September 2013 Legal Briefs

• More on certificates of deposit
• IRA CDs
• The four "smalls"
• Durable POA witness requirements

More on Certificates of Deposit

By John S. Burnett

In last month’s Legal Briefs, Mary Beth provided a lot of information about why your bank might want to start increasing its early withdrawal penalties on certificates of deposit, different ways you might structure the penalty provision, and steps needed to implement and disclose the changed penalty provisions.

This month, we want to take a closer look at the Regulation DD subsequent disclosure requirements relating to CD accounts, and at some issues on CDs as part of Individual Retirement Arrangements (IRAs).

CDs and TISA subsequent disclosures

Regulation DD, the Truth in Savings Act regulation, has two sections on disclosures. Section 1030.4 deals with account disclosures – the ones you provide at account opening and in response to certain consumer inquiries (and the occasional examiner). Section 1030.5 focuses on subsequent disclosures – those required after an account is already opened.

There are three subsections to section 1030.5. They are used for very different things, and it is rare that more than one of the subsections will apply.

Change in terms. Subsection 1050.5(a) requires certain disclosures to current account holders in advance of a change in any term that’s required to be disclosed in the section 1030.4 account disclosures if the change may reduce the annual percentage yield on an account or adversely affect the consumer. Examples would be a reduction in the rate to be paid on a fixed-rate deposit account, a change in the deposit balance and rate tiers for a tiered-rate account (if any depositor might end up receiving a lesser APY) or a change from a type A interest rate tiering structure (in which interest is calculated based on the rate applicable to the current balance) to a Type B tiering structure (in which interest is paid on each tier at the rate applicable to that tier alone). You’d also need to send a change in terms notification if an account fee will increase or the circumstances under which the fee may be imposed will change. There are more details on the changes that would require a notice of change in terms, but what we’ve seen here gives you the flavor of how this subsection is used. What it is almost never used for is to notify a consumer of impending changes (rate, term, etc.) to be applied to a CD account.

Notice before maturity for time accounts longer than one month that roll over. Subsection 1030.5(b) does not deal with changes in terms. Instead, it requires a pre-maturity notice for automatically renewing CDs with initial terms of longer than one month. [When Regulation DD was being written back in 1992, it was decided that consumers shouldn’t need a reminder that a CD of one month or shorter duration was maturing (I only know that because I was there).] The disclosure for time accounts longer than one month that roll over is to be delivered at least 30 days before the maturity date (or 20 days before the end of a grace period during which the renewed CD may be canceled and withdrawn without penalty, if that grace period is at least five days long).

If the CD’s term is longer than one year, the maturity notice must be accompanied by a full account disclosure covering the next automatic term for the account (if the new interest rate and APY aren’t known at the time of the notice, the notice must say so, and provide a date when they will be known and a telephone number a consumer may call to obtain the new interest rate and APY to be paid in the renewal term).

If the current term is one year or less (but more than one month), the bank can provide the same information it would provide for an account term of more than one year, or it may provide the maturity date, and the new maturity date if the account is renewed; the interest rate and APY for the new term, if known (or the information to be provided if the rates aren’t known, as described in the preceding paragraph); and any difference in the terms of the new account as compared to the terms required to be disclosed for the existing account. In last month’s Legal Briefs, Mary Beth wrote about changing the early withdrawal penalty for CDs as of their next rollover dates. This disclosure is the place and the time that you provide the information about the new penalty calculation and any other disclosable term that will change when the account renews. Examples of such changes, in addition to the withdrawal penalty, might include a change in the term of the account (from 13 months to a year, for example); a change in the frequency of interest compounding from daily to monthly or monthly to at maturity only, etc. Any new fees that will apply during the new term of the account – an early withdrawal processing fee, for example – would also be disclosed with this notice.

The only change to a CD account that would not be disclosed under this section (1030.5(b)) but instead would be disclosed using a change in terms notice under 1030.5(a) would be a change affecting the account during its current term. With CD’s, such changes are extremely rare. One that might occur would affect a CD with a variable interest rate (a rare thing in itself) tied to an outside index when that index ceases to be published and a substitute index has to be provided. That would be a change in terms.

Maturity notices for non-renewing CDs of longer than one year. Subsection 1030.5(c) calls for maturity notices for non-renewing CD accounts, but only those with original terms of more than one year. This disclosure is really simple. It goes out at least 10 calendar days before maturity, and states the maturity date and whether interest will be paid after maturity.

Incidentally, one of the questions we field frequently at BankersOnline is whether a bank has to send out the “post-maturity notice” that informs consumers of a rollover and the interest rate and APY that are now in effect on their CD accounts. Somewhere, someone got the bright idea to create that notice and many service providers include it as an option in their CD processing packages. But the answer to the question is “No.” The regulation doesn’t require a post-maturity notice at all.

IRA CDs

By John S. Burnett

From time to time bankers ask about IRA CDs as if there are special requirements for CD accounts held within Individual Retirement Arrangements (often called Individual Retirement Accounts).

An IRA is a vehicle for tax-deferred savings that can use many different types of savings or investment alternatives for holding an individual’s retirement funds. The IRA has to be set up in accordance with the Internal Revenue Code (IRC) provisions and limitations to ensure that the taxpayer/customer is able to take advantage of the tax-deferred nature of IRA investments.

But what of a CD held by an IRA? Is there anything special about it? One frequent difference between these CDs and most bank’s other CDs is the minimum deposit amount. To encourage customers to make incremental deposits to their accounts over the year rather than scramble to find the funds at tax deadline time in April, many banks offer significantly smaller minimum deposit amounts for CDs in IRAs. On average, the term of CDs held in IRAs tends to be longer than the terms frequently offered for non-IRA CDs. That’s probably due to the longer-term goal involved – retirement – in the IRA investment.

And the other aspect of IRA CDs that may be different at many banks is the provision addressing early withdrawals. The IRC regulations governing IRAs include a provision allowing the “benefitted individual” (the depositor/taxpayer) to revoke an IRA under certain limited circumstances. Revocation can take place during the first seven days after the IRA was created. For that reason, a CD in an IRA may have an early withdrawal provision calling for no early withdrawal penalty if the account is paid within seven days after establishment, provided that the depositor forfeits at least an amount equal to the simple interest earned on the amount withdrawn. This is a subtle difference: instead of paying interest for the seven days and collecting a penalty equal to the interest, the bank voids the interest payment for the first seven days.

There’s also a provision in the IRC allowing a withdrawal from an IRA beginning when the customer attains the age of 59 ½ or is disabled. Federal Reserve Regulation D permits such withdrawals to be made without an early withdrawal penalty.

Federal Reserve Regulation D is permissive when it comes to waiving early withdrawal penalties for IRA account withdrawals under the two circumstances described about. That means that banks are permitted to employ these provisions, but are not required to. Some banks do not waive withdrawal penalties for IRA CDs under the age 59 ½ or disability provision (just as some banks don’t waive a penalty in the event of the death of an account owner).

Except for those two influences on bank CD contracts for IRAs, I’m not aware of any restrictions or additional requirements imposed by IRS regulations on how a bank may shape its early withdrawal penalty provisions affecting IRA CDs. When your bank is reviewing its CD withdrawal penalty strategy, don’t forget to include a review of the penalty provisions affecting this special group of accounts.

One closing reminder—After reviewing your strategies and making the important updates to your CD early withdrawal penalty provisions, don’t leave out that last critical step—getting your frontline staff on board with the changes. If they don’t understand the reasons for ramping up your penalty provisions, and the importance of keeping exceptions under control, your efforts could be wasted

The Four “Smalls”

By Mary Beth Guard

Bigger isn’t always better, particularly when it comes to the Dodd-Frank mortgage rules. Congress (and in some cases the CFPB, using its own discretion) has crafted some important special provisions under the rules that provide much-needed relief from some of the most onerous requirements within the rules for institutions under a certain size that meet certain other criteria.Three of the special provisions relate to small creditors. One relates to small servicers. Collectively, I’ve decided to call these “the Four Smalls.” In this article, we will examine each Small, both in terms of the criteria that must be met to qualify for treatment for each of them and in terms of what relief is available to you if you do qualify.

HPML Escrow Small

Closed end consumer credit transactions secured by a principal dwelling are Higher-Priced Mortgage Loans (HPMLs) if they trip certain rate triggers. Under the version of Regulation Z’s §1026.35 as amended effective June 1, 2013, a non-jumbo first lien loan is an HPML if the APR exceeds the APOR by 1.5% or more. A jumbo first lien loan is an HPML if the APR exceeds the APOR by 2.5% or more. Subordinate lien loans are Higher-Priced Mortgage Loans if the APR is 3.5% or more above the APOR, regardless of the size of the subordinate lien loan.

There are various consequences that stem from a loan being an HPML. One consequence is that on a first lien HPML an escrow account must be established and maintained. For many small institutions, the escrow account requirement was enough, all by itself, to make them vow not to make HPMLs. No bank wants to turn away business, however, so it was good news when the CFPB amended this section of Regulation Z to provide a limited exemption from the mandatory escrow requirement for certain small institutions that met certain criteria. This new exemption is our first Small and it became effective June 1, 2013.

In order to qualify for the exemption from the escrow requirement on first lien HPMLs, the creditor must meet four requirements:

Size: The creditor must have had total assets of less than $2 billion as of the end of the preceding calendar year. (Note that this asset threshold will be adjusted on an annual basis.)

Number of transactions: The creditor and its affiliates (combined) must have originated no more than 500 first lien covered transactions during the preceding calendar year. You count all closed end consumer credit transactions secured by a dwelling (not just a principal dwelling). For the definition of the term “covered transactions,” this part of the HPML rule points to the definition under the new Ability to Repay rules. The scope of coverage of the ATR rules is broader than the scope of coverage of the HPML rules, since it encompasses all dwellings, rather than just principal dwellings. So, for purposes of determining whether or not you have to escrow, you’re looking only at your first lien principal dwelling secured loans that trip the HPML rate trigger; but for purposes of determining whether you satisfy the second criteria for the HPML escrow exemption (the criteria based upon the number of transactions by you and your affiliates during the preceding calendar year), you count all first lien “covered transactions” – which means, under §1026.43(b)(1), closed end consumer credit transactions secured by a dwelling. Count the wrong thing and you could erroneously conclude you qualify for the escrow exemption!

Property location: The third requirement relates to the location of your first lien covered transactions. For purposes of this prong of the exemption test, you’re looking only at the first lien covered transactions (using the definition set forth above) that you, as the creditor made (rather than you and your affiliates). More than 50 percent of your first lien covered transactions must be secured by properties located in counties that are either “rural” or “underserved.” It’s not whether your bank is located in such a county, or even whether the borrower is, it is the location of the collateral that matters. The Bureau has published the list of such counties for both 2013 and 2014 on its website.

Limited escrow history. The fourth requirement that must be satisfied in order to earn an exemption from the HPML mandatory escrows relates to what you and your affiliates have previously done when it comes to establishing escrow accounts. If, on the loans that you or your affiliate currently services, you either haven’t previously established any HPML first lien escrow accounts on any extension of consumer credit secured by real property or a dwelling OR if the only such escrow accounts are ones that were established were on or after 4/1/10 and before 6/1/13 or you only established escrow accounts after consummation as an accommodation to distressed consumers to assist such consumers in avoiding default or foreclosure.

Small Servicer

The CFPB has amended Regulation X (the RESPA rule) and Regulation Z to impose new requirements and prohibitions on servicers of consumer mortgage loans. Several of the new provisions provide an exemption for what the rules refer to as a “small servicer.” The term is defined in Regulation Z, Section 1026.41. Part of the definition refers to a Housing Finance Agency, which is not relevant for our purposes. What we care about is the other part of the definition, which is as follows:

A small servicer is a servicer that services 5,000 or fewer mortgage loans, for all of which the servicer (or an affiliate) is the creditor or assignee.

Let’s break that down a bit. First of all, what do they mean by “mortgage loans”? What do you count? You count closed end consumer credit transactions secured by a dwelling. Next, you need to understand when you count. In determining whether a small servicer services 5,000 or fewer mortgage loans, a servicer is evaluated based on the number of mortgage loans serviced by the servicer and any affiliates as of January 1 for the remainder of the calendar year.

A servicer that crosses the threshold will have six months after crossing the threshold or until the next January 1, whichever is later, to comply with any requirements for which a servicer is no longer exempt as a small servicer.

The Commentary provides three helpful examples to illustrate the timing rules:

i. A servicer that begins servicing more than 5,000 mortgage loans (or begins servicing one or more mortgage loans it does not own or did not originate) on October 1, and services more than 5,000 mortgage loans (or services one or more mortgage loans it does not own or did not originate) as of January 1 of the following year, would no longer be considered a small servicer on January 1 of that following year and would have to comply with any requirements from which it is no longer exempt as a small servicer on April 1 of that following year.

ii. A servicer that begins servicing more than 5,000 mortgage loans (or begins servicing one or more mortgage loans it does not own or did not originate) on February 1, and services more than 5,000 mortgage loans (or services one or more mortgage loans it does not own or did not originate) as of January 1 of the following year, would no longer be considered a small servicer on January 1 of that following year and would have to comply with any requirements from which it is no longer exempt as a small servicer on that same January 1.

iii. A servicer that begins servicing more than 5,000 mortgage loans (or begins servicing one or more mortgage loans it does not own or did not originate) on February 1, but services less than 5,000 mortgage loans (or no longer services mortgage loans it does not own or did not originate) as of January 1 of the following year, is considered a small servicer for that following year.

The second prong of the test is that the loans serviced must be ones for all of which the servicer (or an affiliate) is the creditor or assignee. If you, or your affiliate, are servicing loans that you did not make or that have not been assigned to you, you don’t qualify as a small servicer — except for the fact that they built in a tiny bit of wiggle room in a subsequent rulemaking. If you are voluntarily servicing mortgage loans that you do not own or did not originate for an unaffiliated nonprofit organization and you are not receiving any compensation or fees for doing so, that will not jeopardize your status as a small servicer. That exception to the normal “only servicers loans for which you or your affiliate is the creditor or assignee” rule will only work for loans l) voluntarily serviced; 2) without compensation or fee; 3) for a nonprofit entity.

If you do qualify as a Small Servicer under the test in Regulation Z, here is how you benefit:

• With respect to the new steps that must be followed before you can force-place hazard insurance, you get a small measure of relief by being allowed to force place insurance if there is an escrow account and you are able to purchase force-placed insurance less expensively than what the escrow payment would have been for the borrower’s hazard insurance. Unfortunately, it says that as a Small Servicer you still must comply with requirements of §1024.37.
• You are exempt from the new policies and procedures requirements of the servicing rules.
• You are not be subject to the early intervention requirements.
• You aren’t bound by the continuity of contact requirements (although the fact is that with small servicers, there typically will be continuity of contact – the borrower will be dealing with the same persons).
• You are exempt from the loss mitigation procedures requirements. Note, however, that even a small servicer cannot file for foreclosure until the loan is more than 120 days delinquent, nor can the small servicer file for foreclosure if the borrower is performing pursuant to a loss mitigation agreement.
• Rejoice in the fact that you are not bound by the new periodic statement requirements.

ATR/QM Small Creditor

Under the new Ability to Repay rules (Reg Z, Section 1026.43), a lender cannot enter into a closed end consumer credit transaction secured by a dwelling unless it has made a reasonable and good faith determination at or before consummation of the borrower’s reasonable ability to repay the loan. At a minimum, there are eight factors the lender must consider before making the loan. In short form, those are:

1. Income and assets;
2. Current employment status, if employment income is being relied upon;
3. Monthly debits, including alimony and child support;
4. Credit history;
5. What the monthly payment would be on the new loan;
6. The monthly payment on any simultaneous obligation secured by the same dwelling;
7. Monthly payments for mortgage-related obligations; and
8. Monthly debt-to-income ratio.

If a lender does not comply with the Ability to Repay requirements, the lender is violating the Truth in Lending Act. Examiner criticism and action will be sure and swift. In addition, the law sets forth a new private right of action for the borrower. The borrower can sue for statutory damages at any time within the first three years after consummation, asserting noncompliance with the Ability to Repay requirements. If the borrower prevails, the borrower can get damages equal to the interest and fees paid on the loan, plus court costs and attorney fees.

Even after the three years has passed, the risk of noncompliance persists. Should the lender attempt a judicial or nonjudicial foreclosure, the borrower can assert noncompliance with the ATR requirements as a defense by way of setoff or recoupment. It doesn’t mean the borrower can stop the foreclosure, but if the lender can’t prove compliance with the ATR rules, the borrower could get to setoff against the amount owed a sum equal to what the borrower could have gotten had the borrower sued for the statutory damages within the first three years.

With the potential legal liability in mind, it is easy to see why lenders will want some measure of protection from such claims and defense. There are five options for protection.

1. Qualified Mortgage under .43(e)(2);
2. Transitional QM under .43(e)(4) (This is the one where you have a loan that is eligible to be purchased, guaranteed, or insured by various named entities, such as Fannie and Freddie);
3. Small Creditor Portfolio Loan QM under .43(e)(5);
4. Temporary Balloon Payment QM under .43(e)(6); and
5. Balloon Payment QM under .43(f)

(Obviously, rather than making one of these types of QMs, you could instead simply toe the line and comply with every facet of the ATR rule. The difference between simply complying with the ATR rule and making a QM is that QMs carry a measure of protection from legal liability with them, as noted below.)

If you make a QM that is not a Higher-Priced Covered Transaction (yes, that is a totally different term and definition that a Higher-Priced Mortgage Loan), you fall within a Safe Harbor of compliance with the ATR rules.

If you make an HPCT QM – you don’t get the benefit of a Safe Harbor of compliance, but you do get the significant protection of falling within a presumption of compliance. The borrower can attempt to rebut the presumption, but the burden of proof is on the borrower to prove noncompliance by rebutting the presumption – not on you to prove compliance.

So, if you can qualify as a Small under the ATR/QM Small Creditor definition, three positive things happen. You can make loans that fall within the QM type of Small Creditor Portfolio Loan QM and have a presumption of compliance with the ATR rules. You are eligible to make covered transactions (that must be consummated prior to January 10, 2016) with balloon payments under the Temporary Balloon Payment Qualified Mortgage rule. PLUS, if you want to make a QM and fall within the safe harbor of compliance, your loan would have to be a non-HPCT, but an amendment to the rules raises the threshold for HPCTs small creditors. As a small creditor, if you are making a loan under .43(e)(4), (5), (6), or under .43(f), your loan would not be an HPCT (regardless of whether it is a first lien or subordinate lien loan) unless the APR exceeded the APOR by 3.5% or more.

For purposes of being able to make Small Creditor Portfolio Loan QMs, for purposes of being able to make Temporary Balloon Payment QMs, and for purposes of the higher threshold for the HPCT trigger, and for purposes of being eligible to make the basic ATR/QM Small Creditor “Small” test is satisfied if the creditor meets the following requirements: The creditor, along with its affiliates, originated 500 or fewer 1st lien covered transactions during the preceding calendar year; and the creditor had total assets less than $2 billion at the end of the preceding calendar year.

ATR/QM Small Creditor Plus

To be able to make Balloon Payment QMs under .43(f) (which don’t have to be consummated by 1/10/16), you not only have to satisfy the criteria in the preceding paragraphs, but where the loans are located is relevant as well. To qualify as a Small under this test, during the preceding calendar year,you must have extended more than 50% of its total 1st lien covered transactions on properties that are located in counties that are either rural or underserved.

Durable POA Witness Requirements

By Mary Beth Guard

Banks are often asked to accept powers of attorney and we have covered the subject in many Legal Briefs over the years. One question that came up today related to what the requirements are for witnesses on a durable power of attorney that is not executed as a Uniform Statutory Form Power of Attorney (which has its own unique requirements).

When a power of attorney is durable, it means that it has language that provides that it will remain in force despite the subsequent incapacity or incompetence of the principal, or despite the passage of time.

If you have a plain vanilla durable power of attorney, Oklahoma law, at Title 58, Section 1072.2 says it must be executed in the presence of two witnesses, each of whom must sign his/her name both in the presence of the principal and the presence of each other.

The signatures of the witnesses and the principal must be notarized. In addition, the witnesses must be at least 18 and they cannot be related to either the principal or the attorney-in-fact by blood or marriage.

Above the signatures of the witnesses, language substantially similar to the following should appear:

The principal is personally known to me and I believe the principal to be of sound mind. I am eighteen (18) years of age or older. I am not related to the principal by blood or marriage, or related to the attorney-in-fact by blood or marriage. The principal has declared to me that this instrument is his power of attorney granting to the named attorney-in-fact the power and authority specified herein, and that he has willingly made and executed it as his free and voluntary act for the purposes herein expressed.