May 2013 Legal Briefs

• Interagency statement on Biggert-Waters Flood Insurance
• CFPB ability to repay – QM clarification proposal
• Some tweaks for HDMA getting it right
• Escrow rule: What we should have said is …
• CARD Act rule revised
• NAME IT: A guide to formulating a formidable name for your bank
• Oklahoma’s Article 9 remains unchanged
• Oklahoma tax on IRA part 2:

Interagency Statement on Biggert-Waters Flood Insurance

By Andy Zavonia

On March 29, 2013 the FDIC published FIL-14-2013. It was a notice of an interagency statement from the FDIC, Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, National Credit Union Administration, and Farm Credit Administration. The statement was issued to clarify some of the questionable points lenders have had problems with as they address changes by the Biggert-Waters Flood Insurance Reform Act of 2012 to the Flood Disaster Protection Act of 1973 (FDPA).

Five points in Biggert-Waters were clarified as to when they become effective and two of the flood Questions and Answers are impacted as well.

Two items were effective upon enactment last July:

1. The maximum civil money penalty for a FDPA violation has been increased to $2,000. Each agency had to amend its schedule of penalty amounts and this was done months ago. To date we have not seen the maximum penalty imposed; each agency may still use its discretion based on the history of the financial institution and the nature of the current violations. In addition, the penalty cap per year has been deleted.
2. A lender (or its servicer) must notify a borrower if it determines that the flood insurance coverage on the collateral (improved real estate or mobile home) for the loan has expired or is less than the required amount. A notice is sent informing the borrower that adequate flood insurance is required. If the borrower fails to purchase it within 45 days after notification, flood insurance is purchased on their behalf. The lender/servicer can then charge the borrower for the cost of premiums and fees incurred to obtain the required coverage.
3. Biggert-Waters amends the FDPA to:
        a. Provide that the premiums and fees the lender/servicer may charge the borrower include premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide sufficient coverage amount;
        b. Require the lender/servicer, within 30 days of receiving a confirmation of a borrower’s existing flood insurance coverage, to terminate any force-placed insurance and refund to the borrower all force-placed insurance premiums and any related fees paid for by the borrower during any period of overlap between the borrower’s policy and the force-placed policy; and
         c. Require a lender/servicer to accept as confirmation of a borrower’s existing flood insurance policy, a declarations page that includes the existing flood insurance policy number and the identity and contact information for the insurance company or agent.

There are three provisions in Biggert-Waters which will not be effective until implementing regulations are issued. These include:

1. Lenders will be required to accept private flood insurance policies as satisfaction of the mandatory purchase requirement if the coverage provided by the private flood insurance satisfies the coverage requirements allowed in the Act.
2. Three new disclosures will have to be provided to borrowers.
        Flood insurance under the National Flood Insurance Program is available from private insurance companies or from the NFIP directly;
        Flood insurance that provides the same level of coverage as an NFIP policy may be available from private insurance companies; and
        Borrowers are encouraged to compare policies.
3. Lenders/servicers will have to establish escrow accounts for flood insurance premiums and fees for residential improved real estate or mobile home loans. These rules apply to loans outstanding or consummated after July 6, 2014.

Unless it contradicts state laws, there are exemptions, based on two conditions. The institution has less than $1 billion in assets, and as of July 6, 2012 (The Biggert-Waters date), the institution was not required by federal or state law to escrow taxes or insurance for the term of the loan, and it did not have a policy to require escrow of taxes and insurance.

Regulations implementing these requirements and a comment period will be required before they become effective.

CFPB Ability to Repay – QM Clarification Proposal

The Ability to Repay and Qualified Mortgage rule was issued in January 2013 and will be effective in January 2014. The March Legal Briefs had a review of the final rule. The CFPB announced a proposed rule to clarify some of the new provisions, however. The CFPB blogged about the proposal on April 19.
The proposal, which was published in the May 2, 2013, Federal Register, addresses five topics.

Debt-to-Income Ratio

The ability to repay rule allows a lender to make a Qualified Mortgage which can afford the lender certain protections. The Qualified Mortgage however has requirements and limitations, such as a restriction on fees and underwriting requirements. The new Appendix Q is very detailed for these underwriting requirements. It is very similar to the HUD Handbook and FHA underwriting requirements.

There are actually different types of Qualified Mortgages. The main type requires the consumer’s debt-to-income to not exceed 43 percent of the consumer’s monthly income. This proposal provides clearer rules for determining the ratio. It will amend the rule as it pertains to a consumer’s employment record and income, obtaining business credit reports and other issues relating to self-employed consumers, and the treatment of Social Security and rental income.

Questions arose where it was believed FHA underwriting was intended to be flexible and was for insurance purposes, yet the Appendix Q seems to be a bright-line test and is intended for debt-to-income and Ability to Repay purposes. For example, some provisions of the appendix as adopted would require you to assess a consumer’s qualifications for employment, predict whether a consumer’s income will continue for up to three years, or assess economic conditions that may affect future income for self-employed consumers. If your consumer is a rocket scientist, how is the underwriter to understand how qualified this person for their job? The CFPB recognizes that adding these additional requirements does not contribute to the ratio or Ability to Repay qualifications, but may add considerable risk for noncompliance. It may also be difficult to ask an employer if your borrower will have continued employment. If your HR was asked if you would be employed there three years from now, would you expect a guaranty of employment? These are some of the simplifications the proposal will change.

Contract variances and the temporary QM provision

A second type of Qualified Mortgage allows protections when the loan will be eligible either for purchase or guarantee by the government-sponsored enterprises (GSE) Fannie Mae or Freddie Mac, or for guarantee or insurance by a federal agency such as the Federal Housing Administration or the Veterans Administration. This is a temporary exemption and is scheduled to sunset either at seven years (January 2021) or when these agencies establish their own rules for Qualified Mortgages. The proposal recognizes that there are some underwriting requirements these GSEs and agencies require that should not apply to a Qualified Mortgage and loans meeting eligibility requirements provided in a separate agreement can be qualified mortgages.

Purchase, Guarantee or Insurability and the Temporary QM

The proposal would clarify that the temporary QM provision’s requirement that mortgages be “eligible” for purchase, insurance, or guarantee does not exclude loans that do not satisfy those procedural and technical requirements. If a loan was sold to a GSE or federal agency and had to be repurchased, the proposal makes it clear that this does not disqualify the loan as a Qualified Mortgage. Individual facts and circumstances would have to be reviewed to determine that.

No state Reg X preemption

The proposal will make clear that Reg X and RESPA do not preempt state laws.
Small servicer exemptions

RESPA and TILA rules issued last January include a small servicer exemption. Generally to qualify for this you would be servicing 5,000 or fewer mortgage loans. The proposal is intended to clarify which mortgage loans qualify. Loans serviced on a charitable basis are excluded. There are also examples to demonstrate when an exemption applies based on the relationships between servicer and affiliate and between master servicer and subservicer. Other examples are also provided.

While this is a proposal, banks that are gearing up for compliance on this Ability to Repay and Qualified Mortgage rule need to pay attention to the effects the changes will have on their implementation plans. We value clarification, but we also worry how much will come, and when, in relation to the mandatory compliance dates. The comment period ends on June 3, 2013. You are encouraged to comment, and then watch for the final rule which we will analyze for you here.

Separate from the proposal but related to this topic, the CFPB posted its “Ability-to-Repay and Qualified Mortgage Rule Small Entity Compliance Guide” and a “General Comparison Chart” on April 11. The Guide is a 45-page document designed to be a summary of the rule explaining the requirements for Qualified Mortgages and to help small creditors understand the rules and qualify for safe harbor or rebuttable presumption of compliance with the ATR requirements. The Chart is two pages comparing the basic requirements for standard and the three types of Qualified Mortgage loans.

Some Tweaks for HMDA Getting it Right

By John Burnett

The latest version of the FFIEC’s HMDA-helper, A Guide to HMDA Reporting, Getting it Right, is now available. The 2013 edition, which can be found on the FFIEC website at ffiec.gov/hmda/guide.htm, now includes references to the Consumer Financial Protection Bureau as the new “designated regulator” for issuances under the Home Mortgage Disclosure Act and the “owner” of Regulation C. The new asset-size exemption threshold of $42 million that applies for 2013 is also included. There aren’t any other significant changes from the 2011 Guide.

Institutions should refer to the new 2013 edition for guidance on collecting HMDA data during calendar year 2013 (for submission in 2014).

Escrow Rule: What We Should Have Said Is …

Pulling together all the pieces of the regulatory changes required under Title XIV of the Dodd-Frank Act (the Mortgage Reform and Anti-Predatory Lending Act, or “MRAPLA”) in a way that would create the least amount of confusion for both consumers and lenders was one of the early goals set out by the CFPB. When it came to issuing the final Regulation Z escrow rule, however, the “law of unintended consequences” took effect, and the Bureau inadvertently removed language in the current regulation prohibiting, in connection with higher-priced mortgage loans (HPMLs), lending without regard to a consumer’s ability to repay, and imposition of certain prepayment penalties (current paragraphs 1026.35(b)(1) and (2)).

Those two protections were moved to another section of the regulation (new section 1026.43) to apply to most mortgage transactions, instead of only to HPMLs. Therein lies the problem. The Escrow Rule, which pulls those protections out of section 1026.35, will be effective on June 1, 2013, because the Bureau determined that less time would be needed to comply with the Escrow Rule than with the majority of the MRAPLA changes. But the new section 1026.43, which includes some of the more complex new requirements (in addition to the “transplanted” prepayment penalty and expanded ability-to-repay requirements) won’t be effective until January 10, 2014. Although the TILA requirements for ability-to-repay and prepayment penalty provisions would have remained in effect, they would have been omitted from Regulation Z for over seven months.

Therefore, a significant piece of the proposal for “clarifying” amendments to the Escrow Rule is some careful re-insertion of the ability-to-repay and prepayment penalty provisions in section 1026.35 on a temporary basis, with a “sunset” date of January 9, 2014.

Other parts of the proposal would clarify how to determine whether a county is considered “rural” or “underserved” for the application of the escrows requirement and certain Qualified Mortgage and second-appraisal requirements. There is also a correction to the definition of escrow account that mistakenly referred to the old HUD regulation X rather than the Bureau’s own regulation.

Comments on the proposal were to be accepted through May 3, 2013. The Bureau intends to issue a final rule that will be effective June 1.

CARD Act Rule Revised

On Monday, April 29, 2013, the CFPB announced a final rule to update a Regulation Z provision under the CARD Act of 2009 to allow card issuers to go back to an industry practice that used to consider other income available to credit card applicants. The new rule can make credit card accounts responsibly available to individuals who would otherwise be denied credit based on the current Regulation Z section 1026.51 requirement that an issuer may only consider an applicant’s independent ability to pay.

The current Regulation Z provision was imposed by the Federal Reserve Board when it implemented provisions of the Credit Card Accountability Responsibility and Disclosure Act (CARD Act), although the CARD Act itself did not have such a provision (there is a requirement in the CARD Act for an independent ability to repay for applicants under the age of 21). Since the FRB provision was added as of October 1, 2011, some parties have expressed concern that some otherwise-qualified “stay-at-home” spouses or partners would not be able to obtain credit card accounts in their own names. The Bureau first issued a proposal to change the rule in October 2012.

Under the new rule, which will be effective on publication in the Federal Register with compliance optional for six months, creditors may consider income and assets to which a consumer (who is 21 years old or older) has a reasonable expectation of access when evaluating the ability to pay of such an applicant. The requirement for independent income sufficient to repay will continue to apply to applicants less than 21 years old.

NAME IT: A Guide to Formulating a Formidable Name for your Bank

By Anushka Nicholas
3rd Year Law Student Oklahoma City University School of Law

What’s in a name? Everything! Every year small businesses and multimillion dollar companies alike spend tremendous amounts of money in rebranding their businesses due to the simple fact that insufficient time and thought was put into the branding process. As a result, companies lose money, customers lose faith in the brand, and the goodwill associated with the brand diminishes.

For a particularly egregious example of bad branding, consider COCAINE Energy drinks. Redux Beverages marketed their intensely caffeinated drink as COCAINE Energy drink. The name was so misleading and confusing to consumers that in 2007 the FDA claimed Redux was promoting a product that led consumers to believe that illegal substances were contained in the drinks. Redux was forced to go back to the drawing board and come up with a new name, but the end result left consumers skeptical about the new brand even though the only change was the name.

When Oklahoma was a unit banking state, it was common for banks to have virtually identical names from one town to another. These days, a generic-sounding name can be a detriment. As a bank expands its geographic reach, migration to a new name that is distinctive and not tied to a particular locale becomes important. To avoid a name disaster, the institution should work to come up with a brand name that will stand as a strong and enduring Trademark.

A trademark consists of any word, name, symbol or device, or combination thereof, that identifies and distinguishes the source of the goods of one party from those of others. The importance of creating a unique name that can then be trademarked is multifold: The bank starts to garner goodwill for itself under that particular name which then increases company value; the name separates your products and services from that of others; and, of course, brand name establishes brand identity which can then be synonymous with a certain quality and level of expectation.

Trademark protection for a brand depends on what category of marks the name falls into. Descriptive marks that simply describe the products or services that your company generates receive very little trademark protection. The strongest types of trademarks are categorized as fanciful or arbitrary marks. A fanciful mark has no particular meaning and is simply whimsical. Examples of fanciful marks are EXXON and XEROX. An arbitrary mark is a word that exists, however, it has no connection to the products or services being offered. Examples of these marks would be APPLE or AMAZON. Marks that are just below fanciful and arbitrary marks in terms of strength are suggestive marks, which are brand names that hint at the types of products or services being offered. Examples of suggestive marks are VOLKSWAGEN and MICROSOFT.

So, what’s the take away here? :

1. Pull an internal group together to brainstorm about adjectives and nouns that apply to your institution. Play with the words and variations on them. Think about some of the great trademarks you’re familiar with. For example, the product “Aleve” alleviates pain. Or think about how “La-Z-Boy” conjures up an image of comfort. Let the creative juices flow!
2. Choose a fanciful, arbitrary, or suggestive name for your bank. This will ensure strong brand protection, and strong brand identity as the name itself will set you apart from other financial institutions.
3. Know who your target audience is. This is important in formulating a name because you do not want to choose a name that your customers cannot understand or pronounce.
4. Be certain that the chosen name does not evoke thoughts or images of other products or services. Be careful not to choose a name that could somehow make people think of another product, service or something other than your business. If you’re choosing a name for your bank, the name shouldn’t be one that sounds like a hospital or a hot dog, for example. If customers can not solely attribute the brand name to your business, then choose another name!

Conduct a domain name search in addition to a trademark search with the U.S. Patent & Trademark Office (uspto.gov) and with the state. Once you’ve come up with some seemingly viable possibilities, either through your in-house efforts or with the help of a marketing specialist, determine if those names are available. Many companies proceed to use a name without first checking to see if there is a similar or virtually the same name already in use. The absence of a search makes the company vulnerable to potential trademark infringement suits. An online search is quick and easy.

Oklahoma’s Article 9 Remains Unchanged

By Pauli Loeffler

We have received many calls and emails asking about revisions to Article 9 of the Oklahoma Commercial Code. Legislation was introduced this session to enact the 2010 revisions to the U.C.C. but did not pass, so bankers have one less change to worry about.

Oklahoma Tax on IRA Part 2:

In the November 2012 Legal Briefs I wrote about withholding Oklahoma tax on IRAs if federal tax is withheld. I have received questions about IRA distribution forms that have IRS W-4P integrated into the form when the owner or beneficiary of an inherited IRA has elected to withhold federal taxes, but the bank had not been collecting Oklahoma tax. The problem is that while the state requires withholding when federal withholding is elected under the W-4P, this form, like the W-4, does not contain any provisions at all for state withholding elections, yet the Oklahoma statues and Tax Commission Rules refer to these forms for withholding and permit and election to not withold. In order to NOT withhold Oklahoma tax when federal tax is being withheld, the customer is required to separately elect NOT make that election.

Where the customer has chosen to withhold federal taxes by W-4P but has not specifically elected Oklahoma taxes not be withheld, the question posed is whether notice is required prior to withholding. Since Oklahoma law requires withholding and everyone is presumed to know the law (yes, really) notice is NOT required. However, one problem with this is when the recipient is NOT an Oklahoma resident and does not have sufficient Oklahoma income to owe Oklahoma taxes. He will have to file a non-resident tax return in order to get the amount withheld refunded.

Even if Oklahoma residency is not an issue, if the customer has been receiving a specific dollar amount either by check or direct deposit monthly, quarterly or annually, and the bank now begins withholding Oklahoma tax, as a customer service that may prevent calls, I suggest the bank notify the customer by mail. Here is a template for a letter:

Dear IRA Owner:
According to our records, you have elected to have federal income tax withheld. Pursuant to Oklahoma Tax Commission Rules for Withholding (Section 710:90-1-13), if federal tax is withheld as provided on Form W-4P, Oklahoma income tax must also be withheld.
You may submit a new W-4P (enclosed) to elect no federal tax be withheld, in which case no Oklahoma tax will be withheld. If you desire to continue federal tax withholding but do NOT wish Oklahoma withholding, you will need to notify the bank in writing in this regard.
If you wish to change your federal tax withholding election and have neither federal nor Oklahoma tax withheld, please check the appropriate box, sign and return the enclosed form or visit a personal banker at any of our branch locations. Otherwise, no action is needed and both federal and Oklahoma taxes withheld will be deducted from your automatic distribution.
If you have any questions, please contact: [Name(s) and phone number(s) of personal banker].