating whether the charge was borrower-paid at or before closing, seller-paid at or before closing, or paid by others, all costs in connection with the transaction, other than those disclosed under paragraph (f) of this section, listed in a table with a heading disclosed as “Other Costs.” [Sections E, F, G and H are in this table.]

When we get to section H, some lenders have been persuaded, incorrectly, that only the borrower’s costs are recorded here. In § 1026.38(g)(4), we find instructions for this section of the form:

(4) Other. Under the subheading “Other” and in the applicable column as described in paragraph (g) of this section, an itemization of each amount for charges in connection with the transaction that are in addition to the charges disclosed under paragraphs (f) and (g)(1) through (3) for services that are required or obtained in the real estate closing by the consumer, the seller, or other party, the name of the person ultimately receiving the payment, and the total of all such itemized amounts that are designated borrower-paid at or before closing.

Clearly, the rule requires that all parties’ costs, not only those of the borrower, are to be disclosed.

As always, when it comes to the TRID rules, you have to look to the Commentary for many of the details involved in compliance with the regulation. Here are comments 38(g)(4)-1 and -4 on that paragraph of the rule:

  1. Costs disclosed. The costs disclosed under § 1026.38(g)(4) include all real estate brokerage fees, homeowner’s or condominium association charges paid at consummation, home warranties, inspection fees, and other fees that are part of the real estate closing but not required by the creditor or not disclosed elsewhere under § 1026.38.
  2. Real estate commissions. The amount of real estate commissions pursuant to § 1026.38(g)(4) must be the total amount paid to any real estate brokerage as a commission, regardless of the identity of the party holding any earnest money deposit. Additional charges made by real estate brokerages or agents to the seller or consumer are itemized separately as additional items for services rendered, with a description of the service and an identification of the person ultimately receiving the payment.

Note the underlined text in comment 1, which indicates these are costs that are part of the real estate closing, which is broader than the costs involved with the loan itself, carrying out the statements made in Boston in 2013. Taken with the wording of § 1026.38(g)(4), the requirement includes all parties’ costs relating to the real estate closing, and finally, comment 4 makes it clear that those costs include real estate commissions paid by all parties to the transaction.

March 2018 OBA Legal Briefs

  • OBA website update, Legal Briefs and Legal Links
  • Without the App, you can’t comply with HMDA
  • A Revised USA PATRIOT Act/CIP Sign?
  • HMDA Signage Correction
  • Spirit and Intent, SCRA and BMW
  • The Beneficial Ownership Rule
  • UBO:  How low do you go?


OBA website update, Legal Briefs and Legal Links

By Pauli D. Loeffler

It has been more than a decade since the OBA last updated its website, and I hope you are enjoying the recent changes as much as I am. I know that we all hate change because it takes getting used to, but I am sure that in a short amount of time, you will have that “ah ha” moment when you realize that the site is so much better than before.

When I was hired as OBA’s assistant general counsel in June 2004, the OBA Legal Briefs, as I recall, did not require a username and password for access. That was changed when the website was updated within a year of my employment. With the 2005 website update, a login was required, but it was simple since everyone who was an employee of an OBA member bank, an OBA Partner or Endorsed Vendor as well as OBA’s employees used the same login credentials (“community” as username and “strong” for the password).  When a banker would call me wanting the login, I would joke that it was the same for all OBA member bank employees so feel free to share it with other employees, and I supposed that if they left employment, Guido would be sent to rub them out. The deathless prose we wrote wasn’t really protected other than by the fact that most former employees would easily forget the login if they weren’t using it.

The OBA updated its website in February, and to access the monthly Legal Briefs as well as the Legal Links page — which has numerous links to other websites as well as useful Templates, Forms and Charts (more about these later), — you will need to register with OBA by providing your business email and a password. To access the Legal Briefs or the Legal Links page, you will have to login to the site with your individual credentials for access.

Prior to the website update, the Legal Briefs from January 2005 to the most recent appeared from newest to oldest and were searchable using “find in page” (control+F) and a keyword. They are still in reverse chronological order, but with different pagination, and you cannot use “find in page.” However, if you use the search box in the upper right corner, you will get results for the keywords you enter. (I do miss “find in page” but am adjusting to the loss.)

Things change over time, and some of the links in the Legal Briefs may no longer work. If you discover a bad one, please shoot us an email at compliance@oba.com, and we will provide you with the correct link and edit the article to alleviate the issue for others.

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:  https://oba.com/2018/02/01/legal-updates/.  The online Legal Briefs monthly editions are posted on the website about two weeks after the print versions are received.

I highly recommend taking some time to explore the Legal Links page. There you will find links to compliance news links, state regulatory agencies, Oklahoma law-related links, various regulatory resources, regulations and statutes, as well as our newest addition: Templates, Forms, and Charts!

We get a lot of questions from bankers dealing with deceased customers, guardians, trusts, and other topics and have drafted some useful templates, forms, and charts to help deal with these. Here is a list of currently available offerings for download:

Deceased customers

  • Affidavit of Heirs Flow Chart – Deposits
  • Affidavit of Heirs Template – Banking Code Sec. 906 (Deposits)
  • Affidavit of Heirs Template – Probate Code Sec. 393 (Deposits & Safe Deposit Boxes)
  • Affidavit of Heirs Template – Banking Code Sec. 906 (Safe Deposit Boxes)
  • Appointment of Agent by Heirs Template – Banking Code Sec. 906 (Safe Deposit Boxes)
  • Authorization for Access on Death Deputy Appointment for Safe Deposit Box & Revocation Templates
  • Affidavit of Access on Death Deputy for Safe Deposit Box Template
  • Oklahoma Intestate Succession Laws Chart
  • Co-Personal Representatives of Estate

Guardians, conservators

  • Co-guardian Authorization Template


  • Certificate of Trust Template
  • Co-trustee Power of Attorney Template


  • No Jurisdiction Letter Template for Out of State Subpoenas, Levies, and Garnishments


Without the App, you can’t comply with HMDA

By Andy Zavoina

One hundred and ten.  That is the number of data fields the current Loan Application Register (LAR) has for banks subject to the Home Mortgage Disclosure Act (HMDA). Contrast that to the 26 fields many lenders had problems with on the older LAR and we have a recipe for disaster. Data entry questions aside, and we know there are many, what banks are having issues with now are fast loan decisions. Yes, this is turning out to be a problem and here is why:

A lender receives an online real estate application or perhaps a drop-off and it is quickly scanned. An in-file credit report is pulled and for any number of reasons, poor credit, no credit, low credit score, the application is immediately denied. The lender wants the adverse action sent and moves on to income generating work.

Here is where the problem comes in. The application is incomplete for one or more reasons. Perhaps the reason for the loan is unclear; an applicant indicates they are currently renting, but they are applying to refinance a mortgage loan; the applicant is applying for a manufactured home loan, but there is some indication that land will come with it, but the facts are incomplete; or simply personal information was omitted, such as the applicant’s date of birth.

Now that the application has been received and a credit decision finalized, the adverse action notice is sent and days later the application is handled by the person having to enter data for the HMDA LAR. But the information is incomplete. Banks have asked if they can enter NA for not applicable. That does not work in many or most cases. It may not be a valid entry. As an example, assume the applicant omitted their age. That field entry calls for a numeric answer such as 24, or 8888 for not applicable. If the applicant for the loan is not a natural person, 8888 is appropriate, but if it is a natural person, that person’s age is the only acceptable entry. One bank indicated that it anticipates many such problems. Remember that the HMDA LAR is a foundation for a fair lending exam and that is a foundation for a Community Reinvestment Act exam. If there are numerous “holes” such as this in the HMDA LAR, they become violations of Reg C and HMDA, and make fair lending and CRA impossible to grade because there is doubt as to the accuracy of the foundations needed to arrive at sound conclusions. If age or racial demographics are omitted repeatedly, there could be a valid fair lending problem and the missing data could be viewed as a coverup. It just does not work.

What can the bank do? Either the individual completing the HMDA LAR or the lender will have to get answers for the omitted data. I assure you, neither one wants to call the applicant who has just been told no, they do not qualify for a loan from your bank and ask the applicant for additional application information. You may have some information on file or available from a credit report that you can use as a source. Without the data fields being completed, edit checks on the LAR will continually be listed and the data noted as absent or incorrect.

Prevention is better than a cure

Correct these problems at the source. Online applications should be reviewed. Each field on the HMDA LAR that the applicant provides should be accounted for. Is it on the online application? Is it shown as a required field? Is that field properly coded such that the application cannot be submitted without providing the data required? Once these questions can be answered with a “Yes,” these issues will begin to be non-issues.

Next, the bank must reinforce in lender training that loan decisions cannot be made until the same data fields identified above are completed. While the lender may not see these fields as necessary to make a credit decision, and many are not, the bank needs the information to complete the application process. This process extends beyond what the lender needs to make a decision. If the necessary information is not requested prior to the credit decision being made the entire process will take more time and cost the bank more money in the long run, plus lead to potential violations and increased scrutiny in an exam.

Who is best equipped to ask for the complete information? The lender should complete an interview process and not only get all the necessary data for HMDA, but ensure the bank understands the request and can determine if there is some other way to grant a loan or counteroffer for the applicant if a denial seems likely. Any other person can call the applicant, but they would likely just be asking for data. Again, the applicant will be in no mood to assist them, and that person will not be able to salvage the application for the mutual good of the bank and the applicant if a denial has already been communicated to the applicant.

If the applicant does not yet have property in mind, and the bank does not do prequalifications or preapprovals, interview the prospective applicant and show an expression of interest for the loan for when there is a known property. If your bank sees the potential for these HMDA problems, it is best to address the issues now and not when LAR entries are rejecting and will be difficult to resolve, and someone’s workload has just increased.

A Revised USA PATRIOT Act/CIP Sign?

By Andy Zavoina

The USA PATRIOT Act mandated your bank’s Customer Identification Program and financial institutions asked that the CIP regulations include the notice requirement found at 1020.220(a)(5)(i). This is the lobby or application notice starting with, “To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain…” There are rumors circulating that this notice must be changed with the impending May 11, 2018, “applicability date” for implementation of the Beneficial Ownership requirements added by FinCEN. The new rules have not required any change in the required signage. This does not mean signage cannot be posted to better explain the Beneficial Ownership rules. But some vendors incorrectly say that new signs must be purchased and displayed. That is simply not the case.


HMDA Signage Correction

By Andy Zavoina

In the December 2107 edition of Legal Briefs, I recommended posting the new required HMDA signage in addition to leaving your existing signage up for HMDA reports the bank already has. The new 2017 data will be available online later this year from the CFPB and to avoid confusion I had made the recommendation so that 2016 and prior years could be obtained in paper format, as has been done in the past. It has come to our attention that the CFPB does now have the prior years’ disclosures statements available, online. This means that if the bank wants to remove the old HMDA availability sign, it may, because the new requirements (a referral to the CFPB) will meet all the HMDA requirements.

There is a new caveat, however. Referring to 1003.5(c)(1), “A financial institution shall make available to the public upon request at its home office, and each branch office physically located in each MSA and each MD, a written notice that clearly conveys that the institution’s loan/application register, as modified by the Bureau to protect applicant and borrower privacy, may be obtained on the Bureau’s Web site at www.consumerfinance.gov/hmda.” Note that this is what the notice must convey; there is not specific language recommended. And 1003.5(d)(1), “A financial institution shall make the notice required by paragraph (c) of this section available to the public for a period of three years and the notice required by paragraph (b)(2) of this section available to the public for a period of five years. An institution shall make these notices available during the hours the office is normally open to the public for business.” (b)(2) is a written notice of availability of the disclosure statement. It would be easiest to provide the same information as it posted for the new HMDA, though Reg C has suggested text (in the Commentary to section1003.5), it is not required meaning your bank has flexibility in the content.

So, in addition to a posted notice, anyone requesting the LAR or disclosure statement must receive a written notice.  The notice requirements under 1003.5(b)(2) and (c)(1) may each be provided in written or electronic form. Because the provision for electronic disclosure is explicit and there is no reference to E-SIGN, E-SIGN appears to not be a requirement. It is recommended that branches have preprinted notices available for distribution when a request is made in person, and an electronic version that can be used if a request comes in electronically. Don’t waste money on a huge supply. Ask yourself how many times in the last year you have been asked for your HMDA disclosure statement and modified LAR (probably very few, if any), and add 10 or 20 to that and you should have an adequate supply on hand. Mark the last form in your stack as “Use this form to copy 10 more, and place on top of this.” Train staff on your new procedure and they can hand them out, or send the notice electronically in response to an emailed request. While it is not necessary to have a receipt or signed request, the bank should have a procedure which is trained for and periodically tested.

Spirit and Intent, SCRA and BMW

By Andy Zavoina

A recent and first-of-its-kind case between the Department of Justice (DOJ) and BMW AG exemplifies why the spirit and intent of a law or regulation is important when defining how to comply with that law or regulation.

BMW leases autos to servicemembers. These lease programs allow for an upfront payment, often several thousand dollars, which then reduce the monthly lease payment itself. BMW considered these capital cost reduction payments as down payments and not subject to a refund in the case of an early lease termination. This has been their policy and practice since at least 2011.

As servicemembers are being called to active duty, the SCRA allows lease terminations in some cases. These protections apply whether the lease agreement was entered into pre- or post-service. A servicemember may terminate a motor vehicle lease when that servicemember enters the military or receives PCS (permanent change of station) orders or a deployment order. For motor vehicles, the time requirement is 180 days or more and the PCS/deployment will take them outside the continental United States. (Residential leases vary from this.) The lease may be for personal or business purposes.

Cited in this case particularly were two Air Force sergeants deployed to Afghanistan for six months and then reassigned to Japan for a three-year tour. While BMW cancelled the leases, it would not refund the initial payment. If the initial payment was to lower the monthly payment, one could conclude that an early termination would trigger an amortized refund of that payment based on the months remaining in the lease. If the payment was intended to reduce a residual cost at the end of the lease, that may differ. In any event, without admitting any fault BMW has agreed to pay $2.17 million to compensate 492 servicemembers (that’s $4,400 each) and to pay $61,000 to the U.S. Treasury to settle the case.

“Men and women who serve in the armed forces have made enormous sacrifices while selflessly protecting our nation from danger,” U.S. Attorney Craig Carpenito in New Jersey said in a statement. “We must honor their sacrifice by ensuring that their rights are protected when duty calls for their relocation or deployment overseas.” For many purposes a servicemember is quite similar to a protected class under Reg B and it is best to operate with the spirit and intent of consumer protection when handling a servicemember’s account.

And just to clarify that servicemember protections reach beyond banks and other lenders, last month the City of Honolulu came to a settlement on a dispute it was involved in pertaining to the sale of abandoned vehicles. The City had, between 2010 and 2016, auctioned three vehicles belonging to active duty servicemembers without court approvals or a waiver allowing the sale. The City will now pay almost $56,000 to the three, pay a civil money penalty to the U.S. Treasury of $61,000 and create a $150,000 fund to allow for additional claims.

The City has been inundated with abandoned vehicles, many owned by servicemembers, and has run out of storage lots. Regardless of the reasoning, the SCRA protections apply.

The Beneficial Ownership Rule

Questions and Answers from the Top Gun Conference

By John S. Burnett

Even though almost two years have passed since the final Customer Due Diligence rule was issued by FinCEN, the substantial portion of the rule that adds requirements for obtaining and verifying the identity of beneficial ownership of legal entity customers is still generating lots of questions, as we confirmed at BOL Conferences’ recent Top Gun BSA/AML Conference in Scottsdale.

Here are several of those questions and answers, in an FAQ format:

Q1. What accounts are subject to the rule?

Answer: The definition of “account” is the same as the one used under the CIP rules. It is “any formal banking relationship established to provide or engage in services, dealings, or other financial transactions including a deposit account, a transaction or asset account, a credit account, or other extension of credit. It also includes a relationship established to provide a safe deposit box or other safekeeping services, or cash management, custodian and trust services.”

Q2. Can you give examples of products or services that are NOT accounts?

Answer: Any product or service where a formal banking relationship isn’t established, such as check-cashing, wire transfer, or sale of a check or money order. Also excluded are accounts that the bank acquires through an acquisition, merger, purchase of assets, or assumption of liabilities. Also excluded is an account opened for the purpose of participating in an employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA).

Q3. Is a loan purchased as “dealer paper” from an auto dealer considered an account under the rule?

Answer: If the dealer extended the credit and your bank purchased it after the loan was consummated by the borrower and the dealer, it would be considered a purchase of assets, and not an account under the rule. However, if the bank underwrites a loan extended by the bank through a dealer/agent, the loan would be an account and subject to the rule.

Q4. This rule requires that we obtain information on beneficial ownership when a new account is opened. What is a “new account” under the rule?

Answer: A new account is any account opened at a covered financial institution by a legal entity customer on or after May 11, 2018. A new account is opened on or after that date when a legal entity customer:

  • Opens a new operating checking account
  • Opens a new payroll account
  • Opens a new IOLTA account
  • Purchases a new auto-renewing time deposit (certificate of deposit)
  • Signs a new safe deposit box lease
  • Obtains, and signs paperwork for, a new revolving line of credit
  • Obtains a new commercial mortgage loan with a balloon payment
  • Obtains a new extension of credit for inventory purchase, signing a 90-day note
  • Signs an agreement for trust services with your bank’s trust department

Those are just examples; it’s not an exhaustive list.

Q5. Is the automatic rollover of a time deposit at maturity a new account? How about “subnotes” that are sometimes used for individual advances under a formal, advised line of credit?

Answer: The regulation doesn’t even mention such arrangements, as common as they are. I don’t think the time deposit rollovers are new accounts, and I am hoping that FinCEN will clarify this issue and others in its updated FAQ, which we were told FinCEN wants to issue before May 11, 2018. In the absence of guidance from the agency, you have to make a risk-based decision on how to treat them. The “subnotes” aren’t new accounts, because the new account event is the bank’s commitment to lend, i.e., extend the line of credit.

Q6. If an entity customer has a non-interest-bearing checking account with our bank and wants to have it changed to an interest-bearing checking account (assume we offer such accounts), will the change of the account status be a “new account event”?

Answer: If the change is accomplished by making changes to the existing account (such as a new class code, setting an interest payment flag, activating account analysis, etc.), there is not a new account event. However, if the old account is closed and a new interest-bearing DDA is opened, you would have a new account event.

Q7. If we open two accounts simultaneously for a business entity (e.g., a checking and a savings account), must we obtain two certifications of beneficial ownership?

Answer: That question is not addressed in the regulation or the current FinCEN FAQ. But given the purpose of the regulation – to obtain information on the beneficial ownership of the legal entity customer at a point in time, a single certification should be enough, particularly if your bank can index back to that certification from each of the accounts opened in that session with the customer’s representative.

Q8. What good is a photocopy of a driver’s license if the individual isn’t here so that we can compare the photo with the face or compare signatures?

Answer: A photocopy of someone who’s not present is certainly of less value that an original license brought in by the licensee. It can be used for verifying some of the identifying information included on the certification.

Q9. How should we handle IOLTA accounts, which are owned by the attorney or law firm’s clients and the state bar association? How can we get beneficial ownership information on these accounts, or should we?

Answer: Start by understanding who your customer is. The attorney’s clients do not own the account even though they may beneficially own (some of) the funds in the account. And the bar association doesn’t own the account, either. The account is owned by the attorney (in the case of a sole practitioner) or law firm. If your customer is a sole practitioner, there is no legal entity involved and the rule can’t apply. But if the customer is a law firm, a partnership, limited liability partnership (LLP), limited liability company (LLC), professional corporation (PC), etc., it is a legal entity, and you will apply the regulation just as you would for any other legal entity customer.

Q10. For established, low-risk legal entities, must financial institutions obtain beneficial ownership certifications with every future account opened by the entity?

Answer: Yes. Unlike the CIP rule, where you are verifying the identity of your customer at a point in time (account opening) and that identity doesn’t change, under the beneficial ownership rules you are looking at the ownership of the entity, which can change. The point of the rule is to identify ownership interests.

Q11. If we have obtained a beneficial ownership certification from a legal entity customer, should we look through documentation (articles of incorporation, tax returns, etc.) provided to us to ensure the correct information has been provided on the certification?

Answer: You can accept as correct the beneficial ownership certification unless you have reason to doubt its accuracy. For example, if your bank recently investigated pubic records to determine ownership of the entity for a loan under consideration, and become aware that the information obtained is at odds with the information provided on the certification, you would have to follow-up on the certification, requiring that the inconsistency be resolved.

Q12. A legal entity customer wants to open a new deposit account, but the individual opening the account doesn’t have all of the information needed for the beneficial ownership certification, nor does he have copies of photo IDs that we require for new legal entity accounts. Can the account be opened without the required information, and for how long can it remain open without the information/certification?

Answer: The beneficial ownership rule does not provide any such leeway. The beneficial ownership certification must be obtained by the time the account is opened. Verification of the identity of any individuals listed as beneficial owners (or as the control individual) can be completed by the bank after the account is opened, but the bank’s procedures must have a limit on how long that can take, and provide for the closing of the account if the bank cannot verify the identity of each individual named in the certification.


UBO:  How low do you go?

By Mary Beth Guard

When determining the Ultimate Beneficial Owners of a legal entity customer for purposes of the new Beneficial Owner/CDD rule, exactly how far do you need to drill down? Lower than you might think.

I had concluded one of my presentations at our recent Top Gun AML conference on the subject of Layers of Ownership. My husband, Michael, was in the audience, and while I was speaking, he charted out an ownership scenario he remembered from a case where he represented a bank chasing assets of a deadbeat borrower. There were multiple layers of entities that owned parts of the legal entity that had received the extension of credit and because they were essentially all shells, he was able to successfully pierce the corporate veil of each and get to the assets of the individuals behind them.

As I approached my seat, he asked “Do you aggregate ownership interests of individuals when you are determining UBOs?  If Entity A is owed by B Corp. and D Corp., and B Corp. owns 76% of Entity A and D Corp. owns 24% of Entity A, do you really not have to look at who owns D Corp.? Then he showed me his chart. Sam Smith owned 28% of B Corp (which owned 76% of Entity A — our new account customer).  Looks like Sam is not a Beneficial Owner of A, right? (28% of 76% is just over 21% indirect ownership of Entity A.)  Not so fast.  Turns out that Sam also owns 95% of D Corp, which owns 24% of Entity A. That’s another 22.8% indirect ownership of Entity A.

Sam indirectly owns more than 25% of Entity A!  Sam is a Beneficial Owner, as defined in the regulation.

So, the bottom line is that if it looks like an entity owns less than 25%, that is not the end of your inquiry.  You must look at whether, as you continue to go down through the layers, there is any common ownership by natural persons among the companies that own the new customer.

The complexities continue to emerge.

February 2018 OBA Legal Briefs

  • “I received a child support levy…”
  • Tax Refund Checks
  • The ADA and the WWW
  • Prepaid Accounts Rule Amended and Delayed
  • Payday Lending Rule Likely to be Rescinded or Trimmed

Read More »

December 2017 OBA Legal Briefs

  • Managing risk in mobile deposits (Removed for error)
  • The statement exemption for charged-off loans
  • Don’t sweat the HUD-SCRA expiration
  • HMDA notices
  • Abundance of caution”
  • “Legalese” for non-lawyers – Part II

Read More »

September 2017 Legal Briefs

  • Lessons from the American Express settlement
  • CFPB’s 2017 HMDA Rule amendments
  • Forced-placement of flood insurance, with a twist
  • Visa zero liability update

Read More »

July 2017 Legal Briefs

  • “I received a garnishment…”
  • Are annual privacy notices still required?
  • Proposed changes to Prepaid Rule
  • CFPB “special edition” on complaints
  • Will the CFPB get SCRA enforcement authority?
  • “Debt collector” gets a refined definition

Read More »

June 2017 Legal Briefs

  • Consumer loan dollar amounts adjust July 1
  • TCPA compliance for certain alerts
  • ‘New and improved’ credit reports coming soon
  • Amendments to Reg CC – Finally!

Read More »

May 2017 Legal Briefs

  • Complaints – What’s your status quo?
  • Your Corporate Compliance Program
  • Prepaid Accounts Rule Delayed
  • HMDA Rule Changes Proposed

Read More »