Wednesday, September 27, 2023

Legal Briefs

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, 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:  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” 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 »

March 2017 Legal Briefs

  •  Blunder Report
    • A Visit to the Bank of Blunders (Operations)
    • A Visit to the Bank of Blunders (Lending)
  • Labor’s Fiduciary Rule Likely Delayed

Read More »