June 2013 Legal Briefs

• Garnishment of Federal benefits rule revisions
• Consumer loan dollar amounts adjust July 1
• The first California/Achieve financial settlement
• Breach of contract
• Final(?) ability to repay and qualified mortgage rules

Garnishment of Federal Benefits Rule Revisions

By Pauli D. Loeffler

The Interim Final Rule on Garnishment of Federal Benefits was published February 23, 2011, and included a request for comments. It became effective a little over two years ago on May 1, 2011, and various aspects of the Interim Rule as well as revised Oklahoma garnishment forms were addressed by the members of the OBA Compliance Team in the Legal Briefs in April 2011, May, June, and July 2011.

On May 29, 2013, the Treasury Department, and other federal agencies published the Final Rule for 31 C.F.R. Part. The final rule includes revisions to the Interim Final Rule that affect key portions of the rule, including the following: Definitions (§212.3), Rules and procedures to protect benefits (§212.6), and Notice to account holder (§212.7). Appendix C, Part 212 (Examples of the Lookback Period and Protected Amount) has been revised to reflect the revisions made with regard to the lookback period but will not be discussed here, however, please take some time to review these examples. The revisions under the Final Rule are effective for garnishments received on and after June 28, 2013. Revised language per the Final Rule is shown in bold type. Comments are those of this article’s author.

§212.3 – Definitions

Benefit payment means a Federal benefit payment referred to in § 212.2(b) paid by direct deposit to an account with the character “XX” encoded in positions 54 and 55 of the Company Entry Description field and the number “2” encoded in the Originator Status Code field of the Batch Header Record of the direct deposit entry.

Reason for the revision: Codification of guidance provided by the Agencies.

Garnishment order or order means a writ, order, notice, summons, judgment, levy or similar written instruction issued by a court, a State or State agency, a municipality or municipal corporation, or a State child support enforcement agency, including a lien arising by operation of law for overdue child support or an order to freeze the assets in an account, to effect a garnishment against a debtor.

Reasons for the revisions: 1) To include orders or levies issued by a State or State agency or municipality, and 2) to remove any doubt as to whether the rule applies to restraining orders and seizures or judgments in criminal proceedings.

Protected amount means the lesser of the sum of all benefit payments posted to an account between the close of business on the beginning date of the lookback period and the open of business on the ending date of the lookback period, or the balance in an account when the account review is performed. Examples illustrating the application of this definition are included in Appendix C to this part.

Reason for revision: This clarifies that the relevant account balance is the account balance when the account review is performed, and will include intraday items such as ATM or cash withdrawals.

Comment: Banks should not use the Reg CC available funds balance; however, the requirement to provide access to the protected amount remains subject to the usual restrictions on funds availability under Reg CC, i.e., an amount may be protected from garnishment yet be unavailable to the customer based on the bank’s disclosed funds availability policy as permitted under Reg CC.

§212.6 – Rules and procedures to protect benefits

(h) Impermissible garnishment fee. The financial institution may not charge or collect a garnishment fee against a protected amount. The financial institution may charge or collect a garnishment fee up to five business days after the account review if funds other than a benefit payment are deposited to the account within this period, provided that the fee may not exceed the amount of the non-benefit deposited funds.

Reason for the revision: In view of comments received, the Agencies decided to amend the rule to provide financial institutions with an opportunity to impose a garnishment fee in the event that nonprotected funds become available 5 days following the account review.

Special note: “In response to the question as to whether a garnishment fee may be collected from accounts that do not contain a protected amount, the Agencies emphasize that such accounts are not subject to any restrictions under this rule, and that a financial institution may collect an agreed upon garnishment fee from such accounts in accordance with the customer agreement and any applicable laws.”

Comment: The author is acutely aware that the fee disclosures for garnishments and levies provided under Reg DD range from $25.00 to $100.00. On the other hand, the Oklahoma garnishment statute only permits the bank to retain $10.00 from the funds remitted to the creditor’s attorney or the creditor if there is no attorney. This means that in order for the bank to collect the disclosed fee, the account will have a negative balance. This will not be an option if the customer only has one account into which protected benefits are directly deposited. On the other hand, if there were other accounts owned by the customer not receiving protected funds by direct deposit, the bank may place in the account in a negative status. However, based on case law, the bank could NOT then use the right of offset (either by way of the “Banker’s Lien” or the account agreement) against the account receiving the direct deposit of protected benefits. The bank would only be able to setoff such negative balance against: 1) funds transferred to deposit to the other accounts by the customer, 2) non-exempt funds that are deposited into the account receiving direct deposit, or 3) funds from a check the customer presents to be cashed.

§212.7 – Notice to account holder

A financial institution shall issue the notice required by § 212.6(e) in accordance with the following provisions.

(a) Notice requirement. The financial institution shall send the notice in cases where:

(1) A benefit agency deposited a benefit payment into an account during the lookback period;

(2) The balance in the account on the date of account review was above zero dollars and the financial institution established a protected amount; and

(3) There are funds in the account in excess of the protected amount.

Reason for revision: The Agencies determined the requirement to send a notice to account holders in cases where there are no funds in excess of the protected amount may be of little benefit and is likely to result in unnecessary confusion for some account holders. Accordingly, the Agencies are revising the rule to require a notice to an account holder only in cases where there are funds in the account in excess of the protected amount.

Comment: In the event all funds in an account receiving protected benefits by direct deposit are protected funds, the Notice to Account Holder is not required even when funds from that account have been transferred to another account. The funds that have been transferred may still be claimed as exempt by the customer by claiming the exemption and requesting a hearing (part of the garnishment packet required to be sent to the judgment debtor) under the Oklahoma statutes. THE BANK HAS NO DUTY TO EXERT THIS EXEMPTION UNDER EITHER FEDERAL OR OKLAHOMA LAW. Should the bank choose to claim the exemption on behalf of its customer, the bank, rather than the customer, will need to request and appear at the hearing. Further, even if an exemption is claimed, whether by the customer or the bank, the funds must be still remitted to the creditor’s attorney (or the creditor if he has no attorney) along with a copy of the bank’s Answer.

Consumer Loan Dollar Amounts Adjust July 1

By Pauli D. Loeffler

A new set of increased U3C dollar amounts will take effect on July 1, 2013. They are available on the OKDOCC website.

Increased Late Fee.

The maximum late fee that may be assessed on a consumer loan is the greater of (a) five percent (5%) of the unpaid amount of the installment or (b) the dollar amount provided by rule of the Administrator for this section pursuant to Section 1-106. As of July 1, 2013, the amount provided under (b) will increase by $.50 to $24.00.

Before a bank can charge any late fee, the consumer must agree to it in writing. Any time a loan is originated, deferred or renewed, the bank is given the opportunity to obtain the borrower’s consent in writing to the new $24.00 portion of the late-fee formula. However, if a loan is already outstanding and is not being modified or renewed, a bank has no way to increase the amount of late fee that the consumer has previously agreed to pay if your loan agreements state a set dollar amount.

On the other hand, if the late-fee provision contains language such as:

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

the late fee may be increased whenever there is an increase by made by the Administrator of the OKDOCC.

“3-508B,” “3-508A” and “3-511” Loans.

Some banks make small consumer loans based on a special finance-charge method that combines an initial “acquisition charge” with monthly “installment account handling charges,” and does not have a stated maximum annual interest rate. The requirements for such loans are outlined in Section 3-508B of the U3C. The permitted principal amount for one of these small loans was $1,410.00-$4,700.00 but is adjusting to $1440.00 – $4,800.00 on July 1, 2013.

The specific fees chargeable on one of these “508B” loans depend on where the loan falls within certain dollar brackets. Both the dollar brackets and the fees chargeable within each bracket are adjustable for inflation, and the revised amounts are provided at the link given above.

Lenders making “508B” loans should be careful to promptly change to the new dollar amount brackets, and the new permissible fees within each bracket, on July 1. Because of peculiarities in how the bracket amounts are adjusted, using a chart with the old rates after June 30 (without shifting to a revised chart) might result in excess charges for certain small loans. The Department of Consumer Credit provides a 3-508B Loan Chart including Refunds.

American Bank Systems annually updates its 3-508B pricing calculator. On its webpage, you will also find a link to American Bank Systems’ 3-508A “Maximum Annual Percentage Rate Chart” and 3-508B “Loan Pricing Matrix.” 3-508A is the section containing provisions for “blended” rate on small loans exceeding the new adjusted amount of $1440.00 to $4,800.00 as well as the alternative maximum annual percentage rate of 21%. This is also the Section that provides for the 30% annual percentage rate on loans not exceeding $1440.00.

I get a lot of calls when lenders get a warning from their loan origination systems that a loan may exceed the maximum interest rate, but invariably the banker says the interest rate does not exceed the alternative non-blended 21% rate allowed under 3-508A according to their calculations. Usually, the cause for the red flag on the system is Section 3-511 for which loan amounts also adjust annually. Here is the section with the amounts as effective for loans made on and after July 1, 2013. The italicized portion of the statute is nearly always the reason for the notification:

Supervised loans, not made pursuant to a revolving loan account, in which the principal loan amount is $4,800.00 or less and the rate of the loan finance charge calculated according to the actuarial method exceeds eighteen percent (18%) on the unpaid balances of the principal, shall be scheduled to be payable in substantially equal installments at equal periodic intervals except to the extent that the schedule of payments is adjusted to the seasonal or irregular income of the debtor; and

(a) over a period of not more than forty-nine (49) months if the principal is more $1,440,00, or

(b) over a period of not more than thirty-seven (37) months if the principal is $1440.00 or less.

The reason for the warning is generally the result of the loan involving a single pay note, but an interest only note will also trigger the red flag when the amount of loan falls within the parameters of this section.

Dealer Paper “No Deficiency” Amount.

If dealer paper is consumer-purpose and is secured by goods having an original cash price less than a certain dollar amount, and those goods are later repossessed or surrendered, the creditor cannot obtain a deficiency judgment if the collateral sells for less than the balance outstanding. This is covered in Section 5-103(2) of the U3C. This dollar amount was previously $4,700, and increases to $4,800 on July 1.

The First California/Achieve Financial Settlement
Direct Deposit to Prepaid Debit Cards

By John S. Burnett

Late last month, the FDIC announced a settlement with First California Bank (FCB) and Achieve Financial Services, LLP (Achieve) that your bank should study if it issues (or plans to issue) prepaid debit cards that can be loaded with direct deposits of federal benefit payments. In addition to civil money penalties of $600,000 from FCB and $110,000 from Achieve, Achieve has agreed to restitution of about $1.1 million in fees imposed on over 64,000 cardholders. If Achieve fails to completely refund all fees as agreed, FCB will be "on the hook" for any remaining restitution.

Achieve is an affiliated party of FCB. Together, Achieve and FCB offered the "AchieveCard," a prepaid, reloadable MasterCard. The FDIC has determined that the marketing and servicing of the AchieveCard involved unfair and deceptive practices in violation of section 5 of the Federal Trade Commission Act. It found that a number of the representations and omissions of information from Achieve’s website were deceptive. For example, free online billpay was advertised although fees were charged for bill payments under certain circumstances. Some of the advertised features and services of the AchieveCard were not actually available to cardholders, and fees that were not clearly disclosed were charged to cardholders.

Additionally, Achieve imposed error resolution procedures on cardholders that were not disclosed as required by the EFT Act and Regulation E. Some of those procedures may also have been prohibited by Regulation E, although the FDIC does not explicitly say so in its press release or in the Enforcement Orders agreed to by FCB and Achieve. However, the error resolution procedure violations alleged, because they involved prepaid debit cards being reloaded with direct deposits of federal benefit payments, also became violations of the Treasury Department Fiscal Service’s regulations on Federal Government Participation in the Automated Clearing House at 31 CFR Part 210. Section 210.5 of those regulations require, among other things, that the issuer of such cards must comply with all of the requirements and provide the cardholder with all of the consumer protections, that apply to a payroll card account under the EFT Act and Regulation E. Treasury’s regulation, in effect, makes any prepaid card that’s reloaded with federal benefit payments subject to Regulation E, even if it is not explicitly covered in the latter rule.

The lessons from the FCB/Achieve settlement should be obvious to bankers who are careful about compliance: (1) don’t impose requirements on consumers that aren’t permitted by consumer protection regulations; (2) make sure that consumer disclosures are clear, and accurately reflect the terms of an account or service; (3) check every piece of marketing and other consumer communication for deceptive or misleading information, and get rid of or fix anything that might be misinterpreted by a reasonable person of average intelligence; and (4) we wary of affiliates and third parties with whom you do business – they can drag your compliance effort into the swamp unless you are careful about those you partner with and remember that your bank will be responsible for those parties’ compliance missteps when they affect your consumer customers.

Breach of Contract

By Andy Zavoina

A recent court case, Young v. Wells Fargo Bank 2007 CP1 2007 CP1 demonstrates why lenders (and servicers) need to understand why they do, what they do. In this case Susan Young had become past due on her mortgage. Through a series of miscommunications and misunderstandings Wells Fargo and Young ended up in court with years of legal costs to pay, and it isn’t over yet. Here are some general facts of this case.

1. Young became past due on her mortgage after her father passed away and her income was reduced. However, she was able to make a single payment of $2,600 that she mailed and believed would pay her current in August 2008.
2. Soon after making that payment there was a notice posted on her door stating she was late, but to ignore this if she recently made a payment. This begs the question of what is “recent” and does this allow for her recent payment or not?
3. Young called Wells Fargo and was told they had received her payment, but that they would not be applying it to her debt and that foreclosure was planned.
4. After a week of negotiations it was understood that Young had to make an additional payment of $5,628 and that a forbearance agreement would be sent to her.
5. That payment was made, but she received no agreement. Upon contacting the bank, Wells Fargo told her there was no agreement. The bank contended that she was still past due because according to a supervisor there, the bank still had not applied the $2,600 payment. Had that been applied, she would be current. (Are you like me and gasping as you think “really!”)
6. Wells Fargo then agreed to send her a forbearance agreement for signature and it would apply all pending payments. Young received the agreement but noted the monthly payment was now $800 more than what she struggled to pay in the past. To save her home, she executed the agreement, but couldn’t make those payments and went past due again.
7. Fast forward to October 2009, Young had an attorney working with the bank who said she would qualify for the HAMP program. The Home Affordable Modification Program is a federal program designed to assist borrowers who can pay, but not at the same level as they previously did. She is sent a packet of materials including a Trial Period Plan and three coupons for payments to be made in November, December and January.
8. Young made the payments each month but then was told there would be no modification. The bank later said her payments were not made timely by the 30th. Her counsel contacted Wells Fargo again and was again told that letter was sent in error. She would be put in the HAMP program – the papers would be sent in three to four weeks.
9. Fast forward five months to June when Young did receive her modification agreement. The stated payment was $300 per month more than the trial period payment. Rather than accept those terms Young refused and Wells Fargo eventually began foreclosure proceedings.

The legal suits began in January 2011. Two things that stand out in the suit are that the payment differed $300 per month from the Trial Period Plan (TPP) payment. Wasn’t the purpose of that to allow the borrower to demonstrate that she could service the debt at that level? And after the three payments, the loan should have been modified under the HAMP terms, but that wasn’t done. One main issue in the suit was breach of contract. But a strict reading of the TPP said that it wasn’t the final modification, wasn’t a modification at all, and the payment was an approximate of the final payment. But that didn’t appear to be clearly stated so the borrower had different expectations than the lender. It also appeared the lender was not certain what the terms would be and took months to complete the final terms. Consider this with the confusion over on again, off again foreclosure threats and “ignore that letter” comments and it appears neither the lender, nor the borrower had a firm grasp on what was going to happen or when.

From my reading of the case, I question if the lender’s staff perceived this federal program as an internal workout program. They were unfamiliar with the procedures and terms and couldn’t explain them to the borrower. Not knowing what the expectations really were, the borrower couldn’t meet them. Payments were requested and sent, but then wouldn’t be applied against the debt. Letters threatening foreclosure were sent, but the borrower was later told to ignore them. What was fact and what was fiction? The result was two plus years of litigation and it is not over yet. Had there been more understanding of the program the lender was a participant in, and had the terms been known and explained to the borrower, the litigation, the costs, the delinquency, all could have been avoided. Additionally, the house has likely had two additional years to fall into disrepair. Experience tells us delinquent borrowers under threat of losing property do not take good care of it. But for the fact that the borrower has been living without a payment, this will end in a lose-lose case.

There were several counts that were being contested and some were the same issues, stated differently, so the United States Court of Appeals , First Circuit, denied those but sent other issues back to a district court and noted each party will bear their own costs.

More on this case can be found at http://caselaw.findlaw.com/us-1st-circuit/1631090.html?DCMP=NWL-pro_1st.

Final(?) Ability to Repay and Qualified Mortgage Rules

By Andy Zavoina

Many of us who write about the new Dodd-Frank regulations and the Consumer Financial Protection Bureau (CFPB) are having a little fun with the “final,” no “final – final” and “temporarily final” regulations but from the banker’s side of the desk it has to be frustrating as changes tend to make us nervous. What else may change, and when? Do I have to revise what has already been put into motion, and how close to the implementation date may it change again? Well, on May 29, 2013, the CFPB published a final-final rule on the Ability to Repay (ATR) and Qualified Mortgage (QM) rule. This is 279 pages and aside from the lengthy reading, it’s not all bad. We last wrote about ATR and QM in March Legal Briefs and in May we included a QM clarification article.

Remember that the spirit and intent of this new Regulation Z requirement is that a lender will have to ensure that a borrower can repay the mortgage loan, based on the borrower’s qualifications at the time. When a loan meets certain standards under these rules, it is designated as a QM and this creates a presumption of compliance with the new rules. Sounds like a no-brainer as we are not in the habit of making loans that we don’t believe can be repaid. But some lenders in the past were more interested in production than quality, so good lenders are stuck with the fruits of the bad lenders’ labor, and the new, "final-final" rules are still effective January 10, 2014. So what changed this time?

There are exemptions from ATR requirements for three categories of creditors.

1. Creditors designated by the U.S. Department of the Treasury as Community Development Financial Institutions
2. Creditors designated by the U.S. Department of Housing and Urban Development as either a Community Housing Development Organization or a Downpayment Assistance Provider of Secondary Financing (under certain circumstances)
3. Creditors designated as nonprofit organizations under IRS section 501(c)(3) that extend credit no more than 200 times annually, provide credit only to low-to moderate income consumers, and follow their own written procedures to determine that consumers have a reasonable ability to repay their loans are also generally exempted.

The CFPB has added two other exemptions for certain loans made in accordance with:

1. programs administered by a housing finance agency and
2. for an extension of credit made pursuant to an Emergency Economic Stabilization Act program, (such as extensions of credit made pursuant to a State Hardest Hit Fund program.)

These amendments are also designed to help small creditors continue to make loans available to their borrowers. The “small creditor” is defined as having no more than $2 billion in assets and along with affiliates originating no more than 500 first-lien mortgages covered under ATR rules, per year.

Previously the rules allowed certain balloon-payment mortgages to be designated as QMs if they were originated and held in portfolio by small creditors operating predominantly in rural or underserved areas. In this final rule, the CFPB is:

1. adding a fourth category of QMs for certain loans originated and held in portfolio for at least three years (subject to certain limited exceptions) even if the small creditor does not operate predominantly in rural or underserved areas. These loans must meet the general restrictions on QMs with regard to loan features, points and fees, and creditors must evaluate consumers’ debt-to-income ratio or residual income. However, the loans are not subject to a specific debt-to-income ratio as they would be under the general QM definition.
2. raising the threshold defining which QMs receive a safe harbor under the ATR rules for loans that are made by small creditors under the balloon-loan or small creditor portfolio categories of qualified mortgages. Because small creditors often have higher cost of funds, the final rule shifts the threshold separating qualified mortgages that receive a safe harbor from those that receive a rebuttable presumption of compliance with the ability-to-repay rules from 1.5 percentage points above the average prime offer rate (APOR) on first-lien loans to 3.5 percentage points above APOR.
3. providing a two-year transition period during which small creditors that do not operate predominantly in rural or underserved areas can offer balloon-payment QMs if they hold the loans in portfolio.

The last change involves the calculation of points and fees. The January version could have double counted some fees paid to loan originators. Remember points and fees on a QM may not exceed 3 percent of the loan balance, and points and fees in excess of 5 percent will trigger Home Ownership and Equity Protection Act (HOEPA) requirements. This final rule excludes compensation your bank pays to its own loan officers. More specifically, points and fees exclusions include:

1. loan originator compensation paid by a consumer to a mortgage broker when that payment has already been counted toward the points and fees thresholds (under 1026.32(b)(1)(i).)
2. compensation paid by a mortgage broker to an employee of the mortgage broker because that compensation is already included in points and fees as loan originator compensation paid by the consumer or the creditor to the mortgage broker.
3. compensation paid by a creditor to its loan officers.